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 June 30, 2016
[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ___________________ to ___________________

Commission File Number: 000-55117

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

Virginia	46-2331578
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
404 People Place, Charlottesville, Virginia	22911
(Address of principal executive offices)	(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.

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).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 August 10, 2016:

	Class of Stock		Shares Outstanding
	Common Stock, Par Value $2.50		2,368,777

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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 31
		Application of Critical Accounting Policies and Estimates			Page 31
		Financial Condition			Page 32
		Results of Operations			Page 37
	Item 3		Quantitative and Qualitative Disclosures About Market Risk		Page 41
	Item 4		Controls and Procedures		Page 41
Part II. Other Information
	Item 1		Legal Proceedings		Page 42
	Item 1A		Risk Factors		Page 42
	Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		Page 42
	Item 3		Defaults Upon Senior Securities		Page 42
	Item 4		Mine Safety Disclosures		Page 43
	Item 5		Other Information		Page 43
	Item 6		Exhibits		Page 43
Signatures					Page 44

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

		June 30, 2016				December 31, 2015 *
ASSETS		(UNAUDITED)
Cash and due from banks		$	11,732			$	14,200
Federal funds sold			13,382				29,327
Securities:
Available for sale, at fair value			69,545				74,801
Restricted securities, at cost			1,708				1,681
Total securities			71,253				76,482
Loans			424,593				423,664
Allowance for loan losses			(3,186	)			(3,567	)
Loans, net			421,407				420,097
Premises and equipment, net			8,294				8,668
Bank owned life insurance			13,696				13,476
Goodwill			372				-
Other intangible assets, net			731				-
Accrued interest receivable and other assets			4,811				5,241
Total assets		$	545,678			$	567,491
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Demand deposits:
Noninterest-bearing		$	168,402			$	184,574
Interest-bearing			87,147				90,100
Money market deposit accounts			102,474				103,175
Certificates of deposit and other time deposits			112,397				108,618
Total deposits			470,420				486,467
Securities sold under agreements to repurchase			15,719				23,156
Accrued interest payable and other liabilities			1,478				1,571
Total liabilities			487,617				511,194
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; 2,360,007 and 2,412,589
issued and outstanding at June 30, 2016
and December 31, 2015, respectively			5,900				6,031
Capital surplus			21,140				22,214
Retained earnings			30,493				28,170
Accumulated other comprehensive income (loss)			528				(118	)
Total shareholders’ equity			58,061				56,297
Total liabilities and shareholders’ equity		$	545,678			$	567,491

*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							For the six months ended
		June 30, 2016				June 30, 2015			June 30, 2016				June 30, 2015
Interest and dividend income:
Loans, including fees		$	4,294			$	3,529		$	8,627			$	6,791
Federal funds sold			25				6			56				29
Investment securities:
Taxable			245				550			525				1,132
Tax exempt			80				109			164				225
Dividends			23				20			44				41
Other			-				6			4				13
Total interest and dividend income			4,667				4,220			9,420				8,231
Interest expense:
Demand and savings deposits			68				58			135				115
Certificates and other time deposits			157				171			317				338
Federal funds purchased and securities sold
under agreements to repurchase			12				13			24				25
Total interest expense			237				242			476				478
Net interest income			4,430				3,978			8,944				7,753
Provision for (recovery of) loan losses			(275	)			-			(395	)			317
Net interest income after provision
for (recovery of) loan losses			4,705				3,978			9,339				7,436
Noninterest income:
Trust income			398				445			786				894
Brokerage and insurance income			94				8			181				24
Royalty income			9				36			9				81
Customer service fees			227				233			446				467
Debit/credit card and ATM fees			232				219			430				399
Earnings/increase in value of bank owned
life insurance			111				110			220				218
Fees on mortgage sales			67				57			115				94
Gains on sales of securities			-				24			8				46
Losses on sales of other assets			(2	)			-			(27	)			-
Other			114				123			206				216
Total noninterest income			1,250				1,255			2,374				2,439
Noninterest expense:
Salaries and employee benefits			1,847				2,215			3,765				4,531
Net occupancy			472				483			948				979
Equipment			132				136			267				266
Other			1,308				1,341			2,576				2,517
Total noninterest expense			3,759				4,175			7,556				8,293
Income before income taxes			2,196				1,058			4,157				1,582
Provision for income taxes			686				291			1,292				400
Net income		$	1,510			$	767		$	2,865			$	1,182
Net income per common share, basic		$	0.64			$	0.30		$	1.21			$	0.45
Net income per common share, diluted		$	0.63			$	0.30		$	1.20			$	0.45

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							For the six months ended
				June 30, 2016			June 30, 2015				June 30, 2016				June 30, 2015
Net income				$	1,510		$	767			$	2,865			$	1,182
Other comprehensive income (loss)
	Unrealized gain (loss) on securities,
		net of tax of $130 and $335
		for the three and six months
		ended June 30, 2016; and net
		of tax of ($576) and ($196)
		for the three and six months
		ended June 30, 2015			252			(1,117	)			651				(379	)
	Reclassification adjustment
		net of tax of ($0) and ($3)
		for the three and six months
		ended June 30, 2016; and net
		of tax of ($8) and ($15) for the
		three and six months ended
		June 30, 2015			-			(16	)			(5	)			(31	)
	Total other comprehensive income (loss)				252			(1,133	)			646				(410	)
		Total comprehensive income (loss)		$	1,762		$	(366	)		$	3,511			$	772

See Notes to Consolidated Financial Statements

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VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
(dollars in thousands, except per share data)
(unaudited)

														Accumulated
														Other
		Common				Capital				Retained				Comprehensive
		Stock				Surplus				Earnings				Income (Loss)				Total
Balance, December 31, 2014		$	6,721			$	27,889			$	25,978			$	44			$	60,632
Stock options exercised			3				20				-				-				23
Stock purchased under stock
repurchase plan			(634	)			(5,174	)			-				-				(5,808	)
Stock option expense			-				15				-				-				15
Cash dividend declared
($0.175 per share)			-				-				(444	)			-				(444	)
Net income			-				-				1,182				-				1,182
Other comprehensive loss			-				-				-				(410	)			(410	)
Balance, June 30, 2015		$	6,090			$	22,750			$	26,716			$	(366	)		$	55,190
Balance, December 31, 2015		$	6,031			$	22,214			$	28,170			$	(118	)		$	56,297
Stock options exercised			6				35				-				-				41
Stock purchased under stock
repurchase plan			(137	)			(1,123	)			-				-				(1,260	)
Stock option expense			-				14				-				-				14
Cash dividend declared
($0.23 per share)			-				-				(542	)			-				(542	)
Net income			-				-				2,865				-				2,865
Other comprehensive income			-				-				-				646				646
Balance, June 30, 2016		$	5,900			$	21,140			$	30,493			$	528			$	58,061

See Notes to Consolidated Financial Statements

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

			For the six months ended
			June 30, 2016				June 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income		$	2,865			$	1,182
	Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for (recovery of) loan losses			(395	)			317
	Net amortization and accretion of securities			224				392
	Realized gains on sales and calls of securities			(8	)			(46	)
	Net losses on sales of assets			27				-
	Earnings on bank owned life insurance			(220	)			(218	)
	Amortization of intangible assets			42				-
	Depreciation and other amortization			582				590
	Stock option/stock grant expense			14				15
	Decrease in accrued interest receivable and other assets			98				604
	Decrease in accrued interest payable and other liabilities			(604	)			(370	)
	Net cash provided by operating activities			2,625				2,466
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of available for sale securities			(9,481	)			(26,770	)
	Net increase in restricted investments			(27	)			(21	)
	Proceeds from maturities, calls and principal payments of
	available for sale securities			13,470				31,074
	Proceeds from sales of available for sale securities			2,030				16,387
	Proceeds from sales of other real estate owned			-				445
	Net increase in organic loans			(6,029	)			(31,392	)
	Net decrease (increase) in purchased loans			5,114				(22,466	)
	Cash payment for wealth management book of business			(700	)			-
	Purchase of bank premises and equipment			(235	)			(263	)
	Net cash provided by (used in) investing activities			4,142				(33,006	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Net decrease in demand deposits, NOW accounts,
	and money market accounts			(19,826	)			(640	)
	Net increase in certificates of deposit and other time deposits			3,779				1,718
	Net decrease in securities sold under agreements to repurchase			(7,437	)			(1,887	)
	Common stock repurchased			(1,260	)			(5,808	)
	Proceeds from stock options exercised			41				23
	Cash dividends			(477	)			(444	)
	Net cash used in financing activities			(25,180	)			(7,038	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			$	(18,413	)		$	(37,578	)
CASH AND CASH EQUIVALENTS:
	Beginning of period		$	43,527			$	54,107
	End of period		$	25,114			$	16,529
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
	Cash payments for:
	Interest		$	477			$	479
	Taxes		$	1,354			$	439
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
	Unrealized gain (loss) on available for sale securities		$	978			$	(575	)

See Notes to Consolidated Financial Statements

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VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2016

Note 1. Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Virginia National Bankshares Corporation (the “Company”), its subsidiary Virginia National Bank (the “Bank”), and the Bank’s subsidiary, VNBTrust, National Association which offers services under the name VNB Wealth Management (“VNBTrust” or “VNB Wealth”). All significant intercompany balances and transactions have been eliminated in consolidation.

