Virginia National Bankshares Corp - Quarter Report: 2019 March (Form 10-Q)

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

FORM 10-Q
___________

(Mark One)
[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2019
[  ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from ____________ to ____________

Commission File Number: 000-55117

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

Virginia (State or other jurisdiction of incorporation or organization) 404 People Place, Charlottesville, Virginia (Address of principal executive offices)

46-2331578 (I.R.S. Employer Identification No.) 22911 (Zip Code)

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

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

☒  Yes              ☐ No

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

☒  Yes              ☐ No

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

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 May 6, 2019:

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VIRGINIA NATIONAL BANKSHARES CORPORATION

FORM 10-Q

TABLE OF CONTENTS

Part I. Financial Information
Item 1		Financial Statements
Consolidated Balance Sheets (unaudited)				Page 3
Consolidated Statements of Income (unaudited)				Page 4
Consolidated Statements of Comprehensive Income (unaudited)				Page 5
Consolidated Statements of Changes in Shareholders’ Equity (unaudited)				Page 6
Consolidated Statements of Cash Flows (unaudited)				Page 7
Notes to Consolidated Financial Statements (unaudited)				Page 8
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations		Page 30
Application of Critical Accounting Policies and Estimates				Page 30
Financial Condition				Page 31
Results of Operations				Page 36
Item 3		Quantitative and Qualitative Disclosures About Market Risk		Page 40
Item 4		Controls and Procedures		Page 40
Part II. Other Information
Item 1		Legal Proceedings		Page 40
Item 1A		Risk Factors		Page 40
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		Page 40
Item 3		Defaults Upon Senior Securities		Page 41
Item 4		Mine Safety Disclosures		Page 41
Item 5		Other Information		Page 41
Item 6		Exhibits		Page 41
Signatures				Page 42

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

		March 31, 2019				December 31, 2018 *
ASSETS		(Unaudited)
Cash and due from banks		$	10,965			$	11,741
Federal funds sold			3,639				7,133
Securities:
Available for sale, at fair value			61,312				61,392
Restricted securities, at cost			1,684				1,683
Total securities			62,996				63,075
Loans			528,360				537,190
Allowance for loan losses			(4,905	)			(4,891	)
Loans, net			523,455				532,299
Premises and equipment, net			6,846				7,042
Bank owned life insurance			16,900				16,790
Goodwill			372				372
Other intangible assets, net			458				477
Accrued interest receivable and other assets			10,169				5,871
Total assets		$	635,800			$	644,800
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits:
Noninterest-bearing		$	160,071			$	185,819
Interest-bearing			108,933				106,884
Money market and savings deposit accounts			157,737				171,299
Certificates of deposit and other time deposits			130,458				108,531
Total deposits			557,199				572,533
Accrued interest payable and other liabilities			6,076				1,525
Total liabilities			563,275				574,058
Shareholders' equity:
Preferred stock, $2.50 par value, 2,000,000 shares authorized, no shares outstanding			-				-
Common stock, $2.50 par value, 10,000,000 shares authorized; 2,560,138 and 2,543,452 issued and outstanding at March 31, 2019 and December 31, 2018, respectively			6,400				6,359
Capital surplus			27,522				27,013
Retained earnings			39,126				38,647
Accumulated other comprehensive loss			(523	)			(1,277	)
Total shareholders' equity			72,525				70,742
Total liabilities and shareholders' equity		$	635,800			$	644,800

*

Derived from audited Consolidated Financial Statements

See Notes to Consolidated Financial Statements

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

		For the three months ended
		March 31, 2019			March 31, 2018
Interest and dividend income:
Loans, including fees		$	6,097		$	5,714
Federal funds sold			19			35
Investment securities:
Taxable			252			278
Tax exempt			81			85
Dividends			26			28
Total interest and dividend income			6,475			6,140
Interest expense:
Demand and savings deposits			381			232
Certificates and other time deposits			459			140
Repurchase agreements and other borrowings			67			72
Total interest expense			907			444
Net interest income			5,568			5,696
Provision for (recovery of) loan losses			684			(96	)
Net interest income after provision for (recovery of) loan losses			4,884			5,792
Noninterest income:
Trust income			347			414
Advisory and brokerage income			136			140
Royalty income			4			518
Customer service fees			181			247
Debit/credit card and ATM fees			157			187
Earnings/increase in value of bank owned life insurance			110			109
Fees on mortgage sales			30			36
Losses on sales of assets			-			(33	)
Other			94			96
Total noninterest income			1,059			1,714
Noninterest expense:
Salaries and employee benefits			2,346			1,991
Net occupancy			479			480
Equipment			117			128
Data processing			316			252
Other			1,153			1,166
Total noninterest expense			4,411			4,017
Income before income taxes			1,532			3,489
Provision for income taxes			286			693
Net income		$	1,246		$	2,796
Net income per common share, basic *		$	0.49		$	1.10
Net income per common share, diluted *		$	0.49		$	1.09
Weighted average common shares outstanding, basic *			2,550,785			2,534,799
Weighted average common shares outstanding, diluted *			2,559,274			2,554,980

*

Share data for March 31, 2018 has been adjusted to reflect the 5% stock dividend effective April 13, 2018.

See Notes to Consolidated Financial Statements

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

		For the three months ended
		March 31, 2019			March 31, 2018
Net income		$	1,246		$	2,796
Other comprehensive income (loss)
Unrealized gains (losses) on securities, net of tax of $201 and ($197) for the three months ended March 31, 2019 and 2018			754			(743	)
Total other comprehensive income (loss)			754			(743	)
Total comprehensive income		$	2,000		$	2,053

See Notes to Consolidated Financial Statements

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VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(Dollars in thousands, except per share data)
(Unaudited)

												Accumulated
												Other
		Common			Capital			Retained				Comprehensive
		Stock *			Surplus *			Earnings				Income (Loss)				Total
Balance, December 31, 2017		$	6,027		$	22,038		$	37,923			$	(883	)			65,105
Stock options exercised			16			128			-				-				144
Stock option expense			-			1			-				-				1
Stock dividend distributable *			301			4,673			(4,974	)			-				-
Cash dividends declared ($0.19 per share)			-			-			(482	)			-				(482	)
Net income			-			-			2,796				-				2,796
Other comprehensive loss			-			-			-				(743	)			(743	)
Balance, March 31, 2018		$	6,344		$	26,840		$	35,263			$	(1,626	)		$	66,821
Balance, December 31, 2018		$	6,359		$	27,013		$	38,647			$	(1,277	)			70,742
Stock options exercised			14			88			-				-				102
Stock option expense			-			24			-				-				24
Stock grants			27			397			-				-				424
Cash dividends declared ($0.30 per share)			-			-			(767	)			-				(767	)
Net income			-			-			1,246				-				1,246
Other comprehensive income			-			-			-				754				754
Balance, March 31, 2019		$	6,400		$	27,522		$	39,126			$	(523	)		$	72,525

*

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

See Notes to Consolidated Financial Statements

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

See Notes to Consolidated Financial Statements

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VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES

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

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

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

Recent Accounting Pronouncements

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

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

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Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

Note 2. Securities

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

As of March 31, 2019, there were $49.1 million, or 40 issues of individual securities, in a loss position. These securities have an unrealized loss of $780 thousand and consisted of 25 mortgage-backed/CMOs, 8 municipal bonds, and 7 agency bonds. The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, at March 31, 2019 and December 31, 2018 (dollars in thousands):

March 31, 2019

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The Company’s securities portfolio is primarily made up of fixed rate bonds, the prices of which move inversely with interest rates. Any unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. At the end of any accounting period, the portfolio may have both unrealized gains and losses. Management does not believe any of the securities in an unrealized loss position are impaired due to credit quality. Accordingly, as of March 31, 2019, management believes the impairments detailed in the table above are temporary, and no impairment loss has been realized in the Company’s consolidated income statement.

