Virginia National Bankshares Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company is a Virginia-based bank holding company whose subsidiaries provide commercial banking, trust, wealth-management, and investment-management services. The Fauquier merger closed April 1, 2021, so year-over-year comparisons include different merger-related effects and periods.
Financial performance
Amounts are in millions except per-share data. Comparisons are with the corresponding 2021 period unless noted.
| Metric | Q3 2022 | Nine months 2022 |
|---|---|---|
| Interest and dividend income | $14.9 | $40.5 |
| Net interest income | $14.3 | $38.2 |
| Net interest income, fully taxable equivalent (FTE) | $14.4, up $0.8 | $38.4, up $5.6 |
| Net interest margin, FTE | 3.47%, up 39 bps | 3.00%, down 3 bps |
| Noninterest income | $2.3, down 33.9% | $10.7, up 44.3% |
| Noninterest expense | $9.5, down 25.9% | $29.0, down 13.6% |
| Net income | $5.8, versus $3.1 | $16.4, versus $4.8 |
| Diluted EPS | $1.08, versus $0.59 | $3.06, versus $1.07 |
| Efficiency ratio, FTE | 57.0%, versus 75.2% | 59.1%, versus 83.5% |
Q3 return on average assets was 1.30% and return on average equity was 16.50%; nine-month figures were 1.20% and 14.98%, respectively. The filing presents these as GAAP measures and separately provides non-GAAP comparisons excluding prior-year merger costs.
Financial condition, cash flow, and capital
- Assets and loans: Total assets were $1.734 billion at September 30, down 12.1% from year-end 2021. Gross loans were $942.3 million, down from $1.061 billion at year-end; management cited loan paydowns, business and property sales, refinancings, participation changes, acquired-loan workouts, and PPP forgiveness.
- Deposits and liquidity: Deposits totaled $1.597 billion, down $199.5 million from year-end. Cash and cash equivalents were $145.1 million, versus $508.8 million at year-end. The company reported no outstanding FHLB advances or other line borrowings at September 30; it cited access to multiple liquidity sources. The nine-month cash-flow statement shows $17.5 million provided by operations, $177.0 million used in investing, and $204.2 million used in financing.
- Securities: Available-for-sale securities had a $538.5 million fair value, up from $303.8 million at year-end as excess funds were invested. Their $64.4 million gross unrealized loss was attributed by management primarily to higher market interest rates; accumulated other comprehensive loss was $50.4 million at quarter-end, versus $2.2 million at year-end.
- Credit quality: Allowance for loan losses was $5.5 million, or 0.58% of loans; the nine-month provision was a $30,000 recovery. Nonaccrual loans were $607,000. Management considered the allowance adequate but noted it could increase if economic conditions deteriorate.
- Debt and capital: Junior subordinated debt was $3.4 million; no other borrowings were outstanding. Company regulatory capital ratios were 16.41% CET1, 16.41% Tier 1, 16.97% total capital, and 9.17% leverage. The Bank was reported as well capitalized under regulatory standards.
- Equity and dividends: Shareholders’ equity was $126.0 million, down from $162.0 million at year-end, primarily reflecting the $48.2 million nine-month other comprehensive loss, partly offset by net income. Cash dividends paid year to date were $4.8 million; dividends declared were $0.30 per share each quarter.
Material changes and unusual items
- Net interest income benefited from deploying excess liquidity into securities and higher yields on securities and other interest-earning balances. In Q3, declining average loan balances reduced interest income; the FTE margin nevertheless improved year over year.
- Nine-month noninterest income included a one-time $2.4 million commercial-dispute resolution payment and a $1.1 million gain on sale of two buildings. The company also recorded $685,000 of expenses related to the dispute resolution.
- Prior-year noninterest expense included $8.1 million of merger and merger-related costs for the nine-month period; none were recorded in the 2022 period. The 2021 comparison also reflects the April 2021 Fauquier acquisition.
- COVID-19-related loan deferrals had declined to zero by September 30, 2022. The company reported no material operational or internal-control risks identified from its pandemic response.
Outlook, risks, and contingencies
The filing provides no quantified earnings or balance-sheet guidance. Management cautioned that results for the interim periods are not necessarily indicative of full-year results. It cited uncertainty around economic conditions, inflation, interest rates, loan demand, deposits, collateral values, and borrowers’ ability to repay; these factors could affect credit losses, margins, liquidity, and capital. Management also noted that sustained economic weakness could require a higher loan-loss allowance.
The company was preparing to adopt the CECL credit-loss standard for fiscal years beginning after December 15, 2022. It had not determined the impact; management warned adoption could change the allowance, retained earnings, regulatory capital, and related controls. The company was also assessing transition from LIBOR for affected instruments. Management considered the securities unrealized losses temporary, stated it had the ability to hold the securities until recovery or maturity, and reported no other-than-temporary impairment. The filing reported no legal proceedings and no material changes to the risk factors in the 2021 Form 10-K.
Important facts for investors to verify
- Whether deposit outflows continue and how the company funds liquidity needs as interest rates and deposit pricing change.
- Whether unrealized securities losses recover, and any effect of securities sales or liquidity needs on realized earnings and capital.
- Loan portfolio trends, particularly acquired-loan paydowns, criticized classifications, delinquencies, and the adequacy of the allowance.
- The impact of CECL adoption on the allowance, retained earnings, regulatory capital, and disclosures.
- How much of reported earnings is recurring, given the dispute-resolution payment, building-sale gain, and prior-year merger expenses.
- Progress on LIBOR transition and any effect on the junior subordinated debt and affected loans or other instruments.