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

The preparation of financial statements in conformity with GAAP and the reporting guidelines prescribed by regulatory authorities requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, deferred tax assets and other real estate owned. Operating results for the three-month and six-month periods ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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, 2015. If needed, certain previously reported amounts have been reclassified to conform to current period presentation. No such reclassifications were significant.

Recent Accounting Pronouncements

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.

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

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

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During March 2016, the FASB issued ASU No. 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria remain intact. The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-05 to have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early Adoption is permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated financial statements.

During March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.

During June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.

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Note 2. Securities

The amortized cost and fair values of securities available for sale as of June 30, 2016 and December 31, 2015 were as follows (dollars in thousands):

June 30, 2016		Amortized			Gross Unrealized			Gross Unrealized				Fair
		Cost			Gains			(Losses)				Value
U.S. Government agencies		$	11,250		$	147		$	(6	)		$	11,391
Corporate bonds			6,020			89			-				6,109
Mortgage-backed securities/CMOs			33,369			212			(78	)			33,503
Municipal bonds			18,106			438			(2	)			18,542
		$	68,745		$	886		$	(86	)		$	69,545
December 31, 2015		Amortized			Gross Unrealized			Gross Unrealized				Fair
		Cost			Gains			(Losses)				Value
U.S. Government agencies		$	11,260		$	137		$	(19	)		$	11,378
Corporate bonds			6,027			-			(63	)			5,964
Mortgage-backed securities/CMOs			37,077			60			(450	)			36,687
Municipal bonds			20,615			250			(93	)			20,772
		$	74,979		$	447		$	(625	)		$	74,801

As of June 30, 2016, there were $13.3 million, or 14 issues of individual securities, in a loss position. These securities have an unrealized loss of $86 thousand and consisted of 2 agency bonds, 11 mortgage-backed/CMOs, and 1 municipal bond. The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, at June 30, 2016 and December 31, 2015 (dollars in thousands):

June 30, 2016		Less than 12 Months							12 Months or more							Total
					Unrealized							Unrealized							Unrealized
		Fair Value			Losses				Fair Value			Losses				Fair Value			Losses
U.S. Government agencies		$	1,993		$	(4	)		$	998		$	(2	)		$	2,991		$	(6	)
Mortgage-backed/CMOs			-			-				9,486			(78	)			9,486			(78	)
Municipal bonds			791			(2	)			-			-				791			(2	)
		$	2,784		$	(6	)		$	10,484		$	(80	)		$	13,268		$	(86	)
December 31, 2015		Less than 12 Months							12 Months or more							Total
					Unrealized							Unrealized							Unrealized
		Fair Value			Losses				Fair Value			Losses				Fair Value			Losses
U.S. Government agencies		$	-		$	-			$	980		$	(19	)		$	980		$	(19	)
Corporate bonds			5,964			(63	)			-			-				5,964			(63	)
Mortgage-backed/CMOs			21,003			(212	)			9,504			(238	)			30,507			(450	)
Municipal bonds			2,788			(31	)			1,908			(62	)			4,696			(93	)
		$	29,755		$	(306	)		$	12,392		$	(319	)		$	42,147		$	(625	)

The Company’s securities portfolio is primarily made up of fixed rate bonds, whose prices 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 June 30, 2016, 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.

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An “other-than-temporary impairment” (“OTTI”) is considered to exist if any of the following conditions are met: it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the security’s entire amortized cost basis (even if the Company does not intend to sell). In the event that a security would suffer impairment for a reason that was “other than temporary,” the Company would be expected to write down the security’s value to its new fair value, and the amount of the write down would be included in earnings as a realized loss. As of June 30, 2016, management has concluded that none of its investment securities have an OTTI based upon the information available at this time. 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 $37.7 million at June 30, 2016 were pledged as collateral to secure public deposits and securities sold under agreements to repurchase. At December 31, 2015, securities having carrying values of $42.2 million were similarly pledged.

For the six months ended June 30, 2016, proceeds from the sales of securities amounted to $2.0 million, and realized gains on these securities were $8 thousand. For the six months ended June 30, 2015, proceeds from the sales of securities amounted to $16.4 million, with realized gains on these securities of $42 thousand, and an additional $4.4 million in calls of securities accounted for the additional $4 thousand in realized gains.

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 June 30, 2016 and December 31, 2015, are carried at cost.

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Note 3. Loans

The composition of the loan portfolio by loan classification at June 30, 2016 and December 31, 2015 appears below (dollars in thousands).

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.

12

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Following is a breakdown by class of the loans classified as impaired loans as of June 30, 2016 and December 31, 2015. These loans are reported at their recorded investment, which is the carrying amount of the loan as reflected on the Company’s balance sheet, net of charge-offs and other amounts applied to reduce the net book balance. Average recorded investment in impaired loans is computed using an average of month-end balances for these loans for either the six months ended June 30, 2016 or the twelve months ended December 31, 2015. Interest income recognized is for the six months ended June 30, 2016 or the twelve months ended December 31, 2015. (Dollars below reported in thousands.)

June 30, 2016					Unpaid						Average			Interest
		Recorded			Principal			Associated			Recorded			Income
		Investment			Balance			Allowance			Investment			Recognized
Impaired loans without a valuation allowance:
Land and land development		$	55		$	102		$	-		$	57		$	-
1-4 family residential mortgages, first lien, owner occupied			124			152			-			127			-
1-4 family residential mortgages, junior lien			360			360						363			8
Commercial non-owner occupied real estate			1,039			1,039			-			1,048			23
Student loans purchased			713			713			-			119			22
Impaired loans with a valuation allowance			-			-			-			-			-
Total impaired loans		$	2,291		$	2,366		$	-		$	1,714		$	53
December 31, 2015					Unpaid						Average			Interest
		Recorded			Principal			Associated			Recorded			Income
		Investment			Balance			Allowance			Investment			Recognized
Impaired loans without a valuation allowance:
Commercial and industrial - organic		$	-		$	-		$	-		$	4		$	-
Land and land development			59			103			-			64			-
1-4 family residential mortgage, first lien, owner occupied			132			157			-			200			2
1-4 family residential mortgage, junior lien			367			367						485			21
Commercial non-owner occupied real estate			1,061			1,061			-			1,080			47
Impaired loans with a valuation allowance			-			-			-			-			-
Total impaired loans		$	1,619		$	1,688		$	-		$	1,833		$	70

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. Non-accrual loans are shown below by class (dollars in thousands):

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

Based on newly issued regulatory guidance on Student Lending, the Company classified 38 of its student loans purchased as TDRs for a total of $713 thousand during the quarter ended June 30, 2016. These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered restructurings. Student loan borrowers are allowed in-school deferments, plus an automatic six month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. As all student loans purchased are fully insured, the Company does not expect to experience a loss on these loans and interest continues to accrue on these TDRs during any deferment and forbearance periods.

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A summary of loans that were modified under the terms of a TDR during the three and six months ended June 30, 2016 and 2015 is shown below by class (dollars in thousands). The Post-Modification Recorded Balance reflects the period end balances, inclusive of all partial principal pay downs 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
		June 30, 2016								June 30, 2015
				Pre-			Post-					Pre-			Post-
				Modification			Modification					Modification			Modification
		Number		Recorded			Recorded			Number		Recorded			Recorded
		of Loans		Balance			Balance			of Loans		Balance			Balance
Loans modified at below market rates
Student loans purchased		38		$	713		$	713		0		$	-		$	-
Total loans modified during the period		38		$	713		$	713		0		$	-		$	-
		For six months ended								For six months ended
		June 30, 2016								June 30, 2015
				Pre-			Post-					Pre-			Post-
				Modification			Modification					Modification			Modification
		Number		Recorded			Recorded			Number		Recorded			Recorded
		of Loans		Balance			Balance			of Loans		Balance			Balance
Loans modified at below market rates
Student loans purchased		38		$	713		$	713		0		$	-		$	-
Total loans modified during the period		38		$	713		$	713		0		$	-		$	-

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 restructuring (TDRs)		June 30, 2016					December 31, 2015
		No. of		Recorded			No. of		Recorded
		Loans		Investment			Loans		Investment
Performing TDRs
1-4 family residential mortgages, junior lien		2		$	360		2		$	367
Commercial non-owner occupied real estate		1			1,039		1			1,061
Student loans purchased		38			713		-			-
Total performing TDRs		41		$	2,112		3		$	1,428
Nonperforming TDRs
Land and land development		1		$	32		1		$	34
Total TDRs		42		$	2,144		4		$	1,462

There were no loans modified as TDRs that subsequently defaulted during the six months ended June 30, 2016 and 2015 that were modified as TDRs during the twelve months prior to default.

