(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ yes ☐ no

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files). ☒ yes ☐ no

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~13,248,716~~13,332,484 shares of common stock on ~~November~~August 2, ~~2018.~~2019.

	September 30, 2018			December 31, 2017 (1)			(unaudited)
(Dollars in thousands, except share data)	(unaudited)						June 30, 2019			December 31, 2018 (1)
ASSETS
Cash and due from banks	$	6,610		$	9,396		$	8,139		$	7,685
Interest-bearing deposits		15,906			41,971
Interest-earning deposits								15,869			18,981
Federal funds sold								596			625
Certificates of deposit		2,976			3,224			3,498			3,746
Federal funds sold		197			6,961
Available-for-sale securities, at fair value		81,215			77,153			81,169			82,232
Restricted securities		6,750			5,787			6,769			7,600
Loans receivable, net of allowance for loan losses of $7,287 and $7,770, respectively		846,993			758,726
Loans receivable, net of allowance for loan losses of $7,479 and $7,902, respectively								909,913			894,191
Loans held for sale		-			1,651			593			368
Premises and equipment, net		18,315			17,463			21,001			18,169
Accrued interest receivable		3,060			3,194			3,191			3,172
Other real estate owned, net		3,663			4,284			3,168			3,597
Bank owned life insurance		19,147			18,773			19,511			19,270
Goodwill		10,374			10,374			10,374			10,374
Mortgage servicing rights		981			999			916			977
Core deposit intangible		2,381			2,991			1,840			2,193
Deferred tax asset, net								1,128			1,510
Other assets		8,872			7,609			6,585			5,927
Total assets	$	1,027,440		$	970,556		$	1,094,260		$	1,080,617
LIABILITIES
Noninterest-bearing deposits	$	108,602		$	103,037
Noninterest-bearing demand deposits							$	116,229		$	114,122
Savings and interest-bearing demand deposits		330,690			299,820			374,175			359,400
Time deposits		369,836			358,989			385,218			368,670
Total deposits		809,128			761,846			875,622			842,192
Securities sold under repurchase agreements		6,083			9,498			6,983			6,089
Federal Home Loan Bank advances		80,000			70,000			70,000			100,000
Subordinated notes, net of issuance costs		6,889			6,877			6,902			6,893
Other liabilities		8,793			7,781			12,136			7,967
Total liabilities		910,893			856,002			971,643			963,141
SHAREHOLDERS’ EQUITY
Common stock ($5 par value; authorized - 30,000,000 shares; outstanding - 13,238,716 and 13,203,605 shares, respectively) (2)		66,194			66,018
Common stock ($5 par value; authorized - 30,000,000 shares; outstanding - 13,332,484 and 13,201,682 shares, respectively) (2)								66,662			66,008
Additional paid-in capital		37,276			37,142			36,699			36,972
Unearned employee stock ownership plan shares		(1,006	)		(1,129	)		(1,668	)		(1,734	)
Retained earnings		16,775			13,679			20,817			17,557
Accumulated other comprehensive loss, net		(2,692	)		(1,156	)
Accumulated other comprehensive income (loss), net								107			(1,327	)
Total shareholders’ equity		116,547			114,554			122,617			117,476
Total liabilities and shareholders’ equity	$	1,027,440		$	970,556		$	1,094,260		$	1,080,617

	For the Three Months Ended					For the Nine Months Ended					For the Three Months Ended						For the Six Months Ended
(Dollars in thousands, except per share data)	September 30, 2018			September 30, 2017		September 30, 2018			September 30, 2017		June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
INTEREST INCOME
Loans, including fees	$	10,124		$	8,874	$	29,853		$	21,588	$	11,458		$	9,745		$	22,919		$	19,729
Securities:
Taxable		498			329		1,392			946		577			497			1,172			894
Tax-exempt		119			116		356			344		97			117			214			237
Federal funds sold		45			43		171			77		18			52			25			126
Interest-bearing deposit accounts		64			116		242			176
Interest-earning deposit accounts												152			80			288			178
Certificates of deposit		18			18		54			55		19			17			39			36
Total interest income		10,868			9,496		32,068			23,186		12,321			10,508			24,657			21,200
INTEREST EXPENSE
Deposits		2,027			1,292		5,427			2,999		3,088			1,796			5,896			3,400
Federal funds purchased		—			—		—			10
Securities sold under repurchase agreements		3			5		10			12		4			4			7			7
Subordinated notes		128			118		384			354		138			128			275			256
Federal Home Loan Bank advances		441			279		1,140			681		614			386			1,319			699
Total interest expense		2,599			1,694		6,961			4,056		3,844			2,314			7,497			4,362
Net interest income		8,269			7,802		25,107			19,130		8,477			8,194			17,160			16,838
Provision for loan losses		509			1,075		481			1,833
Provision for (recovery of) loan losses												62			(348	)		376			(28	)
Net interest income after provision for loan losses		7,760			6,727		24,626			17,297		8,415			8,542			16,784			16,866
NON-INTEREST INCOME
NONINTEREST INCOME
Income from fiduciary activities		151			217		596			691		206			198			420			445
Service charges and fees on deposit accounts		251			238		538			696		246			152			484			287
Non-deposit product income		144			105		558			300
Wealth management												262			282			469			414
Interchange fees, net		105			101		221			314		121			124			222			116
Other service charges and fees		30			40		91			75		27			30			56			61
Secondary market lending income		152			157		528			358
Secondary market sales and servicing												267			243			339			376
Increase in cash surrender value of bank owned life insurance		123			133		374			341		121			124			240			251
Net gains on sale of available-for-sale securities		—			—		—			2
Net gains (losses) on disposition of other assets		51			—		(18	)		—
Net losses on sale of available-for-sale securities												(2	)		—			(2	)		—
Net loss on disposition of other assets												(1	)		—			(1	)		(69	)
Gain (loss) on rabbi trust assets												40			(25	)		130			27
Gain on curtailment of post-retirement benefit plan		—			—		352			—		—			—			—			352
Other		(11	)		17		90			169		8			35			28			74
Total non-interest income		996			1,008		3,330			2,946
NON-INTEREST EXPENSE
Total noninterest income												1,295			1,163			2,385			2,334
NONINTEREST EXPENSE
Salaries and employee benefits		4,022			3,687		12,407			9,832		3,892			4,273			7,893			8,379
Occupancy		962			811		2,639			1,943		837			874			1,705			1,659
Data processing		556			299		1,941			897		609			834			1,197			1,306
Bank franchise tax		178			141		531			359		230			177			446			353
Telecommunications		132			111		369			215
Telecommunications and other technology												262			166			469			362
FDIC assessments		151			119		521			315		162			187			378			370
Foreclosed property		45			45		110			114		19			53			62			65
Consulting		228			58		957			209		147			341			262			723
Advertising and marketing		126			100		347			227		109			153			176			221
Directors’ fees		146			135		382			466		213			68			377			236
Audit and accounting		236			121		839			366		189			240			393			603
Legal		123			9		380			95		27			119			110			249
Merger related		—			141		363			1,126
Merger-related												—			—			—			363
Core deposit intangible amortization		196			227		610			461		173			203			353			414
Net other real estate owned (gains) losses		(112	)		9		(169	)		102
Net other real estate owned loss (gains)												72			84			66			(57	)
Other		543			707		1,988			1,988		651			790			1,335			1,437
Total non-interest expense		7,532			6,720		24,215			18,715
Total noninterest expense												7,592			8,562			15,222			16,683
Income before income taxes		1,224			1,015		3,741			1,528		2,118			1,143			3,947			2,517
Income tax expense		198			273		645			406		395			197			732			447
Net income	$	1,026		$	742	$	3,096		$	1,122	$	1,723		$	946		$	3,215		$	2,070
Basic and diluted earnings per share	$	0.08		$	0.07	$	0.24		$	0.14	$	0.13		$	0.07		$	0.25		$	0.16

							Unearned																		Unearned
							Employee Stock					Accumulated													Employee Stock					Accumulated
	Shares of				Additional		Ownership					Other			Total			Shares of				Additional			Ownership					Other			Total
	Common		Common		Paid-in		Plan			Retained		Comprehensive			Shareholders’			Common		Common		Paid-in			Plan			Retained		Comprehensive			Shareholders’
(Dollars in thousands)	Stock		Stock		Capital		Shares			Earnings		Loss, net			Equity			Stock		Stock		Capital			Shares			Earnings		Income (Loss), net			Equity
Nine months ended September 30, 2018
Balance at beginning of period		13,203,605	$	66,018	$	37,142	$	(1,129	)	$	13,679	$	(1,156	)	$	114,554
Balances at December 31, 2018																			13,201,682	$	66,008	$	36,972		$	(1,734	)	$	17,557	$	(1,327	)	$	117,476
Net income		—		—		—		—			3,096		—			3,096			—		—		—			—			3,215		—			3,215
Other comprehensive loss, net		—		—		—		—			—		(1,536	)		(1,536	)
Stock options exercised		22,491		112		19		—			—		—			131
Other comprehensive income																			—		—		—			—			—		1,434			1,434
Stock options exercised, net																			5,173		26		(17	)		—			—		—			9
Director stock grant		12,620		64		—		—			—		—			64			18,396		92		56			—			—		—			148
Restricted stock awards																			107,233		536		(536	)		—			—		—			—
ESOP collateral release		—		—		—		123			—		—			123			—		—		—			66			—		—			66
Share-based compensation expense		—		—		115		—			—		—			115			—		—		224			—			—		—			224
Balance at end of period		13,238,716	$	66,194	$	37,276	$	(1,006	)	$	16,775	$	(2,692	)	$	116,547
Cumulative effect adjustment of adoption of accounting principle																			—		—		—			—			45		—			45
Balances at June 30, 2019																			13,332,484	$	66,662	$	36,699		$	(1,668	)	$	20,817	$	107		$	122,617

For the Nine Months Ended

(Dollars in thousands)

September 30, 2018

September 30, 2017

Cash Flows From Operating Activities

Net income

$
3,096

$
1,122

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

1,261

1,041

Net premium amortization and discount accretion of securities

167

271

Amortization of subordinated debt issuance costs

12

13

Amortization of core deposit intangible

610

461

Accretion of fair value adjustment of time deposits

(150
)

(219
)
Accretion of fair value adjustments (discounts) of loans

1,408

(860
)
Provision for loan losses

481

1,833

Share-based compensation

115

178

Gain on sale of available-for-sale securities

—

2

(Decrease) increase in other real estate owned valuation allowance

(33
)

145

Gain on sale of other real estate owned

(136
)

(44
)
Loss on disposal of fixed and other assets

18

—

Decrease in value of mortgage servicing rights

18

16

Originations of loans held for sale

(17,096
)

(10,204
)
Proceeds from loan sales

19,039

10,438

Gain on sold loans

(292
)

(120
)
Increase in cash surrender value of bank owned life insurance

(374
)

(342
)
Gain on curtailment of post-retirement benefit plan

(352
)

—

Decrease in accrued interest receivable and other assets

(675
)

(145
)
Increase in other liabilities

1,487

1,160

Net cash provided by operating activities

8,604

4,746

Cash Flows From Investing Activities

Proceeds from maturities and principal paydowns of available-for-sale securities

3,477

3,093

Proceeds from sales and calls of available-for-sale securities

—

17,662

Maturities of certificates of deposit

248

992

Purchases of available-for-sale securities and certificates of deposit

(9,650
)

(19,121
)
Purchases of restricted securities, net

(963
)

(1,807
)
Decrease (increase) in federal funds sold

6,764

(21,451
)
Net increase in loans

(92,525
)

(57,147
)
Loan purchases

—

(34,037
)
Cash acquired in the merger with Virginia BanCorp

—

14,698

Proceeds from sale of other real estate owned

3,159

603

Proceeds from sale of equipment

—

9

Purchases of premises and equipment

(2,113
)

(1,643
)
Net cash used in investing activities

(91,603
)

(98,149
)
Cash Flows From Financing Activities

Net increase (decrease) in demand, savings, and other interest-bearing deposits

36,435

(2,527
)
Net increase in time deposits

10,997

88,512

Stock options exercised

131

195

Net decrease in securities sold under repurchase agreements

(3,415
)

(1,219
)
Issuance of stock

—

32,888

Dividends paid

—

(376
)
Increase in Federal Home Loan Bank advances

10,000

15,000

Net cash provided by financing activities

54,148

132,473

Net (decrease) increase in cash and due from banks

(28,851
)

39,070

Cash and cash equivalents (including interest-earning deposits) at beginning of period

51,367

12,796

Cash and cash equivalents (including interest-earning deposits) at end of period

$
22,516

$
51,866

Supplemental Schedule of Cash Flow Information

Cash paid for:

Interest

$
6,983

$
4,303

Income taxes

700

690

Non-cash investing and financing activities:

Unrealized (loss) gain on available-for-sale securities

(1,944
)

545

Loans transferred to other real estate owned

2,369

259

Loans originated to facilitate sale of other real estate owned

—

164

Changes in deferred taxes resulting from other comprehensive income transactions

(408
)

184

Unpaid dividends declared

—

527

	For the Six Months Ended
(Dollars in thousands)	June 30, 2019			June 30, 2018
Cash Flows From Operating Activities
Net income	$	3,215		$	2,070
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		871			805
Net premium amortization on available-for-sale securities		276			207
Amortization of subordinated notes issuance costs		9			8
Amortization of core deposit intangible		353			414
Accretion of fair value adjustment on acquired time deposits		(65	)		(110	)
Accretion of fair value discounts on acquired loans		(636	)		(1,051	)
Provision for (recovery of) loan losses		376			(28	)
Share-based compensation expense		224			46
Net loss on the sale of available-for-sale securities		2			—
Increase in other real estate owned valuation allowance		61			91
Net loss (gain) on sale of other real estate owned		5			(148	)
Net loss on the disposition of fixed and other assets		1			69
Decrease in value of mortgage servicing rights		61			22
Originations of loans held for sale (HFS)		(13,982	)		(13,926	)
Proceeds from HFS loan sales		14,004			15,135
Gain on HFS sold loans		(247	)		(227	)
Increase in cash surrender value of bank owned life insurance		(240	)		(251	)
Gain on curtailment of post-retirement benefit plan		—			(352	)
Increase in other assets and accrued interest receivable		(4,707	)		(269	)
Increase in other liabilities		4,119			1,186
Net cash provided by operating activities		3,700			3,691
Cash Flows From Investing Activities
Proceeds from maturities and principal paydowns of available-for-sale securities		2,089			1,808
Proceeds from sales and calls of available-for-sale securities		4,510			—
Purchases of available-for-sale securities		(4,000	)		(650	)
Sales (purchases) of restricted securities, net		831			(403	)
Maturities of certificates of deposit		248			—
Decrease in federal funds sold		29			5,017
Net increase in loans		(15,613	)		(36,799	)
Proceeds from sale of other real estate owned		515			3,001
Net decrease (increase) of premises and equipment		705			(1,421	)
Net cash used in investing activities		(10,686	)		(29,447	)
Cash Flows From Financing Activities
Net increase in demand, savings, and other interest-bearing demand deposits		16,882			2,292
Net increase in time deposits		16,613			11,038
Stock options exercised, net		9			131
Net increase (decrease) in securities sold under repurchase agreements and other borrowings		824			(2,490	)
Decrease in Federal Home Loan Bank advances		(30,000	)		—
Net cash provided by financing activities		4,328			10,971
Net decrease in cash and due from banks		(2,658	)		(14,785	)
Cash and cash equivalents (including interest-earning deposits) at beginning of period		26,666			51,367
Cash and cash equivalents (including interest-earning deposits) at end of period	$	24,008		$	36,582
Supplemental Schedule of Cash Flow Information
Cash paid for:
Interest	$	7,473		$	4,334
Income taxes		—			620
Non-cash investing and financing activities:
Unrealized gain (loss) on available-for-sale securities		1,814			(1,467	)
Changes in deferred taxes resulting from other comprehensive income transactions		(382	)		308
Loans transferred to other real estate owned		152			2,161
Cumulative effect adjustment of adoption of accounting principle		(45	)		—
Employee stock ownership plan transactions		(66	)		(82	)
Director stock grant		148			—

Bay Banks of Virginia, Inc. (the “Company”) is the holding company for Virginia Commonwealth Bank ~~formerly known as Bank of Lancaster~~ (the “Bank” ~~or “VCB”~~), for VCB Financial Group, Inc.~~, formerly known as Bay Trust Company (“VCBFG”~~ (the “Financial Group” or “VCBFG”), and for Steptoes Holdings, LLC (“Steptoes Holdings”). The consolidated financial statements of the Company include the accounts of ~~Bay Banks of Virginia, Inc.,~~the Company, the Bank, ~~VCBFG,~~the Financial Group, and Steptoes Holdings.

On April 1, 2017, the Company completed the merger with Virginia BanCorp Inc., which is further discussed in Note 3, and as such, the consolidated financial statements presented herein reflect the combined operations of the business combination since the effective time of the merger.

In August 2017, the Company completed a private placement of 3,783,784 shares of common stock at an offering price of $9.25 per share to certain existing shareholders, institutional investors, and other accredited investors. Proceeds from the offering, net of offering expenses, were $32.9 million.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and to the general practices within the banking industry. In management’s opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or for any other interim periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Certain amounts presented in the consolidated financial statements of prior periods have been reclassified to conform to current year presentations. The reclassifications had no effect on net income, net income per share, or shareholders’ equity as previously reported.

All dollar amounts included in the tables in these notes are in thousands, except per share data, unless otherwise stated.

In ~~March 2017,~~June 2016, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued Accounting Standards Update (“ASU”) ~~2017-09,~~ ~~Compensation – Stock Compensation (Accounting Standards Codification (“ASC”) 718).~~ The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to account for modifications in Topic 718. An entity should account for the effects of a modification unless all the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in ASC 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU. This ASC was effective for annual periods and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company adopted this ASC in the first quarter of 2018. The adoption did not have a material effect on the Company’s financial statements.

~~In March 2017, the FASB issued ASU 2017-08,~~ ~~Receivables - Nonrefundable Fees and Other Costs (ASC 310-20), Premium Amortization on Purchased Callable Debt Securities.~~ The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company early adopted this ASU, and the adoption did not have a material effect on its consolidated financial statements.

~~In March 2017, the FASB issued ASU 2017-07,~~ ~~Compensation – Retirement Benefits (ASC 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.~~ This ASU intends to improve the presentation of net periodic pension cost and net periodic postretirement benefit costs in the income statement and to narrow the amounts eligible for capitalization in assets. This ASU is effective for fiscal years beginning after December 15, 2017. The Company adopted this ASU in the first quarter of 2018. The adoption did not have a material effect on the Company’s financial statements.

