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.

In 2025, the Federal Reserve reduced rates three times with each rate reduction being 25 bps, and the final reduction occurring in December. There were no rate changes in the first quarter of 2026. Core inflation is expected to return to target by 2028, but with projections in the second half of 2026 and 2027 moving higher. There have been no developments that would be expected to cause significant increases in unemployment. Outgoing Federal Reserve Chairman Powell has highlighted that supply shocks - including the Iran war and energy price hikes - have made it difficult to balance the Federal Reserve's mandate.

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 per share data):

Net income

Net income for the three months ended March 31, 2026 was $5.3 million, a $770.0 thousand increase compared to $4.5 million reported for the three months ended March 31, 2025. Net income per diluted share was $0.97 for the three months ended March 31, 2026 compared to $0.83 per diluted share for the same period in the prior year.

The increase in net income in 2026 is primarily the result of continued decreases in the cost of funds, along with decreases in noninterest expense, particularly in net occupancy, data processing and other expenses.

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 March 31, 2026 was $13.0 million, a $611 thousand increase compared to net interest income (FTE) of $12.4 million for the three months ended March 31, 2025. The net interest margin (FTE) of 3.40% for the three months ended March 31, 2026 was 12 bps higher than the 3.28% realized during the three months ended March 31, 2025. Interest expense decreased by $741 thousand, 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 20 bps period over period, from 2.38% to 2.18%. A $14.9 million decrease in average balances of time deposit products contributed to the reduced interest expense during the three months ended March 31, 2026 compared to 2025. Average loan balances of $1.2 billion for the three months ended March 31, 2025 were flat compared to average loan balances for the three months ended March 31, 2026. Earning assets were negatively impacted by the decrease in the average balances of securities, decreasing from $271.5 million in the three months ended March 31, 2025 to $253.6 million in the three months ended March 31, 2026; however, an increase of $37.8 million in Federal funds during the same periods helped to offset the decreased securities balances. The primary contributor to the margin improvement was the decreased funding costs with a $525 thousand expense reduction due to the control of interest rates paid with a $741 thousand decrease in the costs of interest bearing liabilities as a whole.

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

The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest-bearing liabilities. 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 (a non-GAAP financial measure).

(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.

(5)

Ratio is computed on an annualized basis.

Provision for credit losses

A recovery of credit losses of $336 thousand was recognized during the three months ended March 31, 2026 compared to a recovery of $160 thousand recognized during the three months ended March 31, 2025. The first quarter 2026 recovery was comprised of $281 thousand in a provision release for credit losses on loans, due primarily to the transfer of loans (such as construction loans) into pools requiring a lower reserve. Slightly more positive economic forecasts resulted in decreases in the loss factors associated with the organic loan portfolio. A provision release of $55 thousand for unfunded commitments was recorded, as construction loan commitments decreased slightly over the course of the first quarter of 2026. The first quarter of 2025 release was primarily attributed to declines in balances within loan pools that have higher loss rates and a decline in unfunded construction commitments.

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, 2026. 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 increases in our required ACL and record additional provision for credit loss exposure.

Noninterest income

The components of noninterest income are shown below (dollars in thousands):

Noninterest income for the three months ended March 31, 2026 of $1.5 million was $271 thousand or 15.4% less than the amount recorded for the three months ended March 31, 2025, due primarily to lower debit/credit card and ATM fees as a result to reduced usage and reduced income from a gain on the sale of assets in 2025 compared to 2026.

Noninterest expense

The components of noninterest expense are shown below (dollars in thousands):

Noninterest expense for the quarter ended March 31, 2026 of $8.2 million was $625 thousand or 7.1% less than the quarter ended March 31, 2025. This decrease is primarily due to lower data processing costs resulting from the contract renewal negotiations which occurred in the fourth quarter of 2025, reduced expenses associated with debit and ATM card programs, reduction of depreciation expenses on fully-depreciated assets and the disposal of a branch location in the first quarter of 2025.

Provision for Income Taxes

For the three months ended March 31, 2026 and 2025, the Company provided $1.3 million and $901 thousand for Federal income taxes, respectively, resulting in effective income tax rates of 19.5% and 16.7%, respectively. For each period, the effective income tax rate differed from the U.S. statutory rate of 21% due to the changes in pretax earnings, low-income housing tax credits and the levels of permanent tax differences.

OTHER SIGNIFICANT EVENTS

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