There were no loans secured by 1-4 family residential property that were in the process of foreclosure at either June 30, 2016 or December 31, 2015.

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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. As explained below, beginning with the quarter ended June 30, 2016, the classes have been expanded for more granularity in determining risks and losses inherent in the loan portfolio.

	Loan Classes by Segments
	Commercial loan segment:
	Commercial and industrial - organic
	Commercial and industrial - syndicated
	Real estate construction and land loan segment:
	Residential construction
	Commercial construction
	Land and land development
	Real estate mortgage loan segment:
	1-4 family residential, first lien, investment
	1-4 family residential, first lien, owner occupied
	1-4 family residential, junior lien
	Home equity lines of credit, first lien
	Home equity lines of credit, junior lien
	Farm
	Multifamily
	Commercial owner occupied
	Commercial non-owner occupied
	Consumer loan segment:
	Consumer revolving credit
	Consumer all other credit
	Student loans purchased

Beginning with the quarter ended June 30, 2016, management enhanced its methodology 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. Prior to June 30, 2016, under the Bank’s allowance model, each loan class was assigned a quantitative loss factor that was primarily based on a rolling twelve-quarter look-back at historical losses for that class. As of June 30, 2016, 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 are fully insured for loss by a surety bond that the Company purchased at the same time that each package of loans was acquired in 2015, and the Company has not experienced any losses in this class to date. In addition to the insurance, the Company holds a deposit reserve account to offset any losses resulting from the breach of any representations or warranties by the seller. Qualitative factors are applied and the calculated reserve is net of any deposit reserve accounts.

●

Commercial and industrial syndicated loans do not have an established loss history as the Company only began purchasing these loans late in 2014. Therefore, the S&P Credit Rating and Recovery Rating on the credit facilities are utilized to calculate a three-year weighted average historical default rate until the Company has enough history with these syndicated loans.

Under the historical loss method, quarterly loss rates are calculated for each class by dividing the cumulative gross charge-offs for the past twelve quarters by the average balance for the past twelve quarters. 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 balance. Qualitative factors are combined with these quantitative factors to arrive at the overall general allowances.

15

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In addition to the movement to the migration analysis method, the following other changes were implemented for the quarter ended June 30, 2016:

●	The number of classes increased from twelve to seventeen to provide greater loan level detail.
●	Previously the risk rating “Watch” was included in the “Pass” pool. The “Watch” risk rating was separated to account for the higher level of risk associated with this risk rating.
●	A minimum qualitative loss factor has been applied to the “Good” risk ratings in an abundance of caution. Previously a loan loss reserve had not been applied to loans risk rated “Good”; however, management deemed a nominal reserve as prudent.

The following table represents the effect of the changes in methodology from that used in prior periods on the provision for (recovery of) loan losses through the six months ended June 30, 2016 (dollars in thousands):

The Company’s internal creditworthiness grading system is based on experiences with similarly graded loans. Higher risk-rated credits are reviewed quarterly by experienced senior lenders based on each borrower’s situation. Additionally, internal monitoring and review of credits is conducted on an annual basis and a percentage of the loan portfolio is reviewed by an external loan review group.

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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

0% historical loss factor applied, as these loans are secured by cash and represent a minimal risk. The Company has never experienced a loss within this category.

Good

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

Historical loss factor for loans rated “Pass” is applied to current balances of like-rated loans, pooled by class. Loans with the following risk ratings are pooled by class and considered together as “Pass”:

Satisfactory - modest risk loans where the borrower has strong and liquid financial statements and more than adequate cash flow
Average – average risk loans where the borrower has reasonable debt service capacity
Marginal – acceptable risk loans where the borrower has acceptable financial statements but is leveraged

Watch

These loans have an acceptable risk but require more attention than normal servicing. 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. 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.

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The following represents the loan portfolio designated by the internal risk ratings assigned to each credit as of June 30, 2016 and December 31, 2015 (dollars in thousands). There were no loans rated “Doubtful” as of either period.

														Special			Sub-
June 30, 2016		Excellent			Good			Pass			Watch			Mention			standard			TOTAL
Commercial
Commercial and industrial - organic		$	1,103		$	25,246		$	16,863		$	28		$	234		$	170		$	43,644
Commercial and industrial - syndicated			-			-			17,046			-			-			2,948			19,994
Real estate construction
Residential construction			-			-			2,935			-			-			-			2,935
Commercial construction			-			-			6,078			-			-			-			6,078
Land and land development			-			-			8,422			6			495			608			9,531
Real estate mortgages
1-4 family residential, first lien, investment			-			-			33,343			1,860			231			244			35,678
1-4 family residential, first lien, owner occupied			-			-			16,951			330			-			1,115			18,396
1-4 family residential, junior lien			-			-			2,652			337			195			145			3,329
Home equity lines of credit, first lien			-			-			9,506			39			-			-			9,545
Home equity lines of credit, junior lien			-			-			15,592			-			-			111			15,703
Farm			-			-			7,953			-			-			-			7,953
Multifamily			-			-			17,895			-			-			-			17,895
Commercial owner occupied			-			-			74,742			1,044			-			-			75,786
Commercial non-owner occupied			-			-			92,734			1,039			-			1,097			94,870
Consumer
Consumer revolving credit			71			16,335			609			-			-			5			17,020
Consumer all other credit			205			10,411			1,381			1			-			38			12,036
Student loans purchased			-			-			33,487			713			-			-			34,200
Total Loans		$	1,379		$	51,992		$	358,189		$	5,397		$	1,155		$	6,481		$	424,593
														Special			Sub-
December 31, 2015		Excellent			Good			Pass			Watch			Mention			standard			TOTAL
Commercial
Commercial and industrial - organic		$	1,238		$	30,221		$	15,599		$	101		$	25		$	31		$	47,215
Commercial and industrial - syndicated			-			-			20,691			-			-			2,962			23,653
Real estate construction
Residential construction			-			-			2,178			-			-			-			2,178
Commercial construction			-			-			6,214			-			-			-			6,214
Land and land development			-			-			9,369			8			515			627			10,519
Real estate mortgages
1-4 family residential, first lien, investment			-			-			28,832			1,885			232			179			31,128
1-4 family residential, first lien, owner occupied			-			1,500			18,796			335			-			252			20,883
1-4 family residential, junior lien			-			-			3,060			130			418			162			3,770
Home equity lines of credit, first lien			-			-			11,890			40			-			-			11,930
Home equity lines of credit, junior lien			-			-			15,588			-			-			82			15,670
Farm			-			-			7,762			-			-			-			7,762
Multifamily			-			-			20,209			-			-			-			20,209
Commercial owner occupied			-			-			61,803			3,694			-			747			66,244
Commercial non-owner occupied			-			-			89,619			-			1,061			1,125			91,805
Consumer
Consumer revolving credit			104			16,524			540			-			-			6			17,174
Consumer all other credit			232			10,063			1,317			2			-			41			11,655
Student loans purchased			-			-			35,655			-			-			-			35,655
Total Loans		$	1,574		$	58,308		$	349,122		$	6,195		$	2,251		$	6,214		$	423,664

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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
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” since these are fully collateralized by cash. Beginning in the second quarter of 2016, a nominal qualitative factor has been assigned to loans rated “Good,” as discussed above.

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 market and 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 $2.3 million at June 30, 2016, there was no specific valuation allowance on any of these loans 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.

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A summary of the transactions in the Allowance for Loan Losses by loan portfolio segment for the six months ended June 30, 2016 and the year ended December 31, 2015 appears below (dollars in thousands):

As of and for the period ended June 30, 2016

						Real Estate
		Commercial				Construction				Real Estate				Consumer
		Loans				and Land				Mortgages				Loans				Total
Allowance for Loan Losses:
Balance as of January 1, 2016		$	797			$	159			$	2,592			$	19			$	3,567
Charge-offs			-				-				(12	)			-				(12	)
Recoveries			20				-				2				4				26
Provision for (recovery of) loan losses			(295	)			(4	)			(275	)			179				(395	)
Ending Balance		$	522			$	155			$	2,307			$	202			$	3,186
Ending Balance:
Individually evaluated for impairment		$	-			$	-			$	-			$	-			$	-
Collectively evaluated for impairment			522				155				2,307				202				3,186
Loans:
Individually evaluated for impairment		$	-			$	55			$	1,523			$	713			$	2,291
Collectively evaluated for impairment			63,638				18,489				277,632				62,543				422,302
Ending Balance		$	63,638			$	18,544			$	279,155			$	63,256			$	424,593
As of and for the year ended December 31, 2015
						Real Estate
		Commercial				Construction				Real Estate				Consumer
		Loans				and Land				Mortgages				Loans				Total
Allowance for Loan Losses:
Balance as of January 1, 2015		$	674			$	102			$	2,360			$	28			$	3,164
Charge-offs			(126	)			-				(12	)			(3	)			(141	)
Recoveries			35				-				46				-				81
Provision for (recovery of) loan losses			214				57				198				(6	)			463
Ending Balance		$	797			$	159			$	2,592			$	19			$	3,567
Ending Balance:
Individually evaluated for impairment		$	-			$	-			$	-			$	-			$	-
Collectively evaluated for impairment			797				159				2,592				19				3,567
Loans:
Individually evaluated for impairment		$	-			$	59			$	1,560			$	-			$	1,619
Collectively evaluated for impairment			70,868				18,852				267,841				64,484				422,045
Ending Balance		$	70,868			$	18,911			$	269,401			$	64,484			$	423,664

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.

