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

___________

FORM 10-Q
___________

(Mark One)
[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2015
[  ]		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.      ☒  Yes     ☐  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      ☒  Yes     ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 November 10, 2015:

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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 28
		Application of Critical Accounting Policies and Estimates			Page 28
		Financial Condition			Page 28
		Results of Operations			Page 33
	Item 3			Quantitative and Qualitative Disclosures About Market Risk	Page 38
	Item 4			Controls and Procedures	Page 38
Part II. Other Information
	Item 1		Legal Proceedings		Page 38
	Item 1	A	Risk Factors		Page 38
	Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		Page 38
	Item 3		Defaults Upon Senior Securities		Page 39
	Item 4		Mine Safety Disclosures		Page 39
	Item 5		Other Information		Page 39
	Item 6		Exhibits		Page 40
	Signatures				Page 41

2

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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)

		September 30, 2015				December 31, 2014 *
ASSETS		(UNAUDITED)
Cash and due from banks		$	12,152			$	12,834
Federal funds sold			5,312				41,273
Securities:
Available for sale, at fair value			115,460				141,816
Restricted securities, at cost			1,586				1,565
Total securities			117,046				143,381
Loans			390,098				313,254
Allowance for loan losses			(3,513	)			(3,164	)
Loans, net			386,585				310,090
Premises and equipment, net			8,875				9,465
Other real estate owned, net of valuation allowance			540				1,177
Bank owned life insurance			13,364				13,034
Accrued interest receivable and other assets			4,899				5,799
Total assets		$	548,773			$	537,053
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits:
Noninterest-bearing		$	174,605			$	152,107
Interest-bearing			79,248				93,208
Money market deposit accounts			104,960				94,310
Certificates of deposit and other time deposits			112,832				117,094
Total deposits			471,645				456,719
Securities sold under agreements to repurchase			19,436				17,995
Accrued interest payable and other liabilities			1,290				1,707
Total liabilities			492,371				476,421
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; 2,435,874 and 2,688,336
issued and outstanding at September 30, 2015
and December 31, 2014, respectively			6,090				6,721
Capital surplus			22,757				27,889
Retained earnings			27,310				25,978
Accumulated other comprehensive income			245				44
Total shareholders' equity			56,402				60,632
Total liabilities and shareholders' equity		$	548,773			$	537,053

*Derived from audited Consolidated Financial Statements

See Notes to Consolidated Financial Statements

3

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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 nine months ended
		September 30, 2015			September 30, 2014			September 30, 2015			September 30, 2014
Interest and dividend income:
Loans, including fees		$	3,832		$	3,100		$	10,623		$	9,396
Federal funds sold			13			23			42			64
Investment securities:
Taxable			452			545			1,584			1,595
Tax exempt			108			118			333			358
Dividends			21			20			62			62
Other			4			6			17			12
Total interest and dividend income			4,430			3,812			12,661			11,487
Demand and savings deposits			68			53			183			152
Certificates and other time deposits			174			173			512			511
Federal funds purchased and securities sold
under agreements to repurchase			12			9			37			27
Total interest expense			254			235			732			690
Net interest income			4,176			3,577			11,929			10,797
Provision for (recovery of) loan losses			88			-			405			(118	)
Net interest income after provision for
(recovery of) loan losses			4,088			3,577			11,524			10,915
Noninterest income:
Trust income			410			444			1,304			1,404
Customer service fees			247			217			714			656
Debit/credit card and ATM fees			207			186			606			543
Earnings on bank owned life insurance			112			112			330			328
Gains on sales of securities			23			-			69			16
Royalty income			48			42			129			80
Fees on mortgage sales			56			10			150			19
Other			119			144			359			336
Total noninterest income			1,222			1,155			3,661			3,382
Noninterest expense:
Salaries and employee benefits			2,162			2,357			6,693			6,949
Net occupancy			483			495			1,462			1,478
Equipment			138			126			404			393
Other			1,361			1,278			3,878			3,875
Total noninterest expense			4,144			4,256			12,437			12,695
Income before income taxes			1,166			476			2,748			1,602
Provision for income taxes			327			94			727			269
Net income		$	839		$	382		$	2,021		$	1,333
Earnings per common share, basic		$	0.34		$	0.14		$	0.79		$	0.49
Earnings per common share, diluted		$	0.34		$	0.14		$	0.79		$	0.49

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 nine months ended
		September 30, 2015				September 30, 2014			September 30, 2015				September 30, 2014
Net income		$	839			$	382		$	2,021			$	1,333
Other comprehensive income
Unrealized gain on securities,
net of tax of $322 and $126
for the three and nine months
ended September 30, 2015;
and net of tax of $28 and $604
for the three and nine months
ended September 30, 2014			626				52			247				1,171
Reclassification adjustment
for realized gains on sales of securities,
net of tax of ($8) and ($23)
for the three and nine months
ended September 30, 2015;
and net of tax of $0 and ($5)
for the three and nine months
ended September 30, 2014			(15	)			-			(46	)			(11	)
Total other comprehensive income			611				52			201				1,160
Total comprehensive income		$	1,450			$	434		$	2,222			$	2,493

See Notes to Consolidated Financial Statements

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VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(dollars in thousands, except per share data)
(unaudited)

														Accumulated
														Other
		Common				Capital				Retained				Comprehensive
		Stock				Surplus				Earnings				Income (Loss)				Total
Balance, December 31, 2013		$	6,725			$	27,915			$	24,747			$	(1,431	)		$	57,956
Stock option/grant expense			-				41				-				-				41
Stock options exercised			24				165				-				-				189
Cash dividend ($0.20 per share)			-				-				(538	)			-				(538	)
Net income			-				-				1,333				-				1,333
Other comprehensive income			-				-				-				1,160				1,160
Balance, September 30, 2014		$	6,749			$	28,121			$	25,542			$	(271	)		$	60,141
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			-				22				-				-				22
Cash dividend ($0.275 per share)			-				-				(689	)			-				(689	)
Net income			-				-				2,021				-				2,021
Other comprehensive income			-				-				-				201				201
Balance, September 30, 2015		$	6,090			$	22,757			$	27,310			$	245			$	56,402

See Notes to Consolidated Financial Statements

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

		For the nine months ended
		September 30, 2015				September 30, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	2,021			$	1,333
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recovery of) loan losses			405				(118	)
Net amortization and accretion of securities			571				547
Net gains on sales of securities			(69	)			(16	)
Net gains on sales of assets			-				(44	)
Earnings on bank owned life insurance			(330	)			(328	)
Depreciation and amortization			876				860
Stock option/stock grant expense			22				41
Writedown of other real estate owned			192				64
Losses on sales of other real estate owned			-				13
Decrease in accrued interest receivable and other assets			797				11,223
Decrease in accrued interest payable and other liabilities			(417	)			(7,043	)
Net cash provided by operating activities			4,068				6,532
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities			(26,770	)			(34,444	)
Net (increase) decrease in restricted investments			(21	)			144
Proceeds from maturities, calls and principal payments of
available for sale securities			35,436				19,582
Proceeds from sales of available for sale securities			17,492				6,490
Net (increase) decrease in organic loans			(57,164	)			10,021
Net increase in purchased loans			(19,736	)			-
Proceeds from sale of other real estate owned			445				1,032
Proceeds from sale of bank premises and equipment			-				11
Purchase of bank premises and equipment			(286	)			(549	)
Net cash (used in) provided by investing activities			(50,604	)			2,287
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and money market accounts			19,188				6,140
Net decrease in certificates of deposit and other time deposits			(4,262	)			(4,070	)
Net increase (decrease) in securities sold under agreements to repurchase			1,441				(2,195	)
Common stock repurchased			(5,808	)			-
Proceeds from stock options exercised			23				189
Cash dividends			(689	)			(538	)
Net cash provided by (used in) financing activities			9,893				(474	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		$	(36,643	)		$	8,345
CASH AND CASH EQUIVALENTS:
Beginning of period		$	54,107			$	40,072
End of period		$	17,464			$	48,417
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest		$	738			$	702
Taxes		$	904			$	2,438
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized gain on available for sale securities		$	304			$	1,759
Transfer of loans to other real estate owned		$	-			$	244