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Intangibles—Goodwill and Other (ASC 350): Simplifying the Test for Goodwill Impairment.~~ This ASU simplifies accounting for goodwill impairments by eliminating step two (the implied fair value to carrying value of goodwill) from the existing goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this ASU, and the adoption did not have a material effect on the Company’s financial statements.

~~In June 2016, the FASB issued ASU~~ 2016-13, Financial Instruments – Credit Losses ~~(ASC~~(Accounting Standards Codification (“ASC”) 326), which is new guidance for the accounting for credit losses on instruments within its scope. ItThis ASU introduces a new model for current expected credit losses (“CECL”), which will apply to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit ~~exposures. This will include~~exposures, including loans, held-to-maturity debt securities, loan commitments, financial guarantees, net investments in leases, reinsurance, and trade receivables. The CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. In addition, this ASC will replace the current available-for-sale debt securities other-than-temporary impairment model with an estimate of expected credit losses only when the fair value falls below the amortized cost of the asset. Credit losses on available-for-sale debt securities will be limited to the difference between the security’s amortized cost basis and its fair value. The available-for-sale debt security model will also require the use of an allowance to record estimated credit losses and subsequent recoveries. ~~The~~This ASU also addresses purchased financial assets with credit deterioration. Disclosure requirements are expanded regarding an entity’s assumptions, models, and methods for estimating the allowance for loan losses. The Company has a CECL cross-functional working group that is implementing the standard supported by its third-party vendor. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. On July 17, 2019, the FASB voted to delay the effective date of this ASU for smaller reporting companies and non-SEC registrants to interim and annual periods beginning after December 15, 2022. The FASB directed its staff to draft a proposed ASU outlining this delay for public comment. The Company ~~has formed an implementation group, which~~meets the definition of a smaller reporting company and is ~~evaluating~~monitoring the ~~effect that this ASU will have on its consolidated financial statements. During the third quarter of 2018, the work group reviewed various CECL software tools and vendors, and subsequent to the end~~impact of the ~~quarter, the Company selected a third party vendor and model to support the requirements of the standard and to assist in implementation.~~proposed delay.

In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842)(“ASU 2016-02”). This ~~ASC~~ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. This ~~ASC is~~ASU was effective for the fiscal years beginning after December 15, 2018, with early adoption permitted. The Company ~~has~~is a lessee in several lease agreements, such as for office space, which ~~are currently~~were considered operating leases and not recognized on its consolidated balance ~~sheet. The~~sheet for the year ended December 31, 2018. On January 1, 2019, the Company ~~expects~~adopted the requirements of ASU 2016-02, and as part of the transition to the new ~~guidance~~standard, the Company measured and recognized leases that existed on January 1, 2019 using a modified retrospective approach. The adoption of ASU 2016-02 resulted in the recognition of operating Right-of-Use (“ROU”) assets and operating lease liabilities of $3.5 million and $3.8 million, respectively, primarily related to ~~require these lease agreements to be recognized on its balance sheet as a right-to-use asset with a corresponding liability.~~real estate leases for branches and office space and information technology related equipment. The ~~Company is currently taking inventory of its lease agreements and accumulating the data needed to implement the new standard. However, the~~ Company does not ~~expect the new standard to~~ have ~~a material~~any finance leases as stipulated in ASC 842. A cumulative effect ~~on its financial statements.~~

~~In January 2016, the FASB issued ASU 2016-01,~~ ~~Financial Instruments – Overall (ASC 825-10)~~, which requires equity investments, other than those accounted for using the equity method, to be measured at fair value through earnings. There will no longer be an available-for-sale classification measured (changes in fair value reported in other comprehensive income) for equity securities with readily determinable fair values. The cost method is also eliminated for equity instruments without a readily determinable fair value. For these investments, companies can elect to record the investment at cost, less impairment, plus or minus subsequent adjustments for observable price changes. This election only applies to equity investments that do not qualify for the net asset value practical expedient. Public companies will be required to use the exit price when measuring the fair valueadjustment of financial instruments measured at amortized cost for disclosure purposes. In addition, this ASC requires financial assets and financial liabilities to be presented separately in the notes to the financial statements, grouped by measurement category and form of financial asset. The classification and measurement guidance is effective for periods beginning after December 15, 2017. The Company’s primary available-for sale investments are debt securities and are therefore not included in the scope of this ASU. However, the Company is subject to certain disclosure requirements of the standard and engaged a third party to assist with the measurement of exit prices of its financial instruments, including its loans receivables, deposits, and borrowings and adopted this standard in the first quarter of 2018. The$45 thousand was recorded upon adoption of ~~this ASC did not have a material effect on the Company’s financial statements, other than the fair value disclosures in Note 11.~~

~~In May 2014, the FASB issued ASC 2014-09,~~ ~~Revenue from Contracts with Customers (ASC 606).~~ ~~The amendments in this~~ ASU modify the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The ASC requires that entities apply a specific method to recognize revenue reflecting the consideration expected from customers in exchange for the transfer of goods and

services. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. Entities are also required to disclose significant judgments and changes in judgments for determining the satisfaction of performance obligations. Subsequent to the issuance of this ASC, the FASB issued targeted updates to clarify specific implementation issues including ASU 2016-08, ~~Principal versus Agent Considerations (Reporting Revenue Gross versus Net),~~ ~~ASU 2016-10,~~ ~~Identifying Performance Obligations and Licensing,~~ ~~ASU 2016-12,~~ ~~Narrow-Scope Improvements and Practical Expedients,~~ ~~and ASU 2016-20,~~ ~~Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.~~ For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoptions, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect on initially applying the standard being recognized at the date of initial application. The effective date for this ASC was for annual reporting periods beginning after December 15, 2017. The Company’s primary source of revenue is interest income from loans and investments and loan fees. As these items are outside the scope of the standard, this income was not affected by this ASC. The Company reviewed other sources of income including fiduciary fees, secondary market lending fees, and other deposit account fees against the requirements of the standard and concluded no changes in the accounting methods were necessary. These sources of revenue are recognized in income when the Company’s performance obligation is completed, which generally is when the transaction occurs for transaction related fees or when the asset is transferred on the sale of loans. The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross versus net). Based on its evaluation, the Company determined that the classification of certain debit and credit card related costs should change (i.e., costs should be presented net of related revenues). This classification was made to both revenue and expense for the quarters and year to date periods ended September 30, 2018 and 2017, reported as interchange fees, net on the consolidated statements of operations.

On April 1, 2017, the Company and Virginia BanCorp Inc. (“Virginia BanCorp”), a bank holding company conducting substantially all of its operations through its subsidiary, Virginia Commonwealth Bank, completed a merger pursuant to the Agreement and Plan of Merger, dated as of November 2, 2016, by and between the Company and Virginia BanCorp (the “Merger”). The Company is the surviving corporation in the Merger, and the former shareholders of Virginia BanCorp received 1.178 shares of the Company’s common stock for each share of Virginia BanCorp common stock they owned immediately prior to the merger, for a total issuance of 4,586,221 shares of the Company’s common stock valued at approximately $42.2 million at the time of closing. As of the completion of the Merger, the Company’s legacy shareholders owned approximately 51% of the outstanding common stock of the Company, and Virginia BanCorp’s former shareholders owned approximately 49% of the outstanding common stock of the Company. After the Merger of Virginia BanCorp with and into the Company, Virginia BanCorp’s subsidiary bank was merged with and into Bank of Lancaster, a wholly owned subsidiary of the Company, and immediately thereafter Bank of Lancaster changed its name to Virginia Commonwealth Bank.

~~The Merger was accounted for using the acquisition method of accounting in accordance with ASC 805,~~ ~~Business Combinations~~. Under this method, the assets and liabilities of Virginia BanCorp were recorded at their respective fair values as of April 1, 2017. Determining the fair value of assets and liabilities, particularly for the loan portfolio, is a complex process involving significant judgment regarding methods and assumptions used to calculate the estimated fair values. As a result, the Company recognized goodwill of $7.6 million in connection with the Merger, none of2016-02, which is ~~deductible for income tax purposes.~~

The following table details the total consideration paid by the Company, in connection with the acquisition of Virginia BanCorp, the fair value of the assets acquired and liabilities assumed, and the resulting goodwill.

Fair Value

As Recorded

Adjustments

As Recorded

by Virginia
BanCorp

and
Reclassifications

by the
Company

Consideration paid:

Bay Banks of Virginia, Inc. common stock

$
42,247

Identifiable assets acquired:

Cash and due from banks

$
2,356

$
—

$
2,356

Interest-bearing deposits

12,342

—

12,342

Securities available-for-sale

22,088

—

22,088

Restricted securities

1,543

—

1,543

Loans receivable

272,479

(62,068
)

210,411

Loans held for sale

—

55,648

55,648

Deferred income taxes

1,325

255

1,580

Premises and equipment

3,333

2,703

6,036

Accrued interest receivable

1,253

(24
)

1,229

Other real estate owned

3,113

—

3,113

Core deposit intangible

—

3,670

3,670

Bank owned life insurance

8,430

—

8,430

Mortgage servicing rights

324

—

324

Other assets

365

—

365

Total identified assets acquired

328,951

184

329,135

Identifiable liabilities assumed:

Noninterest-bearing deposits

21,119

—

21,119

Savings and interest-bearing demand deposits

124,640

—

124,640

Time deposits

121,437

733

122,170

Federal Home Loan Bank advances

25,000

—

25,000

Other liabilities

1,525

—

1,525

Total identifiable liabilities assumed

293,721

733

294,454

Total identifiable assets assumed

$
35,230

$
(549
)

$
34,681

Goodwill resulting from acquisition

$
7,566

The table below illustrates the unaudited pro forma revenue and net income of the combined entities had the acquisition taken place on January 1, 2017. The unaudited combined pro forma revenue and net income combines the historical results of Virginia BanCorp with the Company’s consolidated statements of operations for the period noted, and while certain adjustments were made for the estimated effect of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition actually taken place on January 1, 2017. Merger-related expenses of $1.1 million were includedreflected in the Company’s ~~actual consolidated statements~~statement of ~~operations~~shareholders’ equity. Refer to Note 7 for ~~the nine months ended September 30, 2017, but were excluded from the unaudited pro forma~~additional information ~~below. Operational cost savings~~ and ~~other efficiencies expected to be achieved by the Company due to the Merger are also not reflected in the unaudited pro forma amounts.~~disclosures regarding ASU 2016-02.

The net effect of the amortization and accretion of premiums and discounts associated with the Company’s acquisition accounting adjustments to assets acquired and liabilities assumed from Virginia BanCorp had the following effect on the consolidated statements of operations for the periods presented.

The aggregate amortized costs and fair values of available-for-sale securities as of the dates stated were as follows.

			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
September 30, 2018	Cost		Gains		(Losses)			Value
June 30, 2019										Cost		Gains		(Losses)			Value
U.S. Government agencies and mortgage backed securities	$	52,073	$	1	$	(1,938	)	$	50,136	$	51,941	$	205	$	(279	)	$	51,867
State and municipal obligations		20,525		12		(599	)		19,938		16,810		281		(37	)		17,054
Corporate bonds		11,177		5		(41	)		11,141		12,180		68		—			12,248
Total available-for-sale securities	$	83,775	$	18	$	(2,578	)	$	81,215	$	80,931	$	554	$	(316	)	$	81,169

			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
December 31, 2017	Cost		Gains		(Losses)			Value
December 31, 2018										Cost		Gains		(Losses)			Value
U.S. Government agencies and mortgage backed securities	$	49,964	$	6	$	(687	)	$	49,283	$	51,126	$	35	$	(1,279	)	$	49,882
State and municipal obligations		21,113		195		(155	)		21,153		20,484		60		(327	)		20,217
Corporate bonds		6,696		23		(2	)		6,717		12,194		23		(84	)		12,133
Total available-for-sale securities	$	77,773	$	224	$	(844	)	$	77,153	$	83,804	$	118	$	(1,690	)	$	82,232

Securities with fair values of ~~$18.3~~$12.1 million and ~~$19.4~~$17.5 million were pledged as collateral for securities sold under repurchase agreements as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, all of the securities pledged for repurchase agreements were state and municipal obligations. All of the repurchase agreements had remaining contractual maturities that were overnight and continuous. Securities sold under repurchase agreements were ~~$6.1~~$7.0 million and ~~$9.5~~$6.1 million as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, and are included in liabilities on the consolidated balance sheets. The securities pledged to each agreement are reviewed daily and can be changed at the option of the Bank with minimal risk of loss due to fair value changes.

Securities in an unrealized loss position ~~at September~~as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, by period of the unrealized loss, are shown below. The unrealized loss positions were primarily related to interest rate movements and not the credit quality of the issuers. All agency securities and state and municipal securities are investment grade or better, and their losses are considered temporary. Management does not intend to sell nor expect to be required to sell these securities, and all amortized cost bases are expected to be recovered. Securities with unrealized loss positions at September 30, 2018 included 56 U.S. government agencies, 49 state and municipal obligations, and 2 corporate bonds. Securities with unrealized loss positions at December 31, 2017 included 36 U.S. government agencies, 34 state and municipal obligations, and one corporate bond.

The following tables provide ~~additional~~ information on ~~these~~ securities in an unrealized loss position as of the dates stated.

	Less than 12 months					12 months or more					Total							Less than 12 months				12 months or more					Total
September 30, 2018	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
June 30, 2019																Number of Securities		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Government agencies and mortgage backed securities	$	17,047	$	(498	)	$	32,892	$	(1,440	)	$	49,939	$	(1,938	)		45	$	983	$	—	$	31,302	$	(279	)	$	32,285	$	(279	)
State and municipal obligations		11,996		(191	)		5,767		(408	)		17,763		(599	)		8		—		—		3,403		(37	)		3,403		(37	)
Corporate bonds		2,484		(41	)		—		—			2,484		(41	)		—		—		—		—		—			—		—
Total temporarily impaired securities	$	31,527	$	(730	)	$	38,659	$	(1,848	)	$	70,186	$	(2,578	)		53	$	983	$	—	$	34,705	$	(316	)	$	35,688	$	(316	)

	Less than 12 months					12 months or more					Total							Less than 12 months					12 months or more					Total
December 31, 2017	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
December 31, 2018																Number of Securities		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Government agencies and mortgage backed securities	$	25,053	$	(353	)	$	16,184	$	(334	)	$	41,237	$	(687	)		54	$	2,911	$	(22	)	$	43,843	$	(1,257	)	$	46,754	$	(1,279	)
State and municipal obligations		2,753		(15	)		5,787		(140	)		8,540		(155	)		39		2,723		(27	)		9,119		(300	)		11,842		(327	)
Corporate bonds		498		(2	)		—		—			498		(2	)		5		5,742		(84	)		—		—			5,742		(84	)
Total temporarily impaired securities	$	28,304	$	(370	)	$	21,971	$	(474	)	$	50,275	$	(844	)		98	$	11,376	$	(133	)	$	52,962	$	(1,557	)	$	64,338	$	(1,690	)

The following table presents the amortized cost and fair value by contractual maturity of available-for-sale securities ~~available for sale~~ as of the dates stated. Expected maturities may differ from contractual maturities, as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2018				December 31, 2017				June 30, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	978	$	973	$	3,583	$	3,514	$	1,543	$	1,545	$	1,080	$	1,079
Due after one year but less than five years		45,633		44,382		37,747		37,425		43,940		44,036		47,065		46,358
Due after five years but less than ten years		28,063		27,236		28,441		28,250		27,454		27,704		26,615		26,149
Due after ten years		9,101		8,624		8,002		7,964		7,994		7,884		9,044		8,646
Total available-for-sale securities	$	83,775	$	81,215	$	77,773	$	77,153	$	80,931	$	81,169	$	83,804	$	82,232

The Company’s investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock totaled ~~$4.3~~$3.9 million and ~~$3.7~~$5.1 million ~~at September~~as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The Company also ~~had~~has an investment in the Federal Reserve Bank of Richmond (“FRB”) stock, which totaled $2.6 million as of June 30, 2019 and $2.3 million ~~at September 30,~~as of December 31, 2018 and ~~$1.9 million at~~a stock investment in the Bank’s primary correspondent bank totaling $220 thousand as of June 30, 2019 and December 31, ~~2017.~~2018. The investments in both FHLB and FRB stock are required investments related to the Bank’s membership inwith the FHLB and FRB. These securities do not have a readily determinable fair value as their ownership is restricted, and they lack an active market for trading. Additionally, ~~per~~pursuant to charter provisions related to the FHLB and FRB stock, all repurchase transactions of such stock must occur at par. Accordingly, these securities are carried at cost and are periodically evaluated for impairment.

Loans are reported at their recorded investment, which is the outstanding principal balance net of any unearned income and costs, such as deferred fees and costs, charge-offs, and ~~acquisition accounting adjustments (discounts)~~discounts or premiums on acquired or purchased loans. Interest on loans is recognized in earnings over the contractual term of the loan and is calculated using the effective interest method on principal amounts outstanding. Loan ~~origination~~ fees and certain direct origination costs are deferred and recognized as an adjustment of the related loan yield over the contractual term of the loan, adjusted for early pay-offs ~~where~~or principal curtailments, as applicable.

All interest accrued but not collected for loans that are placed on nonaccrual or ~~charged off~~charged-off are reversed against interest income at the time the ~~loan is classified as nonaccrual.~~loans are placed in nonaccrual or charged-off. Any subsequent interest received on these loans is recognized as interest income onunder the cash

basis method of accounting until the loan qualifies tofor return to accrual status. Generally, a loan is returned to accrual status when all ~~the~~ principal and interest amounts contractually due are brought current and future payments are reasonably assured, or itthe loan becomes well-secured and in the process of collection.

The following istable presents a summary ~~of the balances~~ of loans as of the dates stated.

	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
Mortgage loans on real estate:
Construction, land and land development	$	94,750		$	66,042		$	110,598		$	109,475
Farmland		748			923
Commercial mortgages (non-owner occupied)		171,996			146,757			178,532			180,074
Commercial mortgages (owner occupied)		82,391			80,052			82,990			87,241
Residential first mortgages		293,266			269,365			305,252			298,894
Residential revolving and junior mortgages		39,170			46,498			35,875			38,313
Commercial and industrial		144,118			114,093			187,531			164,608
Consumer		27,920			42,566			16,889			23,740
Total loans		854,359			766,296			917,667			902,345
Net unamortized deferred loan (fees) costs		(79	)		200
Net unamortized deferred loan fees								(275	)		(252	)
Allowance for loan losses		(7,287	)		(7,770	)		(7,479	)		(7,902	)
Loans receivable, net	$	846,993		$	758,726		$	909,913		$	894,191

As of June 30, 2019 and December 31, 2018, the Company had $261.7 million and $229.1 million, respectively, of loans pledged to the FHLB as collateral for borrowings.