An “other-than-temporary impairment” (“OTTI”) is considered to exist if either of the following conditions are met: it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the security’s entire amortized cost basis (even if the Company does not intend to sell). In the event that a security would suffer impairment for a reason that was “other than temporary,” the Company would be expected to write down the security’s value to its new fair value, and the amount of the write down would be included in earnings as a realized loss. As of March 31, 2019, management has concluded that none of its investment securities have an OTTI based upon the information available. Additionally, management has the ability to hold any security with an unrealized loss until maturity or until such time as the value of the security has recovered from its unrealized loss position.

Securities having carrying values of $5.0 million at March 31, 2019 were pledged as collateral to secure public deposits. At December 31, 2018, securities having carrying values of $18.0 million were similarly pledged.

For the three months ended March 31, 2019 and March 31, 2018, there were no sales of securities.

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

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Note 3. Loans

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

The balances in the table above include unamortized premiums and net deferred loan costs and fees. As of both March 31, 2019, and December 31, 2018, unamortized premiums on loans purchased were $2.5 million. Net deferred loan costs (fees) totaled $99 thousand and $129 thousand as of March 31, 2019 and December 31, 2018, respectively.

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

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

March 31, 2019					Unpaid						Average			Interest
		Recorded			Principal			Associated			Recorded			Income
		Investment			Balance			Allowance			Investment			Recognized
Impaired loans without a valuation allowance:
Land and land development		$	30		$	89		$	-		$	31		$	-
1-4 family residential mortgages, first lien, owner occupied			77			124			-			79			-
1-4 family residential mortgages, junior lien			124			124						125			2
Commercial non-owner occupied real estate			915			915			-			919			12
Total impaired loans without a valuation allowance			1,146			1,252			-			1,154			14
Impaired loans with a valuation allowance
Student loans purchased			1,607			1,607			49			1,607			22
Total impaired loans with a valuation allowance			1,607			1,607			49			1,607			22
Total impaired loans		$	2,753		$	2,859		$	49		$	2,761		$	36
December 31, 2018					Unpaid						Average			Interest
		Recorded			Principal			Associated			Recorded			Income
		Investment			Balance			Allowance			Investment			Recognized
Impaired loans without a valuation allowance:
Land and land development		$	32		$	90		$	-		$	37		$	-
1-4 family residential mortgages, first lien, owner occupied			82			127			-			90			-
1-4 family residential mortgages, junior lien			127			127						248			15
Commercial non-owner occupied real estate			923			923			-			947			51
Total impaired loans without a valuation allowance			1,164			1,267			-			1,322			66
Impaired loans with a valuation allowance
Student loans purchased			1,602			1,602			90			1,387			86
Total impaired loans with a valuation allowance			1,602			1,602			90			1,387			86
Total impaired loans		$	2,766		$	2,869		$	90		$	2,709		$	152

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

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

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Based on regulatory guidance on Student Lending, the Company has classified 62 of its student loans purchased as TDRs for a total of $1.2 million as of March 31, 2019. These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered restructurings. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Initially, all student loans were fully insured by a surety bond, and the Company did not expect to experience a loss on these loans. Based on the loss of insurance after July 27, 2018 due to the insolvency of the insurer, management has evaluated these loans individually for impairment and included any potential loss in the allowance for loan losses; interest continues to accrue on these TDRs during any deferment and forbearance periods.

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

Troubled debt restructurings (TDRs)		March 31, 2019					December 31, 2018
		No. of		Recorded			No. of		Recorded
		Loans		Investment			Loans		Investment
Performing TDRs
1-4 family residential mortgages, junior lien		1		$	124		1		$	127
Commercial non-owner occupied real estate		1			915		1			923
Student loans purchased		63			1,162		65			1,157
Total performing TDRs		65		$	2,201		67		$	2,207
Nonperforming TDRs
Student loans purchased		1		$	4		1		$	4
Land and land development		1			17		1			19
Total nonperforming TDRs		2		$	21		2		$	23
Total TDRs		67		$	2,222		69		$	2,230

A summary of loans shown above that were modified under the terms of a TDR during the three months ended March 31, 2019 and 2018 is shown below by class (dollars in thousands). The Post-Modification Recorded Balance reflects the period end balances, inclusive of any interest capitalized to principal, partial principal paydowns, and principal charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

		For three months ended								For three months ended
				March 31, 2019								March 31, 2018
				Pre-			Post-					Pre-			Post-
				Modification			Modification					Modification			Modification
		Number		Recorded			Recorded			Number		Recorded			Recorded
		of Loans		Balance			Balance			of Loans		Balance			Balance
Student loans purchased		2		$	55		$	55		3		$	79		$	79
Total loans modified during the period		2		$	55		$	55		3		$	79		$	79

During the three months ended March 31, 2019, there were no loans modified as TDRs that subsequently defaulted which had been modified as TDRs during the twelve months prior to default. There was one loan modified as a TDR that subsequently defaulted during the year ending December 31, 2018 which had been modified as a TDR during the twelve months prior to default. This student loan had a balance of $33 thousand prior to being charged off.

There were no loans secured by 1-4 family residential property that were in the process of foreclosure at either March 31, 2019 or December 31, 2018.

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Note 4. Allowance for Loan Losses

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

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

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

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

●	Student loans purchased - On June 27, 2018, the Company was notified that ReliaMax Surety Company (“ReliaMax Surety”), the South Dakota insurance company which issued surety bonds for the student loan pool, was placed into liquidation due to insolvency. As such, a reserve was calculated beginning in the second quarter of 2018 using the insurance claim history on the portfolio to establish a historical charge-off rate. In addition qualitative factors were applied to the student loan pool and the calculated reserve is net of any deposit reserve accounts held at the Bank. For reporting periods prior to June 30, 2018, the Company did not charge off student loans as the insurance covered the past due loans, but the Company did apply qualitative factors to calculate a reserve on these loans, net of the deposit reserve accounts held by the Company for this group of loans.
●	Commercial and industrial syndicated loans - Prior to the quarter ended September 30, 2016, there was not an established loss history in the commercial and industrial syndicated loans. The S&P credit and recovery ratings on the credit facilities were utilized to calculate a three-year weighted average historical default rate. During the third quarter of 2016, there was a small loss in the commercial and industrial syndicated loans; therefore, the Company utilized a combination of the migration analysis loss method and the S&P credit and recovery ratings.