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The following tables show the aging of past due loans as of June 30, 2016 and December 31, 2015. Also included are loans that are 90 or more days past due but still accruing, because they are well secured and in the process of collection. (Dollars below reported in thousands.)

Past Due Aging as of																				90 Days
June 30, 2016		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		$	-		$	6		$	-		$	6		$	43,638		$	43,644		$	-
Commercial and industrial - syndicated			-			-			-			-			19,994			19,994			-
Real estate construction and land
Residential construction			-			-			-			-			2,935			2,935			-
Commercial construction			-			-			-			-			6,078			6,078			-
Other construction and land			24			-			-			24			9,507			9,531			-
Real estate mortgages
1-4 family residential, first lien, investment			-			-			-			-			35,678			35,678			-
1-4 family residential, first lien, owner occupied			-			21			-			21			18,375			18,396			-
1-4 family residential, junior lien			-			-			-			-			3,329			3,329			-
Home equity lines of credit, first lien			-			-			-			-			9,545			9,545			-
Home equity lines of credit, junior lien			-			-			-			-			15,703			15,703			-
Farm			-			-			-			-			7,953			7,953			-
Multifamily			-			-			-			-			17,895			17,895			-
Commercial owner occupied			-			-			-			-			75,786			75,786			-
Commercial non-owner occupied			-			-			-			-			94,870			94,870			-
Consumer loans
Consumer revolving credit			-			-			-			-			17,020			17,020			-
Consumer all other credit			-			1			-			1			12,035			12,036			-
Student loans purchased			260			88			206			554			33,646			34,200			206
Total Loans		$	284		$	116		$	206		$	606		$	423,987		$	424,593		$	206
Past Due Aging as of																				90 Days
December 31, 2015		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		$	211		$	40		$	-		$	251		$	46,964		$	47,215		$	-
Commercial and industrial - syndicated			-			-			-			-			23,653			23,653			-
Real estate construction and land
Residential construction			-			-			-			-			2,178			2,178			-
Commercial construction			-			-			-			-			6,214			6,214			-
Other construction and land			7			-			-			7			10,512			10,519			-
Real estate mortgages
1-4 family residential, first lien, investment			-			-			-			-			31,128			31,128			-
1-4 family residential, first lien, owner occupied			93			-			-			93			20,790			20,883			-
1-4 family residential, junior lien			63			36			-			99			3,671			3,770			-
Home equity lines of credit, first lien			-			-			-			-			11,930			11,930			-
Home equity lines of credit, junior lien			-			-			-			-			15,670			15,670			-
Farm			-			-			-			-			7,762			7,762			-
Multifamily			-			-			-			-			20,209			20,209			-
Commercial owner occupied			-			-			-			-			66,244			66,244			-
Commercial non-owner occupied			-			-			-			-			91,805			91,805			-
Consumer loans
Consumer revolving credit			-			-			-			-			17,174			17,174			-
Consumer all other credit			58			1			-			59			11,596			11,655			-
Student loans purchased			813			1			-			814			34,841			35,655			-
Total Loans		$	1,245		$	78		$	-		$	1,323		$	422,341		$	423,664		$	-

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Note 5. Intangible Assets

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

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

							Estimated
					% of Total		Economic Useful
		Fair Value			Intangible Assets		Life
Identified Intangible Assets
Non-Compete Agreement		$	103		9.0%		3 years
Customer Relationships Intangible			670		58.5%		10 years
Total Identified Intangible Assets		$	773		67.5%
Goodwill		$	372		32.5%		Indefinite
Total Intangible Assets		$	1,145		100.0%

Through the six months ended June 30, 2016, the Company recognized $42 thousand in amortization expense from these identified intangible assets with a finite life. The net carrying value of $731 thousand will be recognized as amortization expense in future reporting periods through 2026. The following shows the gross and net balance of these intangible assets as of June 30, 2016. (Dollars below reported in thousands.)

		Gross Carrying			Accumulated			Net Carrying
		Value			Amortization			Value
Identified Intangible Assets
Non-Compete Agreement		$	103		$	14		$	89
Customer Relationships Intangible			670			28		$	642
Total Identified Intangible Assets		$	773		$	42		$	731

As of June 30, 2016, the Company carried a contingent liability of $445 thousand, representing the net of the fair value of the purchase price, less the initial payment made on the Effective Date to the Seller. The remaining four annual payments as delineated in the Purchase Agreement will be paid from this liability.

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Note 6. Net Income Per Share and Stock Repurchase Program

On September 22, 2014, the Company announced the approval by its Board of Directors of a stock repurchase program authorizing repurchase of up to 400,000 shares of the Company’s common shares through September 18, 2015. The Company announced on September 21, 2015 that its Board of Directors extended the program for another year. A total of 343,559 shares at a weighted average price of $22.89 per share have been repurchased since the beginning of the program, with the remaining 56,441 shares available for purchase through September 18, 2016 under the extended program.

The following shows the weighted average number of shares used in computing net income per common share and the effect on the weighted average number of shares of diluted potential common stock for the three and six months ended June 30, 2016 and 2015. 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		June 30, 2016								June 30, 2015
					Weighted		Per						Weighted		Per
					Average		Share						Average		Share
		Net Income			Shares		Amount			Net Income			Shares		Amount
Basic net income per share		$	1,510		2,359,101		$	0.64		$	767		2,577,424		$	0.30
Effect of dilutive stock options			-		15,139			-			-		9,357			-
Diluted net income per share		$	1,510		2,374,240		$	0.63		$	767		2,586,781		$	0.30
Six Months Ended		June 30, 2016								June 30, 2015
					Weighted		Per						Weighted		Per
					Average		Share						Average		Share
		Net Income			Shares		Amount			Net Income			Shares		Amount
Basic net income per share		$	2,865		2,371,026		$	1.21		$	1,182		2,632,605		$	0.45
Effect of dilutive stock options			-		14,635			-			-		9,510			-
Diluted net income per share		$	2,865		2,385,661		$	1.20		$	1,182		2,642,115		$	0.45

For the periods ended June 30, 2016 and June 30, 2015, option shares totaling 59,110 and 134,654, respectively, were considered anti-dilutive and were excluded from this calculation.

Note 7. 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 250,000 shares of the Company’s common stock to be issued to plan participants. Similar to the Company’s 2003 Stock Incentive Plan (“2003 Plan”) and 2005 Stock Incentive Plan (“2005 Plan”), the 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 June 30, 2016. Although the 2003 Plan and 2005 Plan have expired and no new grants will be issued under these plans, there were shares issued before the plans 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 fair value on the date of grant and expensed based on that fair value over the applicable vesting period. For the six months ended June 30, 2016 and 2015, the Company recognized $14 thousand and $15 thousand, respectively, in compensation expense for stock options. As of June 30, 2016, there was $22 thousand in unamortized compensation expense remaining to be recognized in future reporting periods through 2017.

Stock Options

Changes in the stock options outstanding related to all of the Plans are summarized as follows (dollars in thousands except per share data):

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 six months of 2016 or during the twelve months ended December 31, 2015.

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Summary information pertaining to options outstanding at June 30, 2016 is as follows:

Restricted Stock

There were no restricted stock grants outstanding throughout 2015 or as of June 30, 2016. No restricted stock grants were awarded during 2015 or the first six months of 2016.

Note 8. 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 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 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.

Level 1 –	Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 –	Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –	Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market

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 June 30, 2016 and December 31, 2015 (dollars in thousands):

		Fair Value Measurements at June 30, 2016 Using:
					Quoted Prices in			Significant Other			Significant
					Active Markets for			Observable			Unobservable
					Identical Assets			Inputs			Inputs
Description		Balance			(Level 1)			(Level 2)			(Level 3)
Assets:
U.S. Government agencies		$	11,391		$	-		$	11,391		$	-
Corporate bonds			6,109			-			6,109			-
Mortgage-backed securities/CMOs			33,503			-			33,503			-
Municipal bonds			18,542			-			18,542			-
Total securities available for sale		$	69,545		$	-		$	69,545		$	-
		Fair Value Measurements at December 31, 2015 Using:
					Quoted Prices in			Significant Other			Significant
					Active Markets for			Observable			Unobservable
					Identical Assets			Inputs			Inputs
Description		Balance			(Level 1)			(Level 2)			(Level 3)
Assets:
U.S. Government agencies		$	11,378		$	-		$	11,378		$	-
Corporate bonds			5,964			-			5,964			-
Mortgage-backed securities/CMOs			36,687			-			36,687			-
Municipal bonds			20,772			-			20,772			-
Total securities available for sale		$	74,801		$	-		$	74,801		$	-

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:

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 $2.3 million and $1.6 million in impaired loans as of June 30, 2016 and December 31, 2015, respectively. None of these impaired loans required a valuation allowance after consideration was given for each borrowing as to the fair value of the collateral on the loan or the present value of expected future cash flows from the customer. 