The following tables present the recorded investment for past due, based upon contractual terms, and ~~nonaccruing~~nonaccrual loans ~~is shown in the following tables~~ as of the dates stated. A loan past due 90 days or more is generally placed on nonaccrual unless it is both ~~well secured~~well-secured and in the process of collection. Loans presented below as 90 days or more past due and still accruing include purchased credit-impaired (“PCI”) loans.

September 30, 2018	30-89 Days Past Due		90 Days or More Past Due and Still Accruing		Nonaccruals		Total Past Due and Nonaccruals		Current		Total Loans
June 30, 2019													30-89 Days Past Due		90 Days or More Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Total Loans
Mortgage loans on real estate:
Construction, land and land development	$	112	$	—	$	499	$	611	$	94,139	$	94,750	$	225	$	—	$	698	$	923	$	109,675	$	110,598
Farmland		—		—		—		—		748		748
Commercial mortgages (non-owner occupied)		—		—		1,003		1,003		170,993		171,996		—		—		434		434		178,098		178,532
Commercial mortgages (owner occupied)		539		28		1,120		1,687		80,704		82,391		144		—		238		382		82,608		82,990
Residential first mortgages		1,342		78		1,092		2,512		290,754		293,266		1,063		156		1,984		3,203		302,049		305,252
Residential revolving and junior mortgages		119		20		385		524		38,646		39,170		99		—		936		1,035		34,840		35,875
Commercial and industrial		98		—		48		146		143,972		144,118		—		—		—		—		187,531		187,531
Consumer		357		3		57		417		27,503		27,920		279		—		287		566		16,323		16,889
Total loans	$	2,567	$	129	$	4,204	$	6,900	$	847,459	$	854,359	$	1,810	$	156	$	4,577	$	6,543	$	911,124	$	917,667

December 31, 2017	30-89 Days Past Due		90 Days or More Past Due and Still Accruing		Nonaccruals		Total Past Due and Nonaccruals		Current		Total Loans
December 31, 2018													30-89 Days Past Due		90 Days or More Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Total Loans
Mortgage loans on real estate:
Construction, land and land development	$	261	$	—	$	1,237	$	1,498	$	64,544	$	66,042	$	552	$	—	$	740	$	1,292	$	108,183	$	109,475
Farmland		—		48		—		48		875		923
Commercial mortgages (non-owner occupied)		449		—		—		449		146,308		146,757		50		—		996		1,046		179,028		180,074
Commercial mortgages (owner occupied)		573		—		1,752		2,325		77,727		80,052		—		56		1,064		1,120		86,121		87,241
Residential first mortgages		2,670		141		1,942		4,753		264,612		269,365		1,341		55		1,361		2,757		296,137		298,894
Residential revolving and junior mortgages		449		20		1,338		1,807		44,691		46,498		115		—		782		897		37,416		38,313
Commercial and industrial		331		—		92		423		113,670		114,093		—		—		48		48		164,560		164,608
Consumer		288		4		135		427		42,139		42,566		329		—		215		544		23,196		23,740
Total loans	$	5,021	$	213	$	6,496	$	11,730	$	754,566	$	766,296	$	2,387	$	111	$	5,206	$	7,704	$	894,641	$	902,345

The following tables include an aging analysis, based upon contractual terms, of the recorded investment of PCI loans included in the tables above, as of the dates ~~stated, included~~stated.

The following table presents the changes in accretable yield for PCI loans for the period stated.

Loans in the Company’s loan portfolio are risk rated on a periodic basis by experienced credit personnel.

Pass – Several pass credit grades comprise loans in this category, which are assigned based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to management attention credits that have all characteristics of an acceptable credit risk but warrant more than the normal level of monitoring.

Special Mention – Adverse trends in the borrower’s financial position are evident and warrant management’s close attention. Any collateral may not be fully adequate to secure the loan balance.

Substandard – A loan in this category has a well-defined weakness in the primary repayment source that jeopardizes the timely collection of the loan. There is a distinct possibility that a loss may result if the weakness is not corrected.

Doubtful – Default has already occurred and it is likely that foreclosure or repossession procedures have begun or will begin in the near future. Weaknesses make collection or liquidation in full, based on currently existing information, highly questionable and improbable.

Loss – Uncollectible and of such little value that continuance as an asset is not warranted.

The following tables ~~above.~~present the Company’s risk rating of loans by loan type as of the dates stated.

September 30, 2018

30-89
Days
Past Due

90 Days or
More Past
Due and
Still Accruing

Nonaccruals

Total Past
Due and
Nonaccruals

Current

Total
PCI
Loans

Mortgage loans on real estate:

Construction, land and land development

$
—

$
—

$
—

$
—

$
1,385

$
1,385

Commercial mortgages (non-owner occupied)

—

—

—

—

149

149

Commercial mortgages (owner occupied)

32

28

—

60

238

298

Residential first mortgages

—

78

—

78

3,448

3,526

Residential revolving and junior mortgages

—

20

—

20

21

41

Commercial and industrial

—

—

—

—

—

—

Consumer

—

3

—

3

54

57

Total purchased credit-impaired loans

$
32

$
129

$
—

$
161

$
5,295

$
5,456

June 30, 2019	Construction, Land and Land Development		Commercial Mortgages (Non-Owner Occupied)		Commercial Mortgages (Owner Occupied)		Residential First Mortgages		Residential Revolving and Junior Mortgages		Commercial and Industrial		Consumer		Total Loans
Rating:
Pass	$	108,524	$	177,969	$	82,423	$	301,753	$	34,552	$	180,375	$	16,598	$	902,194
Special mention		—		—		154		478		63		5,951		—		6,646
Substandard		2,074		563		413		3,021		1,260		1,205		291		8,827
Doubtful		—		—		—		—		—		—		—		—
Total loans	$	110,598	$	178,532	$	82,990	$	305,252	$	35,875	$	187,531	$	16,889	$	917,667

December 31, 2017

30-89
Days
Past Due

90 Days or
More Past
Due and
Still Accruing

Nonaccruals

Total Past
Due and
Nonaccruals

Current

Total
PCI
Loans

Mortgage loans on real estate:

Construction, land and land development

$
—

$
—

$
—

$
—

$
1,405

$
1,405

Commercial mortgages (non-owner occupied)

—

—

—

—

171

171

Commercial mortgages (owner occupied)

161

—

—

161

160

321

Residential first mortgages

349

141

—

490

3,320

3,810

Residential revolving and junior mortgages

—

20

—

20

29

49

Commercial and industrial

—

—

—

—

—

—

Consumer

—

4

—

4

65

69

Total purchased credit-impaired loans

$
510

$
165

$
—

$
675

$
5,150

$
5,825

December 31, 2018	Construction, Land and Land Development		Commercial Mortgages (Non-Owner Occupied)		Commercial Mortgages (Owner Occupied)		Residential First Mortgages		Residential Revolving and Junior Mortgages		Commercial and Industrial		Consumer		Total Loans
Rating:
Pass	$	107,306	$	178,936	$	85,897	$	295,372	$	37,206	$	162,392	$	23,389	$	890,498
Special mention		68		—		107		1,071		—		893		121		2,260
Substandard		2,101		1,138		1,237		2,451		1,107		1,323		230		9,587
Doubtful		—		—		—		—		—		—		—		—
Total loans	$	109,475	$	180,074	$	87,241	$	298,894	$	38,313	$	164,608	$	23,740	$	902,345

The allowance for loan losses (“ALL”) reflects management’s judgment of probable loan losses inherent in the loan portfolio atas of the balance sheet date. Management uses a disciplined process and methodology to establish the ALL each ~~quarter.~~quarter-end. To determine the total ALL, the Company estimates the reserves needed for each homogenous ~~segment and class~~type of the loan portfolio, ~~and for any~~in addition to loans analyzed individually for impairment. Depending on the nature of each ~~segment and class,~~loan type, considerations include historical loss experience, adverse situations that may affect a borrower’s ability to repay, credit scores, past due history, estimated value of any underlying collateral, prevailing local and national economic conditions, and internal policies and procedures including credit risk management and underwriting. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as conditions change.

The ALL consists of specific, general, and unallocated components. The specific component is determined by identifying impaired loans (as described below) then evaluating ~~those meeting certain criteria~~each one individually to calculate the amount of impairment. Impaired loans measured individually for impairment generally include (1) any loan risk rated Special Mention or worse where the borrower has filed for bankruptcy; ~~and~~ (2) all loans risk rated Substandard or worse with balances of $400 thousand or more; and (3) all loans classified as a troubled debt restructuring (“TDR”). ~~A specific allowance is held when~~For the ~~discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The~~ general component of the ALL, is the ~~result of the collective evaluation of~~Company collectively evaluates any loans not ~~identified as~~evaluated individually for a specific reserve, including impaired loans risk rated Substandard or worse with balances less than $400 thousand. All loans evaluated ~~as impaired and~~collectively are grouped into ~~segments~~types, and ~~classes. Historical~~historical loss experience is calculated and applied to each ~~segment or class, as well as adjustments~~loan type and the resultant reserve is adjusted for qualitative factors. Qualitative factors include changes in local and national economic indicators, such as unemployment rates, interest rates, gross domestic product growth, and real estate market trends; the level of past due and nonaccrual loans; risk ratings on individual loans; strength of credit policies and procedures; loan officer experience; borrower credit scores; and other intrinsic risks related to the types and geographic locations of loans. These qualitative adjustments reflect management’s judgment of risks inherent in the ~~segments.~~loan types. An unallocated component is maintained, if needed, to cover uncertainties that could affect management’s estimate of probable losses. ~~Changes in the allowance for loan losses and the related provision expense can materially affect net income.~~

The following table ~~shows~~presents the ALL by loans evaluated for impairment individually and collectively by ~~segment~~loan type as of the dates stated.

September 30, 2018	Mortgage Loans on Real Estate		Commercial and Industrial		Consumer		Total
June 30, 2019									Mortgage Loans on Real Estate		Commercial and Industrial		Consumer		Total
Allowance for loan losses applicable to:
Loans individually evaluated for impairment	$	922	$	—	$	131	$	1,053	$	987	$	—	$	119	$	1,106
Loans collectively evaluated for impairment		3,485		1,130		1,619		6,234		4,065		1,537		771		6,373
Purchased credit-impaired loans		—		—		—		—		—		—		—		—
Total allowance on loan losses	$	4,407	$	1,130	$	1,750	$	7,287
Total allowance for loan losses									$	5,052	$	1,537	$	890	$	7,479
Loan balances applicable to:
Loans individually evaluated for impairment	$	7,463	$	—	$	131	$	7,594	$	7,358	$	—	$	119	$	7,477
Loans collectively evaluated for impairment		669,459		144,118		27,732		841,309		700,837		187,531		16,724		905,092
Purchased credit-impaired loans		5,399		—		57		5,456		5,052		—		46		5,098
Total loans	$	682,321	$	144,118	$	27,920	$	854,359	$	713,247	$	187,531	$	16,889	$	917,667
December 31, 2017
December 31, 2018
Allowance for loan losses applicable to:
Loans individually evaluated for impairment	$	861	$	92	$	141	$	1,094	$	1,036	$	—	$	121	$	1,157
Loans collectively evaluated for impairment		3,003		786		2,887		6,676		3,931		1,374		1,440		6,745
Purchased credit-impaired loans		—		—		—		—		—		—		—		—
Total allowance on loan losses	$	3,864	$	878	$	3,028	$	7,770
Total allowance for loan losses									$	4,967	$	1,374	$	1,561	$	7,902
Loan balances applicable to:
Loans individually evaluated for impairment	$	8,874	$	92	$	141	$	9,107	$	7,485	$	—	$	121	$	7,606
Loans collectively evaluated for impairment		595,007		114,001		42,356		751,364		701,235		164,608		23,573		889,416
Purchased credit-impaired loans		5,756		—		69		5,825		5,277		—		46		5,323
Total loans	$	609,637	$	114,093	$	42,566	$	766,296	$	713,997	$	164,608	$	23,740	$	902,345

The following tables ~~show~~present an analysis of the change in the ALL by ~~segment~~loan type for the periods presented.

For the Three Months Ended June 30, 2019													Mortgage Loans on Real Estate			Commercial and Industrial			Consumer			Total
Beginning Balance													$	5,259		$	1,406		$	1,193		$	7,858
Charge-offs														(105	)		—			(411	)		(516	)
Recoveries														18			—			57			75
Provision (recovery of)														(120	)		131			51			62
Ending Balance													$	5,052		$	1,537		$	890		$	7,479
	Mortgage Loans on Real Estate			Commercial and Industrial			Consumer			Total
For the Three Months Ended September 30, 2018
For the Three Months Ended June 30, 2018													Mortgage Loans on Real Estate			Commercial and Industrial			Consumer			Total
Beginning Balance													$	4,190		$	1,043		$	2,690		$	7,923
Charge-offs														(83	)		(101	)		(335	)		(519	)
Recoveries														16			—			41			57
Provision (recovery of)														121			2			(471	)		(348	)
Ending Balance													$	4,244		$	944		$	1,925		$	7,113

For the Six Months Ended June 30, 2019													Mortgage Loans on Real Estate			Commercial and Industrial			Consumer			Total
Beginning Balance	$	4,244		$	944		$	1,925		$	7,113		$	4,967		$	1,374		$	1,561		$	7,902
Charge-offs		(54	)		—			(418	)		(472	)		(159	)		-			(819	)		(978	)
Recoveries		60			—			77			137			43			1			135			179
Provision		157			186			166			509			201			162			13			376
Ending Balance	$	4,407		$	1,130		$	1,750		$	7,287		$	5,052		$	1,537		$	890		$	7,479

	Mortgage Loans on Real Estate			Commercial and Industrial			Consumer			Total
For the Three Months Ended September 30, 2017
For the Six Months Ended June 30, 2018													Mortgage Loans on Real Estate			Commercial and Industrial			Consumer			Total
Beginning Balance	$	3,686		$	456		$	99		$	4,241		$	3,864		$	878		$	3,028		$	7,770
Charge-offs		(75	)		—			(366	)		(441	)		(114	)		(116	)		(677	)		(907	)
Recoveries		10			1			34			45			43			—			235			278
Provision		216			56			803			1,075
Provision (recovery of)														451			182			(661	)		(28	)
Ending Balance	$	3,837		$	513		$	570		$	4,920		$	4,244		$	944		$	1,925		$	7,113

	Mortgage Loans on Real Estate			Commercial and Industrial			Consumer			Total
For the Nine Months Ended September 30, 2018
Beginning Balance	$	3,864		$	878		$	3,028		$	7,770
Charge-offs		(168	)		(116	)		(1,095	)		(1,379	)
Recoveries		103			1			311			415
Provision (recovery)		608			367			(494	)		481
Ending Balance	$	4,407		$	1,130		$	1,750		$	7,287

	Mortgage Loans on Real Estate			Commercial and Industrial			Consumer			Total
For the Nine Months Ended September 30, 2017
Beginning Balance	$	3,318		$	493		$	52		$	3,863
Charge-offs		(348	)		—			(567	)		(915	)
Recoveries		98			2			39			139
Provision		769			18			1,046			1,833
Ending Balance	$	3,837		$	513		$	570		$	4,920

The following table presents ~~the changes in the accretable yield for PCI loans for the period presented.~~

All loans in the Company’s loan portfolio, with the exception of purchased consumer loans, are risk rated using loan risk grading software that employs a variety of algorithms based on detailed account characteristics to include borrower’s payment history on a total relationship basis as well as loan to value exposure. For non-homogenous loans, management reviews these resulting grade

assignments and makes adjustments to the final grade where appropriate based on an assessment of additional external information that may affect a particular loan. For purchased consumer loans, a loan is rated “substandard” when it is 90 days or more past due; otherwise, the loan is graded “pass”.

~~Pass~~ ~~– Borrower is strong or sound and collateral securing the loan, if any, is adequate.~~

~~Watch~~ ~~– Borrower exhibits some signs of financial stress but is generally believed to be a satisfactory customer and collateral, if any, may be in excess of 90% of the loan balance.~~

~~Special Mention~~ ~~– Adverse trends in the borrower’s financial position are evident and warrant management’s close attention. Any collateral may not be fully adequate to secure the loan balance.~~

~~Substandard~~ – A loan in this category has a well-defined weakness in the primary repayment source that jeopardizes the timely collection of the debt. There is a distinct possibility that a loss may result if the weakness is not corrected.

~~Doubtful~~ – Default has already occurred and it is likely that foreclosure or repossession procedures have begun or will begin in the near future. Weaknesses make collection or liquidation in full, based on currently existing information, highly questionable and improbable.

~~Loss~~ ~~– Uncollectible and of such little value that continuance as a bankable asset is not warranted.~~

~~The following table shows~~ the Company’s recorded investment and the borrowers’ unpaid principal balances for impaired loans, excluding PCI loans, with the associated ALL amount, if applicable, by loan type as of the dates stated.

	As of September 30, 2018						As of December 31, 2017						As of June 30, 2019						As of December 31, 2018
	Recorded Investment		Borrowers’ Unpaid Principal Balance		Related Allowance		Recorded Investment		Borrowers’ Unpaid Principal Balance		Related Allowance		Recorded Investment		Borrowers’ Unpaid Principal Balance		Related Allowance		Recorded Investment		Borrowers’ Unpaid Principal Balance		Related Allowance
With no related allowance:
Construction, land and land development	$	92	$	163	$	—	$	900	$	1,378	$	—	$	328	$	399	$	—	$	335	$	406	$	—
Commercial mortgages (non-owner occupied)		—		—		—		—		—		—		—		—		—		386		386		—
Commercial mortgages (owner occupied)		1,026		1,026		—		1,721		1,971		—		429		429		—		—		—		—
Residential first mortgages		1,507		1,507		—		1,488		1,488		—		1,385		1,385		—		—		—		—
Residential revolving and junior mortgages		416		416		—		414		414		—		—		—		—		1,028		1,028		—
Commercial and industrial		—		—		—		—		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—		—		—		—		—
Total impaired loans with no related allowance		3,041		3,112		—		4,523		5,251		—		2,142		2,213		—		1,749		1,820		—
With an allowance recorded:
Construction, land and land development		523		523		290		550		621		137		176		176		39		275		275		132
Commercial mortgages (non-owner occupied)		443		443		18		—		—		—		434		434		34		443		443		18
Commercial mortgages (owner occupied)		931		931		156		547		586		195		1,058		1,058		54		1,069		1,069		57
Residential first mortgages		2,395		2,395		374		1,914		1,914		367		3,048		3,048		644		3,447		3,447		565
Residential revolving and junior mortgages		130		130		84		1,340		1,340		162		500		500		216		502		502		264
Commercial and industrial		—		—		—		92		92		92		—		—		—		—		—		—
Consumer		131		131		131		141		141		141		119		119		119		121		121		121
Total impaired loans with allowance recorded		4,553		4,553		1,053		4,584		4,694		1,094		5,335		5,335		1,106		5,857		5,857		1,157
Total impaired loans:
Construction, land and land development		615		686		290		1,450		1,999		137		504		575		39		610		681		132
Commercial mortgages (non-owner occupied)		443		443		18		—		—		—		434		434		34		829		829		18
Commercial mortgages (owner occupied)		1,957		1,957		156		2,268		2,557		195		1,487		1,487		54		1,069		1,069		57
Residential first mortgages		3,902		3,902		374		3,402		3,402		367		4,433		4,433		644		3,447		3,447		565
Residential revolving and junior mortgages		546		546		84		1,754		1,754		162		500		500		216		1,530		1,530		264
Commercial and industrial		—		—		—		92		92		92		—		—		—		—		—		—
Consumer		131		131		131		141		141		141		119		119		119		121		121		121
Total impaired loans	$	7,594	$	7,665	$	1,053	$	9,107	$	9,945	$	1,094	$	7,477	$	7,548	$	1,106	$	7,606	$	7,677	$	1,157

The following table ~~shows~~presents the average recorded investment and interest income recognized for impaired loans, excluding PCI loans, by loan type for the periods presented.

