Virginia National Bankshares Corp

RESULTS OF OPERATIONS

Industry events and economic environment

Management of the Company continually monitors the impact of various global and national events on the Company's results of operations and financial condition, including inflation and economic recessionary conditions, changes in interest rates, the political environment, geopolitical conflicts, competition, liquidity matters, changes in legislative or regulatory requirements and changes in government policy, such as the imposition of tariffs and potential trade barriers. The timing and impact of inflation, fluctuations in and volatility of interest rates, and the competitive landscape of loans and deposits on our business and results of operations will depend on future developments, which are uncertain and unpredictable. In July 2025, the One Big Beautiful Bill Act was signed into law, which includes a wide variety of tax reform provisions affecting individuals as well as businesses, including extending and modifying certain key provisions from the Tax Cuts and Jobs Act of 2017 and expanding certain incentives from the Inflation Reduction Act of 2022 while accelerating the phase-out of others.

Inflation has eased in the first half of 2025, but it was estimated at 2.7% as of June 2025, which is still over the FOMC’s 2.0% target. In late 2024, the Federal Reserve shifted its interest rate policy as inflationary pressure began to ease and economic growth moderated, lowering rates 75 bps between September and December in 2024, which resulted in the current Federal Funds target rate range of 4.25% to 4.50%. The FOMC has maintained the Federal Funds target rate range at 4.25% to 4.50% so far in 2025, and it is difficult to predict how the Federal Reserve will balance possible inflationary pressure with the potential of slower economic growth and whether they will respond accordingly.

Management will continue to deploy solid asset liability management strategies to manage our risk related to interest rate fluctuations and monitor balance sheet trends, deposit flows, and liquidity needs to enable us to meet the needs of our customers and maintain financial flexibility.

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.

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, or more important than, 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 June 30, 2025 was $4.2 million, a $79.0 thousand increase compared to $4.2 million reported for the three months ended June 30, 2024. Net income per diluted share was $0.78 for the three months ended June 30, 2025 compared to $0.77 per diluted share for the same period in the prior year.

Net income for the six months ended June 30, 2025 was $8.7 million, compared to $7.8 million for the six months ended June 30, 2024. Net income per diluted share was $1.61 for the six months ended June 30, 2025, compared to $1.45 for the six months ended June 30, 2024.

The increase in net income for each of the periods noted above is primarily the result of decreased cost of funds, as discussed in more detail below.

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).

Quarterly overview -Net interest income (FTE) for the three months ended June 30, 2025 was $12.9 million, a $1.6 million increase compared to net interest income (FTE) of $11.3 million for the three months ended June 30, 2024. The net interest margin (FTE) of 3.40% for the three months ended June 30, 2025 was 36 bps higher than the 3.04% realized during the three months ended June 30, 2024. Interest expense decreased by $1.1 million, positively impacting net interest income (FTE) and net interest margin (FTE), compared to the same period in the prior year. Overall, the cost of interest-bearing deposits decreased 51 bps period over period, from 274 bps to 223 bps. A $52.1 million decrease in average balances of time deposit products contributed to the reduced interest expense during the second quarter of 2025. The increase in average loan balances, from $1.1 billion for the three months ended June 30, 2024 to $1.2 billion for the three months ended June 30, 2025, positively impacted interest income by $1.3 million. This metric was however negatively impacted by the decrease in the average balances of securities, decreasing from $327.7 million in the three months ended June 30, 2024 to $266.9 in the three months ended June 30, 2025, negatively impacting interest income (FTE) by $418 thousand period over period.

Year-to-date overview -Net interest income (FTE) for the six months ended June 30, 2025 was $25.3 million, a $3.0 million increase compared to net interest income (FTE) for the six months ended June 30, 2024. The net interest margin (FTE) of 3.34% for the six months ended June 30, 2025 was 36 bps higher than the 2.98% realized during the six months ended June 30, 2024. Interest expense decreased $2.1 million, positively impacting net interest income (FTE) and net interest margin (FTE), compared to the same period in the prior year. Overall, the cost of interest-bearing deposits decreased 44 bps period over period, from 274 bps to 230 bps. A $43.5 million decrease in average balances of time deposit products contributed to the lower interest expense during the first half of 2025. The increase in average loan balances, from $1.1 billion for the six months ended June 30, 2024 to $1.2 billion for the six months ended June 30, 2025, positively impacted interest income by $2.8 million. This metric was however negatively impacted by the decrease in the average balances of securities, decreasing from $349.0 million in the six months ended June 30, 2024 to $269.2 in the six months ended June 30, 2025, negatively impacting interest income (FTE) by $1.1 million period over period.

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 and six months ended June 30, 2025 and 2024. 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.

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.