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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 June 30, 2016 and December 31, 2015, the Company had no OREO property.

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.

Cash and cash equivalents

For those short-term instruments, including cash, due from banks, federal funds sold and interest-bearing deposits maturing within ninety days, the carrying amount is a reasonable estimate of fair value.

Securities

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

Loans

The fair value of performing loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar remaining maturities. This calculation ignores loan fees and certain factors affecting the interest rates charged on various loans, such as the borrower’s creditworthiness and compensating balances and dissimilar types of real estate held as collateral. The fair value of impaired loans is measured as described within the Impaired Loans section of this note.

Bank owned life insurance

The carrying amounts of bank owned life insurance approximate fair value.

Accrued interest

The carrying amounts of accrued interest approximate fair value.

Deposit liabilities

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

Securities sold under agreements to repurchase

The carrying amounts of securities sold under agreements to repurchase approximate fair value.

Off-balance sheet financial instruments

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

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The carrying values and estimated fair values of the Company’s financial instruments as of June 30, 2016 and December 31, 2015 are as follows (dollars in thousands):

					Fair Value Measurement at June 30, 2016 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		$	25,114		$	25,114		$	-		$	-		$	25,114
Available for sale securities			69,545			-			69,545			-			69,545
Loans, net			421,407			-			-			419,881			419,881
Bank owned life insurance			13,696			-			13,696			-			13,696
Accrued interest receivable			1,428			-			299			1,129			1,428
Liabilities
Demand deposits and
interest-bearing transaction
and money market accounts		$	358,023		$	-		$	358,023		$	-		$	358,023
Certificates of deposit			112,397			-			112,460			-			112,460
Securities sold under
agreements to repurchase			15,719			-			15,719			-			15,719
Accrued interest payable			105			-			105			-			105
					Fair Value Measurement at December 31, 2015 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		$	43,527		$	43,527		$	-		$	-		$	43,527
Available for sale securities			74,801			-			74,801			-			74,801
Loans, net			420,097			-			-			418,774			418,774
Bank owned life insurance			13,476			-			13,476			-			13,476
Accrued interest receivable			1,611			-			369			1,242			1,611
Liabilities
Demand deposits and
interest-bearing transaction
and money market accounts		$	377,849		$	-		$	377,849		$	-		$	377,849
Certificates of deposit			108,618			-			108,578			-			108,578
Securities sold under
agreements to repurchase			23,156			-			23,156			-			23,156
Accrued interest payable			106			-			106			-			106

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change, and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk; however, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment 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.

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Note 9. 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 on sales of securities” with the corresponding income tax effect reflected as a component of income tax expense. Amounts reclassified out of accumulated other comprehensive income are presented below for the three and six months ended June 30, 2016 and 2015 (dollars in thousands):

		Three Months Ended							Six Months Ended
		June 30, 2016			June 30, 2015				June 30, 2016				June 30, 2015
Available for sale securities
Realized gains on sales of securities		$	-		$	24			$	8			$	46
Tax effect			-			(8	)			(3	)			(15	)
Realized gains, net of tax		$	-		$	16			$	5			$	31

Note 10. Segment Reporting

Virginia National Bankshares Corporation has two reportable segments, the Bank and VNB Wealth.

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

The VNB Wealth segment includes (a) trust income from the investment management, wealth advisory and trust and estate services offered by VNBTrust, comprised of both management fees and performance fees, and (b) brokerage and insurance income from retail brokerage, investment advisory, annuity and insurance services offered under the name of VNB Investment Services.

A management fee for administrative and technology support services provided by the Bank is charged to VNB Wealth. For the six months ended June 30, 2016 and June 30, 2015, management fees of $50 thousand and $68 thousand, respectively, were charged to VNB Wealth and eliminated in consolidated totals. The VNB Wealth total assets as shown in the following tables represent the assets of VNB Wealth and should not be confused with client assets under management.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report. 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.

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Segment information for the three and six months ended June 30, 2016 and 2015 is shown in the following tables (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, 2015, included in the Company’s 2015 Form 10-K. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results for the year ending December 31, 2016 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 general economic conditions and in the local economies 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; 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.

As discussed earlier under “Allowance for Loan Losses” in Note 4 of the Notes to Consolidated Financial Statements, beginning with the second quarter of 2016, the Company made significant changes related to determining the allowance for loan losses. The Company’s movement from a historical loss rate methodology to the more complex loss migration analysis, which is a more robust method, will better equip the bank to comply with upcoming regulatory changes. Concurrent with the change in the methodology used, the loan portfolio was further segmented by loan classes and by risk ratings to provide greater loan level detail. For additional information regarding other critical accounting policies, refer to the Application of Critical Accounting Policies and Critical Accounting Estimates section under Item 7 in the 2015 Form 10-K. There have been no other significant changes in the Company’s application of critical accounting policies since December 31, 2015.

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FINANCIAL CONDITION

Total assets

The total assets of the Company as of June 30, 2016 were $545.7 million. This is a $21.8 million decrease from the $567.5 million total assets reported at December 31, 2015 and a $15.3 million increase from the $530.4 million reported at June 30, 2015. Demand deposits and repurchase agreement sweep balances declined $16.2 million and $7.4 million, respectively, accounting for the majority of the decrease in funding as of June 30, 2016 compared to December 31, 2015 balances. The year-over-year net growth in assets was funded largely by expansion within all core deposit categories totaling $19.0 million, while time deposits and repurchase agreement sweep balances contracted by $6.8 million over that period. Total deposits and repurchase agreement sweep balances totaled $486.1 million at June 30, 2016, up 2.6% from the $473.9 million at June 30, 2015 and down 4.6% from the $509.7 million at December 31, 2015.

Federal funds sold

The Company had overnight federal funds sold of $13.4 million at June 30, 2016, compared to $29.3 million at December 31, 2015. At June 30, 2015, the Company had overnight federal funds sold of $4.3 million. 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 Federal Reserve Bank requires the Company to have its participation in the EBA program managed by a pass-through correspondent bank. The Company’s pass-through correspondent is Community Bankers Bank of Midlothian, Virginia. The EBA eliminates the potential of concentration risk that comes with depositing excess balances with one or multiple correspondent banks. Balances on deposit in the EBA are considered to be on deposit with the Federal Reserve Bank, with the correspondent bank acting “as agent.” Balances in the EBA cannot be used to satisfy reserve balance requirements or contractual clearing agreements with the Federal Reserve Bank.

Securities

The Company’s investment securities portfolio as of June 30, 2016 totaled $71.3 million, a decrease of $5.2 million from the $76.5 million reported at December 31, 2015 and a decrease of $50.4 million from the $121.7 million reported at June 30, 2015. Management continues to focus on maximizing the earning capacity of the Company. As loan funding needs have increased over the past year, lower earning securities have been sold in order to deploy these funds to higher earning loans. At June 30, 2016, the investment securities holdings represented 13.1% of the Company’s total assets, a decrease from the 13.5% and 23.0% of total assets at December 31, 2015 and June 30, 2015, respectively.

The Company’s investment securities portfolio included restricted securities totaling $1.7 million as of June 30, 2016 and December 31, 2015. 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. 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 June 30, 2016, the unrestricted securities portfolio totaled $69.6 million. The following table summarizes the Company’s available for sale securities by type as of June 30, 2016 and December 31, 2015 (dollars in thousands):

		June 30, 2016			Percent		December 31, 2015			Percent
		Balance			of Total		Balance			of Total
U.S.Government agencies		$	11,391		16.38%		$	11,378		15.21%
Corporate bonds			6,109		8.78%			5,964		7.97%
Mortgage-backed securities/CMOs			33,503		48.18%			36,687		49.05%
Municipal bonds			18,542		26.66%			20,772		27.77%
Total available for sale securities		$	69,545		100.00%		$	74,801		100.00%

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, Winchester, Frederick County and areas in the Commonwealth of Virginia that are within a 75 mile radius of any Virginia National Bank office.

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As of June 30, 2016, total loans were $424.6 million, an increase of $0.9 million from the balance of $423.7 million as of December 31, 2015 and an increase of $57.5 million from the $367.1 million at June 30, 2015. Loans as a percentage of total assets at June 30, 2016 were 77.8%, compared to 69.2% as of June 30, 2015. Loans as a percentage of deposits at June 30, 2016 were 90.3%, a 10.1 percentage point improvement over the 80.2% ratio as of the year prior.