	For the Three Months Ended								For the Nine Months Ended								For the Three Months Ended								For the Six Months Ended
	September 30, 2018				September 30, 2017				September 30, 2018				September 30, 2017				June 30, 2019				June 30, 2018				June 30, 2019				June 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Construction, land and land development	$	93	$	—	$	367	$	—	$	147	$	1	$	385	$	—	$	330	$	4	$	84	$	—	$	332	$	9	$	165	$	1
Commercial mortgages (non-owner occupied)		—		—		248		4		—		—		248		11		—		—		—		—		—		—		—		—
Commercial mortgages (owner occupied)		1,013		8		1,030		5		985		29		1,102		16		405		7		1,385		20		399		13		1,380		32
Residential first mortgages		1,472		21		1,425		4		1,282		62		1,439		15		1,389		18		1,513		24		1,391		36		1,471		41
Residential revolving and junior mortgages		416		1		482		5		415		4		485		7		—		—		415		1		—		—		415		3
Commercial and industrial		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Consumer		—		3		—		—		—		—		—		—		—		—		—		3		—		—		—		—
Total impaired loans with no allowance		2,994		33		3,552		18		2,829		96		3,659		49		2,124		29		3,397		48		2,122		58		3,431		77
With an allowance recorded:
Construction, land and land development		524		8		1,315		15		512		24		1,323		44		225		10		571		8		241		15		553		17
Commercial mortgages (non-owner occupied)		445		11		—		—		223		11		—		—		435		4		224		—		437		27		149		—
Commercial mortgages (owner occupied)		935		13		1,372		4		945		39		1,381		19		1,061		14		538		8		1,063		28		541		15
Residential first mortgages		2,394		32		1,928		23		2,277		94		1,937		71		3,055		34		2,623		36		3,065		65		2,386		67
Residential revolving and junior mortgages		130		2		1,389		11		125		7		1,345		38		501		3		131		2		501		6		123		4
Commercial and industrial		—		—		92		—		—		—		92		—		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		8		—		—		120		2		—		—		120		5		—		5
Total impaired loans with allowance recorded		4,428		66		6,096		53		4,082		183		6,078		172		5,397		67		4,087		54		5,427		146		3,752		108
Total impaired loans:
Construction, land and land development		617		8		1,682		15		659		25		1,708		44		555		14		655		8		573		24		718		18
Commercial mortgages (non-owner occupied)		445		11		248		4		223		11		248		11		435		4		224		—		437		27		149		—
Commercial mortgages (owner occupied)		1,948		21		2,402		9		1,930		68		2,483		35		1,466		21		1,923		28		1,462		41		1,921		47
Residential first mortgages		3,866		53		3,353		27		3,559		156		3,376		86		4,444		52		4,136		60		4,456		101		3,857		108
Residential revolving and junior mortgages		546		3		1,871		16		540		11		1,830		45		501		3		546		3		501		6		538		7
Commercial and industrial		—		—		92		—		—		—		92		—		—		—		—		—		—		—		—		—
Consumer		—		3		—		—		—		8		—		—		120		2		—		3		120		5		—		5
Total impaired loans	$	7,422	$	99	$	9,648	$	71	$	6,911	$	279	$	9,737	$	221	$	7,521	$	96	$	7,484	$	102	$	7,549	$	204	$	7,183	$	185

The following table presents a reconciliation of nonaccrual loans to impaired loans as of the dates stated.

	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
Nonaccrual loans	$	4,204		$	6,496		$	4,577		$	5,206
Nonaccrual loans not individually evaluated for impairment		(2,196	)		(854	)
Nonaccrual loans collectively evaluated for impairment								(1,470	)		(2,040	)
Nonaccrual impaired loans		2,008			5,642			3,107			3,166
TDRs on accrual		4,415			2,214			4,046			4,115
Other impaired loans on accrual		1,171			1,251			324			325
Total impaired loans	$	7,594		$	9,107		$	7,477		$	7,606

For economic or legal reasons related to a borrower’s financial condition, management may grant a concession to a borrower that it would not otherwise consider. In cases where borrowers are experiencing financial difficulties and are granted new terms that provide for a reduction of either interest or principal or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risks, the related loan is classified as a troubled debt restructuring. Management strives to identify borrowers in financial difficulty early and may work with them to modify their ~~loan~~loan(s) to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance, and other actions intended to minimize the economic loss to the ~~Company.~~Company and are classified as TDRs.

TDRs are considered impaired and are individually evaluated for impairment for the ALL. The following ~~table presents,~~tables present by ~~segment,~~loan type information related to loans modified as TDRs for the periods presented.

No loans designated as TDRs subsequently defaulted in the first ~~nine~~three or six months of ~~2018~~2019 or ~~2017.~~2018.

The following table presents a ~~roll forward~~roll-forward of accruing and ~~nonaccruing~~nonaccrual TDRs for the period presented.

	Accruing			Nonaccruing			Total			Accruing			Nonaccrual			Total
Balance as of December 31, 2017	$	1,452		$	2,612		$	4,064
Balance as of December 31, 2018										$	4,115		$	1,477		$	5,592
Charge-offs		—			(92	)		(92	)		—			—			—
Payments and other adjustments		(64	)		65			1			(52	)		(106	)		(158	)
New TDR designation		1,192			702			1,894			52			—			52
Release TDR designation		—			—			—			—			—			—
Transfer		1,835			(1,835	)		—			(69	)		69			—
Balance as of September 30, 2018	$	4,415		$	1,452		$	5,867
Balance as of June 30, 2019										$	4,046		$	1,440		$	5,486

The following table presents the number and carrying ~~value~~values of properties included in other real estate owned (“OREO”) as of the dates stated.

	September 30, 2018				December 31, 2017				June 30, 2019				December 31, 2018
	Number of		Carrying		Number of		Carrying		Number of		Carrying		Number of		Carrying
	Properties		Value		Properties		Value		Properties		Value		Properties		Value
Residential		4	$	1,240		5	$	443		3	$	983		6	$	1,339
Land		18		1,896		20		3,223		16		1,729		17		1,741
Commercial properties		3		527		4		618		3		456		3		517
Total other real estate owned		25		3,663		29		4,284
Total other real estate owned, net										22		3,168		26		3,597

There were nothree residential mortgage loans totaling $349 thousand in the process of foreclosure as of ~~September~~June 30, ~~2018.~~2019.

On January 1, 2019, the Company adopted the requirements of ASU 2016-02. As part of the adoption of this accounting standard, the Company evaluated its population of existing real estate and equipment leases as of January 1, 2019. The purpose was to determine whether the Company’s existing contractual arrangements constitute a lease, or contains an embedded lease, which would be in scope under ASU 2016-02, and whether such leases would meet the requirements of an operating or financing lease under the new accounting standard. Based on this evaluation, the Company identified 16 operating leases for land, buildings, and equipment with remaining lease terms ranging from one to 10 years. Most of the Company’s leases include renewal options, with renewal terms extending the lease obligation up to as much as five years. Lease terms may include renewal or extension options to the extent they are reasonably certain to be exercised as assessed at lease commencement. As of and for the six months ended June 30, 2019, the Company did not have any leases that met the standard definition of a finance lease nor did it engage in any sale-leaseback transactions, have any short-term leases, or have any sublease income.

For operating leases, ROU assets and lease liabilities are recognized at the commencement date of the respective lease. ROU assets represent the Company’s right to use leased assets over the term of the lease. Lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term and are measured as the present value of the lease payments over the lease term. ROU assets are measured as the amount of the lease liability adjusted for certain items such as prepaid lease payments, unamortized lease incentives, and unamortized direct costs. ROU assets are amortized on a straight-line basis less the periodic interest expense adjustment of the lease liability and the amortization is included in occupancy expense in the Company’s consolidated statements of operations. For the three and six months ended June 30, 2019, operating lease expense totaled $233 thousand and $460 thousand, respectively. The discount rate used for the present value calculations for lease liabilities was the rate implicit in the lease if determinable, and when the rate was not determinable, the Company used its incremental, collateralized borrowing rate with the FHLB for the period that most closely coincided with the respective lease term as of the commencement date of the lease.

During the first quarter of 2019, the Company commenced a new operating lease for the Richmond, Virginia office of the Financial Group, which resulted in the recognition of an operating ROU asset and lease liability of $826 thousand. During the second quarter of 2019, the Company commenced a new operating lease for a retail branch in Henrico County, Virginia, which resulted in the recognition of an operating ROU asset and lease liability of $478 thousand and $473 thousand, respectively.

The following table presents the ROU assets and lease liabilities as of the date stated. ROU assets and lease liabilities are included in other assets and other liabilities, respectively, in the Company’s consolidated balance sheets.

The following table presents the weighted average remaining lease term and discount rate associated with the Company’s operating leases as of the date stated.

The following table presents a maturity analysis of the Company’s operating lease liabilities for the five years ending subsequent to June 30, 2019 and in total thereafter.

The following table presents supplemental cash flow information related to the Company’s operating leases for the period stated.

As part of the implementation of ASU 2016-02, the Company elected the following practical expedients. The Company elected to retain the operating lease classification for all of its existing leases as of January 1, 2019 under the former lease accounting standard. The Company elected not to reassess whether existing leases contained embedded lease arrangements or whether there were initial directs costs that should have been considered as part of the transition to ASU 2016-02. The Company also elected not to recognize an ROU asset and lease obligation for contracts with an initial term of twelve months or less. The expense associated with these short-term leases is included in noninterest expense in the consolidated statements of operations. To the extent that a lease arrangement includes both lease and non-lease components, the Company has elected not to account for these separately. Lastly, the Company has elected in its accounting policies to utilize a fair value threshold, such that a contract with an ROU asset or lease obligation below a minimum threshold of $7.5 thousand is excluded from the provisions of ASU 2016-02.

The following table shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock. Basic earnings per share amounts are computed by dividing ~~the~~ net income (the numerator) by the weighted average number of common shares outstanding (the denominator). Diluted earnings per share amounts assume the conversion, exercise, or issuance of all potential common stock instruments, unless the effect is to reduce the loss or increase ~~the~~ earnings per common share. For both computations, the weighted average number of employee stock ownership plan (“ESOP”) shares not committed to be released to participant accounts ~~purchased by the ESOP~~ are not assumed to be outstanding. The weighted average ESOP shares excluded from the computation were ~~147,383~~204,675 and ~~154,376~~207,462 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively. The weighted average ESOP shares excluded from the computation were ~~136,376~~154,410 and ~~104,510~~157,885 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, respectively. For the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, options on ~~88,784~~76,784 and ~~11,258~~96,415 shares, respectively, were not included in computing diluted earnings per share because their effects would have been anti-dilutive. For the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, options on ~~88,784~~76,784 and ~~21,258~~96,415 shares, respectively, were not included in computing diluted earnings per share because their effects would have been anti-dilutive.

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,				For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Net income	$	1,026	$	742	$	3,096	$	1,122	$	1,723	$	946	$	3,215	$	2,070
Weighted average shares outstanding, basic		13,080,372		10,488,227		13,059,845		8,175,431		13,059,824		13,059,604		13,030,528		13,049,142
Dilutive shares:
Stock options		56,060		69,396		60,334		67,269		32,425		62,081		33,189		67,484
Restricted shares		6,117		—		8,536		—
Restricted stock										12,694		4,734		7,087		5,021
Weighted average shares outstanding, dilutive		13,142,549		10,557,623		13,128,715		8,242,700		13,104,943		13,126,419		13,070,804		13,121,647
Basic and diluted earnings per share	$	0.08	$	0.07	$	0.24	$	0.14	$	0.13	$	0.07	$	0.25	$	0.16

The Company has a non-contributory, cash balance pension plan for employees who were vested in the plan as of December 31, 2012, when it was frozen (i.e., curtailed). Each participant’s account balance grows based on monthly interest credits.

The Company also sponsored a post-retirement benefit plan covering retirees who were age 55 with 10 years of service or age 65 with five years of service prior to March 1, 2018, when the plan was curtailed. The Company recognized a gain on the curtailment of the post-retirement plan of $352 thousand at March 1, 2018, which is included in the consolidated statements of operations for the nine months ended September 30, 2018. The post-retirement benefit plan provides coverage toward a retiree’s eligible medical and life insurance benefits expenses. The plan is unfunded and funded as benefits are paid.

As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Bank had ~~$80.0~~$70.0 million and ~~$70.0~~$100.0 million ~~respectively,~~ of outstanding FHLB borrowings, consisting of ~~three~~two and ~~two~~four advances, respectively. Advances on the FHLB ~~lines~~line are secured by a blanket lien on qualified one-to-four family real estate, commercial real estate, and multifamily residential loans. Immediate available credit, as of ~~September~~June 30, ~~2018,~~2019, was ~~$150.1~~$186.7 million against a total line of credit of ~~$245.1~~$274.7 million. As of June 30, 2019, the Bank had $18.0 million of letters of credit issued by the FHLB for the benefit of the Virginia Department of the Treasury as collateral for public deposits held by the Bank to comply with the Security of Public Deposits Act. The $18.0 million is not an outstanding borrowing, as of June 30, 2019, but does reduce the available credit under the FHLB credit line.

~~Further~~The following table presents information regarding the ~~three~~two advances outstanding as of ~~September~~June 30, ~~2018 are shown in the following table.~~2019.

							Maturity				Stated			Maturity
	Balance		Originated	Interest Rate			Date	Balance		Originated	Interest Rate			Date
Adjustable rate hybrid	$	10,000	4/12/2013		4.72	%	4/13/2020	$	10,000	4/12/2013		4.98	%	4/13/2020
Fixed rate credit		60,000	9/4/2018		2.11	%	10/4/2018		60,000	6/3/2019		2.48	%	7/3/2019
Fixed rate credit		10,000	9/26/2018		2.27	%	10/12/2018
Total FHLB borrowings	$	80,000			2.46	%		$	70,000

On May 28, 2015, the Company entered into a purchase agreement with 29 accredited investors under which the Company issued an aggregate of $7.0 million of subordinated notes (the “notes”) to the accredited investors. The notes have a maturity date of May 28,

2025 and bear interest, payable on the first of March and September of each year, at a fixed interest rate of 6.50% per year. The notes are not convertible into common stock or preferred stock and are not callable by the holders. The Company has the right to redeem the notes, in whole or in part, without premium or penalty, at any interest payment date on or after May 28, 2020, but in all cases in a principal amount with integral multiples of $1,000, plus interest accrued and unpaid through the date of redemption. If an event of default occurs, such as the bankruptcy of the Company, the holder of a note may declare the principal amount of the notes to be due and immediately payable. The notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s existing and future senior indebtedness. The notes qualify as Tier 2 capital for regulatory reporting. The aggregate carrying value of the notes, including capitalized debt issuance costs, was $6.9 million ~~at both September~~as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, the effective interest rate on the notes was ~~6.85%~~6.84% and ~~6.87%~~6.85%, respectively.

The aggregate carrying value of debt secured by shares of Company stock, issued and outstanding, in the Company’s ESOP was ~~$1.0~~$1.7 million ~~at September~~as of June 30, 2019 and December 31, 2018 and ~~$1.1 million at December 31, 2017 and was~~is included in other liabilities on the consolidated balance sheets. The debt is comprised of ~~five~~four fixed ~~rate-amortizing~~rate amortizing notes, ~~four~~three of which carry an interest rate of 3.25% and one that carries an interest rate of 4.50% with maturity dates ranging from March 1, ~~2019~~2025 to December 31, ~~2027.~~2027, and one variable rate amortizing note with a maturity date of June 14, 2024. Shares that collateralize these loans are not allocated to ESOP participants’ accounts.

The Company uses fair value to record certain assets and liabilities and to determine fair value disclosures. Authoritative accounting guidance (ASC 820, Fair Value Measurements (“ASC 820”)) clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value also assumes that the reporting entity would sell the asset or transfer the liability in the principal or most advantageous market.

ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

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 financial statements:

Available-for-sale ~~securities~~securities:: Available-for-sale securities 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). In certain cases, where

there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The Company engages a ~~third party~~third-party to determine the fair value of its available-for-sale securities.

Rabbi trust: The Company has a rabbi trust for the benefit of participants in the company’s deferred compensation benefit plan. The assets held by the rabbi trust are invested at the direction of the individual participants and are generally invested in marketable investment securities such as common stocks and mutual funds or short-term investments (e.g., cash) (Level 1). Rabbi trust assets are included in other assets on the consolidated balance sheets.

Mortgage servicing rights (“~~MSR”~~MSRs”): The Company currently owns MSRs from two residential loan portfolios, one serviced for Fannie Mae ~~(“FNMA”)~~ and one serviced for Freddie ~~Mac (“FHLMC”).~~Mac. The MSRs ~~for the portfolios serviced for FNMA and FHLMC~~ are recorded at fair value on a recurring basis, with changes in fair value recorded in ~~the~~ results of operations.