See Notes to Consolidated Financial Statements

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VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2015

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 nine-month periods ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

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, 2014. If needed, certain previously reported amounts have been reclassified to conform to current period presentation. No such reclassifications were significant.

Recent Accounting Pronouncements

In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. The amendments in the ASU also require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for the first interim or annual period beginning after December 15, 2014; however, the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The new guidance applies to reporting entities that grant employees share-based payments in which the terms of the award allow a performance target to be achieved after the requisite service period. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Existing guidance in “Compensation – Stock Compensation (Topic 718)” should be applied to account for these types of awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted and reporting entities may choose to apply the amendments in the ASU either on a prospective or retrospective basis. The Company is currently assessing the impact that ASU 2014-12 will have on its consolidated financial statements.

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 any impact on its consolidated financial statements.

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In January 2015, the FASB issued ASU No. 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” The amendments in this ASU eliminate from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU 2015-01 to have a material impact on its consolidated financial statements.

In May 2015, the FASB issued ASU No. 2015-08, “Business Combinations (Topic 805): Pushdown Accounting – Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115.” The amendments in ASU 2015-08 amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115, Topic 5: Miscellaneous Accounting, regarding various pushdown accounting issues, and did not have a material impact on the Company’s consolidated financial statements.

In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date.” The amendments in ASU 2015-14 defer the effective date of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU 2014-09. The Company does not expect the adoption of ASU 2015-14 (or ASU 2014-09) to have a material impact on its consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company does not expect the adoption of ASU 2015-16 to have a material impact 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 September 30, 2015 and December 31, 2014 were as follows (dollars in thousands):

Securities having carrying values of $34.023 million at September 30, 2015 were pledged as collateral to secure public deposits and securities sold under agreements to repurchase. At December 31, 2014, securities having carrying values of $23.799 million were similarly pledged.

For the nine months ended September 30, 2015, proceeds from the sales and calls of securities amounted to $34.892 million, and realized gains on these securities were $69 thousand. For the nine months ended September 30, 2014, proceeds from the sales of securities amounted to $6.490 million, and realized gains on these securities were $16 thousand.

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, totaling $1.586 million as of September 30, 2015 and $1.565 million as of December 31, 2014. These restricted securities are carried at cost.

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The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, at September 30, 2015 and December 31, 2014 (dollars in thousands):

September 30, 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		$	-		$	-			$	989		$	(11	)		$	989		$	(11	)
Corporate bonds			6,028			(24	)			-			-				6,028			(24	)
Asset-backed securities			1,143			(18	)			955			(3	)			2,098			(21	)
Mortgage-backed/CMOs			13,101			(43	)			12,071			(172	)			25,172			(215	)
Municipal bonds			5,956			(80	)			1,906			(67	)			7,862			(147	)
		$	26,228		$	(165	)		$	15,921		$	(253	)		$	42,149		$	(418	)
December 31, 2014
		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		$	6,375		$	(21	)		$	966		$	(35	)		$	7,341		$	(56	)
Corporate bonds			13,213			(102	)			3,032			(16	)			16,245			(118	)
Asset-backed securities			98			-				2,007			(28	)			2,105			(28	)
Mortgage-backed/CMOs			6,276			(35	)			25,081			(369	)			31,357			(404	)
Municipal bonds			1,769			(19	)			10,330			(178	)			12,099			(197	)
		$	27,731		$	(177	)		$	41,416		$	(626	)		$	69,147		$	(803	)

As of September 30, 2015, there were $42.149 million, or 48 issues of individual securities in a loss position. These securities have an unrealized loss of $418 thousand and consisted of 21 mortgage-backed/CMOs, 18 municipal bonds, and 9 other security issues.

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 September 30, 2015, management believes the impairments detailed in the table above are temporary, and no impairment loss has been realized in the Company’s consolidated income statement.

An “other-than-temporary impairment” (“OTTI”) is considered to exist if 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 September 30, 2015, 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.

11

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Note 3. Loans

The composition of the loan portfolio by loan classification at September 30, 2015 and December 31, 2014 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.

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.

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

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Following is a breakdown by class of the loans classified as impaired loans as of September 30, 2015 and December 31, 2014. These loans are reported at their recorded investment, which is the carrying amount of the loan as reflected on the Company’s balance sheet, net of charge-offs and other amounts applied to reduce the net book balance. Average recorded investment in impaired loans is computed using an average of month-end balances for these loans for either the nine months ended September 30, 2015 or the twelve months ended December 31, 2014. Interest income recognized is for the nine months ended September 30, 2015 or the twelve months ended December 31, 2014. (Dollars below reported in thousands.)

September 30, 2015					Unpaid						Average			Interest
		Recorded			Principal			Associated			Recorded			Income
		Investment			Balance			Allowance			Investment			Recognized
Impaired loans without a valuation allowance:
Commercial and industrial - organic		$	47		$	65		$	-		$	5		$	-
Other construction and land			62			105			-			65			-
1-4 family residential mortgages			504			528			-			747			19
Commercial non-owner occupied real estate			1,072			1,072			-			1,086			35
Impaired loans with a valuation allowance			-			-			-			-			-
Total impaired loans		$	1,685		$	1,770		$	-		$	1,903		$	54

December 31, 2014					Unpaid						Average			Interest
		Recorded			Principal			Associated			Recorded			Income
		Investment			Balance			Allowance			Investment			Recognized
Impaired loans without a valuation allowance:
Other construction and land		$	69		$	109		$	-		$	79		$	1
1-4 family residential mortgages			525			545			-			437			16
Home equity lines of credits			-			-			-			50			3
Commercial owner occupied real estate			1,103			1,103			-			1,124			60
Commercial non-owner occupied real estate			-			-			-			46			-
Impaired loans with a valuation allowance			-			-			-			-			-
Total impaired loans		$	1,697		$	1,757		$	-		$	1,736		$	80

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

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)		September 30, 2015					December 31, 2014
		No. of		Recorded			No. of		Recorded
		Loans		Investment			Loans		Investment
Performing TDRs
1-4 family residential mortgages		2		$	368		2		$	376
Commercial non-owner occupied real estate		1			1,072		1			1,103
Total performing TDRs		3		$	1,440		3		$	1,479
Nonperforming TDRs
Other construction and land		1		$	36		1		$	39
Total TDRs		4		$	1,476		4		$	1,518

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None of the TDRs reported above were modified under the terms of a TDR during the nine months ended September 30, 2015 and 2014. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reportable. Additionally, there were no loans modified as TDRs that subsequently defaulted during the nine months ended September 30, 2015 and 2014 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 September 30, 2015 or December 31, 2014. The one property that had previously been transferred to Other Real Estate Owned consisted of a 1-4 family residential property and was reported net of valuation allowance at $540 thousand at September 30, 2015 and $1.177 million at December 31, 2014. A portion of the property was sold during the second quarter of 2015 accounting for $445 thousand of the decrease in the amount carried. The remaining difference was due to a writedown of $192 thousand in the third quarter of 2015.

