Virginia National Bankshares Corp

RESULTS OF OPERATIONS

Non-GAAP presentations

The accounting and reporting policies of the Company conform to GAAP and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Company’s performance. These include tangible book value per share, tangible equity and the following fully-taxable equivalent measures: net interest income-FTE, efficiency ratio-FTE and net interest margin-FTE. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented.

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Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of (1) items that do not reflect ongoing operating performance, (2) balances of intangible assets, including goodwill, that vary significantly between institutions, and (3) tax benefits that are not consistent across different opportunities for investment. These non-GAAP financial measures should not be considered an alternative to GAAP-basis financial statements, and other banks and bank holding companies may define or calculate these or similar measures differently. Net income is discussed in Management’s Discussion and Analysis on a GAAP basis unless noted as “non-GAAP.”

A reconcilement of the non-GAAP financial measures used by the Company to evaluate and measure the Company's performance to the most directly comparable GAAP financial measures is presented below (dollars in thousands, except for the per share data):

Net income

Net income for the three months ended March 31, 2024 was $3.6 million, a $2.1 million decrease compared to $5.8 million reported for the three months ended March 31, 2023. Net income per diluted share was $0.68 for the three months ended March 31, 2024 compared to $1.08 per diluted share for the same period in the prior year.

Net interest income

Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets for the period. The level of interest rates, together with the volume and mix of earning assets and interest-bearing liabilities, impact net interest income (FTE) and net interest margin (FTE).

Net interest income (FTE) for the three months ended March 31, 2024 was $11.0 million, a $2.5 million decrease compared to net interest income (FTE) of $13.5 million for the three months ended March 31, 2023. The increase in average loan balances, from $932.8 million for the three months ended March 31, 2023 to $1.1 billion for the three months ended March 31, 2024, positively impacted interest income by $2.5 million. This metric was however negatively impacted by the decrease in the average balances of securities, decreasing from $514.5 million in the three months ended March 31, 2023 to $370.3 in the three months ended March 31, 2024, negatively impacting interest income (FTE) by $1.1 million period over period. Interest expense increased $4.7 million, also negatively impacting net interest margin (FTE), compared to the same period in the prior year. The net interest margin (FTE) of 2.93% for the three months ended March 31, 2024 was 78 bps lower than the 3.71% for the three months ended March 31, 2023. Overall, the cost of interest-bearing deposits increased period over period, from a cost of 109 bps to 273 bps. A $3.4 million increase in average balances of time deposit product with premium rates drove interest expense higher for the first 3 months of 2024. The cost of Federal funds purchased positively impacted net interest margin (FTE) by $158 thousand compared to the same period in the prior year due to reduced average balances while the cost of borrowings negatively impacted net interest margin (FTE) by $52 thousand as compared to the same period in the prior year due to increased average balances.

Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP net interest margin.

The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest-bearing liabilities, for the three months ended March 31, 2024 and 2023. These tables also include rate/volume analyses for these same periods (dollars in thousands).

Consolidated Average Balance Sheet and Analysis of Net Interest Income

(1)

Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations earlier in this section.

(2)

Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.

(3)

Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.

(4)

The impact on the net interest income (FTE) resulting from changes in average balances and average rates is shown for the period indicated. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

The Company believes that higher interest rates will continue to have a positive effect on yields of variable rate loans, new loan originations and purchases/reinvestment of AFS securities. The Company also understands that the cost of deposits may increase as competition for deposits increases and as time deposits reprice at maturity. A portion of the Company’s funding may continue to be drawn from borrowings in the near term, also resulting in a higher cost of funds. The effect of these factors on the Corporation’s net interest margin (FTE) will depend on a number of factors, including the Company’s ability to continue to increase the loan portfolio, compete for deposits and manage its borrowings. The Company can give no assurance as to the timing or extent of further increases in market interest rates or the impact of rising interest rates or any other factor on the Company's net interest margin (FTE). Alternatively, if market interest rates begin to decline, the Company’s net interest margin (FTE) may be adversely affected as the Company generally expects its assets to reprice more quickly than its deposits and borrowings.

Provision for credit losses

A recovery of provision for credit losses of $22 thousand was recognized during the three months ended March 31, 2024 compared to a recovery of provision for loan losses of $248 thousand recognized during the three months ended March 31, 2023. The first quarter 2024 recovery of provision for credit losses was comprised of $11 thousand of provision for loan losses and $33 thousand of recovery for provision for losses on unfunded commitments.

A significant portion of the increase in loan balances in the first quarter of 2024 was attributable to the purchase of government-guaranteed loans which do not require an ACL. No changes have been made to the qualitative factor methodology since January 1, 2023.

Further discussion of management’s assessment of the ACL is provided earlier in the report and in Note 5 – Allowance for Credit Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the ACL was adequately provided for at March 31, 2024. The ACL calculation, provision for credit losses, asset quality and collateral values may be significantly impacted by deterioration in economic conditions. Should economic conditions worsen, we could experience further increases in our required ACL and record additional provision for credit loss exposure.

Noninterest income

The components of noninterest income for the three months ended March 31, 2024 and 2023 are shown below (dollars in thousands):

Noninterest income for the three months ended March 31, 2024 of $2.2 million was $98 thousand or 4.3% less than the amount recorded for the three months ended March 31, 2023, due primarily to the fact that the gain on the termination of the interest rate swap that occurred in the first quarter of 2023 was $81 thousand more than the gain on the early redemption of debt in the first quarter of 2024.

Noninterest expense

The components of noninterest expense for the three months ended March 31, 2024 and 2023 are shown below (dollars in thousands):

Noninterest expense for the quarter ended March 31, 2024 of $8.8 million was $42 thousand or 0.5% lower than the quarter ended March 31, 2023. This decrease is primarily due to reduced occupancy expense of $207 thousand after closing a branch and a reduction of marketing expenses of $127 thousand.

The efficiency ratio (FTE) was 66.8% for the three months ended March 31, 2024 compared to 56.1% for the same quarter of 2023, due predominantly to the decrease in net interest income (FTE), as described above. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP efficiency ratio.

Provision for Income Taxes

For the three months ended March 31, 2024 and 2023, the Company provided $671 thousand and $1.3 million for Federal income taxes, respectively, resulting in effective income tax rates of 15.5% and 18.2%, respectively, declining due to the application of prior period tax adjustments. For each period, the effective income tax rate differed from the U.S. statutory rate of 21% due to the recognition of low-income housing tax credits and the effect of tax-exempt income from municipal bonds and bank owned life insurance policies.

OTHER SIGNIFICANT EVENTS

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