The Company engages a third-party to determine the fair value of MSRs. The third-party employs a model ~~is used~~ to determine fair value, which establishes pools of performing loans, calculates cash flows for each pool, and applies a discount rate to each pool. Loans are segregated into 12 pools based on each loan’s term and seasoning (age). All loans have fixed interest rates. Cash flows are then estimated by utilizing assumed service costs and prepayment speeds. Monthly service costs were assumed to be $6.50 per loan as of ~~September~~June 30, ~~2018~~2019 and as of December 31, ~~2017.~~2018. Prepayment speeds are determined primarily based on the average interest rate of the loans in each pool. The prepayment scale used is the Public Securities Association (“PSA”) model, where “100% PSA” means prepayments are zero in the first month, then increase by 0.2% of the loan balance each month until reaching 6.0% in month 30. Thereafter, the 100% PSA model assumes an annual prepayment of 6.0% of the remaining

loan balance. The average PSA speed assumption in the fair value model is ~~128%~~181% and ~~150%~~133% as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. A discount rate of 12.5% ~~and 13.0%~~ was then applied to each pool as of ~~September~~June 30, ~~2018~~2019 and as of December 31, ~~2017, respectively.~~2018. The discount rate is intended to represent the estimated market yield for the highest quality grade of comparable servicing. MSRs are classified as Level 3.

The following ~~table presents~~tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of the dates stated.

			Fair Value Measurements as of September 30, 2018 Using								Fair Value Measurements as of June 30, 2019 Using
	Balance as of September 30, 2018		Level 1		Level 2		Level 3		Balance as of June 30, 2019		Level 1		Level 2		Level 3
Available-for-sale securities:
U. S. Government agencies and mortgage backed securities	$	50,136	$	—	$	50,136	$	—	$	51,867	$	—	$	51,867	$	—
State and municipal obligations		19,938		—		19,938		—		17,054		—		17,054		—
Corporate bonds		11,141		—		—		11,141		12,248		—		6,537		5,711
Total available-for-sale securities	$	81,215	$	—	$	70,074	$	11,141	$	81,169	$	—	$	75,458	$	5,711
Mortgage servicing rights	$	981	$	—	$	—	$	981	$	916	$	—	$	—	$	916
Rabbi trust assets									$	1,053	$	1,053	$	—

			Fair Value Measurements as of December 31, 2017 Using								Fair Value Measurements as of December 31, 2018 Using
	Balance as of December 31, 2017		Level 1		Level 2		Level 3		Balance as of December 31, 2018		Level 1		Level 2		Level 3
Available-for-sale securities:
U. S. Government agencies and mortgage backed securities	$	49,283	$	—	$	49,283	$	—	$	49,882	$	—	$	49,882	$	—
State and municipal obligations		21,153		—		21,153		—		20,217		—		20,217		—
Corporate bonds		6,717		—		—		6,717		12,133		—		8,462		3,671
Total available-for-sale securities	$	77,153	$	—	$	70,436	$	6,717	$	82,232	$	—	$	78,561	$	3,671
Mortgage servicing rights	$	999	$	—	$	—	$	999	$	977	$	—	$	—	$	977
Rabbi trust assets									$	972	$	972	$	—	$	—

The ~~reconciliation of items~~following table presents the change in financial assets valued using Level 3 inputs isfor the periods stated.

The $2.0 million transfer from level 2 to level 3 fair value for corporate bonds was attributable to a lack of a third-party pricing valuation as ~~follows.~~of June 30, 2019.

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 financial statements:

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. The measurement of loss associated with impaired loans can be based on either the discounted cash flows of the loan or the fair value of the collateral ~~if any,~~ less estimated costs to ~~sell.~~sell, if the loan is collateral-dependent. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Any given loan may have multiple types of collateral; however, the ~~vast~~ majority of the Company’s loan collateral is real estate. The value of real estate collateral is generally determined utilizing a 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 lack of marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of operations.

Other Real Estate ~~Owned:~~Owned, net: OREO is measured at fair value less estimated costs to sell, generally based on an appraisal conducted by an independent, licensed ~~appraiser.~~appraiser, or using other methods such as a brokered price opinion of a third-party real estate agent. If the collateral value is significantly adjusted due to differences in the comparable properties or is discounted by the Company because of lack of marketability, then the fair value is considered Level 3. Fair value adjustments, if any, are recorded in the period incurred and included in other noninterest expense on the consolidated statements of operations.

The following ~~table summarizes~~tables present the Company’s assets that were measured at fair value on a ~~non-recurring~~nonrecurring basis as of the dates stated.

			Fair Value Measurements as of September 30, 2018 Using								Fair Value Measurements as of June 30, 2019 Using
	Balance as of September 30, 2018		Level 1		Level 2		Level 3		Balance as of June 30, 2019		Level 1		Level 2		Level 3
Impaired loans	$	3,500	$	—	$	—	$	3,500
Impaired loans, net									$	4,229	$	—	$	—	$	4,229
Other real estate owned, net		3,663		—		—		3,663		3,168		—		—		3,168

			Fair Value Measurements as of December 31, 2017 Using								Fair Value Measurements as of December 31, 2018 Using
	Balance as of December 31, 2017		Level 1		Level 2		Level 3		Balance as of December 31, 2018		Level 1		Level 2		Level 3
Impaired loans	$	3,491	$	—	$	—	$	3,491
Impaired loans, net									$	4,700	$	—	$	—	$	4,700
Other real estate owned, net		4,284		—		—		4,284		3,597		—		—		3,597

The following tables ~~display~~present quantitative information about Level 3 ~~Fair Value Measurements~~fair value measurements as of the dates stated.

Balance as of September 30, 2018

Valuation

Technique

Unobservable

Input

Range

(Weighted

Average)

Balance as of June 30, 2019

Valuation

Technique

Unobservable

Input

Range

(Weighted

Average)

Impaired loans

3,500

Discounted appraised value

Selling Cost

Lack of Marketability

0%-30% (15%)

50%-100% (83%)

Impaired loans, net

4,229

Discounted appraised value

Selling Cost

Lack of Marketability

20%-25% (20%)

100% (100%)

Discounted cash flows

Discount rate

5%-7% (6%)

Discounted cash flows

Discount rate

5%-7% (6%)

Other real estate owned, net

3,663

Discounted appraised value

Selling Cost

Lack of Marketability

3%-11% (7%)

9%-100% (24%)

3,168

Discounted appraised value

Selling Cost

Lack of Marketability

6%-23% (9%)

9%-100% (21%)

~~In the first quarter of 2018, the Company adopted ASU 2016-01,~~ ~~Financial Instruments – Overall~~ (Subtopic 825-10), which requires public companies to use the exit price when measuring fair value of financial instruments measured at amortized cost. The Company engaged a third party to assist with the prospective measurement of the fair value of certain assets and liabilities measured on a nonrecurring basis. The fair values as of September 30, 2018 below were calculated using the exit prices, as promulgated by this standard, while the fair values as of December 31, 2017 were calculated using a discounted cash flows method or other methods; therefore, the tables below are not comparable.

The carrying values of cash and due from banks, ~~interest-bearing~~interest-earning deposits, ~~certificates of deposit,~~ federal funds sold or purchased, ~~accrued interest receivable, loans held for sale, and~~ noninterest-bearing deposits, savings and interest-bearing deposits, and securities sold under repurchase agreements are payable on demand or are of such short duration that carrying value approximates market ~~value.~~value (Level 1).

The carrying values of certificates of deposit, loans held for sale, and accrued interest receivable are payable on demand or are of such short duration that carrying value approximates market value (Level 2).

The carrying value of restricted securities approximates fair value based on the redemption provisions of the ~~issuer.~~issuer (Level 3).

The fair value of performing loans is estimated by discounting the future cash flows using two sets of data sources. First, recent originations occurring over the prior twelve months were evaluated, and second, market data showing originations over the prior three months was evaluated. The selected rate was the greater of the two sources. For all loans other than a selective consumer loan portfolio, credit loss severity rates were calculated using the probability of default and the loss given default percentages derived from market data. For the consumer loan portfolio, historical delinquency data was obtained by the servicer of the portfolio. The fair value of impaired loans is measured as described within the Impaired Loans section of this note. The fair value of loans does consider the lack of liquidity and uncertainty in the market that might affect the ~~valuation.~~valuation (Level 3).

Time deposits are presented at estimated fair value by discounting the future cash flows using recent issuance rates over the prior three months and a market rate analysis of recent offering ~~rates.~~rates (Level 3).

The fair value of the Company’s subordinated notes is estimated by utilizing recent issuance rates for subordinated debt offerings of similar issuer ~~size.~~size (Level 3).

The fair value of ~~the~~ FHLB advances is estimated by discounting the future cash flows using current interest rates offered for similar ~~advances.~~advances (Level 2).

Commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter parties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter parties at the reporting date. At September 30, 2018 and December 31, 2017, the fair value of loan commitments and standby letters of credit ~~was immaterial,~~are generally not sold or traded. The estimated fair values of off-balance sheet credit commitments, including standby letters of credit and ~~therefore~~guarantees written, are not ~~included in~~readily available due to the ~~table below.~~lack of cost-effective and reliable measurement methods for these instruments.

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair value of the Company’s financial instruments will change 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. 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.

The following tables summarize the Company’s financial assets and liabilities at carrying values and estimated fair values on a nonrecurring basis as of the dates stated.


	Carrying Value as of		Fair Value as of		Fair Value Measurements as of September 30, 2018 Using						Carrying Value as of		Fair Value as of		Fair Value Measurements as of March 31, 2019 Using
	September 30, 2018		September 30, 2018		Level 1		Level 2		Level 3		June 30, 2019		June 30, 2019		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	6,610	$	6,610	$	6,610	$	—	$	—	$	8,139	$	8,139	$	8,139	$	—	$	—
Interest-bearing deposits		15,906		15,906		15,906		—		—
Interest-earning deposits												15,869		15,869		15,869		—		—
Federal funds sold												596		596		596		—		—
Certificates of deposit		2,976		2,976		—		2,976		—		3,498		3,498		—		3,498		—
Federal funds sold		197		197		197		—		—
Restricted securities		6,750		6,750		—		6,750		—		6,769		6,769		—		—		6,769
Loans receivable, net		846,993		831,095		—		—		831,095		909,913		898,163		—		—		898,163
Loans held for sale		—		—		—		—		—		593		593		—		593		—
Accrued interest receivable		3,060		3,060		—		—		3,060		3,191		3,191		—		3,191		—
Financial Liabilities:
Noninterest-bearing liabilities		108,602		108,602		108,602		—		—
Noninterest-bearing demand deposits												116,229		116,229		116,229		—		—
Savings and interest-bearing demand deposits		330,690		330,690		—		330,690		—		374,175		374,175		374,175		—		—
Time deposits		369,836		370,777		—		370,777		—		385,218		379,095		—		—		379,095
Securities sold under repurchase agreements		6,083		6,083		—		6,083		—		6,983		6,983		6,983		—		—
FHLB advances		80,000		79,690		—		79,690		—		70,000		69,828		—		69,828		—
Subordinated notes, net		6,889		7,043		—		7,043		—		6,902		7,033		—		—		7,033


	Carrying Value as of		Fair Value as of		Fair Value Measurements as of December 31, 2017 Using							Carrying Value as of		Fair Value as of		Fair Value Measurements as of December 31, 2018 Using
	December 31, 2017		December 31, 2017		Level 1			Level 2		Level 3		December 31, 2018		December 31, 2018		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	9,396	$	9,396	$	9,396		$	—	$	—	$	7,685	$	7,685	$	7,685	$	—	$	—
Interest-bearing deposits		41,971		41,971		41,971			—		—
Interest-earning deposits													18,981		18,981		18,981		—		—
Certificates of deposit		3,224		3,224		—			3,224		—		3,746		3,746		—		3,746		—
Federal funds sold		6,961		6,961		6,961			—		—		625		625		625		—		—
Restricted securities		5,787		5,787		—			5,787		—		7,600		7,600		—		—		7,600
Loans receivable, net		758,726		774,099		—	��		—		774,099		894,191		877,114		—		—		877,114
Loans held for sale		1,651		1,651		—			1,651		—		368		368		—		368		—
Accrued interest receivable		3,194		3,194		—			—		3,194		3,172		3,172		—		3,172		—
Financial Liabilities:
Noninterest-bearing liabilities		103,037		103,037		103,037			—		—
Noninterest-bearing demand deposits													114,122		114,122		114,122		—		—
Savings and interest-bearing demand deposits		299,820		299,820		—			299,820		—		359,400		359,400		359,400		—		—
Time deposits		358,989		356,450		—			-		356,450		368,670		369,347		—		—		369,347
Securities sold under repurchase agreements		9,498		9,498		—			9,498		—		6,089		6,089		6,089		—		—
FHLB advances		70,000		70,486		—			70,486		—		100,000		99,727		—		99,727		—
Subordinated notes, net		6,877		7,000		—			—		7,000		6,893		7,046		—		—		7,046

The components of accumulated other comprehensive income (loss), net of deferred taxes, are ~~shown~~presented in the following tables for the ~~periods~~period presented.

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

The following discussion is intended to assist in understanding the results of operations and the financial condition of Bay Banks of Virginia, Inc. (the “Company”), the holding company for Virginia Commonwealth Bank (the “Bank”) and VCB Financial Group, Inc. (the “Financial Group”). This discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 (the ~~“2017~~“2018 Form 10-K”).

This report contains statements concerning the Company’s expectations, plans, objectives, future financial performance, and other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. These forward-looking statements include statements about the Company’s plans, obligations, expectations and intentions, and other statements that are not historical facts. Words such as “anticipates,” “believes,” “intends,” “should,” “expects,” “will,” and variations of similar expressions are intended to identify forward-looking statements. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to: changes in interest rates, general economic conditions, the legislative/regulatory climate, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve ~~System;~~System (the “Federal Reserve”); the quality or composition of the loan orand investment portfolios; demand for loan products; deposit flows; competition; expansion activities; demand for financial services in the Company’s market area; accounting principles, policies, and guidelines; changes in banking, tax, and other laws and regulations and interpretations or guidance thereunder; and other factors detailed in the Company’s publicly filed documents, including the factors described in Item 1A., “Risk Factors,” in the ~~2017~~2018 Form 10-K. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made.

On April 1, 2017, the Company and Virginia BanCorp, Inc. (“Virginia BanCorp”) completed a merger pursuant to the Agreement and Plan of Merger, dated as of November 2, 2016, by and between the Company and Virginia BanCorp (the “Merger”). Pursuant to the Merger, the Company acquired approximately $329.1 million in assets, including $266.1 million of loans, and assumed approximately $294.5 million in liabilities as of April 1, 2017. Merger related costs incurred by the Company were $363 thousand and $1.1 million for the first nine months of 2018 and 2017, respectively.

The financial information for the periods ended September 30, 2017 and September 30, 2018 presented herein reflects the combined operations of the business combination since the effective time of the Merger, April 1, 2017.GENERAL

All dollar amounts included in the tables of this discussion are in thousands, except per share data, unless otherwise stated.

~~GENERAL~~ There were no changes to the Critical Accounting Policies disclosed in Item 7 of the 2018 Form 10-K.

The principal source of earnings for the Company is net interest income. Net interest income is the amount by which interest income exceeds interest expense. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Changes in the volume and/or mix of interest-earning assets and interest-bearing liabilities, the associated yields and rates, the level of noninterest-bearing deposits, and the volume of nonperforming assets have an effect on net interest income, net interest margin, and net income.

The following table presents average interest-earning assets and interest-bearing liabilities, taxable-equivalent yields on such assets, and rates (costs) paid on such liabilities, net interest margin (“NIM”), and net interest spread, as of and for the periods stated. Yields and costs are annualized.

	Average Balances, Income and Expense, Yields and Rates
	As of and for the Three Months Ended June 30,
	2019							2018							2019 Compared to 2018
	Average		Income/		Yield/			Average		Income/		Yield/			Income/ Expense			Variance Attributable to (8)
	Balance		Expense		Cost			Balance		Expense		Cost			Variance			Rate			Volume
INTEREST-EARNING ASSETS:
Taxable securities	$	69,617	$	577		3.32	%	$	61,309	$	497		3.24	%	$	80		$	13		$	67
Tax-exempt securities (1)		17,001		123	��	2.90	%		19,163		148		3.09	%		(25	)		(9	)		(17	)
Total securities		86,618		700		3.24	%		80,472		645		3.21	%		55			4			50
Gross loans (2) (3)		917,474		11,458		5.01	%		798,353		9,745		4.88	%		1,713			265			1,448
Interest-earning deposits and federal funds sold		29,719		170		2.29	%		31,437		131		1.67	%		39			46			(7	)
Certificates of deposits		3,716		19		2.05	%		3,224		18		2.23	%		1			(2	)		3
Total interest-earning assets		1,037,527		12,347		4.77	%		913,486		10,539		4.61	%	$	1,808		$	314		$	1,494
Noninterest-earning assets		67,884							75,460
Total average assets	$	1,105,411						$	988,946
INTEREST-BEARING LIABILITIES:
Savings deposits	$	57,670	$	45		0.31	%	$	62,739	$	49		0.31	%	$	(4	)	$	(0	)	$	(4	)
Demand deposits		74,045		35		0.19	%		79,776		42		0.21	%		(7	)		(4	)		(3	)
Time deposits (4)		383,783		2,048		2.14	%		370,350		1,353		1.47	%		695			646			49
Money market deposits		240,831		960		1.60	%		153,398		352		0.92	%		608			407			201
Total deposits		756,329		3,088		1.64	%		666,263		1,796		1.08	%		1,292			1,049			243
Securities sold under repurchase agreements		6,594		4		0.24	%		6,402		4		0.25	%		—			—			—
Subordinated notes and ESOP debt		8,586		138		6.45	%		7,969		128		6.42	%		10			—			10
FHLB advances		85,846		614		2.87	%		66,593		386		2.32	%		228			116			112
Total interest-bearing liabilities		857,355		3,844		1.80	%		747,227		2,314		1.24	%	$	1,530		$	1,166		$	364
Noninterest-bearing deposits		115,547							107,992
Other noninterest-bearing liabilities		11,950							18,405
Total average liabilities		984,852							873,624
Average shareholders' equity		120,559							115,321
Total average liabilities and shareholders' equity	$	1,105,411						$	988,946
Net interest income and NIM (5)			$	8,503		3.29	%			$	8,225		3.60	%	$	278		$	(852	)	$	1,130
Total cost of funds (6)						1.58	%						1.08	%
Net interest spread (7)						2.97	%						3.38	%

Interest income for the three months ended June 30, 2019, on a taxable-equivalent basis, was $12.3 million, an increase of $1.8 million from the second quarter of 2018, primarily attributable to higher average interest-earning assets of $1.04 billion in the 2019 period compared to $913.5 million in the 2018 period, an increase of $124.0 million, and higher yields on gross loans quarter-over-quarter. The increase in average interest-earning assets was primarily attributable to higher average gross loan balances in the 2019 period of $119.1 million. Higher loan yields in the 2019 period were partially offset by lower accretion of acquired loan discounts, which had a negative 11 basis point effect on quarter-over-quarter yields, as further discussed below. Interest income in the second quarter of 2018 included negative adjustments totaling $145 thousand for amounts incorrectly reported in the first quarter of 2018, as previously reported.