Provision for credit losses

An expense to the provision for credit losses of $3 thousand was recognized during the three months ended June 30, 2025 compared to a provision release of $338 thousand recognized during the three months ended June 30, 2024. The second quarter 2025 provision was comprised of $90 thousand provision for loan losses, due primarily to declining balances in pools with higher loss rates offsetting reserves required by changes in environmental factors, and a recovery of $87 thousand for unfunded commitments, as a result of a decline in unfunded construction commitments. The second quarter 2024 recovery of provision for credit losses was comprised of $519 thousand of recovery of provision for loan losses and $181 thousand of provision for losses on unfunded commitments.

A recovery of provision for credit losses of $157 thousand was recognized during the six months ended June 30, 2025 compared to a recovery of provision for loan losses of $360 thousand recognized during the six months ended June 30, 2024. The first half 2025 recovery or provision for credit losses was comprised of a recovery of provision for credit losses of $15 thousand and a recovery of provision for losses on unfunded commitments of $142 thousand. The first half 2024 recovery of provision for credit losses was comprised of $508 thousand of recovery of provision for loan losses and $148 thousand of provision for losses on unfunded commitments.

An update to the peer data used in the Company's CECL model was performed during the three months ended June 30, 2024. This included a new group of peer banks, an adjustment to the k-factors used in the DCF models, and the election to mirror CRE non-owner occupied data for the multifamily pool based on the more appropriate and reasonable data fit. In addition, during the second quarter of 2024, a reallocation of qualitative factor weightings for each pool was performed based on assessment of applicability and significance in terms of anticipated effect of each factor on loss rates for each pool. An update to the prepayment and curtailment rates used in the Company's CECL model was performed during the three months ended September 30, 2024. No changes to the model have been made during the first six months of 2025.

The decrease in unfunded commitment reserve was almost entirely due to the reserve associated with the construction portfolio. In the second quarter of 2025, the construction pool was assigned a loss rate of 1.77%, compared to 2.04% in the first quarter of 2025. This decrease was due to a 26% decrease in the portfolio balance as several projects funded during the second quarter.

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 June 30, 2025. 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 June 30, 2025 and 2024 are shown below (dollars in thousands):

Noninterest income for the three months ended June 30, 2025 of $1.3 million was $380 thousand or 22.5% less than the amount recorded for the three months ended June 30, 2024, due primarily to a reduction in debit/credit card and ATM fees, as a result of a reduction in number of accounts.

The components of noninterest income for the six months ended June 30, 2025 and 2024 are shown below (dollars in thousands):

Noninterest income for the six months ended June 30, 2025 of $3.1 million was $798 thousand or 20.6% less than the amount recorded for the six months ended June 30, 2024, due primarily to the fact that a gain of $379 thousand on the early termination of debt was recorded in the first quarter of 2024, coupled with the reduction in wealth management and debit/credit card and ATM fees. The reduction in wealth management fees is primarily attributable to the sale of Masonry Capital effective April 1, 2024, as fees earned in the first quarter of 2024 by such segment contributed $190 thousand to the Company; the decline in wealth management fees associated with Masonry Capital was offset by a reduction in Masonry Capital-related expenses of $200 thousand. The increase year-over-year in gains on sale of assets resulted from the sale of a branch which closed in the first quarter of 2025.

Noninterest expense

The components of noninterest expense for the three months ended June 30, 2025 and 2024 are shown below (dollars in thousands):

Noninterest expense for the quarter ended June 30, 2025 of $8.7 million was $559 thousand or 6.9% more than the quarter ended June 30, 2024. This increase is primarily due to increases in bank franchise tax and data processing expenses, as well as professional fees and legal expenses related to special projects, partially offset by continued reductions in compensation expense and right-sizing the branch network from the Merger.

The components of noninterest expense for the six months ended June 30, 2025 and 2024 are shown below (dollars in thousands):

Noninterest expense for the six months ended June 30, 2025 of $17.5 million was $564 thousand or 3.3% higher than the six months ended June 30, 2024. Increases were due primarily to expenses associated with special projects but were partially offset by reductions in compensation expense as the Bank continues to recognize operational efficiencies.

The efficiency ratio (FTE) was 61.2% for the three months ended June 30, 2025 compared to 62.7% for the same quarter of 2024, due predominantly to the increase in net interest income (FTE), as described above. The efficiency ratio of 61.8% for the six months ended June 30, 2025 improved from the 64.8% realized in the six months ended June 30, 2024 for the same reason. 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 June 30, 2025 and 2024, the Company provided $1.2 million and $929 thousand for Federal income taxes, respectively, resulting in effective income tax rates of 21.9% and 18.3%, respectively, increasing primarily due to adoption of the proportional amortization method for low income housing tax credits. For the six months ended June 30, 2025 and 2024, the Company provided $2.1 million and $1.6 million for Federal income taxes, respectively, resulting in effective income tax rates of 19.3% and 17.0%, respectively. For each period, the effective income tax rate differed from the U.S. statutory rate of 21% due to the accounting change associated with 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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