Virginia National Bankshares Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Comparisons below are with the corresponding 2022 periods unless noted. The company operates Virginia National Bank and investment-related businesses; it sold the Sturman Wealth Advisors business line in December 2022.
Financial performance
| Metric | Q2 2023 | Six months 2023 | Prior comparable period |
|---|---|---|---|
| Interest and dividend income | $18.3 million | $34.7 million | $13.2 million and $25.5 million |
| Net interest income | $13.7 million | $27.1 million | $12.5 million and $23.9 million |
| Net income | $5.65 million | $11.44 million | $5.69 million and $10.61 million |
| Diluted EPS | $1.05 | $2.13 | $1.06 and $1.98 |
| Net interest margin, FTE | 3.83% | 3.77% | 3.02% and 2.78% |
| Efficiency ratio, FTE | 54.1% | 55.1% | 58.3% and 60.1% |
Q2 net income declined $34,000 year over year despite higher net interest income; for the first half, net income rose $833,000. Higher loan yields supported net interest income, while sharply higher deposit and borrowing costs offset some of the benefit. Q2 noninterest income was $2.05 million, down 43.9%, largely because the prior-year quarter included $1.1 million in property-sale gains. First-half noninterest income declined 48.8%, reflecting the absence of prior-year one-time commercial-dispute proceeds, property-sale gains, and advisory and brokerage income. Noninterest expense fell 9.3% in Q2 and 10.8% for the first half, which management attributed in part to merger-related efficiencies and fewer branch facilities.
Financial position, cash flow, and liquidity
- At June 30, total assets were $1.584 billion, down 2.4% from December 31, 2022. Gross loans were $973.3 million, up 3.9% from year-end; net loans were $965.5 million.
- Deposits were $1.348 billion, down $130.3 million from year-end. Noninterest and low-cost transaction, money-market, and savings accounts were 83.3% of deposits, versus 92.2% at year-end; time deposits increased to $225.0 million. Estimated uninsured deposits were $311.6 million, or 23.1% of deposits.
- Cash and cash equivalents were $29.9 million, compared with $40.1 million at year-end. The $473.9 million available-for-sale securities portfolio had $58.2 million of unrealized losses; management attributed these primarily to higher market rates and reported no securities credit-loss allowance.
- Funding included $20.5 million of federal funds purchased and $59.7 million of FHLB advances. The company reported $393 million of available FHLB credit capacity, subject to negotiation and other factors, plus $114 million in unsecured correspondent-bank lines and a $4 million Federal Reserve discount-window line.
- For the first half, operating cash flow was $10.1 million, investing cash flow was positive $32.8 million, and financing cash flow was negative $53.1 million; cash and cash equivalents decreased $10.2 million.
- Shareholders’ equity was $142.4 million. Company regulatory ratios were 17.97% CET1, 17.97% Tier 1, 18.80% total capital, and 11.20% leverage; the Bank also exceeded applicable “well capitalized” thresholds.
Credit quality and material changes
The allowance for credit losses was $7.9 million, or 0.81% of loans, compared with $5.6 million, or 0.59%, at year-end. The increase includes the January 2023 CECL adoption adjustment; adoption increased the loan allowance by approximately $2.5 million and reduced opening retained earnings by $1.9 million, net of tax. Nonaccrual loans were $1.2 million, or 0.12% of loans, versus $673,000 at year-end. Loans 90 or more days past due and still accruing totaled $107,000. Management said loan growth was the main driver of the Q2 provision and considered the allowance adequate, while noting it could rise if economic conditions deteriorate.
Management reported $62.3 million of organic loan production and $27.7 million of purchases of government-guaranteed loans in the first half, partly offset by $53.1 million of paydowns and normal amortization. Commercial mortgages were 50.0% of gross loans. The filing reports $1.1 million of troubled loan modifications at June 30 and no loans modified for borrowers experiencing financial difficulty during the quarter or first half.
Outlook, risks, and other notable items
- No formal earnings or financial guidance is provided. Management expects higher rates to support yields on variable-rate loans, new loans, and securities reinvestment, but expects deposit costs to continue rising and borrowing costs to remain elevated. It cautions that falling rates could also pressure margins if assets reprice faster than deposits and borrowings.
- Key stated risks include inflation, interest-rate and market changes, deposit competition and liquidity needs, economic weakness and real-estate values, borrower financial condition, credit-loss estimates, securities valuations, cybersecurity, technology, and regulatory changes.
- The Board approved a share-repurchase plan of up to 5% of outstanding common stock, subject to consultation with the Federal Reserve. Quarterly cash dividends declared were $0.33 per share.
- The company sold $49.9 million of available-for-sale securities in the first half, recording a $206,000 pretax loss, to fund operating needs. It also terminated an interest-rate hedge, receiving $479,000.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material change to previously disclosed risk factors. No legal proceedings were reported.
Investor verification points
- Track deposit outflows, the changing mix and pricing of deposits, uninsured deposits, and reliance on wholesale or borrowed funding.
- Monitor net interest margin as deposit and borrowing costs reprice, and assess sensitivity to both rising and falling rates.
- Review credit trends, including nonaccruals, criticized commercial real-estate exposures, loan growth, and the adequacy of the CECL allowance.
- Assess the company’s capacity to hold securities with $58.2 million of unrealized losses and the effect of any future sales on earnings and liquidity.
- Confirm the status and any conditions of the proposed repurchase plan, and consider that Q2 and first-half comparisons are affected by prior-year one-time income and the Sturman Wealth sale.