Loans acquired in the Merger were discounted to estimated fair value (for credit losses and interest rates) as of the effective date of the Merger. A portion of the acquisition accounting adjustments (discounts) to record the acquired loans at estimated fair value is being recognized (accreted) into interest income over the estimated remaining life of the loans for those loans that were deemed to be, as of the Merger date, purchased performing and over the period of expected cash flows from the loans that were deemed to be purchased credit-impaired (“PCI”). The amount of accretion income recognized within a period is based on many factors, including among other factors, loan prepayments and curtailments; therefore, amounts recognized are subject to volatility. Accretion of discounts on acquired loans in the second quarter of 2019 was $197 thousand compared to $547 thousand in the second quarter of 2018, a $350 thousand decline.

~~A time deposit (certificate of deposit) fair value adjustment was also recorded as~~Average interest-earning assets comprised 93.9% and 92.5% of the ~~Merger date,~~Company’s average assets for the three months ended June 30, 2019 and 2018, respectively.

Interest expense for the three months ended June 30, 2019 was $3.8 million, an increase of $1.5 million from the second quarter of 2018, primarily attributable to higher costs of interest-bearing liabilities. Average interest-bearing liabilities increased by $110.1 million to $857.4 million in the 2019 period compared to $747.2 million in the 2018 period. The increase in average interest-bearing liabilities was primarily attributable to deposit growth, particularly money market deposits, which ~~represents a premium over~~increased $87.4 million. Higher cost of funds (1.58% and 1.08% for the ~~value~~second quarters of 2019 and 2018, respectively) was primarily due to competition for deposits in the ~~contractual repayments~~Company’s markets, the repricing of ~~fixed-maturity~~maturing time deposits, ~~using prevailing market~~and higher rates paid on Federal Home Loan Bank of Atlanta (“FHLB”) advances.

Net interest ~~rates for similar term deposits. The resulting fair value adjustment is being amortized into interest expense~~income, on a ~~level-yield~~taxable-equivalent basis, ~~over~~for the ~~weighted average remaining life~~three months ended June 30, 2019 was $8.5 million, an increase of $680 thousand from the three months ended June 30, 2018.

Net interest margin was 3.29% and 3.60% for the three months ended June 30, 2019 and 2018, respectively. The decrease in NIM was primarily attributable to the increase in cost of funds, as noted above, and lower accretion of discounts on acquired ~~time deposit portfolio.~~loans, also noted above, partially offset by higher yields on gross loans in the 2019 period and the negative effect of interest income adjustments in the 2018 period, as noted above.

The following table presents average interest-earning assets and interest-bearing liabilities, ~~tax-equivalent~~taxable-equivalent yields on such assets, and rates (costs) paid on such liabilities, ~~net interest margin,~~NIM, and net interest spread, as of and for the periods stated. Yields and costs are annualized.

	Average Balances, Income and Expense, Yields and Rates																							Average Balances, Income and Expense, Yields and Rates
	As of and for the Three Months Ended September 30,																							As of and for the For the Six Months Ended June 30,
	2018							2017							2018 Compared to 2017									2019							2018							2019 Compared to 2018
																		Variance Attributable to (7)																							Variance Attributable to (8)
	Average Balance		Income/ Expense		Yield/ Cost			Average Balance		Income/ Expense		Yield/ Cost			Income/ Expense Variance			Rate			Volume			Average Balance		Income/ Expense		Yield/ Cost			Average Balance		Income/ Expense		Yield/ Cost			Income/ Expense Variance			Rate			Volume
INTEREST-EARNING ASSETS:
Taxable securities	$	63,304	$	498		3.12	%	$	58,838	$	329		2.24	%	$	169		$	144		$	25		$	69,937	$	1,172		3.38	%	$	62,075	$	894		2.88	%	$	278		$	166		$	112
Tax-exempt securities (1)		19,149		151		3.12	%		19,285		176		3.64	%		(25	)		(24	)		(1	)		18,123		271		3.01	%		19,218		300		3.12	%		(29	)		(12	)		(17	)
Total securities		82,453		649		3.12	%		78,123		505		2.58	%		144			120			24			88,060		1,443		3.30	%		81,293		1,194		2.94	%		249			153			96
Gross loans (2) (3)		821,778		10,126		4.89	%		737,742		8,874		4.81	%		1,252			241			1,011			912,568		22,919		5.06	%		786,973		19,729		5.01	%		3,190			73			3,117
Interest-bearing deposits and federal funds sold		21,769		110		2.00	%		48,764		159		1.30	%		(49	)		39			(88	)
Interest-earning deposits and federal funds sold																									26,470		312		2.38	%		37,528		304		1.62	%		8			97			(89	)
Certificates of deposits		3,111		17		2.17	%		3,224		18		2.20	%		(1	)		(0	)		(1	)		3,731		39		2.11	%		3,224		37		2.30	%		2			(4	)		6
Total interest-earning assets	$	929,111	$	10,902		4.66	%	$	867,853	$	9,556		4.40	%	$	1,346		$	400		$	946			1,030,829	$	24,713		4.83	%		909,018	$	21,264		4.68	%	$	3,449		$	319		$	3,130
Noninterest-earning assets																									66,079							64,525
Total average assets																								$	1,096,908						$	973,543
INTEREST-BEARING LIABILITIES:
Savings deposits	$	62,258	$	47		0.30	%	$	64,115	$	32		0.20	%	$	15		$	16		$	(1	)	$	57,586	$	87		0.30	%	$	63,494	$	92		0.29	%	$	(5	)	$	4		$	(9	)
Demand deposits		78,556		38		0.19	%		93,809		40		0.17	%		(2	)		5			(7	)		74,652		70		0.19	%		82,598		83		0.20	%		(13	)		(5	)		(8	)
Time deposits (4)		365,444		1,462		1.59	%		330,496		999		1.21	%		463			357			106			376,745		3,873		2.07	%		368,582		2,568		1.40	%		1,305			1,248			57
Money market deposits		171,529		480		1.11	%		134,148		221		0.66	%		259			197			62			238,628		1,866		1.58	%		151,239		657		0.87	%		1,209			834			375
Total deposits		677,787		2,027		1.19	%		622,568		1,292		0.83	%		735			575			160			747,611		5,896		1.59	%		665,913		3,400		1.04	%		2,496			2,080			416
Securities sold under repurchase agreements		5,724		3		0.21	%		13,939		5		0.13	%		(2	)		1			(3	)		6,406		7		0.22	%		7,008		7		0.20	%		—			1			(1	)
Subordinated notes and ESOP debt		7,932		128		6.40	%		6,871		118		6.86	%		10			(8	)		18			8,592		275		6.45	%		7,987		256		6.41	%		19			—			19
FHLB advances		70,543		441		2.48	%		72,500		279		1.54	%		162			170			(8	)		92,884		1,319		2.86	%		66,796		699		2.10	%		620			348			272
Total interest-bearing liabilities	$	761,986	$	2,599		1.35	%	$	715,878	$	1,694		0.95	%	$	905		$	737		$	168			855,493	$	7,497		1.77	%		747,704	$	4,362		1.18	%	$	3,135		$	2,429		$	706
Net interest income and net interest margin (5)			$	8,303		3.57	%			$	7,862		3.62	%	$	441		$	(338	)	$	778
Noninterest-bearing deposits	$	108,594						$	96,644																112,250							103,424
Total cost of funds (8)						1.19	%						0.83	%
Net interest spread (6)						3.31	%						3.45	%
Other noninterest-bearing liabilities																									9,829							8,434
Total average liabilities																									977,572							859,562
Average shareholders' equity																									119,336							113,981
Total average liabilities and shareholders' equity																								$	1,096,908						$	973,543
Net interest income and NIM (5)																										$	17,216		3.37	%			$	16,902		3.75	%	$	314		$	(2,110	)	$	2,424
Total cost of funds (6)																													1.56	%						0.98	%
Net interest spread (7)																													3.06	%						3.50	%

Interest income for the ~~three~~six months ended ~~September~~June 30, ~~2018,~~2019, on a taxable-equivalent basis, was ~~$10.9~~$24.7 million, an increase of ~~$1.3~~$3.4 million from the ~~third quarter~~first half of ~~2017,~~2018, primarily ~~driven by~~attributable to higher average interest-earning assets of ~~$929.1~~$1.03 billion in the 2019 period compared to $909.0 million in the 2018 period, ~~compared to $867.9 million in the 2017 period,~~ an increase of ~~$61.3~~$121.8 million. ~~This~~The increase in average interest-earning assets was primarily attributable to ~~organic~~higher average gross loan ~~growth~~balances in the 2019 period of $125.6 million. Accretion of discounts on acquired loans in the

first half of 2019 was $636 thousand compared to $1.1 million in the first half of 2018, a decline of $414 thousand. The higher yield on average interest-earning assets in the 2019 period ~~and higher yields on loans and securities~~was primarily due to ~~the increasing interest rate environment,~~higher loan yields, partially offset by lower accretion of acquired loan discounts, inwhich had a negative 11 basis point effect.

Average interest-earning assets comprised 94.0% and 93.4% of the Company’s average assets for the six months ended June 30, 2019 and 2018, ~~period of $357 thousand compared to $409 thousand in the 2017 period.~~respectively.

Interest expense for the ~~three~~six months ended ~~September~~June 30, ~~2018~~2019 was ~~$2.6~~$7.5 million, an increase of ~~$905 thousand~~$3.1 million from the ~~third quarter~~first half of ~~2017,~~2018, primarily ~~driven by~~attributable to higher ~~average~~costs of interest-bearing liabilities. Average interest-bearing liabilities ~~of $762.0~~increased by $107.8 million to $855.5 million in the 2019 period compared to $747.7 million in the 2018 ~~period compared to~~

~~$715.9 million in the 2017 period, an increase of $46.1 million. This~~period. The increase in average interest-bearing liabilities was primarily attributable to ~~organic retail~~ deposit growth, particularly ~~time and~~ money market ~~deposits. Contributing to the increase in interest expense in the third quarter~~deposits, which increased $87.4 million. Higher cost of ~~2018 compared to the third quarter of 2017 were higher costs of deposits (1.19%~~funds (1.56% and ~~0.83%~~0.98% for the ~~third quarters~~first six months of 2019 and 2018, ~~and 2017,~~ respectively) were primarily due to ~~heightened~~ competition for deposits in the Company’s markets, ~~and promotional deposit products as~~ the ~~Company expands in the Hampton Roads market. In addition,~~repricing of maturing time deposits, and higher rates ~~were~~ paid on ~~Federal Home Loan Bank of Atlanta (“FHLB”) advances (2.48% and 1.53% for the third quarters of 2018 and 2017, respectively) due to the increasing~~FHLB.

~~Due to the changes in interest~~ income, ~~and interest expense discussed above, net interest income for the three months ended September 30, 2018,~~ on a taxable-equivalent basis, for the six months ended June 30, 2019 was ~~$8.3~~$17.2 million, an increase of ~~$441~~$314 thousand from the ~~third quarter of 2017.~~six months ended June 30, 2018.

Net interest margin was ~~3.57%~~3.37% and ~~3.62%~~3.75% for the ~~three~~six months ended ~~September~~June 30, 2019 and 2018, ~~and 2017,~~ respectively. ~~This~~The decrease isin NIM was primarily attributable to the increase in ~~funding costs,~~cost of funds, as noted above, and lower accretion of ~~fair value adjustments (discounts)~~discounts on acquired loans ($~~357~~636 thousand and ~~$409 thousand~~$1.1 million for 2019 and 2018, ~~and 2017,~~ respectively) and the amortization of fair value adjustments (premium) on time deposits ($40 thousand and $103 thousand for 2018 and 2017, respectively). Excluding the acquisition accounting adjustments on loans and time deposits, net interest margin was 3.40% in the 2018 period compared to 3.39% in the 2017 period.

The following table presents average interest-earning assets and interest-bearing liabilities, tax-equivalent yields on such assets and rates (costs) paid on such liabilities, and net interest margin, as of and for the periods stated. Yields and costs are annualized.

Average Balances, Income and Expense, Yields and Rates

As of and for the Nine Months Ended September 30,

2018

2017

2018 Compared to 2017

Variance Attributable to (7)

Average
Balance

Income/
Expense

Yield/ Cost

Average
Balance

Income/
Expense

Yield/ Cost

Income/ Expense Variance

Rate

Volume

INTEREST-EARNING ASSETS:

Taxable securities

$
62,490

$
1,392

2.98
%

$
40,765

$
946

3.10
%

$
446

$
(58
)

$
504

Tax-exempt securities (1)

19,195

451

3.14
%

19,233

521

3.61
%

(70
)

(69
)

(1
)
Total securities

81,685

1,843

3.02
%

59,998

1,467

3.26
%

376

(127
)

503

Gross loans (2) (3)

799,080

29,853

4.99
%

601,278

21,588

4.79
%

8,265

1,163

7,102

Interest-bearing deposits and federal funds sold

32,217

413

1.71
%

27,566

253

1.23
%

160

117

43

Certificates of deposits

3,186

54

2.27
%

3,564

55

2.05
%

(1
)

5

(6
)
Total interest-earning assets

$
916,168

$
32,163

4.69
%

$
692,406

$
23,363

4.50
%

$
8,800

$
1,285

$
7,139

INTEREST-BEARING LIABILITIES:

Savings deposits

$
63,078

$
139

0.29
%

$
58,563

$
91

0.21
%

$
48

$
41

$
7

Demand deposits

81,236

121

0.20
%

76,558

103

0.18
%

18

12

6

Time deposits (4)

367,524

4,030

1.47
%

247,839

2,248

1.21
%

1,782

696

1,086

Money market deposits

158,077

1,137

0.96
%

116,419

557

0.64
%

580

381

199

Total deposits

669,915

5,427

1.08
%

499,379

2,999

0.80
%

2,428

1,130

1,298

Federal funds purchased

—

—

0.00
%

1,999

10

0.69
%

(10
)

—

(10
)
Securities sold under repurchase agreements

6,575

10

0.20
%

9,827

12

0.16
%

(2
)

2

(4
)
Subordinated notes and ESOP debt

7,969

384

6.44
%

6,867

354

6.87
%

30

(27
)

57

FHLB advances

68,059

1,140

2.24
%

64,659

681

1.41
%

459

423

36

Total interest-bearing liabilities

$
752,518

$
6,961

1.24
%

$
582,731

$
4,056

0.93
%

$
2,905

$
1,528

$
1,377

Net interest income and net interest margin (5)

$
25,202

3.67
%

$
19,307

3.72
%

$
5,895

$
(243
)

$
5,762

Noninterest-bearing deposits

$
105,166

$
87,776

Total cost of funds (8)

1.08
%

0.81
%

Net interest spread (6)

3.46
%

3.57
%

Interest income for the nine months ended September 30, 2018, on a taxable-equivalent basis, was $32.2 million, an increase of $8.8 million from the first nine months of 2017, primarily driven by higher average interest-earning assets of $916.2 million in the 2018 period compared to $692.4 million in the 2017 period, an increase of $223.8 million. This increase in average interest-earning assets was primarily attributable to organic loan growth and interest-earning assets acquired in the Merger included from the effective date of the Merger. Also contributing to the increase in interest income in the first nine months of 2018 compared to the first nine months of 2017 were higher yields on gross loans ~~due to the increasing interest rate environment and higher accretion of discounts on acquired loans of $1.4 million~~ in the ~~2018 period compared to $860 thousand in the 2017~~2019 period.

Interest expense for the nine months ended September 30, 2018 was $7.0 million, an increase of $2.9 million from the first nine months of 2017, primarily driven by higher average interest-bearing liabilities of $752.5 million in the 2018 period compared to $582.7 million in the 2017 period, an increase of $169.8 million. This increase in average interest-bearing liabilities was primarily attributable to organic deposit growth and liabilities assumed in the Merger included from the effective date of the Merger. Contributing to the increase in interest expense in the first nine months of 2018 compared to the first nine months of 2017 was higher rates paid on deposits (1.08% and 0.80% for the first nine months of 2018 and 2017, respectively) due to heightened competition for deposits, as mentioned above. In addition, higher rates were paid on FHLB advances (2.24% and 1.41% for the first nine months of 2018 and 2017, respectively) due to the increasing interest rate environment.

Due to the changes in interest income and interest expense discussed above, net interest income for the nine months ended September 30, 2018, on a taxable-equivalent basis, was $25.2 million, an increase of $5.9 million from the first nine months of 2017.

Net interest margin was 3.67% and 3.72% for the nine months ended September 30, 2018 and 2017, respectively. This decrease is primarily attributable to higher funding costs, partially offset by the effects of accretion of discounts on acquired loans and higher yields on loans. Excluding the acquisition accounting adjustments on loans and time deposits, net interest margin was 3.44% in the 2018 period compared to 3.51% in the 2017 period.

~~The following table presents the effect of acquisition accounting adjustments (accretion of loan discounts and amortization of time deposits) on net interest margin for the periods stated:~~

Provision for loan losses was ~~$509~~$62 thousand for the three months ended ~~September~~June 30, ~~2018,~~2019, while ~~the~~ provision for loan losses was ~~$1.1 million~~a benefit of $348 thousand in the same period of ~~2017.~~2018. Provision in the 2019 period was primarily attributable to adjustments to certain qualitative loan loss factors to adjust for the change in the composition of the Company’s loan portfolio, particularly recent growth in loan types with little or no historical losses. Reserves resulting from these factors were partially offset by lowered reserves for individually evaluated loans. Provision for loan losses in the 2018 period included a $580 thousand benefit to correct for an overstatement in the Company’s allowance for loan losses as of December 31, 2017, as previously reported. Provision for loan losses was ~~$481~~$376 thousand for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, while provision for loan losses for the first ~~nine months~~half of ~~2017~~2018 was ~~$1.8 million. Provision~~a recovery of $28 thousand. The increase in provision for loan losses in the ~~third quarter~~first half of ~~2018~~2019 was primarily attributable to an increase of approximately ~~$52.7~~$16.5 million of gross ~~loans~~loans. The recovery in the ~~quarter, while~~2018 period was primarily attributable to the ~~provision in~~correction of the third quarter of 2017 includes reserves for a select portfolio of consumer loans. The provision for loan losses for the first nine months of 2018 included a benefit of $580 thousand to correct for an overstatement recorded in the Company’s year-endDecember 31, 2017 allowance for loan losses ~~for acquired loans, as reported in the Company’s Form 10-Q for the second quarter of 2018.~~overstatement.