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, trends in 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.

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. 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.

Based on the internal risk ratings assigned to each credit, a historical loss factor is assigned to the balances for each class of loans, using a cumulative historical loss rate for the most recent twelve quarters. 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.

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.

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Risk Ratings And Historical Loss Factor Applied

Excellent

0% 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% applied, as these loans represent a low risk and are either secured by marketable securities within margin, or in the case of the student loans purchased, are fully insured by a surety bond purchased by the Company. 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 – acceptable risk loans which require more attention than normal servicing

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, an 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 September 30, 2015 and December 31, 2014 (dollars in thousands).

											Special			Sub-
September 30, 2015		Excellent			Good			Pass			Mention			standard			Doubtful			TOTAL
Commercial
Commercial and industrial - organic		$	660		$	31,300		$	15,970		$	-		$	111		$	-		$	48,041
Commercial and industrial - syndicated			-			-			21,057			-			2,970			-			24,027
Real estate construction
Residential construction			-			-			1,025			-			-			-			1,025
Other construction and land			-			-			17,470			-			638			-			18,108
Real estate mortgages
1-4 family residential			-			1,500			60,232			618			716			-			63,066
Home equity lines of credit			-			-			28,631			-			82			-			28,713
Multifamily			-			-			21,170			-			-			-			21,170
Commercial owner occupied			-			-			57,562			-			1,116			-			58,678
Commercial non-owner occupied			-			-			88,067			1,071			1,139			-			90,277
Consumer
Consumer revolving credit			88			15,523			544			-			6			-			16,161
Consumer all other credit			253			8,439			1,573			-			43			-			10,308
Student loans purchased			-			10,524			-			-			-			-			10,524
Total Loans		$	1,001		$	67,286		$	313,301		$	1,689		$	6,821		$	-		$	390,098

											Special			Sub-
December 31, 2014		Excellent			Good			Pass			Mention			standard			Doubtful			TOTAL
Commercial
Commercial and industrial - organic		$	3,579		$	23,261		$	18,487		$	64		$	734		$	-		$	46,125
Commercial and industrial - syndicated			-			-			14,815			-			-			-			14,815
Real estate construction
Residential construction			-			-			337			-			-			-			337
Other construction and land			-			-			10,903			507			165			-			11,575
Real estate mortgages
1-4 family residential			-			1,910			56,968			455			829			-			60,162
Home equity lines of credit			-			-			25,411			-			87			-			25,498
Multifamily			-			-			26,462			-			-			-			26,462
Commercial owner occupied			-			-			58,890			-			1,978			-			60,868
Commercial non-owner occupied			-			-			54,012			-			-			-			54,012
Consumer
Consumer revolving credit			34			3,054			332			-			8			-			3,428
Consumer all other credit			200			7,856			1,867			-			49			-			9,972
Total Loans		$	3,813		$	36,081		$	268,484		$	1,026		$	3,850		$	-		$	313,254

In addition to the historical factors, 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 four factors drive losses to a much greater extent than the last four factors; therefore, the first four factors are weighted more heavily. Although the markets served by the Company remain stronger than the national economy as a whole, management continues to pay close attention on a case-by-case basis for any yet unforeseen potential ripple effects of the housing downturn and the related financial market fallout.

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Like the historical factors, qualitative factors are not assessed against loans rated “excellent” or rated “good,” since these are fully collateralized by cash, readily marketable securities, or, in the case of the student loans purchased, are fully insured by a surety bond purchased by the Company.

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 seven loans in the amount of $1.685 million classified as impaired loans at September 30, 2015, 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.

A summary of the transactions in the Allowance for Loan Losses by loan portfolio segment for the nine months ended September 30, 2015 and the year ended December 31, 2014 appears below (dollars in thousands):

As of and for the period ended September 30, 2015

						Real Estate
		Commercial				Construction and			Real Estate			Consumer
		Loans				Land			Mortgages			Loans				Total
Allowance for Loan Losses:
Balance as of December 31, 2014		$	674			$	102		$	2,360		$	28			$	3,164
Charge-offs			(126	)			-			-			(3	)			(129	)
Recoveries			27				-			46			-				73
Provision for (recovery of) loan losses			191				39			179			(4	)			405
Ending Balance		$	766			$	141		$	2,585		$	21			$	3,513
Ending Balance:
Individually evaluated for impairment		$	-			$	-		$	-		$	-			$	-
Collectively evaluated for impairment			766				141			2,585			21				3,513
Loans:
Individually evaluated for impairment		$	47			$	62		$	1,576		$	-			$	1,685
Collectively evaluated for impairment			72,021				19,071			260,328			36,993				388,413
Ending Balance		$	72,068			$	19,133		$	261,904		$	36,993			$	390,098

As of and for the year ended December 31, 2014

						Real Estate
		Commercial				Construction and				Real Estate				Consumer
		Loans				Land				Mortgages				Loans				Total
Allowance for Loan Losses:
Balance as of December 31, 2013		$	340			$	198			$	2,788			$	34			$	3,360
Charge-offs			(286	)			-				(262	)			(3	)			(551	)
Recoveries			32				-				10				7				49
Provision for (recovery of) loan losses			588				(96	)			(176	)			(10	)			306
Ending Balance		$	674			$	102			$	2,360			$	28			$	3,164
Ending Balance:
Individually evaluated for impairment		$	-			$	-			$	-			$	-			$	-
Collectively evaluated for impairment			674				102				2,360				28				3,164
Loans:
Individually evaluated for impairment		$	-			$	69			$	1,628			$	-			$	1,697
Collectively evaluated for impairment			60,940				11,843				225,374				13,400				311,557
Ending Balance		$	60,940			$	11,912			$	227,002			$	13,400			$	313,254

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

The following tables show the aging of past due loans as of September 30, 2015 and December 31, 2014. 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
September 30, 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		$	-		$	-		$	47		$	47		$	47,994		$	48,041		$	-
Commercial and industrial - syndicated			-			-			-			-			24,027			24,027			-
Real estate construction and land
Residential construction			-			-			-			-			1,025			1,025			-
Other construction and land			-			-			-			-			18,108			18,108			-
Real estate mortgages
1-4 family residential			-			36			23			59			63,007			63,066			23
Home equity lines of credit			12			-			-			12			28,701			28,713			-
Multifamily			-			-			-			-			21,170			21,170			-
Commercial owner occupied			-			-			-			-			58,678			58,678			-
Commercial non-owner occupied			-			-			-			-			90,277			90,277			-
Consumer loans
Consumer revolving credit			34			-			-			34			16,127			16,161			-
Consumer all other credit			3			-			-			3			10,305			10,308			-
Student loans purchased			127			5			28			160			10,364			10,524			28
Total Loans		$	176		$	41		$	98		$	315		$	389,783		$	390,098		$	51