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

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

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

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

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

Risk Ratings and Historical Loss Factor Assigned

Excellent

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

Good

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

Pass

Watch

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

Special Mention

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

Substandard

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

Doubtful

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

15

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

														Special			Sub-
March 31, 2019		Excellent			Good			Pass			Watch			Mention			standard			TOTAL
Commercial
Commercial and industrial - organic		$	3,072		$	21,578		$	15,965		$	164		$	39		$	257		$	41,075
Commercial and industrial - government guaranteed			32,286			-			-			-			-			-			32,286
Commercial and industrial - syndicated			-			-			9,579			-			-			2,539			12,118
Real estate construction
Residential construction			-			-			1,345			-			-			-			1,345
Commercial construction			-			-			3,439			-			-			-			3,439
Land and land development			-			-			9,531			493			-			491			10,515
Real estate mortgages
1-4 family residential, first lien, investment			-			-			37,439			3,572			115			269			41,395
1-4 family residential, first lien, owner occupied			-			-			16,147			1,070			10			132			17,359
1-4 family residential, junior lien			-			-			2,272			56			21			503			2,852
1-4 family residential, first lien - purchased			-			-			18,563			-			-			-			18,563
Home equity lines of credit, first lien			-			-			7,501			439			-			339			8,279
Home equity lines of credit, junior lien			-			-			9,465			96			-			111			9,672
Farm			-			-			7,721			332			-			1,329			9,382
Multifamily			-			-			27,874			-			-			-			27,874
Commercial owner occupied			-			-			87,991			6,945			-			-			94,936
Commercial non-owner occupied			-			-			115,043			1,503			-			972			117,518
Consumer
Consumer revolving credit			54			22,554			637			-			-			-			23,245
Consumer all other credit			246			3,880			527			3			-			28			4,684
Student loans purchased			-			-			49,520			2,082			140			81			51,823
Total Loans		$	35,658		$	48,012		$	420,559		$	16,755		$	325		$	7,051		$	528,360
														Special			Sub-
December 31, 2018		Excellent			Good			Pass			Watch			Mention			standard			TOTAL
Commercial
Commercial and industrial - organic		$	3,692		$	23,381		$	13,993		$	264		$	28		$	168		$	41,526
Commercial and industrial - government guaranteed			31,367			-			-			-			-			-			31,367
Commercial and industrial - syndicated			-			-			9,588			-			-			2,546			12,134
Real estate construction
Residential construction			-			-			1,552			-			-			-			1,552
Commercial construction			-			-			5,078			-			-			-			5,078
Land and land development			-			-			9,888			501			-			505			10,894
Real estate mortgages
1-4 family residential, first lien, investment			-			-			36,314			3,607			117			273			40,311
1-4 family residential, first lien, owner occupied			-			-			15,540			1,087			11			137			16,775
1-4 family residential, junior lien			-			-			2,573			58			22			516			3,169
1-4 family residential, first lien - purchased			-			-			18,647			-			-			-			18,647
Home equity lines of credit, first lien			-			-			7,911			414			-			-			8,325
Home equity lines of credit, junior lien			-			-			10,704			97			-			111			10,912
Farm			-			-			8,719			339			-			1,339			10,397
Multifamily			-			-			27,328			-			-			-			27,328
Commercial owner occupied			-			-			86,868			6,932			-			-			93,800
Commercial non-owner occupied			-			-			120,720			1,519			-			975			123,214
Consumer
Consumer revolving credit			44			20,852			644			-			-			-			21,540
Consumer all other credit			263			4,699			535			4			-			29			5,530
Student loans purchased			-			-			51,494			2,401			431			365			54,691
Total Loans		$	35,366		$	48,932		$	428,096		$	17,223		$	609		$	6,964		$	537,190

16

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

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

It has been the Company’s experience that the first five factors drive losses to a much greater extent than the last three factors; therefore, the first five factors are weighted more heavily. Qualitative factors are not assessed against loans rated “Excellent” or “Good.”

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

Impaired loans are individually evaluated and, if deemed appropriate, a specific allocation is made for these loans. In reviewing the loans classified as impaired loans totaling $2.8 million at March 31, 2019, specific valuation allowance was recognized after consideration was given for each borrowing as to the fair value of the collateral on the loan or the present value of expected future cash flows from the borrower. The $49 thousand in the allowance total shown below as individually evaluated for impairment was attributed to the impaired student loans which required an allowance as of March 31, 2019 due to the loss of the insurance on this portfolio as discussed previously.

17

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A summary of the transactions in the Allowance for Loan Losses by loan portfolio segment for the three months ended March 31, 2019 and the year ended December 31, 2018 appears below (dollars in thousands):

Allowance for Loan Losses Rollforward by Portfolio Segment
As of and for the period ended March 31, 2019

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

18

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

Past Due Aging as of																				90 Days
March 31, 2019		30-59				60-89			90 Days or											Past Due
		Days Past				Days Past			More Past		Total Past						Total			and Still
		Due			Due				Due		Due			Current			Loans			Accruing
Commercial loans
Commercial and industrial - organic		$	-		$	-		$	-		$	-		$	41,075		$	41,075		$	-
Commercial and industrial - government guaranteed			-			-			548			548			31,738			32,286			548
Commercial and industrial - syndicated			-			-			-			-			12,118			12,118			-
Real estate construction and land
Residential construction			-			-			-			-			1,345			1,345			-
Commercial construction			-			-			-			-			3,439			3,439			-
Land and land development			-			-			-			-			10,515			10,515			-
Real estate mortgages
1-4 family residential, first lien, investment			-			-			-			-			41,395			41,395			-
1-4 family residential, first lien, owner occupied			-			-			-			-			17,359			17,359			-
1-4 family residential, junior lien			-			-			-			-			2,852			2,852			-
1-4 family residential - purchased		.				-			-			-			18,563			18,563			-
Home equity lines of credit, first lien			-			-			-			-			8,279			8,279			-
Home equity lines of credit, junior lien			-			-			-			-			9,672			9,672			-
Farm			-			-			-			-			9,382			9,382			-
Multifamily			-			-			-			-			27,874			27,874			-
Commercial owner occupied			-			-			-			-			94,936			94,936			-
Commercial non-owner occupied			-			-			-			-			117,518			117,518			-
Consumer loans
Consumer revolving credit			-			-			-			-			23,245			23,245			-
Consumer all other credit			44			-			-			44			4,640			4,684			-
Student loans purchased			477			140			486			1,103			50,720			51,823			81
Total Loans		$	521		$	140		$	1,034		$	1,695		$	526,665		$	528,360		$	629
Past Due Aging as of																				90 Days
December 31, 2018		30-59			60-89			90 Days or												Past Due
		Days Past			Days Past			More Past			Total Past						Total			and Still
		Due			Due			Due			Due			Current			Loans			Accruing
Commercial loans
Commercial and industrial - organic		$	50		$	172		$	-		$	222		$	41,304		$	41,526		$	-
Commercial and industrial - government guaranteed			-			-			548			548			30,819			31,367			548
Commercial and industrial - syndicated			-			-			-			-			12,134			12,134			-
Real estate construction and land
Residential construction			-			-			-			-			1,552			1,552			-
Commercial construction			-			-			-			-			5,078			5,078			-
Land and land development			1			-			15			16			10,878			10,894			15
Real estate mortgages
1-4 family residential, first lien, investment			-			-			-			-			40,311			40,311			-
1-4 family residential, first lien, owner occupied			-			-			-			-			16,775			16,775			-
1-4 family residential, junior lien			-			-			-			-			3,169			3,169			-
1-4 family residential - purchased			954			-			-			954			17,693			18,647			-
Home equity lines of credit, first lien			-			-			-			-			8,325			8,325			-
Home equity lines of credit, junior lien			-			-			-			-			10,912			10,912			-
Farm			-			-			-			-			10,397			10,397			-
Multifamily			-			-			-			-			27,328			27,328			-
Commercial owner occupied			-			-			-			-			93,800			93,800			-
Commercial non-owner occupied			75			-			-			75			123,139			123,214			-
Consumer loans
Consumer revolving credit			-			-			-			-			21,540			21,540			-
Consumer all other credit			4			599			-			603			4,927			5,530			-
Student loans purchased			850			463			754			2,067			52,624			54,691			332
Total Loans		$	1,934		$	1,234		$	1,317		$	4,485		$	532,705		$	537,190		$	895

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Note 5. Net Income Per Share

On March 16, 2018, the Board of Directors approved a stock dividend of five percent (5%) on the outstanding shares of common stock of the Company (or .05 share for each share outstanding) which was issued on April 13, 2018 to all shareholders of record as of the close of business on April 3, 2018 (the “5% Stock Dividend”). Shareholders received cash in lieu of any fractional shares that they otherwise would have been entitled to receive in connection with the stock dividend. The price paid for fractional shares was based on the volume-weighted average price of a share of common stock for the most recent three (3) days prior to the record date during which a trade of the Company’s stock occurred.

For the following table, share and per share data have been adjusted to reflect the 5% Stock Dividend. The table shows the weighted average number of shares used in computing net income per common share and the effect on the weighted average number of shares of diluted potential common stock for the three months ended March 31, 2019 and 2018. Potential dilutive common stock equivalents have no effect on net income available to common shareholders. (Dollars below reported in thousands except per share data.)