The following tables present a summary of noninterest income and the dollar and percentage change for the periods presented. ~~Noninterest~~

The increase in noninterest income ~~for~~in the ~~nine~~three months ended ~~September~~June 30, ~~2017 included the operations of Virginia BanCorp since the effective date of the Merger.~~

Non-deposit product income increased $39 thousand in the third quarter of 2018 compared to the third quarter of 2017 due to higher commissions from the wealth management business of the Company’s wholly-owned subsidiary, VCB Financial Group, Inc. (“VCBFG”). This increase was offset by lower income from fiduciary activities from the trust and estate administration business of VCBFG of $66 thousand. Net gains on disposition of other assets2019 was primarily attributable to service charges and fees on deposit accounts, as the ~~sale of~~Company implemented a ~~former branch building and land~~consecutive days overdraft program in the ~~third quarter~~second half of ~~2018.~~2018, and a gain on rabbi trust assets for the benefit of participants in the Company’s deferred compensation benefit plan.

Higher noninterest income in the ~~nine~~six months ended ~~September~~June 30, 2019 was primarily attributable to higher service charges and fees on deposit accounts, due to lower fee income collected in the 2018 period due to the core operating system conversion initiated in the fourth quarter of 2017 as a result of the Merger, and interchange fees, net, and a larger gain on rabbi trust assets. The first half of 2018 included a gain ~~of $352 thousand~~ on the curtailment of the Company’s post-retirement benefit plan ~~effective~~on March 1, 2018. Non-deposit product income increased by $258 thousand in the 2018 period compared to the 2017 period due to higher wealth management commissions earned by VCBFG. Additionally, secondary market lending income increased $170 thousand in the 2018 period compared to the 2018 period due to higher sales volume of originated residential mortgages sold to governmental agencies and other third-party buyers.

The following tables present a summary of noninterest expense and the dollar and percentage change for the periods presented. ~~Noninterest~~

Lower noninterest expenses ~~for~~in the ~~nine~~three months ended ~~September~~June 30, ~~2017 included~~2019 compared to the ~~operations~~same period of ~~Virginia BanCorp from~~2018 were primarily due to lower salaries and benefits, data processing costs, and consulting costs in the ~~effective date of~~2019 period. Lower salaries and benefits in the ~~Merger.~~

~~Noninterest expenses increased $812 thousand~~2019 period were primarily due to certain management personnel that exited the Company in the third quarter of 2018 ~~compared~~and those retiring pursuant to the ~~third~~fourth 2018 quarter ~~of 2017, primarily due to higher salaries and benefits (greater number of full-time equivalents) and higher~~early retirement program. Lower data processing ~~expenses. There were no merger related expenses reported~~costs in the ~~three months ended September 30, 2018.~~ In the third quarter of 2018, the Company announced initiatives and other anticipated reductions to decrease noninterest expenses. The benefits of these items are reflected in data processing, consulting, and salaries and employee benefits expenses in the third quarter of 2018.The decrease in other expense is primarily due to a $172 thousand benefit recorded in the third quarter of 2018 to correct for an overstatement of other expense in 2017 related to contributions to employee stock ownership plans (ESOP).

~~Higher noninterest expenses in the first nine months of 2018~~2019 period were primarily due to higher ~~personnel costs (greater number of full-time equivalents) and higher consulting, audit and accounting, and legal fees, due to various regulatory and corporate activities~~expenses in the 2018 period related primarily to Merger conversion activities, while consulting expenses related to the implementation of an enterprise risk management platform and a three-year strategic plan.

~~period.~~ ~~Expenses~~Noninterest expenses in the six months ended June 30, 2018 included $363 thousand of merger-related expenses, while there were no merger-related expenses in the first half of 2019. In addition, costs associated with the succession of the Company’s Chief Financial Officer and costs related to fees incurred in the first ~~nine months~~half of 2018 in the completion of the Company’s 2017 year-end financial reporting, ~~were~~totaling approximately $1.2 ~~million. Expenses associated with these items are primarily recorded in~~million, which increased salaries and employee benefits, consulting, and audit and accounting during this period. Lower data processing and ~~legal.~~consulting costs in the 2019 period were primarily due to those items discussed above. Audit and accounting fees in the six months ended June 30, 2018 include expenses associated with a Sarbanes-Oxley readiness assessment. Additionally, the first half of 2018 included a net gain on the sale and valuation of other real estate owned of $57 thousand compared to a $66 thousand net loss in the first half of 2019.

The following table ~~below~~ presents ~~the~~ income tax expense and effective income tax rate for the periods presented.

	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017			June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Income tax expense	$	198		$	273		$	645		$	406		$	395		$	197		$	732		$	447
Effective tax rate		16.2	%		26.9	%		17.2	%		26.6	%
Effective income tax rate														18.6	%		17.2	%		18.6	%		17.8	%

Lower effective tax rates in the 2018 periods reflected the Tax Cuts and Jobs Act of 2017 enacted in December 2017, which reduced the federal corporate marginal income tax rate from 34% to 21%, effective January 1, 2018.

Loans charged-off during the ~~third~~second quarter of ~~2018,~~2019, net of recoveries, totaled ~~$335~~$441 thousand compared to ~~$396~~$462 thousand for the ~~third~~second quarter of ~~2017. This resulted~~2018, resulting in ~~a slight decrease in the~~an annualized net charge-off ratio ~~to 0.17%~~of 0.19% and 0.23% for the ~~third quarter of~~three months ended June 30, 2019 and 2018, ~~compared to 0.22% for the third quarter of 2017.~~respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, the annualized net charge off ratio was ~~0.12%~~0.18% compared to ~~0.18%~~0.16% for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018.

The ratio of allowance for loan losses (“ALL”) to gross loans was ~~0.85%~~0.82% as of ~~September~~June 30, ~~2018~~2019 compared to ~~1.01%~~0.88% as of December 31, ~~2017.~~2018. The decline in the ratio of ~~ALL~~allowance for loan losses to gross loans issince December 31, 2018 was primarily ~~due~~attributable to ~~the overstatement in the ALL at year-end 2017, as previously discussed, and~~ the reduction in ~~historical loss factors as older periods are released from the calculation. Gross loans is inclusive~~balances (and related allowance for loan losses) attributable to a select portfolio of ~~loans acquired in the Merger, which were recorded at fair value as of the date of the Merger.~~purchased consumer loans.

The following table presents certain asset quality measures as of the dates stated.

	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
Loans 90 days or more past due and still accruing (1)	$	—		$	48		$	—		$	—
Nonaccrual loans (1)		4,204			6,496			4,577			5,206
Total nonperforming loans		4,204			6,544			4,577			5,206
Other real estate owned, net		3,663			4,284			3,168			3,597
Total nonperforming assets	$	7,867		$	10,828		$	7,745		$	8,803
Allowance for loan losses	$	7,287		$	7,770		$	7,479		$	7,902
ALL to gross loans		0.85	%		1.01	%		0.82	%		0.88	%
Nonperforming assets to total assets		0.77	%		1.12	%		0.71	%		0.81	%
Nonperforming loans to gross loans		0.49	%		0.85	%		0.50	%		0.58	%

Total assets increased by ~~$56.9~~$13.6 million to ~~$1.03~~$1.09 billion as of ~~September~~June 30, ~~2018~~2019 from ~~$970.6 million~~$1.08 billion as of December 31, ~~2017,~~2018, primarily due to ~~organic~~net loan growth in the first ~~nine months~~half of ~~2018. Cash, including federal funds sold and interest-bearing deposits, was $22.7 million and $58.3 million as~~2019 of ~~September 30, 2018 and December 31, 2017, respectively.~~$15.7 million.

The following tables present information about the ~~Company’s~~ securities portfolio on a taxable-equivalent basis as of the dates stated. The increase in fair value of $4.1 million since year-end 2017 in the available-for-sale securities portfolio was primarily attributable to approximately $9.7 million of purchases of available-for-sale securities, partially offset by principal amortization and an increase in unrealized losses of $1.9 million, primarily due to an increase in interest rates. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, available-for-sale securities represented ~~7.9%~~7.4% and 7.6% of total ~~assets.~~assets, respectively.

	September 30, 2018									June 30, 2019
	Amortized Cost		Fair Value		Weighted Average Life in Years		Weighted Average Yield			Amortized Cost		Fair Value		Weighted Average Life in Years		Weighted Average Yield
U.S. Government agencies and mortgage backed securities	$	52,073	$	50,136		6.02		2.21	%	$	51,941	$	51,867		6.7		2.31	%
State and municipal obligations		20,525		19,938		5.53		3.17	%		16,810		17,054		4.6		3.03	%
Corporate bonds		11,177		11,141		2.40		5.59	%		12,180		12,248		4.0		5.68	%
Total available-for-sale securities		83,775		81,215		4.65		2.81	%		80,931		81,169		5.1		2.99	%
Restricted securities		6,750		6,750	n/a			5.75	%		6,769		6,769	n/a			6.71	%
Total securities	$	90,525	$	87,965				3.02	%	$	87,700	$	87,938				3.30	%

	December 31, 2017									December 31, 2018
	Amortized Cost		Fair Value		Weighted Average Life in Years		Weighted Average Yield			Amortized Cost		Fair Value		Weighted Average Life in Years		Weighted Average Yield
U.S. Government agencies and mortgage backed securities	$	49,964	$	49,283		5.76		1.76	%	$	51,126	$	49,882		6.1		2.28	%
State and municipal obligations		21,113		21,153		5.45		3.47	%		20,484		20,217		6.3		3.15	%
Corporate bonds		6,696		6,717		5.16		6.41	%		12,194		12,133		5.2		5.62	%
Total available-for-sale securities		77,773		77,153		5.46		2.79	%		83,804		82,232		5.9		2.87	%
Restricted securities		5,787		5,787	n/a			6.54	%		7,600		7,600	n/a			5.75	%
Total securities	$	83,560	$	82,940				3.02	%	$	91,404	$	89,832				3.08	%

During the nine months ended September 30, 2018, gross loans increased by $87.8 million, or 11.5% (over 15% annualized), since December 31, 2017. Excluding the pay down of approximately $50 million in the first nine months of 2018 of purchased portfolio loans, including those acquired in the Merger, gross loan growth on an annualized basis was approximately 24%. The largest components of this increase were a $30.0 million increase in commercial and industrial loans, a $28.7 million increase in construction, land, and land development loans, a $27.6 million increase in commercial mortgages, and a $23.9 million increase in residential first mortgages, partially offset by a $14.6 million decline in consumer loans, primarily the decline in balances of certain portfolios of consumer loans acquired in the Merger and in the second and third quarters of 2017.

The following table presents the ~~Company’s~~ composition of loans in dollar amounts and as a percentage of total loans as of the dates stated.

	September 30, 2018						December 31, 2017						June 30, 2019						December 31, 2018
	Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total
Mortgage loans on real estate:
Construction, land and land development	$	94,750			11.1	%	$	66,042			8.6	%	$	110,598			12.2	%	$	109,475			12.2	%
Farmland		748			0.1	%		923			0.1	%
Commercial mortgages (non-owner occupied)		171,996			20.1	%		146,757			19.2	%		178,532			19.5	%		180,074			20.0	%
Commercial mortgages (owner occupied)		82,391			9.6	%		80,052			10.4	%		82,990			9.0	%		87,241			9.7	%
Residential first mortgages		293,266			34.2	%		269,365			35.2	%		305,252			33.2	%		298,894			33.1	%
Residential revolving and junior mortgages		39,170			4.6	%		46,498			6.1	%		35,875			3.9	%		38,313			4.2	%
Commercial and industrial		144,118			16.9	%		114,093			14.9	%		187,531			20.4	%		164,608			18.2	%
Consumer		27,920			3.3	%		42,566			5.5	%		16,889			1.8	%		23,740			2.6	%
Total loans		854,359			100.0	%		766,296			100.0	%		917,667			100.0	%		902,345			100.0	%
Net unamortized deferred loan (fees) costs		(79	)					200
Net unamortized deferred loan fees														(275	)					(252	)
Allowance for loan losses		(7,287	)					(7,770	)					(7,479	)					(7,902	)
Loans receivable, net	$	846,993					$	758,726					$	909,913					$	894,191

During the six months ended June 30, 2019, gross loans increased by ~~$483 thousand since~~$15.3 million, an annualized growth rate of over 3%, from December 31, ~~2017 to $7.3~~2018. Excluding the payoff of approximately $19.5 million as of ~~September 30, 2018, primarily due to charge-offs (net of recoveries) and the correction~~purchased portfolio loans in the ~~second quarter~~first half of ~~2018 of an amount recorded~~2019, including those acquired in the ~~Company’s year-end 2017 allowance~~Merger, gross loan growth for ~~loan losses, as previously noted.~~the six months ended June 30, 2019 on an annualized basis was nearly 8%. The largest components of this increase were a $22.9 million increase in commercial and industrial loans and a $3.9 million increase in residential loans, partially offset by a $6.9 million decline in consumer loans and a $5.8 million decline in commercial mortgages.

The following table presents the Company’s ~~allowance for loan losses~~ALL by loan type and the percent of loans in each category to total loans as of the dates stated.

Allowance for loan losses decreased $423 thousand from December 31, 2018 to $7.5 million as of June 30, 2019, primarily due to net charge-offs of $799 thousand, almost exclusively for a select portfolio of purchased consumer loans, partially offset by provision for loan losses of $376 thousand recorded for the six months ended June 30, 2019.

Other real estate owned, net (“OREO”), as of ~~September~~June 30, ~~2018~~2019 was ~~$3.7~~$3.2 million, consisting of ~~25 individual~~22 properties ~~(18~~(16 of which were land lots), compared to ~~$4.3~~$3.6 million inof OREO ~~(29~~(26 properties) as of December 31, ~~2017,~~2018, or a ~~$621~~$429 thousand ~~decline.~~decrease. This ~~decline~~decrease was primarily attributable to the sale of ~~two~~six residential properties ($~~2.3 million~~481 thousand carrying amount) in the first ~~quarter~~half of ~~2018 resulting in a net gain~~2019, partially offset by the addition of ~~approximately $257 thousand.~~two residential properties ($152 thousand carrying amount).

As of ~~September~~June 30, ~~2018,~~2019, total deposits were ~~$809.1~~$875.6 million compared to ~~$761.8~~$842.2 million at ~~year-end 2017,~~December 31, 2018, a ~~$47.3~~$33.4 million, ~~(or 8.3% annualized)~~or 8% annualized, increase. The increase was primarily due to an increase of ~~$30.9~~$16.5 million in time deposits and an increase of $14.8 million in savings and interest-bearing demand ~~deposits and a $10.8 million increase in time~~ deposits.

Maturities of large denomination time deposits (equal to or greater than $100 thousand) as of ~~September~~June 30, ~~2018~~2019 are presented in the following table.

As of ~~September~~June 30, ~~2018, the Company had two fixed rate FHLB advances totaling $70.0 million and one variable rate FHLB advance of $10.0 million outstanding. As of December 31, 2017,~~2019, the Company had one fixed rate FHLB advance of $60.0 million and one variable rate FHLB advance of $10.0 million outstanding. As of December 31, 2018, the Company had three fixed rate FHLB advances totaling $90.0 million and one variable rate FHLB advance of $10.0 million outstanding. The following table ~~summarizes the period-end balance, highest month balance, average balance, and weighted average rate paid~~presents various information regarding FHLB advances as of and for the periods presented.

Liquidity represents an institution’s ability to meet present and future financial obligations (such as commitments to fund loans or meet depositors’ requirements) through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, ~~interest-bearing~~interest-earning deposits with other banks, federal funds sold, and investments and loans maturing within one year. The Company’s ability to obtain deposits and purchase funds at favorable rates are major factors for liquidity. Management believes that the Company maintains overall liquidity that is sufficient to satisfy its depositors’ requirements and its customers’ credit needs.

~~At September~~As of June 30, ~~2018,~~2019, cash and cash equivalents totaled ~~$22.5 million,~~$24.6 million; investment securities maturing in one year or less totaled ~~$2.4~~$4.7 million, and loans maturing in one year or less totaled ~~$176.9~~$214.0 million. This resulted in a liquidity ratio as of ~~September~~June 30, ~~2018~~2019 of ~~19.6%~~22.2% compared to ~~14.7%~~21.5% as of December 31, ~~2017.~~2018. The Company determines this ratio by dividing the sum of cash and cash equivalents, and investment securities and loans maturing in one year or less, by total assets. ~~The Bank has formal liquidity management plans, which includes periodic evaluation of cash flow projections.~~

The Company has a secured borrowing line ~~of credit~~ with the FHLB of ~~$245.1~~$274.7 million, with ~~$150.1~~$186.7 million available as of ~~September~~June 30, ~~2018~~2019, and unsecured federal funds lines of credit with various correspondent banks totaling ~~$24.5~~$41.0 million. Federal funds lines of credit are uncommitted and can be cancelled at any time by the ~~correspondent~~lending bank.

As of ~~September~~June 30, ~~2018,~~2019, the Company was not aware of any other known trends, events, or uncertainties that have or are reasonably likely to have a material effect on liquidity.

Capital resources represent funds, earned or obtained, over which a financial institution can exercise greater long-term control in comparison with deposits and borrowed funds. The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Company’s resources, and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allows management to effectively leverage its capital to maximize return to shareholders. The Company’s capital, also known as shareholders’ equity, is comprised primarily of outstanding common stock, additional paid-in capital, and retained earnings.

~~Capital resources are~~Shareholders’ equity is primarily affected by net income and net unrealized gains or losses on available-for-sale securities, ~~(net~~net of ~~tax).~~taxes. The available-for-sale securities portfolio is reported at fair value with unrealized gains or losses, net of taxes, recognized as accumulated other comprehensive income (loss) on the Company’s consolidated balance sheets. Another factor affecting accumulated other comprehensive income (loss) is changes in the fair value of the Company’s pension and post-retirement benefit plans and changes in said plan obligations. Shareholders’ equity before accumulated other comprehensive ~~loss~~income (loss), net of taxes, was ~~$119.2~~$122.5 million as of ~~September~~June 30, ~~2018~~2019 compared to ~~$115.7~~$118.8 million as of December 31, ~~2017.~~2018. The increase of ~~$3.5~~$3.7 million was primarily attributable to net income of ~~$3.1~~$3.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. Accumulated other comprehensive ~~loss increased~~income (loss), net of taxes, decreased by ~~$1.5~~$1.4 million from December 31, ~~2017~~2018 to ~~September~~June 30, ~~2018,~~2019, primarily due to an increase in unrealized net ~~losses (net~~gains, net of ~~tax)~~taxes, in the Company’s available-for-sale securities ~~portfolio, primarily due to an increasing interest rate environment.~~portfolio.