From the $289.6 million outstanding at September 30, 2014, gross loans have increased $135.0 million, or 46.6%, due to approximately $71.6 million in net organic loan growth, supplemented by purchases of $27.0 million in syndicated loans and $36.4 million in student loans. The purchase of loans is considered a secondary strategy, which allows the Company to supplement organic loan growth and enhance earnings. 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. The first package of student loans totaling $10.8 million was purchased late in the second quarter of 2015. The purchase of a second student loan package totaling $25.6 million closed in the fourth quarter of 2015. Along with the purchase of these student loans, the Company purchased a surety bond that fully insures this portion of the Company’s consumer portfolio.

While the increase in loan balances slowed to a modest $929 thousand during the first two quarters of 2016, after experiencing significant loan growth in each of the prior five quarters, the benefit from the expansion in these higher yielding assets should continue to strengthen earnings in 2016.

The following table summarizes the Company’s loan portfolio by type of loan as of June 30, 2016, December 31, 2015, and June 30, 2015 (dollars in thousands):

		June 30, 2016			Percent		December 31, 2015			Percent		June 30, 2015			Percent
		Balance			of Total		Balance			of Total		Balance			of Total
Commercial and industrial		$	63,638		15.0%		$	70,868		16.7%		$	76,825		20.9%
Real estate - commercial			188,551		44.4%			178,258		42.1%			161,008		43.9%
Real estate - residential mortgage			90,604		21.3%			91,143		21.5%			88,158		24.0%
Real estate - construction			18,544		4.4%			18,911		4.5%			16,026		4.4%
Consumer installment and other			63,256		14.9%			64,484		15.2%			25,068		6.8%
Total loans		$	424,593		100.0%		$	423,664		100.0%		$	367,085		100.0%

Loan quality

Non-accrual loans remained low and totaled $179 thousand at June 30, 2016, compared to the $191 thousand and $205 thousand reported at December 31, 2015 and June 30, 2015, respectively.

At June 30, 2016, the Company had loans in the amount of $2.3 million classified as impaired loans. Of this total, $2.1 million were Troubled Debt Restructurings (TDRs) which are still accruing interest. Based on newly issued regulatory guidance on Student Lending, the Company classified 38 of its student loans purchased as TDRs for a total of $713 thousand during the quarter ended June 30, 2016. These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered restructurings. Student loan borrowers are allowed in-school deferments, plus an automatic six month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. As all student loans purchased are fully insured, the Company does not expect to experience a loss on these loans and interest continues to accrue on these TDRs during any deferment and forbearance periods.

At December 31, 2015, the Company had loans totaling $1.6 million classified as impaired loans, of which, $1.4 million were TDRs which are still accruing interest. At June 30, 2015, the Company had loans in the amount of $1.8 million classified as impaired loans, of which, $1.6 million were TDRs which are still accruing interest.

The Company had loans totaling $206 thousand that were past due ninety or more days and still accruing interest in its portfolio as of June 30, 2016. The Company had no loans past due ninety or more days and still accruing interest in its portfolio as of December 31, 2015 and as of June 30, 2015.

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

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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:

●	National and local economic trends;
●	Underlying collateral values;
●	Loan delinquency status and trends;
●	Loan risk classifications;
●	Industry concentrations;
●	Lending policies;
●	Experience, ability and depth of lending staff; and
●	Levels of policy exceptions

As discussed earlier, beginning with the second quarter of 2016, the Company moved from a historical loss rate method to 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. Concurrent with the change in the methodology used, the loan portfolio was further segmented by loan classes and by risk ratings to provide greater loan level detail. Management believes that this new methodology together with greater data granularity will more accurately reflect the potential risks and losses inherent in the loan portfolio.

The relationship of the allowance for loan losses to total loans at June 30, 2016, December 31, 2015, and June 30, 2015 appears below (dollars in thousands):

The allowance for loan losses as a percentage of total loans at June 30, 2016 of 0.75% was 19 basis points lower than the 0.94% at June 30, 2015 and is reflective of both a continued improvement in asset quality and as a result of the Company’s movement to the migration loss analysis.

A recovery of provision for loan losses totaling $395 thousand was recorded in the first six months of 2016, while a provision for loan losses of $317 thousand was recognized for the first six months of 2015. The following is a summary of the changes in the allowance for loan losses for the six months ended June 30, 2016 and June 30, 2015 (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, where an analysis shows the effect of the changes in methodology from that used in prior periods on the recovery of the provision for loan losses. 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.

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Management reviews the adequacy of 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 June 30, 2016.

Premises and equipment

The Company’s premises and equipment, net of depreciation, as of June 30, 2016 totaled $8.3 million compared to the December 31, 2015 amount of $8.7 million. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of assets. Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon disposition, assets and related accumulated depreciation are removed from the books, and any resulting gain or loss is charged to income.

As of June 30, 2016, the Company and its subsidiaries occupied seven full-service banking facilities in the cities of Charlottesville and Winchester, as well as the counties of Albemarle and Orange in Virginia. The Company’s lease for the Loudoun Mall banking office located at 186 North Loudoun Street, Winchester, Virginia is expiring, and the Company will permanently close that office on or about October 28, 2016. Upon its closure, the Loudoun Mall deposit and loan accounts will automatically be transferred to the Creekside Office, located at 3119 Valley Avenue, Winchester, Virginia, and the Loudoun Mall staff will relocate to the Creekside Office. The Company is continuing to search for at least one new branch office location in Winchester.

The multi-story office building at 404 People Place in Charlottesville also serves as the Company’s corporate headquarters and operations center, as well as the principal offices of VNB Wealth.

The Arlington Boulevard and People Place facilities also contain office space that is currently under lease to tenants.

Deposits and securities sold under agreement to repurchase

Depository accounts represent the Company’s primary source of funds and are comprised of demand deposits, interest-bearing checking accounts, money market deposit accounts and time deposits. These deposits have been provided predominantly by individuals, professionals, small businesses and organizations in the Charlottesville/Albemarle area, the Orange County area, and the Winchester area. Total deposits as of June 30, 2016 were $470.4 million, down $16.1 million compared to the balances of $486.5 million at December 31, 2015 and $12.6 million higher than the $457.8 million total as of June 30, 2015.

Noninterest-bearing demand deposits on June 30, 2016 were $168.4 million, representing 35.8% of total deposits. Interest-bearing transaction and money market accounts totaled $189.6 million, and represented 40.3% of total deposits at June 30, 2016. Collectively, noninterest-bearing and interest-bearing transaction and money market accounts represented 76.1% of total deposit accounts at June 30, 2016. These account types are an excellent source of low-cost funding for the Company.

Certificates of deposit and other time deposit accounts totaled $112.4 million at June 30, 2016 and $108.6 million at December 31, 2015. 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 $17.8 million and $17.2 million as of June 30, 2016 and December 31, 2015, respectively.

Securities sold under agreement to repurchase are an additional source of funding for the Company and are available to non-individual accountholders on an overnight term through the Company’s investment sweep product. Under the agreements to repurchase, invested funds are fully collateralized by security instruments that are pledged on behalf of customers utilizing this product. Total balances in securities sold under agreement to repurchase as of June 30, 2016 were $15.7 million, compared to $23.2 million at December 31, 2015 and $16.1 million as of June 30, 2015.

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Deposit accounts
(dollars in thousands)	June 30, 2016						December 31, 2015						June 30, 2015
				% of Total						% of Total						% of Total
	Balance			Deposits			Balance			Deposits			Balance			Deposits
No cost and low cost deposits:
Noninterest demand deposits	$	168,402		35.8	%		$	184,574		37.9	%		$	160,577		35.1	%
Interest checking accounts		87,147		18.5	%			90,100		18.5	%			81,004		17.7	%
Money market deposit accounts		102,474		21.8	%			103,175		21.3	%			97,404		21.2	%
Total noninterest and low
cost deposit accounts		358,023		76.1	%			377,849		77.7	%			338,985		74.0	%
Time deposit accounts:
Certificates of deposit		94,636		20.1	%			91,459		18.8	%			102,792		22.5	%
CDARS deposits		17,761		3.8	%			17,159		3.5	%			16,020		3.5	%
Total certificates of deposit
and other time deposits		112,397		23.9	%			108,618		22.3	%			118,812		26.0	%
Total deposit account balances	$	470,420		100.0	%		$	486,467		100.0	%		$	457,797		100.0	%

Securities sold under agreements to repurchase
(dollars in thousands)		June 30, 2016			December 31, 2015			June 30, 2015
		Balance			Balance			Balance
Securities sold under
agreements to repurchase		$	15,719		$	23,156		$	16,108

Shareholders’ equity and regulatory capital ratios

The following table displays the changes in shareholders’ equity for the Company from December 31, 2015 to June 30, 2016 (dollars in thousands):

Equity, December 31, 2015	$	56,297
Net income		2,865
Other comprehensive income		646
Cash dividends declared		(542	)
Stock purchased under stock repurchase plan		(1,260	)
Stock options exercised		41
Equity increase due to expensing of stock options		14
Equity, June 30, 2016	$	58,061

Effective January 1, 2015, the final rules adopted by the federal bank regulatory agencies to implement the Basel III regulatory capital rules 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 2016, this initial 0.625% buffer effectively results in the minimum (i) common equity Tier 1 capital ratio of 5.125% of risk-weighted assets; (ii) Tier 1 capital ratio of 6.625% of risk-weighted assets; and (iii) total capital ratio of 8.625% 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, 2015.