Past Due Aging as of																				90 Days
December 31, 2014		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		$	46,119		$	46,125		$	-
Commercial and industrial - syndicated			-			-			-			-			14,815			14,815			-
Real estate construction and land
Residential construction			-			-			-			-			337			337			-
Other construction and land			-			-			-			-			11,575			11,575			-
Real estate mortgages
1-4 family residential			-			24			-			24			60,138			60,162			-
Home equity lines of credit			-			-			-			-			25,498			25,498			-
Multifamily			-			-			-			-			26,462			26,462			-
Commercial owner occupied			-			-			-			-			60,868			60,868			-
Commercial non-owner occupied			-			-			-			-			54,012			54,012			-
Consumer loans
Consumer revolving credit			1			-			-			1			3,427			3,428			-
Consumer all other credit			12			30			-			42			9,930			9,972			-
Total Loans		$	19		$	54		$	-		$	73		$	313,181		$	313,254		$	-

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Note 5. Earnings Per Share

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 265,212 shares at a weighted average price of $22.89 per share have been repurchased since the beginning of the program, with the remaining 134,788 shares available for purchase through September 18, 2016 under the extended program.

The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock for the three months and nine months ended September 30, 2015 and 2014. Potential dilutive common stock equivalents have no effect on net income available to common shareholders.

Three Months Ended		September 30, 2015								September 30, 2014
(dollars in thousands, except per share data)					Weighted		Per						Weighted		Per
					Average		Share						Average		Share
		Net Income			Shares		Amount			Net Income			Shares		Amount
Basic earnings per share		$	839		2,435,874		$	0.34		$	382		2,697,674		$	0.14
Effect of dilutive stock options			-		9,806			-			-		14,875			-
Diluted earnings per share		$	839		2,445,680		$	0.34		$	382		2,712,549		$	0.14

Nine Months Ended		September 30, 2015								September 30, 2014
(dollars in thousands, except per share data)					Weighted		Per						Weighted		Per
					Average		Share						Average		Share
		Net Income			Shares		Amount			Net Income			Shares		Amount
Basic earnings per share		$	2,021		2,566,308		$	0.79		$	1,333		2,694,487		$	0.49
Effect of dilutive stock options			-		9,609			-			-		10,870			-
Diluted earnings per share		$	2,021		2,575,917		$	0.79		$	1,333		2,705,357		$	0.49

For the periods ended September 30, 2015, and September 30, 2014, option shares totaling 124,754 and 111,260, respectively, were considered anti-dilutive and were excluded from this calculation.

Note 6. Stock Compensation 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 Virginia National Bank 1998 Stock Incentive Plan (“1998 Plan”), 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. The 2005 Plan expired on December 20, 2014. No new grants will be issued under the 1998 Plan, the 2003 Plan, or the 2005 Plan as all three plans have expired.

For all of the Company’s stock incentive plans (the “Plans”), the option price of incentive options will not be less than the fair value of the stock at the time an option is granted. Nonqualified options may be granted at a price established by the Board of Directors, including prices less than the fair market value on the date of grant. Outstanding 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 September 30, 2015:

The Company accounts for all of its stock incentive plans under recognition and measurement accounting principles which require that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. Stock-based compensation arrangements include stock options and restricted stock. All stock-based payments to employees are required to be valued at a fair value on the date of grant and expensed based on that fair value over the applicable vesting period. For the nine months ended September 30, 2015 and 2014, the Company recognized $22 thousand and $38 thousand, respectively, in compensation expense for stock options, and for the nine months ended September 30, 2014, an additional $3 thousand was recognized in compensation expense for restricted stock grants. As of September 30, 2015, there was $43 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 three quarters of 2015, and there were stock option grants of 5,000 shares during the first quarter of 2014.

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Summary information pertaining to options outstanding at September 30, 2015 is as follows:

Restricted Stock

The restricted stock that had been outstanding as of September 30, 2014 was fully vested in November 2014. No restricted stock grants were awarded during 2014 or the first nine months of 2015.

Note 7. Fair Value Measurements

Determination of Fair Value

The Company follows ASC 820, “Fair Value Measurements and Disclosures,” to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This codification clarifies that the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability 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 September 30, 2015 and December 31, 2014 (dollars in thousands):

					Fair Value Measurements at September 30, 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		$	19,942		$	-		$	19,942		$	-
Corporate bonds			11,139			-			11,139			-
Asset-backed securities			2,098			-			2,098			-
Mortgage-backed securities/CMOs			59,586			-			59,586			-
Municipal bonds			22,695			-			22,695			-
Total securities available for sale		$	115,460		$	-		$	115,460		$	-

					Fair Value Measurements at December 31, 2014 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		$	31,528		$	-		$	31,528		$	-
Corporate bonds			21,276			-			21,276			-
Asset-backed securities			2,105			-			2,105			-
Mortgage-backed securities/CMOs			63,220			-			63,220			-
Municipal bonds			23,687			-			23,687			-
Total securities available for sale		$	141,816		$	-		$	141,816		$	-

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).

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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 $1.685 million and $1.697 million in impaired loans as of September 30, 2015 and December 31, 2014, 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.

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.

The following table presents the Company’s assets that were measured at fair value on a nonrecurring basis as of September 30, 2015 and December 31, 2014 (dollars in thousands):

Fair Value Measurements at September 30, 2015 Using:

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Description

Balance

(Level 1)

(Level 2)

(Level 3)

Assets:

Other Real Estate Owned

$

540

$

-

$

-

$

540

Fair Value Measurements at December 31, 2014 Using:

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Description

Balance

(Level 1)

(Level 2)

(Level 3)

Assets:

Other Real Estate Owned

$

1,177

$

-

$

-

$

1,177

For the assets measured at fair value on a nonrecurring basis as of September 30, 2015, the following table displays quantitative information about Level 3 Fair Value Measurements (dollars in thousands):

										Weighted
Description			Fair Value			Valuation Technique		Unobservable Inputs		Average
Assets:
Other Real Estate Owned			$	540		Market comparables		Discount applied to contract price *		6.0	%

^* A discount percentage is applied to the amount of the pending contract for sale, based on cost to sell.

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.

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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 September 30, 2015 and December 31, 2014 are as follows (dollars in thousands):

					Fair Value Measurement at September 30, 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		$	17,464		$	17,464		$	-		$	-		$	17,464
Available for sale securities			115,460			-			115,460			-			115,460
Loans, net			386,585			-			-			379,167			379,167
Bank owned life insurance			13,364			-			13,364			-			13,364
Accrued interest receivable			1,299			-			467			832			1,299
Liabilities
Demand deposits and
interest-bearing transaction
and money market accounts		$	358,813		$	-		$	358,813		$	-		$	358,813
Certificates of deposit			112,832			-			115,914			-			115,914
Securities sold under
agreements to repurchase			19,436			-			19,436			-			19,436
Accrued interest payable			111			-			111			-			111
					Fair Value Measurement at December 31, 2014 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		$	54,107		$	54,107		$	-		$	-		$	54,107
Available for sale securities			141,816			-			141,816			-			141,816
Loans, net			310,090			-			-		310,806				310,806
Bank owned life insurance			13,034			-			13,034			-			13,034
Accrued interest receivable			1,296			-			566			730			1,296
Liabilities
Demand deposits and
interest-bearing transaction
and money market accounts		$	339,625		$	-		$	339,625		$	-		$	339,625
Certificates of deposit			117,094			-			117,189			-			117,189
Securities sold under
agreements to repurchase			17,995			-			17,995			-			17,995
Accrued interest payable			117			-			117			-			117

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 8. Other Comprehensive Income

A component of the Company’s other comprehensive income, in addition to net income from operations, is the recognition of the unrealized gains and losses on available for sale securities, net of income taxes. Reclassifications of realized gains and losses on available for sale securities are reported in the income statement as “Gains 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 nine months ended September 30, 2015 and 2014 (dollars in thousands):

		Three Months Ended							Nine Months Ended
		September 30, 2015				September 30, 2014			September 30, 2015				September 30, 2014
Available for sale securities
Realized gains on sales of securities		$	23			$	-		$	69			$	16
Tax effect			(8	)			-			(23	)			(5	)
Realized gains, net of tax		$	15			$	-		$	46			$	11

Note 9. 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.

