Virginia National Bankshares Corporation — Q2 2022 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2022. The Company provides commercial banking and wealth, trust and investment-management services. The Fauquier Bankshares merger closed April 1, 2021; year-to-date comparisons therefore include different periods of Fauquier operations. Filed August 12, 2022.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $12.46 million | $13.15 million | $23.89 million | $19.13 million |
| Net income | $5.69 million | $0.15 million | $10.61 million | $1.65 million |
| Diluted EPS | $1.06 | $0.03 | $1.98 | $0.41 |
| Net interest margin, FTE | 3.02% | 3.05% | 2.78% | 3.00% |
| Efficiency ratio, FTE | 58.3% | 99.1% | 60.1% | 89.5% |
| Provision for (recovery of) loan losses | $(0.22) million | $(0.14) million | $(0.07) million | $0.21 million |
Q2 return on average assets was 1.27% and return on average equity was 16.20%; six-month figures were 1.15% and 14.26%, respectively. These reported returns and earnings were affected by unusual items and prior-year merger costs.
Financial condition, cash flow and liquidity
- At June 30, total assets were $1.745 billion, down 11.5% from December 31, 2021. Net loans were $954.7 million, down from $1.055 billion; deposits were $1.599 billion, down from $1.796 billion.
- Cash and cash equivalents were $215.7 million versus $508.8 million at year-end. The Company shifted excess liquidity into securities: available-for-sale securities rose to $461.8 million from $303.8 million. Management reported access to multiple liquidity sources; there were no outstanding FHLB advances or other borrowing-line balances.
- Six-month operating cash flow was $9.7 million; investing cash outflow was $102.4 million, mainly reflecting $216.5 million of securities purchases, partly offset by loan paydowns. Financing cash outflow was $200.4 million, chiefly from deposit reductions. Cash and cash equivalents declined by $293.2 million.
- Junior subordinated debt was $3.39 million. The Bank also had a $60 million letter of credit securing public-fund deposits, collateralized by commercial mortgages.
- Shareholders’ equity was $134.2 million, down from $162.0 million at year-end, largely reflecting a $35.5 million six-month other comprehensive loss as interest rates reduced the fair value of securities. AOCI was a $37.7 million loss at June 30.
- Company regulatory capital ratios were 15.95% common equity Tier 1, 15.95% Tier 1, 16.50% total capital and 8.79% leverage. The Bank was classified as well capitalized. The Company declared $0.30 per share in dividends for each quarter.
Material changes and management commentary
- Q2 net interest income fell 5.2% year over year as lower average loan balances outweighed growth in securities income; FTE net interest margin was down 3 basis points. Six-month net interest income rose 25.0%, mainly reflecting merger-related loan volume and higher securities balances, although FTE margin declined 22 basis points.
- Noninterest income rose 24.9% in Q2 and 113.0% for six months. It included a $1.1 million gain on the sale of two buildings in Q2 and a $2.4 million one-time commercial-dispute settlement in the first half. The settlement was accompanied by $685,000 of related first-quarter expenses.
- Noninterest expense fell 41.0% in Q2 and 6.0% for six months, principally because the 2021 comparison included $5.9 million and $6.2 million, respectively, of merger-related expenses. The six-month comparison also reflects a full six months of post-merger costs in 2022 versus a partial year in 2021.
- Loans declined amid PPP loan forgiveness, legacy loan paydowns and workouts of acquired loans. PPP loans outstanding were approximately $1.9 million. Nonaccrual loans were $511,000; COVID-related loan deferrals had declined to zero. The allowance for loan losses was $5.5 million, or 0.57% of loans; management considered it adequate but noted it could rise if economic conditions deteriorate.
- Available-for-sale securities had $48.2 million of gross unrealized losses at June 30, versus $4.2 million at year-end. Management attributed the losses mainly to rising market rates, considered them temporary, and reported no other-than-temporary impairment.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management cited uncertainty around inflation, interest rates, labor and supply-chain conditions, economic recovery and COVID-19, with potential effects on loan demand, credit losses, collateral values, margins and capital. Forward-looking statements also identify merger-integration, cost-savings, revenue, competition, technology, regulatory, vendor and asset-quality risks. The Company said it was assessing the transition from LIBOR for affected instruments. CECL adoption was expected for fiscal years beginning after December 15, 2022; the effect had not yet been estimated and could affect the allowance, retained earnings and regulatory capital. Management reported effective disclosure controls and no material change in internal control over financial reporting. No legal proceedings or material changes to reported risk factors were disclosed.
Investor verification points
- Assess underlying earnings after separating the $1.1 million property-sale gain, $2.4 million settlement income and related expenses, and the impact of prior-year merger charges.
- Review deposit outflows, cash deployment into securities, funding alternatives and sensitivity to deposit repricing as interest rates change.
- Evaluate the magnitude and duration of securities’ unrealized losses, AOCI effects on equity, and management’s ability and intent to hold securities through recovery.
- Monitor loan paydowns, acquired-loan performance, criticized and delinquent credits, allowance assumptions and any deterioration in local economic or collateral conditions.
- Verify the eventual CECL transition impact on credit reserves, retained earnings and regulatory capital, and the handling of LIBOR-linked debt and other contracts.