Three Months Ended		March 31, 2019								March 31, 2018
					Weighted		Per						Weighted		Per
					Average		Share						Average		Share
		Net Income			Shares		Amount			Net Income			Shares		Amount
Basic net income per share		$	1,246		2,550,785		$	0.49		$	2,796		2,534,799		$	1.10
Effect of dilutive stock options			-		8,489			0.00			-		20,181			(0.01	)
Diluted net income per share		$	1,246		2,559,274		$	0.49		$	2,796		2,554,980		$	1.09

For the three-month period ended March 31, 2019, there were 62,750 option shares considered anti-dilutive and excluded from this calculation. For the three-month period ended March 31, 2018, there were no shares considered anti-dilutive and excluded from this calculation.

Note 6. Stock Incentive Plans

At the Annual Shareholders Meeting on May 21, 2014, shareholders approved the Virginia National Bankshares Corporation 2014 Stock Incentive Plan (“2014 Plan”). The 2014 Plan makes available up to 262,500 shares of the Company’s common stock, as adjusted by the 5% Stock Dividend, to be issued to plan participants. The 2014 Plan provides for granting of both incentive and nonqualified stock options, as well as restricted stock and other stock based awards. No new grants will be issued under the 2003 Plan or the 2005 Plan as these plans have expired.

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

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A summary of the shares issued and available under each of the Plans is shown below as of March 31, 2019. Share data and exercise price range per share have been adjusted to reflect the 5% Stock Dividend. Although the 2005 Plan has expired and no new grants will be issued under this plan, there were options issued before the plan expired which are still outstanding as shown below.

The Company accounts for all of its stock incentive plans under recognition and measurement accounting principles which require that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. Stock-based compensation arrangements include stock options and restricted stock. All stock-based payments to employees are required to be valued at a fair value on the date of grant and expensed based on that fair value over the applicable vesting period. For the three months ended March 31, 2019 and 2018, the Company recognized $24 thousand and $1 thousand, respectively, in compensation expense for stock options. As of March 31, 2019, there was $382 thousand in unrecognized compensation expense remaining to be recognized in future reporting periods through 2023.

Stock Options

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

		March 31, 2019
					Weighted Average			Aggregate
		Number of Options			Exercise Price			Intrinsic Value
Outstanding at January 1, 2019		82,481			$	38.02		$	327
Issued		-				-
Exercised		(5,693	)			17.90
Expired		(11,675	)			17.39
Outstanding at March 31, 2019		65,113			$	43.48		$	42
Options exercisable at March 31, 2019		1,313			$	14.37		$	32

The fair value of any grant is estimated at the grant date using the Black-Scholes pricing model. There were no stock option grants during the first three months of 2019. During 2018, stock option grants for 62,750 shares were issued.

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Summary information pertaining to options outstanding at March 31, 2019 is shown below. Share and per share data have been adjusted to reflect the 5% Stock Dividend.

There was an intrinsic value of $120,000 for the options exercised during the three months ended March 31, 2019.

Stock Grants

On February 20, 2019, a total of 10,993 shares of stock were granted to non-employee directors and certain members of executive management for services to be provided during the year ending December 31, 2019. Based on the market price on February 20, 2019 of $38.65, the total expense for these shares will be $424 thousand which will be expensed over the twelve months of 2019 as those services are provided. As of March 31, 2019, $106 thousand of this total has been realized in stock grant expense.

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Note 7. Fair Value Measurements

Determination of Fair Value

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

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

Fair Value Hierarchy

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

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

Securities available for sale

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

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

					Fair Value Measurements at March 31, 2019 Using:
					Quoted Prices in			Significant
					Active Markets			Other			Significant
					for Identical			Observable			Unobservable
					Assets			Inputs			Inputs
Description		Balance			(Level 1)			(Level 2)			(Level 3)
Assets:
U.S. Government agencies		$	19,227		$	-		$	19,227		$	-
Mortgage-backed securities/CMOs			24,428			-			24,428			-
Municipal bonds			17,657			-			17,657			-
Total securities available for sale		$	61,312		$	-		$	61,312		$	-
					Fair Value Measurements at December 31, 2018 Using:
					Quoted Prices in			Significant
					Active Markets			Other			Significant
					for Identical			Observable			Unobservable
					Assets			Inputs			Inputs
Description		Balance			(Level 1)			(Level 2)			(Level 3)
Assets:
U.S. Government agencies		$	18,974		$	-		$	18,974		$	-
Mortgage-backed securities/CMOs			25,063			-			25,063			-
Municipal bonds			17,355			-			17,355			-
Total securities available for sale		$	61,392		$	-		$	61,392		$	-

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

Other Real Estate Owned

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

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

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

Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had impaired loans of $2.8 million as of March 31, 2019 and December 31, 2018. The impaired loans as of March 31, 2019 and December 31, 2018 requiring a valuation allowance are shown in the table below.

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The following table presents the balances, less associated allowance, measured at fair value on a nonrecurring basis as of March 31, 2019 and December 31, 2018 (dollars in thousands):

Fair Value Measurements at March 31, 2019 Using:

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Inputs

Description

Balance

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans

Student loans purchased

1,558

-

-

1,558

Total impaired loans

$

1,558

$

-

$

-

$

1,558

Fair Value Measurements at December 31, 2018 Using:

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Inputs

Description

Balance

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans

Student loans purchased

1,512

-

-

1,512

Total impaired loans

$

1,512

$

-

$

-

$

1,512

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

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

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The carrying values and estimated fair values of the Company's financial instruments as of March 31, 2019 and December 31, 2018 are as follows (dollars in thousands):

					Fair Value Measurement at March 31, 2019 using:
					Quoted Prices			Significant
					in Active			Other			Significant
					Markets for			Observable			Unobservable
					Identical Assets			Inputs			Inputs
		Carrying value			Level 1			Level 2			Level 3			Fair Value
Assets
Cash and cash equivalent		$	14,604		$	14,604		$	-		$	-		$	14,604
Available for sale securities			61,312			-			61,312			-			61,312
Loans, net			523,455			-			-			506,505			506,505
Bank owned life insurance			16,900			-			16,900			-			16,900
Accrued interest receivable			2,239			-			355			1,884			2,239
Liabilities
Demand deposits and interest-bearing transaction, money market, and savings accounts		$	426,741		$	-		$	426,741		$	-		$	426,741
Certificates of deposit			130,458			-			130,340			-			130,340
Accrued interest payable			337			-			337			-			337
					Fair Value Measurement at December 31, 2018 using:
					Quoted Prices			Significant
					in Active			Other			Significant
					Markets for			Observable			Unobservable
					Identical Assets			Inputs			Inputs
		Carrying value			Level 1			Level 2			Level 3			Fair Value
Assets
Cash and cash equivalent		$	18,874		$	18,874		$	-		$	-		$	18,874
Available for sale securities			61,392			-			61,392			-			61,392
Loans, net			532,299			-			-			514,917			514,917
Bank owned life insurance			16,790			-			16,790			-			16,790
Accrued interest receivable			2,100			-			342			1,758			2,100
Liabilities
Demand deposits and interest-bearing transaction and money market accounts		$	464,002		$	-		$	464,002		$	-		$	464,002
Certificates of deposit			108,531			-			108,323			-			108,323
Accrued interest payable			243			-			243			-			243

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

Note 8. Other Comprehensive Income

A component of the Company’s other comprehensive income, in addition to net income from operations, is the recognition of the unrealized gains and losses on available for sale securities, net of income taxes. Reclassifications of realized gains and losses on available for sale securities are reported in the income statement as “Gains (losses) on sales of securities” with the corresponding income tax effect reflected as a component of income tax expense. As there were no sales of securities in the three months ended March 31, 2019 and 2018, there were no amounts reclassified out of accumulated other comprehensive income during these periods.