VNB Wealth services include investment management, trust and estate administration, advisory, and brokerage services. Income is primarily derived from two forms of fee income: management fees and performance fees. A management fee for administrative and technology support services provided by the Bank is charged to VNB Wealth. For the nine months ended September 30, 2015 and September 30, 2014, management fees of $101 thousand and $188 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 nine months ended September 30, 2015 and 2014 is shown in the following tables (dollars in thousands):

Three months ended September 30, 2015		Bank				VNB Wealth				Consolidated
Net interest income		$	4,170			$	6			$	4,176
Provision for loan losses			88				-				88
Noninterest income			761				461				1,222
Noninterest expense			3,419				725				4,144
Income (loss) before income taxes			1,424				(258	)			1,166
Provision for (benefit of) income taxes			414				(87	)			327
Net income (loss)		$	1,010			$	(171	)		$	839
Total assets		$	538,836			$	9,937			$	548,773
Three months ended September 30, 2014		Bank				VNB Wealth				Consolidated
Net interest income		$	3,570			$	7			$	3,577
Provision for loan losses			-				-				-
Noninterest income			667				488				1,155
Noninterest expense			3,572				684				4,256
Income (loss) before income taxes			665				(189	)			476
Provision for (benefit of) income taxes			158				(64	)			94
Net income (loss)		$	507			$	(125	)		$	382
Total assets		$	498,061			$	9,950			$	508,011
Nine months ended September 30, 2015		Bank				VNB Wealth				Consolidated
Net interest income		$	11,910			$	19			$	11,929
Provision for loan losses			405				-				405
Noninterest income			2,225				1,436				3,661
Noninterest expense			10,213				2,224				12,437
Income (loss) before income taxes			3,517				(769	)			2,748
Provision for (benefit of) income taxes			986				(259	)			727
Net income (loss)		$	2,531			$	(510	)		$	2,021
Total assets		$	538,836			$	9,937			$	548,773
Nine months ended September 30, 2014		Bank				VNB Wealth				Consolidated
Net interest income		$	10,771			$	26			$	10,797
Provision for (recovery of) loan losses			(118	)			-				(118	)
Noninterest income			1,874				1,508				3,382
Noninterest expense			10,667				2,028				12,695
Income (loss) before income taxes			2,096				(494	)			1,602
Provision for (benefit of) income taxes			435				(166	)			269
Net income (loss)		$	1,661			$	(328	)		$	1,333
Total assets		$	498,061			$	9,950			$	508,011

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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, 2014, included in the Company’s 2014 Form 10-K. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results for the year ending December 31, 2015 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.

For additional information regarding critical accounting policies, refer to the Application of Critical Accounting Policies and Critical Accounting Estimates section under Item 7 in the 2014 Form 10-K. There have been no significant changes in the Company’s application of critical accounting policies related to the allowance for loan losses since December 31, 2014.

FINANCIAL CONDITION

Total assets

The total assets of the Company as of September 30, 2015 were $548.8 million. This is an $11.7 million increase from the $537.1 million total assets reported at December 31, 2014 and a $40.8 million increase from the $508.0 million reported at September 30, 2014. The year-over-year net growth in assets was funded largely by expansion within the core deposit categories, while time deposits contracted over that period. Deposits and repurchase agreement sweep balances totaled $491.1 million at September 30, 2015, up $44.5 million or 10.0% from the $446.6 million at September 30, 2014.

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Federal funds sold

The Company had overnight federal funds sold of $5.3 million at September 30, 2015, compared to $41.3 million at December 31, 2014. At September 30, 2014, the Company had overnight federal funds sold of $33.9 million. The decrease in federal funds sold is attributable to the deployment of the excess funds into higher yielding loans as discussed below.

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 September 30, 2015 totaled $117.0 million, a decrease of $26.4 million from the $143.4 million reported at December 31, 2014 and a decrease of $27.1 million from the $144.1 million reported at September 30, 2014. Management is focused on maximizing the earning capacity of the Company’s excess liquidity. As loan funding needs have increased over the past four quarters, lower earning securities have been called or sold during the first nine months of 2015 and deployed to these higher earning assets. At September 30, 2015, the investment securities holdings represented 21.3% of the Company’s total assets, a decrease from the 26.7% and 28.4% of total assets at December 31, 2014 and September 30, 2014, respectively.

The Company’s investment securities portfolio included restricted securities totaling $1.6 million as of September 30, 2015 and December 31, 2014. 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 September 30, 2015, the unrestricted securities portfolio totaled $115.5 million. The following table summarizes the Company's available for sale securities by type as of September 30, 2015 and December 31, 2014 (dollars in thousands):

		September 30, 2015			Percent			December 31, 2014			Percent
		Balance			of Total			Balance			of Total
U.S.Government agencies		$	19,942		17.26	%		$	31,528		22.23	%
Corporate bonds			11,139		9.65	%			21,276		15.00	%
Asset-backed securities			2,098		1.82	%			2,105		1.49	%
Mortgage-backed securities			59,586		51.61	%			63,220		44.58	%
Municipal bonds			22,695		19.66	%			23,687		16.70	%
Total available for sale securities		$	115,460		100.00	%		$	141,816		100.00	%

The Company has no direct exposure to subprime mortgages. The Company does not hold private mortgage-backed securities, credit default swaps, or FNMA or FHLMC preferred stock investments in its investment portfolio.

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 is Charlottesville, Albemarle County, Orange County, Winchester, Frederick County, Fauquier County and adjacent counties.

As of September 30, 2015, total loans were $390.1 million, an increase of $76.8 million or 24.5% from the balance of $313.3 million as of December 31, 2014 and an increase of $100.5 million or 34.7% from the $289.6 million at September 30, 2014. Loans as a percentage of total assets at September 30, 2015 were 71.1%, an improvement over the 57.0% ratio as of September 30, 2014. Loans as a percentage of deposits at September 30, 2015 were 82.7%, a 15.7% improvement over the 67.0% ratio as of the year prior.

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The Company has experienced four sequential quarters of significant expansion in total loans due to approximately $62.7 million in net organic loan growth since September 30, 2014, supplemented by purchases of $27.0 million in syndicated loans and $10.8 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 a whole and to each borrower. The package of student loans totaling $10.8 million was purchased on the last day of the second quarter of 2015; therefore, the resulting interest income from this purchase began to be realized in the third 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.