Book value per share of the Company’s common stock, including accumulated other comprehensive ~~loss,~~income (loss), net of tax, increased to ~~$8.80~~$9.20 as of ~~September~~June 30, ~~2018~~2019 from ~~$8.68~~$8.90 as of December 31, ~~2017.~~2018.

The Bank is subject to minimum regulatory capital ratios as defined by the ~~Board of Governors of the~~ Federal ~~Reserve System (the “Federal Reserve”).~~Reserve. As of ~~September~~June 30, ~~2018,~~2019, the Bank’s capital ratios continue to be in excess of regulatory minimums and the Bank was ~~well-capitalized~~well capitalized by these guidelines.

In July 2013, the Federal Reserve issued final rules that made changes to its capital rules to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Effective January 1, 2015, the final rules require theThe Bank is required to comply with the following minimum capital ratios: (i) a ~~new~~ Common Equity Tier 1 ~~capital~~Capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 ~~capital~~Capital ratio of 6.0% of risk-weighted ~~assets (increased from the prior requirement of 4.0%);~~assets; (iii) a ~~total capital~~Total Risked-based Capital ratio of 8.0% of risk-weighted ~~assets (unchanged from the prior requirement);~~assets; and (iv) a ~~leverage~~Leverage ratio of 4.0% of total ~~assets (unchanged from the prior requirement).~~assets. The following additional capital requirements related to the ~~capital~~“capital conservation ~~buffer are being~~buffer” have been phased in over a four-year period, ~~which began~~beginning on January 1, 2016. ~~When~~As fully phased in on January 1, 2019, the rules ~~will~~ require the Bank to ~~maintain~~maintain: (i) a minimum ratio of Common Equity Tier 1 to risk-weighted assets of ~~at least~~ 4.5%, plus a

2.5% ~~“capital~~capital conservation ~~buffer” (which is added to the 4.5% Common Equity Tier 1 ratio as that~~ buffer ~~is phased in, effectively~~ resulting in a minimum ratio of Common Equity Tier 1 to risk-weighted assets of ~~at least~~ 7.0% ~~upon full implementation)~~, (ii) a minimum ratio of Tier 1 ~~capital~~Capital to risk-weighted assets of ~~at least~~ 6.0%, plus the 2.5% capital conservation buffer, ~~(which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively~~ resulting in a minimum Tier 1 ~~capital~~Capital ratio of 8.5% ~~upon full implementation)~~, (iii) a minimum ratio of ~~total capital~~Total Risk-based Capital to risk-weighted assets of ~~at least~~ 8.0%, plus the 2.5% capital conservation buffer, ~~(which is added to the 8.0% total capital ratio as that buffer is phased in, effectively~~ resulting in a minimum ~~total capital~~Total Risk-based Capital ratio of 10.5% ~~upon full implementation)~~, and (iv) a minimum ~~leverage~~Leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer requirement ~~is being~~was phased in ~~as of~~beginning January 1, 2016, ~~at 0.625% of risk-weighted assets,~~ increasing by ~~the same amount~~0.625% each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

The following ~~table presents~~tables present capital ratios for the Bank, minimum capital ratios required, and ratios defined as ~~“well-capitalized”~~“well capitalized” by the Bank’s regulators as of the dates stated.

As of September 30, 2018	Actual Ratio			Minimum Capital Requirement Ratio			Well- Capitalized Ratio
As of June 30, 2019										Actual Ratio			Minimum Capital Requirement Ratio			Well- Capitalized Ratio
Total risk-based capital		11.72	%		8.00	%		10.00	%		12.82	%		10.50	%		10.00	%
Tier 1 capital		10.86	%		6.00	%		8.00	%		12.00	%		8.50	%		8.00	%
Common equity tier 1		10.86	%		4.50	%		6.50	%		12.00	%		7.00	%		6.50	%
Tier 1 leverage ratio		9.45	%		4.00	%		5.00	%		10.14	%		4.00	%		5.00	%

As of December 31, 2017	Actual Ratio			Minimum Capital Requirement Ratio			Well- Capitalized Ratio
As of December 31, 2018										Actual Ratio			Minimum Capital Requirement Ratio			Well- Capitalized Ratio
Total risk-based capital		12.70	%		8.00	%		10.00	%		11.68	%		9.875	%		10.00	%
Tier 1 capital		11.65	%		6.00	%		8.00	%		10.80	%		7.875	%		8.00	%
Common equity tier 1		11.65	%		4.50	%		6.50	%		10.80	%		6.375	%		6.50	%
Tier 1 leverage ratio		8.97	%		4.00	%		5.00	%		9.42	%		4.000	%		5.00	%

In the normal course of business, the Company offers various financial products to its customers to meet their credit and liquidity needs. These instruments ~~may~~ involve elements of ~~liquidity,~~ credit and interest rate risk in excess of the amount recognized in the ~~Company’s~~ consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and ~~standby-letters~~stand-by letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional commitments as it does for on-balance sheet commitments. Subject to its normal credit standards and risk monitoring procedures, the Company makes contractual commitments to extend credit. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Conditional commitments are issued by the Company in the form of performance stand-by letters of credit, which guarantee the performance of a customer to a third party. ~~The credit risk of issuing~~Additionally, but to a much lesser extent, the Company issues financial stand-by letters of credit, ~~is essentially~~which guarantee payment to the ~~same as that involved in extending loan facilities~~underlying beneficiary (i.e., third party) if the customer fails to ~~customers.~~meet its designated financial obligation.

The following table presents ~~the Company’s~~ off balance sheet commitments as of the dates stated.

	September 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
Total loan commitments outstanding	$	154,014	$	144,249	$	156,786	$	160,479
Stand-by letters of credit		1,637		447		3,683		2,848

There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s ~~2017~~2018 Form 10-K.

Refer to Note 2, Amendments to the Accounting Standards Codification, in the Notes to the Consolidated Financial Statements contained in Item 1 of this report, for information related to the adoption of ~~new~~ amendments to the Accounting Standards Codification.

As of the end of the period to which this report relates, the Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). 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, not absolute, assurance that objectives of the disclosure controls and procedures are met. The design of any disclosure ~~controls~~control and ~~procedures~~procedure is also 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 conditions.

Based upon ~~this~~the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are ~~not~~ effective in ensuring that information required to ~~ensure~~be disclosed by the Company in the reports that ~~material information~~it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the ~~Company on a timely basis in order~~Securities and Exchange Commission’s reports and forms, and that such information is accumulated and communicated to ~~comply with the Company’s disclosure obligations under the Exchange Act~~management, including its Chief Executive Officer and the rules and regulations promulgated under it. The aforementioned officers based this conclusion on the fact that the Company had material weaknesses as described in its 2017 Form 10-K, which were not fully remediated and tested as of September 30, 2018.

Management, with oversight from the Audit Committee, is committed to remediating the material weaknesses which existed as of December 31, 2017 and have not been fully remediated as of September 30, 2018, and is actively engaged in the implementation of a remediation plan, including the actions detailed in the 2017 Form 10-K, to ensure that controls contributing to these material weaknesses are designed appropriately and will operate effectively. In the first quarter of 2018, the Company hired a new Chief Financial Officer, ~~and Controller with substantial experience in financial reporting under the Exchange Act and in the requirements~~as appropriate to ~~implement appropriate changes in internal controls in areas of the findings of control deficiencies.~~

In the second and third quarters of 2018, management designed and implemented internal controls that address and remediate a substantial number of the control deficiencies that culminated in material weaknessesallow timely decisions regarding disclosure, as of ~~December 31, 2017. As of the end of the quarterly period ended September~~June 30, ~~2018, management has not fully tested the operating effectiveness of these controls.~~2019.

~~Except as noted in the preceding section, there~~There was no change to the Company’s internal control over financial reporting during the three months ended ~~September~~June 30, ~~2018~~2019 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

In the ordinary course of its operations, the Company is a party to various legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.

There have been no material changes to the risk factors disclosed in the ~~2017~~2018 Form 10-K.

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.


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None

Large accelerated filer	☐	Accelerated filer	☐☒
Non-accelerated filer	☒☐	Smaller reporting company	☒
		Emerging growth company	☐

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS		34

CONSOLIDATED BALANCE SHEETS AS OF ~~SEPTEMBER~~JUNE 30, ~~2018~~2019 (UNAUDITED) AND DECEMBER 31, ~~2017~~2018		34

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2018~~2019 AND ~~2017~~2018 (UNAUDITED)		45

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2018~~2019 AND ~~2017 (UNAUDITED)~~		5

~~CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30,~~ 2018 (UNAUDITED)		6

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN SHAREHOLDERS’ EQUITY FOR THE ~~NINE~~THREE AND SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2018~~2019 AND ~~2017~~2018 (UNAUDITED)		7

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018 (UNAUDITED)		9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		810

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		2829

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		3940

ITEM 4. CONTROLS AND PROCEDURES		3941

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		4041

ITEM 1A. RISK FACTORS		4041

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		4041

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		4041

ITEM 4. MINE SAFETY DISCLOSURES		4041

ITEM 5. OTHER INFORMATION		4041

ITEM 6. EXHIBITS		4142

	For the Three Months Ended						For the Three Months Ended
	September 30, 2018						September 30, 2017
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Residential first mortgages (1)		4	$	1,272	$	1,303		—	$	—	$	—

	June 30, 2019
Operating lease right-of-use assets	$	4,410

Current operating lease liabilities	$	802
Noncurrent lease liabilities		3,930
Total operating lease liabilities	$	4,732

			Fair Value
	As Recorded		Adjustments			As Recorded
	by Virginia BanCorp		and Reclassifications			by the Company
Consideration paid:
Bay Banks of Virginia, Inc. common stock						$	42,247
Identifiable assets acquired:
Cash and due from banks	$	2,356	$	—		$	2,356
Interest-bearing deposits		12,342		—			12,342
Securities available-for-sale		22,088		—			22,088
Restricted securities		1,543		—			1,543
Loans receivable		272,479		(62,068	)		210,411
Loans held for sale		—		55,648			55,648
Deferred income taxes		1,325		255			1,580
Premises and equipment		3,333		2,703			6,036
Accrued interest receivable		1,253		(24	)		1,229
Other real estate owned		3,113		—			3,113
Core deposit intangible		—		3,670			3,670
Bank owned life insurance		8,430		—			8,430
Mortgage servicing rights		324		—			324
Other assets		365		—			365
Total identified assets acquired		328,951		184			329,135
Identifiable liabilities assumed:
Noninterest-bearing deposits		21,119		—			21,119
Savings and interest-bearing demand deposits		124,640		—			124,640
Time deposits		121,437		733			122,170
Federal Home Loan Bank advances		25,000		—			25,000
Other liabilities		1,525		—			1,525
Total identifiable liabilities assumed		293,721		733			294,454
Total identifiable assets assumed	$	35,230	$	(549	)	$	34,681
Goodwill resulting from acquisition						$	7,566

	For the Nine Months Ended September 30, 2017
Net interest income	$	22,014
Net income		2,752

	Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018
Loans (1)	$	357		$	1,408
Core deposit intangible (2)		(196	)		(610	)
Time deposits (3)		40			150
Depreciation (4)		(10	)		(30	)
Net impact to income before income taxes	$	191		$	918

	June 30, 2019
Weighted average remaining lease term - operating leases	8 years
Weighted average discount rate - operating leases		3.11	%

2019	$	449
2020		944
2021		977
2022		601
2023		351
Thereafter		2,062
Total		5,384
Less interest		(652	)
Lease liability	$	4,732

	For the Six Months Ended
	June 30, 2019
Cash paid for amount included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	496
Right-of-use assets obtained in exchange for new operating lease liabilities	$	1,304


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.

	MSRs			Corporate Bonds
Balance as of January 1, 2019	$	977		$	3,671
Purchases		—			—
Transfer from level 2 to level 3		—			2,044
Fair value adjustments		(61	)		(4	)
Sales		—			—
Balance as of June 30, 2019	$	916		$	5,711

	Balance as of December 31, 2017		Valuation Technique	Unobservable Input	Range (Weighted Average)
Impaired loans	$	3,491	Discounted appraised value	Selling Cost Lack of Marketability	6%-20% (16%) 50%-90% (65%)
��			Discounted cash flows	Discount rate	5%-6% (6%)
Other real estate owned, net		4,284	Discounted appraised value	Selling Cost Lack of Marketability	3%-13% (8%) 10%-100% (16%)

	For the Three Months Ended September 30, 2018
	Net Unrealized Losses on Securities			Pension and Post-retirement Benefit Plans			Accumulated Other Comprehensive Loss
Balance as of July 1, 2018	$	(1,648	)	$	(667	)	$	(2,315	)
Change in net unrealized holding loss on available-for-sale securities, net of tax benefit of $100		(377	)		—			(377	)
Balance as of September 30, 2018	$	(2,025	)	$	(667	)	$	(2,692	)

	For the Nine Months Ended September 30, 2018
	Net Unrealized Losses on Securities			Pension and Post-retirement Benefit Plans			Accumulated Other Comprehensive Loss
Balance as of January 1, 2018	$	(489	)	$	(667	)	$	(1,156	)
Change in net unrealized holding loss on available-for-sale securities, net of tax benefit of $408		(1,536	)		—			(1,536	)
Balance as of September 30, 2018	$	(2,025	)	$	(667	)	$	(2,692	)

	For the Three Months Ended June 30, 2019
	Net Unrealized Gains (Losses) on Securities			Pension and Post-retirement Benefit Plans			Accumulated Other Comprehensive Income (Loss), net
Balance as of April 1, 2019	$	(446	)	$	(75	)	$	(521	)
Change in net unrealized holding gain on available-for-sale securities, net of deferred tax expense of $167		628			—			628
Balance as of June 30, 2019	$	182		$	(75	)	$	107

	For the Six Months Ended June 30, 2019
	Net Unrealized Gains (Losses) on Securities			Pension and Post-retirement Benefit Plans			Accumulated Other Comprehensive Income (Loss), net
Balance as of January 1, 2019	$	(1,252	)	$	(75	)	$	(1,327	)
Change in net unrealized holding gain on available-for-sale securities, net of deferred tax expense of $382		1,434			—			1,434
Balance as of June 30, 2019	$	182		$	(75	)	$	107

	Average Balances, Income and Expense, Yields and Rates
	As of and for the Nine Months Ended September 30,
	2018							2017							2018 Compared to 2017
																		Variance Attributable to (7)
	Average Balance		Income/ Expense		Yield/ Cost			Average Balance		Income/ Expense		Yield/ Cost			Income/ Expense Variance			Rate			Volume
INTEREST-EARNING ASSETS:
Taxable securities	$	62,490	$	1,392		2.98	%	$	40,765	$	946		3.10	%	$	446		$	(58	)	$	504
Tax-exempt securities (1)		19,195		451		3.14	%		19,233		521		3.61	%		(70	)		(69	)		(1	)
Total securities		81,685		1,843		3.02	%		59,998		1,467		3.26	%		376			(127	)		503
Gross loans (2) (3)		799,080		29,853		4.99	%		601,278		21,588		4.79	%		8,265			1,163			7,102
Interest-bearing deposits and federal funds sold		32,217		413		1.71	%		27,566		253		1.23	%		160			117			43
Certificates of deposits		3,186		54		2.27	%		3,564		55		2.05	%		(1	)		5			(6	)
Total interest-earning assets	$	916,168	$	32,163		4.69	%	$	692,406	$	23,363		4.50	%	$	8,800		$	1,285		$	7,139
INTEREST-BEARING LIABILITIES:
Savings deposits	$	63,078	$	139		0.29	%	$	58,563	$	91		0.21	%	$	48		$	41		$	7
Demand deposits		81,236		121		0.20	%		76,558		103		0.18	%		18			12			6
Time deposits (4)		367,524		4,030		1.47	%		247,839		2,248		1.21	%		1,782			696			1,086
Money market deposits		158,077		1,137		0.96	%		116,419		557		0.64	%		580			381			199
Total deposits		669,915		5,427		1.08	%		499,379		2,999		0.80	%		2,428			1,130			1,298
Federal funds purchased		—		—		0.00	%		1,999		10		0.69	%		(10	)		—			(10	)
Securities sold under repurchase agreements		6,575		10		0.20	%		9,827		12		0.16	%		(2	)		2			(4	)
Subordinated notes and ESOP debt		7,969		384		6.44	%		6,867		354		6.87	%		30			(27	)		57
FHLB advances		68,059		1,140		2.24	%		64,659		681		1.41	%		459			423			36
Total interest-bearing liabilities	$	752,518	$	6,961		1.24	%	$	582,731	$	4,056		0.93	%	$	2,905		$	1,528		$	1,377
Net interest income and net interest margin (5)			$	25,202		3.67	%			$	19,307		3.72	%	$	5,895		$	(243	)	$	5,762
Noninterest-bearing deposits	$	105,166						$	87,776
Total cost of funds (8)						1.08	%						0.81	%
Net interest spread (6)						3.46	%						3.57	%

		Within 3 Months				3-6 Months				6-12 Months				Over 12 Months				Total				Percent of Total Deposits
Time deposits			32,275				13,335				45,121				110,690				201,421				26.0	%

	Nine Months Ended September 30, 2018									Twelve Months Ended December 31, 2017
	Period-End Balance		Highest Month-End Balance		Average Balance		Weighted Average Rate			Period-End Balance		Highest Month-End Balance		Average Balance		Weighted Average Rate
FHLB advances	$	80,000	$	80,000	$	68,059		2.46	%	$	70,000	$	75,000	$	52,500		1.87	%

	Six Months Ended June 30, 2019									Year Ended December 31, 2018
	Period-End Balance		Highest Month-End Balance		Average Balance		Weighted Average Rate			Period-End Balance		Highest Month-End Balance		Average Balance		Weighted Average Rate
FHLB advances	$	70,000	$	100,000	$	92,884		2.86	%	$	100,000	$	100,000	$	71,753		2.38	%


31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2018,~~2019, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, (ii) Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, (iii) Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the ~~nine~~three and six months ended ~~September~~June 30, 2019 and 2018, (v) Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, and (vi) Notes to Consolidated Financial Statements.

	Bay Banks of Virginia, Inc.
	(Registrant)

~~November 9, 2018~~August 8, 2019	By:	/s/ Randal R. Greene
		Randal R. Greene
		President and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Judy C. Gavant
		Judy C. Gavant
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)