Note 9. Segment Reporting

Beginning in 2019, the Company has four reportable segments. Each reportable segment is a strategic business unit that offers different products and services. They are managed separately, because each segment appeals to different markets and, accordingly, require different technology and marketing strategies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report.

The four reportable segments are:

●	Bank - The commercial banking segment involves making loans and generating deposits from individuals, businesses and charitable organizations. Loan fee income, service charges from deposit accounts, and other noninterest-related fees, such as fees for debit cards and ATM usage and fees for treasury management services, generate additional income for the Bank segment.
●	VNB Investment Services - VNB Investment Services offers wealth management and investment advisory services. Revenue for this segment is generated primarily from investment advisory and financial planning fees, with a small and decreasing portion attributable to brokerage commissions.
●	VNB Trust & Estate Services – VNB Trust & Estate Services offers corporate trustee services, trust and estate administration, IRA administration and custody services. Revenue for this segment is generated from administration, service and custody fees. Investment management services currently are offered through third-parties. In addition, royalty income, in the form of fixed and incentive fees, from the sale of Swift Run Capital Management, LLC in 2013 is reported as income of VNB Trust & Estate Services. More information on royalty income and the related sale can be found under Summary of Significant Accounting Policies in Note 1 of the notes to consolidated financial statements, which is found in Item 8. Financial Statements and Supplementary Data, in the Company’s Form 10-K Report for December 31, 2018.
●	Masonry Capital - Masonry Capital offers investment management services for separately managed accounts and a private investment fund employing a value-based, catalyst-driven investment strategy. Revenue for this segment is generated from management fees which are derived from Assets Under Management and incentive income which is based on the investment returns generated on performance-based Assets Under Management.

A management fee for administrative and technology support services provided by the Bank is allocated to the other three lines of business previously combined under VNB Wealth. For both the three months ended March 31, 2019 and 2018, management fees totaling $25 thousand were charged by the Bank and eliminated in consolidated totals.

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Segment information for the three months ended March 31, 2019 and 2018 is shown in the following tables (dollars in thousands).

					VNB			VNB Trust &
					Investment			Estate			Masonry
Three months ended March 31, 2019		Bank			Services			Services			Capital				Consolidated
Net interest income		$	5,568		$	-		$	-		$	-			$	5,568
Provision for loan losses			684			-			-			-				684
Noninterest income			573			136			346			4				1,059
Noninterest expense			3,799			136			307			169				4,411
Income before income taxes			1,658			-			39			(165	)			1,532
Provision for income taxes			312			-			8			(34	)			286
Net income		$	1,346		$	-		$	31		$	(131	)		$	1,246
Total assets		$	635,668			NR*			NR*		$	132			$	635,800
	*	Not reportable. Asset information is not reported for these segments, as the assets previously allocated to VNB Wealth are reported at the Bank level subsequent to the merger of VNBTrust into the Bank effective July 1, 2018; also, assets specifically allocated to these VNB Wealth lines of business are insignificant and are no longer provided to the chief operating decision maker.

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

Note 10. Leases

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

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

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

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

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

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

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ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with Virginia National Bankshares Corporation’s consolidated financial statements, and notes thereto, for the year ended December 31, 2018, included in the Company’s 2018 Form 10-K. Per share data for March 31, 2018 has been adjusted to reflect the 5% Stock Dividend effective April 13, 2018 (the “5% Stock Dividend”). Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results for the year ending December 31, 2019 or any future period.

FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS

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

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

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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FINANCIAL CONDITION

Total assets

The total assets of the Company as of March 31, 2019 were $635.8 million. This is a $9.0 million decrease from the $644.8 million total assets reported at December 31, 2018 and a $10.3 million increase from the $625.5 million reported at March 31, 2018. An $8.8 million decrease in loans since December 31, 2018 was the major reason for the decrease in assets since year-end.

Federal funds sold

The Company had overnight federal funds sold of $3.6 million as of March 31, 2019, compared to $7.1 million as of December 31, 2018; the Company had no fed funds sold as of March 31, 2018. Any excess funds are sold on a daily basis in the federal funds market. The Company intends to maintain sufficient liquidity at all times to meet its funding commitments.

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

Securities

The Company’s investment securities portfolio as of March 31, 2019 totaled $63.0 million, a decrease of $100 thousand compared with the $63.1 million reported at December 31, 2018 and a decrease of $4.2 million from the $67.2 million reported at March 31, 2018. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. At March 31, 2019 and March 31, 2018, the investment securities holdings represented 9.9% and 10.8% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling $1.7 million as of March 31, 2019 and December 31, 2018, compared to $2.3 million as of March 31, 2018. These securities represent stock in the Federal Reserve Bank of Richmond (“FRB-R”), the Federal Home Loan Bank of Atlanta (“FHLB-A”), and CBB Financial Corporation (“CBBFC”), the holding company for Community Bankers Bank. The level of FRB-R and FHLB-A stock that the Company is required to hold is determined in accordance with membership guidelines provided by the Federal Reserve Bank Board of Governors or the Federal Home Loan Bank of Atlanta. The decrease compared to March 31, 2018 was due to the decrease in the Company’s short-term borrowing initiated with the FHLB-A from the first quarter of 2018 to the first quarter of 2019. Stock ownership in the bank holding company for Community Bankers’ Bank provides the Bank with several benefits that are not available to non-shareholder correspondent banks. None of these restricted securities are traded on the open market and can only be redeemed by the respective issuer.

At March 31, 2019, the unrestricted securities portfolio totaled $61.3 million. The following table summarizes the Company's available for sale securities by type as of March 31, 2019, December 31, 2018, and March 31, 2018 (dollars in thousands):

		March 31, 2019						December 31, 2018						March 31, 2018
					Percent						Percent						Percent
		Balance			of Total			Balance			of Total			Balance			of Total
U.S. Government agencies		$	19,227		31.4	%		$	18,974		30.9	%		$	18,784		28.9	%
Mortgage-backed securities/CMOs			24,428		39.8	%			25,063		40.8	%			28,408		43.8	%
Municipal bonds			17,657		28.8	%			17,355		28.3	%			17,738		27.3	%
Total available for sale securities		$	61,312		100.0	%		$	61,392		100.0	%		$	64,930		100.0	%

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

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Loan portfolio

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

As of March 31, 2019, total loans were $528.4 million, compared to $537.2 million as of December 31, 2018 and $524.7 million at March 31, 2018. Loans as a percentage of total assets at March 31, 2019 were 83.1%, compared to 83.9% as of March 31, 2018. Loans as a percentage of deposits at March 31, 2019 were 94.8%, compared to 100.0% as of March 31, 2018. This consistently high loan-to-deposit ratio is in line with our strategy to achieve an effective mix of earning assets and liabilities on our balance sheet.