Using the new capital requirements, the Company’s capital ratios remain well above the levels designated by bank regulators as "well capitalized" at June 30, 2016. Under the current risk-based capital guidelines of federal regulatory authorities, the Company’s common equity Tier 1 capital ratio and Tier 1 capital ratio are both at 12.51% of its risk-weighted assets and are well in excess of the minimum capital requirements of 6.50% and 8.00%, respectively. Additionally, the Company has a total capital ratio of 13.21% of its risk-weighted assets and leverage ratio of 10.37% of total assets, which are both well in excess of the minimum 10.00% and 5.00% level designated by bank regulators under “well capitalized” capital guidelines.

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Stock repurchase program

On September 22, 2014, the Company announced the approval by its Board of Directors of a stock repurchase program authorizing repurchase of up to 400,000 shares of the Company’s common shares through the open market or in privately negotiated transactions through September 18, 2015. The Company announced on September 21, 2015 that its Board of Directors had extended the program for another year. A total of 343,559 shares at a weighted average price of $22.89 per share have been repurchased since the beginning of the program, with the remaining 56,441 shares available for purchase through September 18, 2016 under the extended program. The repurchase program does not obligate the Company to repurchase any shares and may be suspended or terminated at any time.

RESULTS OF OPERATIONS

Net income

Net income for the three months ended June 30, 2016 was $1.5 million, a 96.9% increase compared to the $767 thousand reported for the three months ended June 30, 2015. Net income per diluted share was $0.63 for the quarter ended June 30, 2016 compared to $0.30 per diluted share for the same quarter in the prior year. The $743 thousand increase in net income for the second quarter of 2016 when compared to the same period of 2015 is attributable to an increase in net interest income of $452 thousand, a decrease of $275 thousand in the provision for loan losses and a decrease in noninterest expenses of $416 thousand. Partially offsetting the increase was a decrease in noninterest income of $5 thousand and an increase of $395 thousand in the provision for income taxes.

Net income for the first six months of 2016 was $2.9 million, or 142.4% higher than the reported net income of $1.2 million during the same period in 2015. Net income per diluted share for the first half of 2016 was $1.20, or $0.75 higher than the $0.45 per diluted share reported in the first half of 2015. The $1.7 million increase in net income during the first six months of 2016 from the first six months of 2015 is attributable to several positive factors, including an increase of $1.2 million in net interest income, a decrease of $712 thousand in the provision for loan losses, and a decrease of $737 thousand in noninterest expense. Partially offsetting the net increase was a decrease of $65 thousand in noninterest income and an increase of $892 thousand in provision for income taxes.

Net interest income

Net interest income for the three months ended June 30, 2016 was $4.4 million, a $452 thousand increase compared to net interest income of $4.0 million for the three months ended June 30, 2015. Net interest income was positively impacted by an improved mix in earning assets as average loans for the second quarter of 2016 were $69.8 million higher than the average loans for the second quarter of 2015, while the quarterly average balances in lower yielding investments and fed funds contracted $64.8 million in the year-over-year comparison.

Net interest margin is the ratio of taxable-equivalent net interest income 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 and net interest margin. The net interest margin of 3.50% for the three months ended June 30, 2016 was 32 basis points higher than the 3.18% for the quarter ended June 30, 2015.

For the six months ended June 30, 2016, the Company recorded $8.9 million in net interest income, or 15.4% more than the $7.8 million recorded for the same six months a year ago. The Bank’s tax-equivalent net interest margin for the first half of 2016 was 3.49% or 40 basis points higher than the 3.09% reported for the same period in 2015.

Total interest income was $1.2 million higher than the prior year, accounting for the year-to-date increase in net interest income. On average, loan balances comprised 80.8% of the earning assets for the first half of 2016, an improvement from the 65.5% for the first half of 2015. This shift resulted in an earning asset yield, as computed on a tax-equivalent basis, of 3.67% on average earning asset balances of $520.4 million for the six months ended June 30, 2016. The earning asset yield, as computed on a tax-equivalent basis, was 3.28% on average earning asset balances of $513.4 million for the six months ended June 30, 2015

The Company’s net interest income continues to benefit from having one of the lowest cost of funds among community banks in the country. A table showing the mix of no cost and low cost deposit accounts is shown under “Financial Condition - Deposits and securities sold under agreement to repurchase” earlier in this report. Interest expense as a percentage of average earning assets was 0.18% for the three and six months ended June 30, 2016 and 0.19% for the three and six months ended June 30, 2015.

The following tables detail the average balance sheet, including an analysis of net interest income for earning assets and interest bearing liabilities, for the three and six months ended June 30, 2016 and 2015. 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
		June 30, 2016											June 30, 2015									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		$	57,850			$	268		1.85	%		$	126,930			$	570		1.80	%		$	(319	)		$	17			$	(302	)
Tax Exempt Securities 1			14,310				121		3.38	%			18,825				165		3.51	%			(38	)			(6	)			(44	)
Total Securities 1			72,160				389		2.16	%			145,755				735		2.02	%			(357	)			11				(346	)
Total Loans			419,429				4,294		4.12	%			349,612				3,529		4.05	%			714				51				765
Fed Funds Sold			21,425				25		0.47	%			11,893				6		0.20	%			7				12				19
Other Interest Bearing Deposits			1,148				-		0.00	%			1,918				6		1.25	%			(2	)			(4	)			(6	)
Total Earning Assets			514,162				4,708		3.68	%			509,178				4,276		3.37	%			362				70				432
Less: Allowance for Loan Losses			(3,411	)									(3,480	)
Total Non-Earning Assets			37,523										37,710
Total Assets		$	548,274									$	543,408
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking		$	86,673			$	11		0.05	%		$	82,315			$	10		0.05	%		$	1			$	-			$	1
Money Market Deposits			108,917				57		0.21	%			95,018				48		0.20	%			7				2				9
Time Deposits			112,772				156		0.56	%			117,107				171		0.59	%			(6	)			(9	)			(15	)
Total Interest-Bearing Deposits			308,362				224		0.29	%			294,440				229		0.31	%			2				(7	)			(5	)
Securities Sold Under Agreement
to Repurchase			19,260				11		0.23	%			20,355				13		0.26	%			(1	)			(1	)			(2	)
Total Interest-Bearing Liabilities			327,622				235		0.29	%			314,795				242		0.31	%			1				(8	)			(7	)
Non-Interest-Bearing Liabilities:
Demand deposits			161,583										168,216
Other liabilities			1,626										1,041
Total Liabilities			490,831										484,052
Shareholders’ Equity			57,443										59,356
Total Liabilities & Shareholders’ Equity		$	548,274									$	543,408
Net Interest Income (Tax Equivalent)						$	4,473									$	4,034					$	361			$	78			$	439
Interest Rate Spread 2									3.39	%									3.06	%
Interest Expense as a Percentage									0.18	%									0.19	%
of Average Earning Assets
Net Interest Margin 3									3.50	%									3.18	%

(1)		Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 34%.
(2)		Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.
(3)		Net interest margin is net interest income expressed as a percentage of average earning assets.
(4)		The impact on the net interest income 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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Consolidated Average Balance Sheet And Analysis of Net Interest Income

		For the three months ended
		June 30, 2016											June 30, 2015									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		$	60,146			$	569		1.89	%		$	128,529			$	1,173		1.83	%		$	(645	)		$	41			$	(604	)
Tax Exempt Securities (1)			14,943				248		3.32	%			19,361				341		3.52	%			(75	)			(18	)			(93	)
Total Securities (1)			75,089				817		2.18	%			147,890				1,514		2.05	%			(720	)			23				(697	)
Total Loans			420,446				8,627		4.13	%			336,290				6,791		4.07	%			1,725				111				1,836
Fed Funds Sold			23,665				56		0.48	%			26,992				29		0.22	%			(4	)			31				27
Other Interest Bearing Deposits			1,199				4		0.67	%			2,206				13		1.19	%			(5	)			(4	)			(9	)
Total Earning Assets			520,399				9,504		3.67	%			513,378				8,347		3.28	%			996				161				1,157
Less: Allowance for Loan Losses			(3,487	)									(3,352	)
Total Non-Earning Assets			37,478										38,357
Total Assets		$	554,390									$	548,383
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking		$	89,241			$	22		0.05	%		$	82,317			$	21		0.05	%		$	2			$	(1	)		$	1
Money Market Deposits			107,452				113		0.21	%			95,408				94		0.20	%			12				7				19
Time Deposits			114,616				316		0.55	%			116,491				338		0.59	%			(5	)			(17	)			(22	)
Total Interest-Bearing Deposits			311,309				451		0.29	%			294,216				453		0.31	%			9				(11	)			(2	)
Securities Sold Under Agreement
to Repurchase			20,368				24		0.24	%			20,109				25		0.25	%			-				(1	)			(1	)
Total Interest-Bearing Liabilities			331,677				475		0.29	%			314,325				478		0.31	%			9				(12	)			(3	)
Non-Interest-Bearing Liabilities:
Demand deposits			164,012										172,513
Other liabilities			1,621										1,180
Total Liabilities			497,310										488,018
Shareholders’ Equity			57,080										60,365
Total Liabilities & Shareholders’ Equity		$	554,390									$	548,383
Net Interest Income (Tax Equivalent)						$	9,029									$	7,869					$	987			$	173			$	1,160
Interest Rate Spread (2)									3.38	%									2.97	%
Interest Expense as a Percentage									0.18	%									0.19	%
of Average Earning Assets
Net Interest Margin (3)									3.49	%									3.09	%

