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 2025, the Federal Reserve reduced rates three times with each rate reduction being 25 bps, and the final reduction occurred in December. There were no rate changes in the first half of 2026. While growth is solid, inflation remains above the 2% goal due to supply and energy shocks. At the July 29, 2026 FOMC meeting, where the rates remained unchanged again, the new Federal Reserve Chair Kevin Warsh avoided future guidance on forward rate paths, and focused instead on new task forces to review policy frameworks.

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) balances of intangible assets, including goodwill, that vary significantly between institutions, and (2) 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 June 30, 2026 was $9.0 million, a $4.8 million increase compared to $4.2 million reported for the three months ended June 30, 2025. Net income per diluted share was $1.65 for the three months ended June 30, 2026 compared to $0.78 per diluted share for the same period in the prior year.

Net income for the six months ended June 30, 2026 was $14.3 million, compared to $8.7 million for the six months ended June 30, 2025. Net income per diluted share was $2.62 for the six months ended June 30, 2026, compared to $1.61 for the six months ended June 30, 2025.

The increase in net income in 2026 is primarily the result of the increase in noninterest income, continued decreases in the cost of funds and increases in earning asset yields despite some contraction in loan balances, along with decreases in noninterest expense, particularly in net occupancy, data processing and other expenses. The gain from the sale of the Bearing limited partnership investment augmented noninterest income.

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, 2026 was $13.8 million, a $954 thousand increase compared to net interest income (FTE) of $12.9 million for the three months ended June 30, 2025. The net interest margin (FTE) of 3.65% for the three months ended June 30, 2026 was 25 bps higher than the 3.40% realized during the three months ended June 30, 2025. Interest expense decreased by $590 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 11 bps period over period, from 2.23% to 2.12%. A $3.3 million decrease in average balances of time deposit products contributed to the reduced interest expense during the three months ended June 30, 2026 compared to 2025. Average loan balances of $1.2 billion for the three months ended June 30, 2025 were flat compared to average loan balances for the three months ended June 30, 2026. Earning assets were negatively impacted by the decrease in the average balances of securities, decreasing from $266.9 million in the three months ended June 30, 2025 to $243.9 million in the three months ended June 30, 2026; however, an increase of $25.9 million in Federal funds sold during the same periods helped to offset the decreased securities balances. The primary contributor to the margin improvement was decreased funding costs with a $590 thousand expense reduction due to the control of interest rates paid and decreased borrowings.

Year-to-date overview -Net interest income (FTE) for the six months ended June 30, 2026 was $26.8 million, a $1.6 million increase compared to net interest income (FTE) for the six months ended June 30, 2025. The net interest margin (FTE) of 3.52% was 18 bps higher than the 3.34% realized during the six months ended June 30, 2025. Interest expense decreased by $1.3 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 15 bps period over period, from 230 bps to 215 bps. A $9.0 million decrease in average balances of time deposit products contributed to a lower interest expense in 2026. Average loan balances of $1.2 billion for the six months ended June 30, 2026 were flat compared to average loan balances for the six months ended June 30, 2025. Earning assets were negatively impacted by the decrease in the average balances of securities, decreasing from $269.2 million in the six months ended June 30, 2025 to $248.8 million in the six months ended June 30, 2026. There was an increase in Federal funds sold of $31.8 million which helped offset the decrease in securities.

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.

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 provision for credit losses of $231 thousand was recognized during the three months ended June 30, 2026 compared to $3 thousand recognized during the three months ended June 30, 2025. For the six months ended June 30, 2026 and 2025 there were recoveries of $105 thousand and $157 thousand, respectively. The provision recognized in the three months ended June 30, 2026 was due to construction and multifamily project loans originated which drove increases in the ACL as those pools require higher reserves. The fluctuation of loan balances with a net reduction of outstanding balances from December 31, 2025 to June 30, 2026 contributed to the release. In addition, the migration of loans that were refinanced into pools requiring lower reserves contributed to the release.

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, 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):

(1)

Percentage change is not reported when the baseline (prior period) is zero, as the percentage change is mathematically undefined.

Noninterest income for the three months ended June 30, 2026 of $6.0 million was $4.7 million or 360.1% more than the amount recorded for the three months ended June 30, 2025, due primarily to the gain on the sale of limited partnership investment. The sale of the Company's interest in the investment in Bearing Insurance Group, LLC, a full service insurance agency owned by multiple banks throughout Virginia, was completed on May 1, 2026.

(1)

Percentage change is not reported when the baseline (prior period) is zero, as the percentage change is mathematically undefined.

Noninterest income for the six months ended June 30, 2026 of $7.5 million was $4.5 million or 144.9% more than the amount recorded for the six months ended June 30, 2025, due primarily to the gain on sale of the limited partnership investment, as discussed above.

Noninterest expense

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

Noninterest expense for the quarter ended June 30, 2026 of $8.3 million was $412 thousand or 4.7% less than the quarter ended June 30, 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, reduction of depreciation expenses on fully-depreciated assets and a reduction in other expenses (which includes legal fees) incurred in the most recent quarter compared to the same quarter of 2025.

The components of noninterest expense for the six months ended June 30, 2026 and 2025 are shown below (dollars in thousands):

Noninterest expense for the six months ended June 30, 2026 of $16.5 million was $1.0 million or 5.9% less than the six months ended June 30, 2025. This decrease is primarily due to the same factors discussed above.

Efficiency Ratio

The efficiency ratio (FTE) was 41.6% for the three months ended June 30, 2026 compared to 61.2% for the same quarter of 2025, primarily due to a one time gain on sale of limited partner investment. The efficiency ratio (FTE) of 47.9% for the six months ended June 30, 2026 improved from 61.8% realized in the six months ended June 30, 2025, as all the components of the ratio improved for both the quarter to date and year to date periods of 2026 compared to 2025. 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, 2026 and 2025, the Company provided $2.3 million and $1.2 million for Federal income taxes, respectively, resulting in effective income tax rates of 20.1% and 21.9%, respectively. For the six months ended June 30, 2026 and 2025, the Company provided $3.5 million and $2.1 million for Federal income taxes, respectively, resulting in effective tax rates of 19.9% and 19.3%, 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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