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

		March 31, 2019						December 31, 2018						March 31, 2018
					Percent						Percent						Percent
		Balance			of Total			Balance			of Total			Balance			of Total
Commercial and industrial		$	85,479		16.2	%		$	85,027		15.8	%		$	81,292		15.5	%
Real estate - commercial			249,710		47.3	%			254,739		47.4	%			233,151		44.4	%
Real estate - residential mortgage			98,120		18.6	%			98,139		18.3	%			92,739		17.7	%
Real estate - construction			15,299		2.8	%			17,524		3.3	%			26,566		5.1	%
Consumer loans			79,752		15.1	%			81,761		15.2	%			90,981		17.3	%
Total loans		$	528,360		100.0	%		$	537,190		100.0	%		$	524,729		100.0	%

Loan balances declined $8.8 million, or 1.6%, since December 31, 2018 yet expanded $3.6 million, or 0.7%, from March 31, 2018. Over the one-year period, the loan growth was comprised of $48.8 million in new funding from organic loan growth, which was offset by $60.9 million in payoffs and normal amortization, supplemented by $15.7 million in net growth in purchased loans. The purchase of loans is considered a secondary strategy, which allows the Company to supplement organic loan growth and enhance earnings. Purchased loans with balances outstanding of $114.8 million as of March 31, 2019 were comprised of:

●	Student loans totaling $51.8 million. The Company purchased two student loan packages in 2015 and a third in the fourth quarter of 2016. A fourth tranche was closed in December 2017 for an additional $15.0 million. Along with the purchase of these four packages of student loans, the Company purchased surety bonds to fully insure this portion of the Company’s consumer portfolio. However, during June 2018, ReliaMax Surety, the insurance company which issued the surety bonds, was placed into liquidation due to insolvency. Loss claims were filed for loans in default as of July 27, 2018, when the surety bonds were terminated, and the Company anticipates payment on such claims. No surety claims may be filed for student loans in default after July 27, 2018.
●	Loans guaranteed by a U.S. government agency (“government guaranteed”) totaling $32.3 million, inclusive of premium. During the fourth quarter of 2016, the Company began augmenting the commercial and industrial portfolio with government guaranteed loans which represent the portion of loans that are 100% guaranteed by either the United States Department of Agriculture (“USDA”) or the Small Business Administration (“SBA”); the originating institution holds the unguaranteed portion of each loan and services it. These government guaranteed portion of loans are typically purchased at a premium. In the event of early prepayment, the Company may need to write off any unamortized premium.
●	Syndicated loans totaling $12.1 million. Syndicated loans represent shared national credits in leveraged lending transactions and are included in the commercial and industrial portfolio. The Company has developed policies to limit overall credit exposure to the syndicated market, as well as limits by industry and amount per borrower.
●	Mortgage loans totaling $18.6 million. In the fourth quarter of 2018, the Company purchased a package of 1-to-4 family residential mortgages. Each of the 42 adjustable rate loans purchased were individually underwritten by the Company prior to the closing of the purchase. The collateral on these loans is located primarily on the East Coast of the United States.

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

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Loan quality

Non-accrual loans totaled $552 thousand at March 31, 2019, compared to the $615 thousand and $171 thousand reported at December 31, 2018 and March 31, 2018, respectively. The balance of loans in non-accrual status increased as a result of $445 thousand in student loans classified as non-accrual during the second and third quarters of 2018 based on the loss of insurance on these loans. The Company has filed claims with the liquidator of ReliaMax Surety, which issued surety bonds on the student loan portfolio, for these non-accrual loans. Based on information released by the liquidator, the Company expects to collect the principal balances outstanding on such loans, which were 120 or more days past due as of July 27, 2018, together with interest outstanding as of that date. Student loans that become 120 days or more past due after July 27, 2018 are classified as charge-offs. The Company has contracted with a third party to proactively manage the collections of past due student loans; this third party has extensive experience and specializes in this type of asset management.

At March 31, 2019 and December 31, 2018, the Company had loans classified as impaired loans in the amount of $2.8 million, compared to $2.6 million at March 31, 2018. Based on regulatory guidance on Student Lending, the Company has classified 64 of its purchased student loans as TDRs for a total of $1.2 million as of March 31, 2019. These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered restructurings. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Management has evaluated these loans individually for impairment and included any potential loss in the allowance for loan loss; interest continues to accrue on these TDRs during any deferment and forbearance periods.

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

Allowance for loan losses

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

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

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

The relationship of the allowance for loan losses to total loans at March 31, 2019, December 31, 2018, and March 31, 2018 appears below (dollars in thousands):

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A provision for loan losses totaling $684 thousand was recorded in the first quarter of 2019; a recovery of loan losses of $96 thousand was recorded for the first quarter of 2018. The following is a summary of the changes in the allowance for loan losses for the three months ended March 31, 2019 and March 31, 2018 (dollars in thousands):

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

Management reviews the Allowance for Loan Losses on a quarterly basis to ensure it is adequate based upon the calculated potential losses inherent in the portfolio. Management believes the allowance for loan losses was adequately provided for as of March 31, 2019.

Premises and equipment

The Company’s premises and equipment, net of depreciation, as of March 31, 2019 totaled $6.8 million compared to $7.0 million as of December 31, 2018 and March 31, 2018, respectively. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of assets. Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon disposition, assets and related accumulated depreciation are removed from the books, and any resulting gain or loss is charged to income.

As of March 31, 2019, the Company and its subsidiaries occupied five full-service banking facilities in the cities of Charlottesville and Winchester, as well as the county of Albemarle in Virginia. VNB Trust & Estate Services’ main office is located at 112 Third Street, SE, Charlottesville, Virginia. The Company also operates a drive-through location at 301 East Water Street, Charlottesville, Virginia. The Bank closed its Orange, Virginia office effective April 13, 2018; expanded messenger service continues to be available to the customers within and surrounding Orange, Virginia.

The multi-story office building at 404 People Place, Charlottesville, Virginia, located in Albemarle County, also serves as the Company’s corporate headquarters and operations center, as well as the principal offices of VNB Investment Services and Masonry Capital.

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

Leases

$4.1 million of the increase in each of Other Assets and Other Liabilities resulted from the Company’s implementation of ASU 2016-02 “Leases” (Topic 842). This implementation required the Company to recognize right-of-use assets, which are assets that represent the Company’s right to use, or control the use of, a specified asset for the lease term, offset by the lease liability, which is the Company’s obligation to make lease payments arising from a lease, measured on a discounted basis.

Deposits

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

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Total deposits as of March 31, 2019 were $557.2 million, down $15.3 million compared to the balances of $572.5 million at December 31, 2018, yet up $32.4 million compared to the $524.8 million total as of March 31, 2018.

Deposit accounts
(dollars in thousands)		March 31, 2019						December 31, 2018						March 31, 2018
					% of Total						% of Total						% of Total
		Balance			Deposits			Balance			Deposits			Balance			Deposits
No cost and low cost deposits:
Noninterest demand deposits		$	160,071		28.7	%		$	185,819		32.4	%		$	162,720		31.0	%
Interest checking accounts			108,933		19.6	%			106,884		18.7	%			94,369		18.0	%
Money market and savings deposit accounts			157,737		28.3	%			171,299		29.9	%			163,187		31.1	%
Total noninterest and low cost deposit accounts			426,741		76.6	%			464,002		81.0	%			420,276		80.1	%
Time deposit accounts:
Certificates of deposit			94,278		16.9	%			81,265		14.2	%			70,791		13.5	%
CDARS deposits			36,180		6.5	%			27,266		4.8	%			33,775		6.4	%
Total certificates of deposit and other time deposits			130,458		23.4	%			108,531		19.0	%			104,566		19.9	%
Total deposit account balances		$	557,199		100.0	%		$	572,533		100.0	%		$	524,842		100.0	%

Noninterest-bearing demand deposits on March 31, 2019 were $160.1 million, representing 28.7% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled $266.7 million, and represented 47.9% of total deposits at March 31, 2019. Collectively, noninterest-bearing and interest-bearing transaction and money market accounts represented 76.6% of total deposit accounts at March 31, 2019. These account types are an excellent source of low-cost funding for the Company.

The Company implemented insured cash sweep (“ICS^®”) deposit products during the third quarter of 2018. ICS^® deposit balances of $21.4 million and $19.2 million are included in the interest checking accounts and the money market and savings deposit accounts balances, respectively, in the table above, as of March 31, 2019. As of December 31, 2018, ICS^® deposit balances of $15.8 million and $21.0 million are included in the interest checking accounts and the money market and savings deposit account balances, respectively.

The remaining 23.4% of total deposits consisted of certificates of deposit and other time deposit accounts totaling $130.5 million at March 31, 2019. Included in this deposit total are Certificate of Deposit Account Registry Service CDs, known as CDARS^TM, whereby depositors can obtain FDIC deposit insurance on account balances of up to $50 million. CDARS deposits totaled $36.2 million as of March 31, 2019, of which $26.2 million were reciprocal balances for the Bank’s customers and $10.0 million were brokered deposits.