The following table summarizes the Company's loan portfolio by type of loan as of September 30, 2015, December 31, 2014, and September 30, 2014 (dollars in thousands):

		September 30, 2015			Percent			December 31, 2014			Percent			September 30, 2014			Percent
		Balance			of Total			Balance			of Total			Balance			of Total
Commercial and industrial		$	72,068		18.5	%		$	60,940		19.5	%		$	48,621		16.8	%
Real estate - commercial			170,125		43.6	%			141,342		45.1	%			132,671		45.8	%
Real estate - residential mortgage			91,779		23.5	%			85,660		27.3	%			83,131		28.7	%
Real estate - construction			19,133		4.9	%			11,912		3.8	%			13,128		4.5	%
Consumer installment and other			36,993		9.5	%			13,400		4.3	%			12,070		4.2	%
Total loans		$	390,098		100.0	%		$	313,254		100.0	%		$	289,621		100.0	%

Loan quality

Non-accrual loans remained low and totaled $245 thousand at September 30, 2015, fairly level with the $218 thousand reported at December 31, 2014 and down $124 thousand or 33.6% compared to $369 thousand at September 30, 2014.

At September 30, 2015, the Company had seven loans in the amount of $1.7 million classified as impaired loans. Of this total, $1.4 million were Troubled Debt Restructurings (TDRs) which are still accruing interest. The Company had two loans totaling $51 thousand that were past due ninety or more days and still accruing interest in its portfolio as of September 30, 2015.

At December 31, 2014, the Company had loans in the amount of $1.7 million classified as impaired loans. Of this total, $1.5 million were TDRs which are still accruing interest. The Company had no loans past due ninety or more days and still accruing interest in its portfolio as of the end of 2014.

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.

Allowance for loan losses

The allowance for loan losses as a percentage of total loans at September 30, 2015 was 0.90% compared to 1.01% at December 31, 2014 and 1.07% at September 30, 2014.

The following is a summary of the changes in the allowance for loan losses for the nine months ended September 30, 2015 and September 30, 2014 (dollars in thousands):

Net loan charge-offs for the first nine months of 2015 totaled $56 thousand, compared to net charge-offs totaling $148 thousand during the first nine months of 2014. A provision for loan losses amounting to $405 thousand was recorded during the first three quarters of 2015. During the first nine months of 2014, a recovery of provision for loan losses amounting to $118 thousand was recorded.

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The relationship of the allowance for loan losses to total loans at September 30, 2015, December 31, 2014, and September 30, 2014 appears below (dollars in thousands):

The decreased balance in the allowance relative to total loans compared to the prior periods is reflective of the continued improvement in the underlying credit quality factors used in measuring inherent risk within the loan portfolio. In addition, the Company experienced a favorable shift in the mix of loans toward categories requiring no reserve, such as loans fully secured by marketable securities and student loans. As discussed above, a package of student loans totaling $10.8 million was purchased on June 30, 2015. Along with the purchase of these loans, the Company purchased a surety bond that fully insures this portfolio; therefore, no allowance was reserved for this portion of total loans.

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 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

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 management details the rollforward of the allowance by loan portfolio segments. The 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 impact the amount of allowance in a given loan segment include any one or all of the following: the recovery of a previously charged-off loan balance; the decline in the amount of classified or delinquent loans in a loan segment from the previous period, which most commonly occurs when these loans are repaid or are foreclosed; or when there are improvements in the ratios used to estimate the probability of loan losses. Improvements to the ratios could include lower historical loss rates, improvements to any of the qualitative factors mentioned above, or reduced loss expectations for individually-classified loans.

Management reviews the 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 September 30, 2015.

Premises and equipment

The Company’s premises and equipment, net of depreciation, as of September 30, 2015 totaled $8.9 million compared to the December 31, 2014 amount of $9.5 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 September 30, 2015, 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 Bank also had a loan production office in Warrenton, Virginia.

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.

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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 and small businesses in the Charlottesville/Albemarle area, the Orange County area, and the Winchester area. Total deposits as of September 30, 2015 were $471.6 million, up $14.9 million compared to the balances of $456.7 million at December 31, 2014. In comparing total deposits as of a year ago, balances as of September 30, 2015 are $39.1 million or 9.0% higher than the $432.5 million total as of September 30, 2014.

Securities sold under agreement to repurchase are available to non-individual accountholders on an overnight term through the Company’s investment sweep product. Total balances in securities sold under agreement to repurchase as of September 30, 2015 were $19.4 million, compared to $18.0 million at December 31, 2014 and $14.1 million as of September 30, 2014.

Noninterest-bearing demand deposits on September 30, 2015 were $174.6 million, representing 37.1% of total deposits. Interest-bearing transaction and money market accounts totaled $184.2 million, and represented 39.0% of total deposits at September 30, 2015. Collectively, noninterest-bearing and interest-bearing transaction and money market accounts represented 76.1% and 74.4% of total deposit accounts at September 30, 2015 and December 31, 2014, respectively. These account types are an excellent source of low-cost funding for the Company.

Certificates of deposit and other time deposit accounts totaled $112.8 million at September 30, 2015 and $117.1 million at December 31, 2014. 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 $15.6 million as of September 30, 2015, compared to $18.7 million at December 31, 2014.

Deposit accounts
(dollars in thousands)		September 30, 2015						December 31, 2014						September 30, 2014
					% of Total						% of Total						% of Total
No cost and low cost deposits		Balance			Deposits			Balance			Deposits			Balance			Deposits
Noninterest demand deposits		$	174,605		37.1	%		$	152,107		33.3	%		$	140,037		32.4	%
Interest checking accounts			79,248		16.8	%			93,208		20.4	%			81,282		18.7	%
Money market deposit accounts			104,960		22.2	%			94,310		20.7	%			91,119		21.1	%
Total noninterest and low
cost deposit accounts		$	358,813		76.1	%		$	339,625		74.4	%		$	312,438		72.2	%
Time deposit accounts
Certificates of deposit		$	97,247		20.6	%		$	98,401		21.5	%		$	96,289		22.3	%
CDARS deposits			15,585		3.3	%			18,693		4.1	%			23,803		5.5	%
Total certificates of deposit
and other time deposits		$	112,832		23.9	%		$	117,094		25.6	%		$	120,092		27.8	%
Total deposit account balances		$	471,645		100.0	%		$	456,719		100.0	%		$	432,530		100.0	%
Securities sold under agreements to repurchase
(dollars in thousands)		September 30, 2015						December 31, 2014						September 30, 2014
		Balance						Balance						Balance
Securities sold under
agreements to repurchase		$			19,436			$			17,995			$			14,102

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Shareholders' equity and regulatory capital ratios

The following table displays the changes in shareholders' equity for the Company from December 31, 2014 to September 30, 2015 (dollars in thousands):

Effective January 1, 2015, the final rules adopted by the federal bank regulatory agencies to implement the Basel III regulatory capital rules require the Company and its subsidiaries to comply with the following new minimum capital ratios: (i) a new common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6% of risk-weighted assets (increased from the prior requirement of 4%); (iii) a total capital ratio of 8% of risk-weighted assets (unchanged from the prior requirement); and (iv) a leverage ratio of 4% of total assets (unchanged from the prior requirement). These are the initial capital requirements, which are currently in effect. Beginning January 1, 2016 a capital conservation buffer requirement will be phased in over a four-year period, beginning at 0.625% of risk-weighted assets and increasing to 2.5% at January 1, 2019. 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, 2014.