(1)		Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 34%.
(2)		Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.
(3)		Net interest margin is net interest income expressed as a percentage of average earning assets.
(4)		The impact on the net interest income 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 recovery of the provision for loan losses of $395 thousand was recorded in the first half of 2016, while a provision for loan losses of $317 thousand was recognized for the first half of 2015. This resulted in a positive impact to income of $712 thousand when comparing year-over-year. Last year’s loan loss provision was driven by the $53.8 million in loan growth during the first two quarters of 2015. As discussed earlier, beginning with the second quarter of 2016, the Company moved from a historical loss rate method to a loss migration model. The 2016 recovery of provision for loan loss is reflective of a continued improvement in asset quality, slower loan growth, and the Company’s movement to the migration loss analysis. Further discussion of management’s assessment of the allowance for loan losses is provided earlier in the report and in Note 4 – Allowance for Loan Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the allowance was adequately provided for at June 30, 2016.

Noninterest income

Noninterest income for the quarter ended June 30, 2016 of $1.3 million was level with the amount recorded for the quarter ended June 30, 2015. On a year-to-date basis, noninterest income of $2.4 million was recognized in the first six months of 2016, a decline of $65 thousand from the same period in 2015.

The components of noninterest income for the three and six months are shown below (dollars in thousands):

	For the three months ended							For the six months ended
	June 30, 2016				June 30, 2015			June 30, 2016				June 30, 2015
Noninterest income:
Trust income	$	398			$	445		$	786			$	894
Brokerage and insurance income		94				8			181				24
Royalty income		9				36			9				81
Customer service fees		227				233			446				467
Debit/credit card and ATM fees		232				219			430				399
Earnings on bank owned life insurance		111				110			220				218
Fees on mortgage sales		67				57			115				94
Gains on sales of securities		-				24			8				46
Losses on sales of other assets		(2	)			-			(27	)			-
Other		114				123			206				216
Total noninterest income	$	1,250			$	1,255		$	2,374			$	2,439

The purchase of the wealth management book of business, as discussed earlier under Note 5 – Intangible Assets, increased the brokerage and insurance revenue by $157 thousand from the same six-month period last year. Offsetting this increase, VNB Wealth realized $108 thousand less in trust income. Small downticks in other categories further suppressed noninterest income, accounting for the year-over-year contraction.

Noninterest expense

Noninterest expense for the second quarter of 2016 was $3.8 million, a reduction of $416 thousand from the $4.2 million reported in the quarter ended June 30, 2015. For the first six months of 2016, noninterest expense contracted by 8.9% to $7.6 million compared to the $8.3 million recognized in the same period of 2015. The $737 thousand reduction year-over-year was driven by a $766 thousand decline in salaries and employee benefits as management continually takes advantage of opportunities to streamline operations and maximize the efficiency of staff. In addition, 2015 was the last year that the Company accrued for guaranteed bonuses which were strategically used to retain valued personnel to stabilize the VNB Wealth Management team during its planned transition. Other expense categories have been identified and are being evaluated for potential savings that would have a positive impact on net income on an ongoing basis.

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The components of noninterest expense for the three and six months are shown below (dollars in thousands):

	For the three months ended						For the six months ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Noninterest expense:
Salaries and employee benefits	$	1,847		$	2,215		$	3,765		$	4,531
Net occupancy		472			483			948			979
Equipment		132			136			267			266
ATM, debit and credit card		79			77			149			147
Bank franchise tax		109			96			215			188
Computer software		94			88			181			170
Data processing		298			285			587			544
FDIC deposit insurance assessment		71			94			155			186
Marketing, advertising and promotion		137			161			275			286
Professional fees		119			131			230			291
Other		401			409			784			705
Total noninterest expense	$	3,759		$	4,175		$	7,556		$	8,293

One of the ratios the Company examines in its evaluation of net income is the efficiency ratio, which measures the cost to produce one dollar of revenue. The Company computes its efficiency ratio by dividing noninterest expense by the sum of net interest income (on an FTE basis) and noninterest income. A lower ratio is an indicator of increased efficiency.

The efficiency ratio of 65.7% for the second quarter of 2016 reflected an improvement of 13.2 percentage points compared to the efficiency ratio of 78.9% for the same quarter of 2015.

The efficiency ratio of 66.3% for the first six months of 2016 compared favorably to the efficiency ratio of 80.5% for the first six months of 2015. The improved asset mix from the significant loan growth experienced last year added to the revenue stream, while cost reduction strategies lowered expenses.

Provision for Income Taxes

For the three and six months ended June 30, 2016, the Company provided $686 thousand and $1.3 million for Federal income taxes, resulting in an effective income tax rate of 31.2% and 31.1%, respectively. For the three and six months ended June 30, 2015, the Company provided $291 thousand and $400 thousand for Federal income taxes, resulting in an effective income tax rate of 27.5% and 25.3%, respectively. The effective income tax rates differed from the U.S. statutory rate of 34% during the comparable periods primarily due to the effect of tax-exempt income from municipal bonds and life insurance policies. The tax benefits from the tax-exempt income in the first six months of 2016 and 2015 of $133 thousand and $150 thousand, respectively, remained fairly constant over the two periods. However, the higher effective tax rate for 2016 compared to the prior year was a result of significantly higher net income before taxes that was taxable at the full statutory rate.

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 Controller (Acting Principal 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.

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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 Controller (Acting Principal Financial Officer) have concluded that the disclosure controls and procedures were effective at the reasonable assurance level. There was no change in the internal control over financial reporting that occurred during the quarter ended June 30, 2016 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.

On September 22, 2014, the Company announced the approval by its Board of Directors of a stock repurchase program authorizing repurchase of up to 400,000 shares of the Company’s common shares through the open market or in privately negotiated transactions. The Company announced on September 21, 2015 that its Board of Directors extended the program for another year. As of June 30, 2016, a total of 343,559 shares have been purchased since the beginning of this program, with the remaining 56,441 shares available for purchase through September 18, 2016 under the extended program (the “Stock Repurchase Program”).

The table below represents the number of shares repurchased by quarter since the Stock Repurchase Program’s inception on September 16, 2014 through June 30, 2016.

									Maximum
							Total number		number of
							of shares		shares that
		Total number of		Average price			purchased as		may yet be
		shares		paid per			part of publicly		purchased
Period		purchased		share			announced Plan		under the Plan
September 16, 2014 to
September 30, 2014		-		$	-		-		400,000
October 1, 2014 to
December 31, 2014		11,500		$	22.75		11,500		388,500
January 1, 2015 to
March 31, 2015		805		$	22.50		12,305		387,695
April 1, 2015 to
June 30, 2015		252,907		$	22.90		265,212		134,788
July 1, 2015 to
September 30, 2015		-		$	-		265,212		134,788
October 1, 2015 to
December 31, 2015		23,285		$	22.90		288,497		111,503
January 1, 2016 to
March 31, 2016		55,062		$	22.90		343,559		56,441
April 1, 2016 to
June 30, 2016		-		$	-		343,559		56,441
Total		343,559		$	22.89		343,559		56,441

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

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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.

a, b, c Incorporated herein 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.

d Incorporated herein by reference to Virginia National Bank’s Definitive Proxy Statement, filed with the Office of the Comptroller of the Currency on April 24, 2003. Virginia National Bankshares Corporation assumed this plan on December 16, 2013 upon consummation of the reorganization under the agreement referenced as Exhibit 2.0.

e Incorporated herein by reference to Virginia National Bank’s Definitive Proxy Statement, filed with the Office of the Comptroller of the Currency on March 30, 2006. Virginia National Bankshares Corporation assumed this plan on December 16, 2013 upon consummation of the reorganization under the agreement referenced as Exhibit 2.0.

f Incorporated herein by reference to Virginia National Bankshares Corporation’s Definitive Proxy Statement, filed with the Securities and Exchange Commission on April 10, 2014.

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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.

	VIRGINIA NATIONAL BANKSHARES CORPORATION
			(Registrant)
		By:	/s/ Glenn W. Rust
			Glenn W. Rust
			President and Chief Executive Officer
		Date:	August 15, 2016
		By:	/s/ Vicki T. Miller
			Vicki T. Miller
			Senior Vice President and Controller
		Date:	August 15, 2016

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