Borrowings

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

Repurchase agreements, also referred to as securities sold under agreement to repurchase, were available to non-individual accountholders on an overnight term through the Company’s investment sweep product. Under the agreements to repurchase, invested funds were fully collateralized by security instruments that were pledged on behalf of customers utilizing this product. The repurchase agreement product was discontinued by the Company effective December 31, 2018, in connection with the roll-out of ICS^® to customers, and therefore, there were no balances in repurchase agreements as of March 31, 2019 or December 31, 2018. Total balances in repurchase agreements as of March 31, 2018 were $13.7 million.

The Company has a collateral dependent line of credit with the FHLB of Atlanta. As of March 31, 2019 and December 31, 2018, the Company had no outstanding balances from FHLB advances. As of March, 31, 2018, the Company had outstanding FHLB advances of $15.0 million.

Additional borrowing arrangements maintained by the Bank include formal federal funds lines with four major regional correspondent banks. The Company had no outstanding balances as of March 31, 2019 or December 31, 2018 and an outstanding balance of $2.8 million as of March 31, 2018 in overnight federal funds purchased.

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Shareholders' equity and regulatory capital ratios

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

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

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

Using the new capital requirements, the Company’s capital ratios remain well above the levels designated by bank regulators as "well capitalized" at March 31, 2019. Under the current risk-based capital guidelines of federal regulatory authorities, the Company’s common equity Tier 1 capital ratio and Tier 1 capital ratio are both at 14.16% of its risk-weighted assets and are in excess of the well-capitalized minimum capital requirements of 6.50% and 8.00%, respectively. Additionally, the Company has a total capital ratio of 15.12% of its risk-weighted assets and leverage ratio of 11.37% of total assets, which are both in excess of the well-capitalized minimum 10.00% and 5.00% level designated by bank regulators under “well capitalized” capital guidelines.

RESULTS OF OPERATIONS

Non-GAAP presentations

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

●	Fully taxable-equivalent (“FTE”) adjustments – Net interest margin and efficiency ratios are presented on an FTE basis, consistent with SEC guidance in Industry Guide 3 which states that tax exempt income may be calculated on a tax equivalent basis. This is a non-GAAP presentation. The FTE basis adjusts for the tax-exempt status of net interest income from certain investments using a federal tax rate of 21%, where applicable, to increase tax-exempt interest income to a taxable-equivalent basis.
●	Net interest margin – Net interest margin (FTE) is calculated as net interest income, computed on an FTE basis, expressed as a percentage of average earning assets. The Company believes this measure to be the preferred industry measurement of net interest margin and that it enhances comparability of net interest margin among peers in the industry.
●	Efficiency ratio – One of the ratios the Company monitors in its evaluation of operations is the efficiency ratio, which measures the cost to produce one dollar of revenue. The Company computes its efficiency ratio (FTE) by dividing noninterest expense by the sum of net interest income (FTE) and noninterest income. A lower ratio is an indicator of increased operational efficiency. This non-GAAP metric is used to assist investors in understanding how management assesses its ability to generate revenues from its non-funding-related expense base, as well as to align presentation of this financial measure with peers in the industry. The Company believes this measure to be the preferred industry measurement of operational efficiency, which is consistent with Federal Deposit Insurance Corporation (“FDIC”) studies.

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

Net income

Net income for the three months ended March 31, 2019 was $1.2 million, a 55.4% decrease compared to the $2.8 million reported for the three months ended March 31, 2018. Net income per diluted share was $0.49 for the quarter ended March 31, 2019 compared to $1.09 per diluted share for the same quarter in the prior year, as adjusted to reflect the 5% Stock Dividend. The $1.6 million decrease in net income for the first quarter of 2019, when compared to the same period of 2018, was driven by a $780 thousand increase in provision for loan losses, a $514 thousand decrease in royalty income, and a $394 increase in noninterest expense.

Net interest income

Net interest income (FTE) for the three months ended March 31, 2019 was $5.6 million, a 2.3% decrease compared to net interest income of $5.7 million for the three months ended March 31, 2018. Net interest income was negatively impacted by the effect of higher rates paid on deposit balances, increasing interest expense by $449 thousand, compared to the effect of higher rates earned on loans, which positively impacted net interest income by $290 thousand.

Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets for the period. The level of interest rates, together with the volume and mix of earning assets and interest-bearing liabilities, impact net interest income (FTE) and net interest margin (FTE). The net interest margin (FTE) of 3.78% for the quarter ended March 31, 2019 was seven basis points lower than the 3.85% for the quarter ended March 31, 2018. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP net interest margin.

Total interest income (FTE) for the three months ended March 31, 2019 was $333 thousand higher than the same period in the prior year. The increased yield on loans was the major contributor to the increased interest income. This shift resulted in an earning asset yield, as computed on a tax-equivalent basis, of 4.39% on average earning asset balances of $599.8 million for the three months ended March 31, 2019. The earning asset yield, as computed on a tax-equivalent basis, was 4.15% on average earning asset balances of $602.7 million for the three months ended March 31, 2018.

Offsetting the increased interest income was an increase in interest expense of $463 thousand for the three months ended March 31, 2019 compared to the same period in the prior year. Interest expense increased due to increased rates paid on deposits to be competitive in the market. The rate paid on interest-bearing deposits averaged 90 basis points in the first quarter of 2019, compared to 42 basis points for the first quarter of 2018. Average balances of interest-bearing deposits also increased, from $359.0 million in the first quarter of 2018 to $380.0 million in the first quarter of 2019. Average balances of borrowed funds decreased from $35.2 million in the first quarter of 2018 to $10.1 million in the first quarter of 2019, causing a decrease in interest expense on borrowed funds. A table showing the mix of no cost and low cost deposit accounts is shown under “Financial Condition - Deposits” earlier in this report.

The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest bearing liabilities, for the three months ended March 31, 2019 and 2018. These tables also include a rate/volume analysis for these same periods (dollars in thousands).

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Consolidated Average Balance Sheet And Analysis of Net Interest Income

		For the three months ended
		March 31, 2019										March 31, 2018										Change in Interest Income/Expense
		Average				Interest			Average			Average				Interest			Average			Change Due to : 4								Total
		Balance				Income			Yield/			Balance				Income			Yield/											Increase/
(dollars in thousands)						Expense			Cost							Expense			Cost			Volume				Rate				(Decrease)
ASSETS
Interest Earning Assets:
Securities
Taxable Securities		$	50,090			$	277		2.21	%		$	55,079			$	306		2.22	%		$	(28	)		$	(1	)		$	(29	)
Tax Exempt Securities 1			13,112				103		3.14	%			13,396				108		3.22	%			(2	)			(3	)			(5	)
Total Securities 1			63,202				380		2.40	%			68,475				414		2.42	%			(30	)			(4	)			(34	)
Total Loans			533,358				6,097		4.64	%			524,873				5,714		4.42	%			93				290				383
Fed Funds Sold			3,216				19		2.40	%			9,320				35		1.52	%			(30	)			14				(16	)
Total Earning Assets			599,776				6,496		4.39	%			602,668				6,163		4.15	%			33				300				333
Less: Allowance for Loan Losses			(4,905	)									(3,955	)
Total Non-Earning Assets			39,668										37,801
Total Assets		$	634,539									$	636,514
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking		$	102,915			$	49		0.19	%		$	95,637			$	12		0.05	%		$	1			$	36			$	37
Money Market and Savings Deposits			161,507				332		0.83	%			157,010				220		0.57	%			6				106				112
Time Deposits			115,599				459		1.61	%			106,388				140		0.53	%			13				307				320
Total Interest-Bearing Deposits			380,021				840		0.90	%			359,035				372		0.42	%			20				449				469
Repurchase agreements and other borrowed funds			10,051				67		2.70	%			35,219				72		0.83	%			(80	)			74				(6	)
Total Interest-Bearing Liabilities			390,072				907		0.94	%			394,254				444		0.46	%			(60	)			523				463
Non-Interest-Bearing Liabilities:
Demand deposits			171,274										174,156
Other liabilities			1,243										1,870
Total Liabilities			562,589										570,280
Shareholders' Equity			71,941										66,234
Total Liabilities & Shareholders' Equity		$	634,530									$	636,514
Net Interest Income (FTE)						$	5,589									$	5,719					$	93			$	(223	)		$	(130	)
Interest Rate Spread 2									3.45	%									3.69	%
Interest Expense as a Percentage of Average Earning Assets									0.61	%									0.30	%
Net Interest Margin (FTE) 3									3.78	%									3.85	%