Using the new capital requirements, the Company’s capital ratios remain well above the levels designated by bank regulators as "well capitalized" at September 30, 2015. Under the current risk-based capital guidelines of federal regulatory authorities, the Company has a Tier 1 capital ratio of 13.03% of its risk-weighted assets and a total capital ratio of 13.85% of its risk-weighted assets. Both are well in excess of the minimum capital requirements of 6.00% and 8.00%, respectively. Additionally, the Company has a leverage ratio of 10.09% of total assets, which is well in excess of the minimum 5.00% level designated by bank regulators under “well capitalized” capital guidelines.

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 265,212 shares at a weighted average price of $22.89 per share have been repurchased since the beginning of the program, with the remaining 134,788 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 September 30, 2015 was $839 thousand compared to the $382 thousand reported for the three months ended September 30, 2014. Earnings per share (basic and diluted) were $0.34 per share for the quarter ended September 30, 2015 compared to $0.14 per share for the same quarter in the prior year. The $457 thousand increase in net income for the third quarter of 2015 when compared to the same period of 2014 is attributable to an increase in net interest income of $599 thousand, an increase in noninterest income of $67 thousand, and a decrease in noninterest expenses of $112 thousand, partially offset by an increase of $88 thousand in the provision for loan losses and an increase of $233 thousand in the provision for income taxes.

Net income for the first nine months of 2015 was $2.021 million, or 51.6% higher than the reported net income of $1.333 million during the same period in 2014. Earnings per share (basic and diluted) for the first three quarters of 2015 was $0.79 per share, or $0.30 higher than the $0.49 per share reported in the first three quarters of 2014. The $688 thousand increase in net income during the first nine months of 2015 from the first nine months of 2014 is attributable to several positive factors, including an increase of $1.132 million in net interest income, a $279 thousand increase in noninterest income, and a decrease of $258 thousand in noninterest expense. Partially offsetting the net increase was an increase of $523 thousand in provision for loan losses and an increase of $458 thousand in provision for income taxes.

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Net interest income

Net interest income for the three months ended September 30, 2015 was $4.176 million, a $599 thousand increase compared to net interest income of $3.577 million for the three months ended September 30, 2014. Net interest income is computed as the difference between the interest income on earning assets and the interest expense on deposits and other interest-bearing liabilities. Net interest income represents the principal source of revenue for the Company.

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 3.22% for the three months ended September 30, 2015 was 25 basis points higher than the net interest margin of 2.97% from the quarter ended December 31, 2014 and 19 basis points higher than the quarter ended September 30, 2014. On a year to date basis, the net interest margin of 3.13% as of September 30, 2015 was fairly even with the 3.11% reported for the first nine months of 2014.

Total interest income of $4.430 million for the quarter ended September 30, 2015 was $618 thousand higher than the $3.812 million earned in the same quarter of 2014. Total interest income was positively impacted due to the increase in average earning assets, especially in the loan portfolio growth. For the quarter ended September 30, 2015, average earning assets were $521.6 million or $45.8 million higher than the $475.8 million in average earning assets for the third quarter of 2014. Average loan balances were $87.0 million higher in the quarter ended September 30, 2015 than the same quarter in 2014, while the average balances in all other earning assets contracted by $41.2 million. The improvement in the earnings mix resulted in an earning asset yield, adjusted to a tax equivalent basis, for the three months ended September 30, 2015 of 3.41% or 18 basis points above the tax equivalent earning asset yield of 3.23% for the three months ended September 30, 2014.

The loan yield for the third quarter of 2015 was 4.03% or 21 basis points lower than the 4.24% loan yield for the same period in 2014. Loan yields contracted due to lower rates on new production in the protracted low interest rate environment combined with pay-offs of higher interest loans. The decrease in loan rates lowered interest income by $158 thousand for the three months ended September 30, 2015, compared to the same quarter a year ago. However, the volume increase in loans accounted for an increase of $890 thousand, resulting in an additional $732 thousand in interest income on loans for the three months ended September 30, 2015 compared to the same quarter a year ago.

Interest expense of $254 thousand for the three months ended September 30, 2015 was fairly level with $235 thousand for the three months ended September 30, 2014. 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.

For the nine months ended September 30, 2015, the Company recorded $11.929 million in net interest income, or 10.5% more than the $10.797 million recorded for the same nine months a year ago. Total interest income was $1.174 million higher than the prior year, which was slightly offset by an increase in interest expense of $42 thousand to account for the $1.132 million increase in net interest income. The Bank’s tax-equivalent net interest margin for the first three quarters of 2015 was 3.13% or 2 basis points lower than the 3.11% reported for the same period in 2014.

The earning asset yield, as computed on a tax-equivalent basis, was 3.32% on average earning asset balances of $516.1 million for the nine months ended September 30, 2015. The earning asset yield for the nine months ended September 30, 2014 was 3.30% on average earning asset balances of $472.6 million, or $43.5 million less than the same period in 2015. On average, loan balances were 67.8% of the earning assets for the first three quarters of 2015, an improvement from the 62.2% recorded for the first three quarters of 2014.

The Company’s cost of funds for the nine months ended September 30, 2015 and 2014 was 0.19% and 0.20%, respectively. On average, total funding increased $42.5 million to $490.9 million for the first nine months of 2015, as compared to $448.4 million for the same period in 2014.

The following table details the average balance sheet, including an analysis of net interest income for earning assets and interest bearing liabilities, for the three and nine months ended September 30, 2015 and 2014. The table also includes 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
		September 30, 2015										September 30, 2014										Change in Interest Income/Expense
		Average				Interest			Average			Average				Interest			Average											Total
		Balance				Income/			Yield/			Balance				Income/			Yield/			Change Due to: 4								Increase/
						Expense			Cost							Expense			Cost			Volume				Rate				(Decrease)
ASSETS
Interest Earning Assets:
Securities
Taxable Securities		$	101,870			$	473		1.86	%		$	121,056			$	565		1.87	%		$	(89	)		$	(3	)		$	(92	)
Tax Exempt Securities 1			18,803				164		3.49	%			19,827				179		3.61	%			(9	)			(6	)			(15	)
Total Securities 1			120,673				637		2.11	%			140,883				744		2.11	%			(98	)			(9	)			(107	)
Total Loans			377,234				3,832		4.03	%			290,208				3,100		4.24	%			890				(158	)			732
Fed Funds Sold			22,300				13		0.23	%			42,699				23		0.21	%			(12	)			2				(10	)
Other Interest Bearing Deposits			1,357				4		1.17	%			2,040				6		1.17	%			(2	)			-				(2	)
Total Earning Assets			521,564				4,486		3.41	%			475,830				3,873		3.23	%			778				(165	)			613
Less: Allowance for Loan Losses			(3,482	)									(3,094	)
Total Non-Earning Assets			38,178										40,284
Total Assets		$	556,260									$	513,020
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking		$	82,665			$	10		0.05	%		$	82,557			$	11		0.05	%		$	-			$	(1	)		$	(1	)
Money M arket Deposits			103,729				58		0.22	%			90,892				42		0.18	%			6				10				16
Time Deposits			116,350				174		0.59	%			122,230				173		0.56	%			(9	)			10				1
Total Interest-Bearing Deposits			302,744				242		0.32	%			295,679				226		0.30	%			(3	)			19				16
Securities Sold Under Agreement
to Repurchase			20,308				12		0.23	%			15,191				9		0.24	%			3								3
Total Interest-Bearing Liabilities			323,052				254		0.31	%			310,870				235		0.30	%			-				19				19
Non-Interest-Bearing Liabilities:
Demand deposits			175,801										140,772
Other liabilities			1,219										967
Total Liabilities			500,072										452,609
Shareholders' Equity			56,188										60,411
Total Liabilities & Shareholders' Equity		$	556,260									$	513,020
Net Interest Income (Tax Equivalent)						$	4,232									$	3,638					$	778			$	(184	)		$	594
Interest Rate Spread 2									3.10	%									2.93	%
Interest Expense as a Percentage
of Average Earning Assets									0.19	%									0.20	%
Net Interest Margin 3									3.22	%									3.03	%