(1)		Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations earlier in this section.
(2)		Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.
(3)		Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.
(4)		The impact on the net interest income (FTE) resulting from changes in average balances and average rates is shown for the period indicated. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

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Provision for loan losses

A provision for loan losses of $684 thousand was recorded in the first three months of 2019, compared to a recovery of loan losses of $96 thousand for the first three months of 2018. The significant increase in the 2019 provision for loan losses was due to insolvency of the company that previously provided surety bonds to insure the Company’s student loan portfolio. The allowance for loan losses as a percentage of total loans at March 31, 2019 was 0.93%, compared to 0.91% as of December 31, 2018 and 0.75% as of March 31, 2018. Further discussion of management’s assessment of the allowance for loan losses is provided earlier in the report and in Note 4 – Allowance for Loan Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the allowance was adequately provided for at March 31, 2019.

Noninterest income

The components of noninterest income for the three months ended March 31, 2019 and 2018 are shown below (dollars in thousands):

		For the three months ended							Variance
		March 31, 2019			March 31, 2018				$				%
Noninterest income:
Trust income		$	347		$	414			$	(67	)		-16.2	%
Advisory and brokerage income			136			140				(4	)		-2.9	%
Royalty income			4			518				(514	)		-99.2	%
Customer service fees			181			247				(66	)		-26.7	%
Debit/credit card and ATM fees			157			187				(30	)		-16.0	%
Earnings/increase in value of bank owned life insurance			110			109				1			0.9	%
Fees on mortgage sales			30			36				(6	)		-16.7	%
Losses on sales of assets			-			(33	)			33			100.0	%
Other			94			96				(2	)		-2.1	%
Total noninterest income		$	1,059		$	1,714			$	(655	)		-38.2	%

Noninterest income for the quarter ended March 31, 2019 of $1.1 million was $655 thousand or 38.2% lower than the amount recorded for the quarter ended March 31, 2018. This decrease was largely due to the lack of performance fee royalty income in the first quarter of 2019, compared to $518 thousand in the first quarter of 2018. Royalty income is collected periodically from SRCM Holdings, LLC, as described in Note 1 – Summary of Significant Accounting Policies, found in the Notes to the Consolidated Financial Statements within the Company’s Form 10-K for the year ended December 31, 2018.

Noninterest expense
The components of noninterest expense for the three months ended March 31, 2019 and 2018 are shown below (dollars in thousands):

		For the three months ended						Variance
		March 31, 2019			March 31, 2018			$				%
Noninterest expense:
Salaries and employee benefits		$	2,346		$	1,991		$	355			17.8	%
Net occupancy			479			480			(1	)		-0.2	%
Equipment			117			128			(11	)		-8.6	%
ATM, debit and credit card			46			63			(17	)		-27.0	%
Bank franchise tax			151			122			29			23.8	%
Computer software			108			93			15			16.1	%
Data processing			316			252			64			25.4	%
FDIC deposit insurance assessment			15			50			(35	)		-70.0	%
Loan expenses			62			75			(13	)		-17.3	%
Marketing, advertising and promotion			194			192			2			1.0	%
Professional fees			203			197			6			3.0	%
Other			374			374			-			0.0	%
Total noninterest expense		$	4,411		$	4,017		$	394			9.8	%

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Noninterest expense for the first quarter of 2019 of $4.4 million was $394 thousand higher than the first quarter of 2018. Salaries and employee benefits increased $355 thousand due to increased staffing for our new Richmond market and cyber and network security professionals, as well as the quarterly expense of stock grants issued in February 2019. Data processing expense increased $64 thousand primarily due to costs associated with mobile banking and settlement software. Management continues to evaluate expenses for potential containments and reductions that would have a positive impact on net income on an ongoing basis.

The efficiency ratio (FTE) weakened to 66.4% for the first quarter of 2019 from 54.0% for the same quarter of 2018, due to the increase in noninterest expense and the decrease in noninterest income. The improved asset mix and higher yields on earning assets should continue to enhance net interest income; however, noninterest expense will continue to increase as the Company positions itself for growth and enters into new markets. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP efficiency ratio.

Provision for Income Taxes

The Company benefited from the Tax Cuts and Jobs Act (“Tax Act”) enacted on December 22, 2017, which permanently lowered the corporate income tax rate to 21% effective January 1, 2018, amongst other significant changes to the U.S. tax law. For the three months ended March 31, 2019 and March 31, 2018, the Company provided $286 thousand and $693 thousand for Federal income taxes, respectively, resulting in an effective income tax rate of 18.7% and 19.9%, respectively. The effective income tax rates differed from the U.S. statutory rate of 21% primarily due to the effect of tax-exempt income from life insurance policies and municipal bonds.

OTHER SIGNIFICANT EVENTS

None

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required

ITEM 4. CONTROLS AND PROCEDURES

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

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

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective at the reasonable assurance level. There was no change in the internal control over financial reporting that occurred during the quarter ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None

ITEM 1A. RISK FACTORS.

Not required

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

None

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable

ITEM 5. OTHER INFORMATION.

(a) Required 8-K disclosures.

None

(b) Changes in procedures for director nominations by security holders.

None

ITEM 6. EXHIBITS.

Exhibit
Number		Description of Exhibit
2.0		Reorganization Agreement and Plan of Share Exchange, dated as of March 6, 2013, between Virginia National Bank and Virginia National Bankshares Corporation (incorporated by reference to Virginia National Bankshares Corporation’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 18, 2013).
3.1		Articles of Incorporation of Virginia National Bankshares Corporation, as amended and restated (incorporated by reference to Virginia National Bankshares Corporation’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 18, 2013).
3.2		Bylaws of Virginia National Bankshares Corporation (incorporated by reference to Virginia National Bankshares Corporation’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 18, 2013).
10.1		Virginia National Bank 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Virginia National Bankshares Corporation’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2017. Virginia National Bankshares Corporation assumed this plan from Virginia National Bank on December 16, 2013 upon consummation of the reorganization under the agreement referenced as Exhibit 2.0).
10.2		Virginia National Bank Amended and Restated 2005 Stock Incentive Plan (incorporated by reference to Exhibit 99.1 to Virginia National Bankshares Corporation’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 25, 2017. Virginia National Bankshares Corporation assumed this plan from Virginia National Bank on December 16, 2013 upon consummation of the reorganization under the agreement referenced as Exhibit 2.0).
10.3		Virginia National Bankshares Corporation 2014 Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to Virginia National Bankshares Corporation’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 25, 2017).
31.1		302 Certification of Principal Executive Officer
31.2		302 Certification of Principal Financial Officer
32.1		906 Certification
101.0		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018, (ii) the Consolidated Statements of Income for the three months ended March 31, 2019 and March 31, 2018, (iii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and March 31, 2018, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2019 and March 31, 2018, (v) the Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and March 31, 2018 and (vi) the Notes to the Consolidated Financial Statements (furnished herewith).

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SIGNATURES

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.

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