(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 averages 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 nine months ended
		September 30, 2015										September 30, 2014										Change in Interest Income/Expense
		Average				Interest			Average			Average				Interest			Average			Change Due to : 4								Total
		Balance				Income/			Yield/			Balance				Income/			Yield/											Increase/
						Expense			Cost							Expense			Cost			Volume				Rate				(Decrease)
ASSETS
Interest Earning Assets:
Securities
Taxable Securities		$	119,545			$	1,646		1.84	%		$	118,247			$	1,657		1.87	%		$	18			$	(29	)		$	(11	)
Tax Exempt Securities (1)			19,173				505		3.51	%			19,803				542		3.65	%			(17	)			(21	)			(38	)
Total Securities (1)			138,718				2,151		2.07	%			138,050				2,199		2.12	%			1				(50	)			(49	)
Total Loans			350,087				10,623		4.06	%			293,865				9,396		4.27	%			1,725				(498	)			1,227
Fed Funds Sold			25,411				42		0.22	%			39,153				64		0.22	%			(23	)			1				(22	)
Other Interest Bearing Deposits			1,920				17		1.18	%			1,521				12		1.05	%			3				2				5
Total Earning Assets			516,136				12,833		3.32	%			472,589				11,671		3.30	%			1,706				(545	)			1,161
Less: Allowance for Loan Losses			(3,396	)									(3,303	)
Total Non-Earning Assets			38,297										41,491
Total Assets		$	551,037									$	510,777
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking		$	82,435			$	31		0.05	%		$	82,150			$	31		0.05	%		$	-			$	-			$	-
Money Market Deposits			98,212				152		0.21	%			88,139				121		0.18	%			15				16				31
Time Deposits			116,443				512		0.59	%			123,420				511		0.55	%			(30	)			31				1
Total Interest-Bearing Deposits			297,090				695		0.31	%			293,709				663		0.30	%			(15	)			47				32
Securities Sold Under Agreement
to Repurchase			20,176				37		0.25	%			14,939				27		0.24	%			10				-				10
Total Interest-Bearing Liabilities			317,266				732		0.31	%			308,648				690		0.30	%			(5	)			47				42
Non-Interest-Bearing Liabilities:
Demand deposits			173,621										139,799
Other liabilities			1,195										2,646
Total Liabilities			492,082										451,093
Shareholders' Equity			58,955										59,684
Total Liabilities & Shareholders' Equity		$	551,037									$	510,777
Net Interest Income (Tax Equivalent)						$	12,101									$	10,981					$	1,711			$	(592	)		$	1,119
Interest Rate Spread (2)									3.01	%									3.00	%
Interest Expense as a Percentage
of Average Earning Assets									0.19	%									0.20	%
Net Interest M argin (3)									3.13	%									3.11	%

(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 averages 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

Through the first three quarters of 2015, a total of $405 thousand in provision for loan losses was recorded, compared to a recovery of provision for loan loss of $118 thousand being recorded for the first nine months of 2014. The 2015 loan loss provision was driven by the $76.8 million in loan growth. In management’s opinion, the allowance was adequately provided for at September 30, 2015. 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.

Noninterest income

Late in the third quarter of 2014, a new fee structure for the Bank was implemented as part of management’s revenue enhancement strategy. The full impact of the fee increases are expected to be realized on a full year basis in 2015.

Noninterest income for the quarter ended September 30, 2015 was $1.222 million, an increase of $67 thousand from the $1.155 million reported for the quarter ended September 30, 2014. On a year to date basis, noninterest income for 2015 was $3.661 million, up $279 thousand compared to $3.382 million through the first nine months of 2014. This increase was primarily driven by the mortgage banking revenue from a new line of business commenced during the second quarter of 2014 and from the new fee structure implemented late in the third quarter of 2014.

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

	For the three months ended						For the nine months ended
	September 30, 2015			September 30, 2014			September 30, 2015			September 30, 2014
Noninterest income:
Trust income	$	410		$	444		$	1,304		$	1,404
Customer service fees		247			217			714			656
Debit/credit card and ATM fees		207			186			606			543
Earnings on bank owned           life insurance		112			112			330			328
Gains on sales of securities		23			-			69			16
Royalty income		48			42			129			80
Fees on mortgage sales		56			10			150			19
Other		119			144			359			336
Total noninterest income	$	1,222		$	1,155		$	3,661		$	3,382

Noninterest expense

Noninterest expense for the third quarter of 2015 was $4.144 million, a decrease of $112 thousand from the $4.256 million reported in the quarter ended September 30, 2014. For the first nine months of 2015, noninterest expense totaled $12.437 million, a reduction of $258 thousand from the total of $12.695 million recorded for the same period in 2014. A decline in salaries and employee benefits of $256 thousand largely contributed to the year-over-year decrease. Management continues to evaluate expense categories for potential reductions that would have a positive impact on net income on an ongoing basis.

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

		For the three months ended						For the nine months ended
		September 30, 2015			September 30, 2014			September 30, 2015			September 30, 2014
Noninterest expense:
Salaries and employee benefits		$	2,162		$	2,357		$	6,693		$	6,949
Net occupancy			483			495			1,462			1,478
Equipment			138			126			404			393
Other			1,361			1,278			3,878			3,875
Total noninterest expense		$	4,144		$	4,256		$	12,437		$	12,695

The efficiency ratio improved to 76.0% for the third quarter of 2015 compared to 89.2% for the third quarter of 2014. The efficiency ratio of 78.9% for the first three quarters of 2015 compared favorably to the 88.8% for the same period of 2014. The loan growth and mortgage origination initiatives, along with fee increases, should add to the revenue stream. In concert, cost containment strategies should lower expenses. Together, these initiatives and strategies should have the impact of improving efficiency over time.

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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.

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 September 30, 2015 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. A total of 265,212 shares have been purchased since the beginning of this program, with the remaining 134,788 shares available for purchase through September 18, 2016 under the extended program.

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The table below represents the number of shares repurchased by quarter since the Plan’s inception on September 16, 2014 through September 30, 2015.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable

ITEM 5. OTHER INFORMATION.

(a) Required 8-K disclosures.

None

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

None

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ITEM 6. EXHIBITS.

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SIGNATURES

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

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