Virginia National Bankshares Corp quarterly report, Q3 FY2023

Virginia National Bankshares Corporation — Q3 2023 Form 10-Q

Reporting period: Three and nine months ended September 30, 2023; balance-sheet comparisons are primarily with December 31, 2022. The company operates Virginia National Bank, VNB Trust & Estate Services, and Masonry Capital. Sturman Wealth Advisors was sold in December 2022.

Key financial results

Metric	Q3 2023	Q3 2022	Nine months 2023	Nine months 2022
Net interest income	$11.1 million	$14.3 million	$38.2 million	$38.2 million
Net income	$4.7 million	$5.8 million	$16.1 million	$16.4 million
Diluted earnings per share	$0.86	$1.08	$2.99	$3.06
Net interest margin, FTE	3.04%	3.47%	3.52%	3.00%
Efficiency ratio, FTE	60.3%	57.0%	56.7%	59.1%

Q3 interest and dividend income rose to $17.2 million from $14.9 million, but interest expense increased to $6.1 million from $0.7 million, driving the decline in net interest income. Management attributed the sharp increase in funding costs mainly to deposit repricing.
Q3 net income also reflected lower noninterest expense ($8.3 million versus $9.5 million). Nine-month noninterest income fell to $7.0 million from $10.7 million, largely because the 2022 period included a $2.4 million commercial-dispute resolution payment and a $1.1 million property-sale gain.
Return on average assets was 1.18% for Q3 and 1.37% year to date; return on average equity was 12.91% and 15.42%, respectively.

Financial position, liquidity and capital

Total assets were $1.56 billion, down 3.7% from year-end 2022. Loans were $1.02 billion, up 9.0%; commercial mortgages were $511.3 million, or 50.2% of loans.
Deposits totaled $1.37 billion, down $108.0 million from year-end. Deposits increased $22.2 million during Q3 as the bank adjusted pricing to meet market demands. Time deposits rose to $277.5 million from $115.1 million at year-end; noninterest and other transaction, money-market and savings deposits were 79.7% of total deposits.
Estimated uninsured deposits were $329.9 million, or 24.1% of deposits, versus $459.4 million, or 31.1%, at year-end. The company reported no brokered or specialty CDs.
Cash and cash equivalents were $18.4 million at September 30, compared with $40.1 million at year-end. For the nine months, operating cash flow was $10.7 million; investing activities provided $37.4 million, while financing activities used $69.9 million.
Short-term borrowings were $43.0 million, all under a collateral-dependent FHLB line; none were outstanding at year-end. The company reported $396 million of available FHLB credit subject to negotiation, $114 million of unsecured correspondent-bank lines, and a $4 million Federal Reserve discount-window line; no balances were outstanding on the latter facilities.
Shareholders’ equity was $135.7 million. Company regulatory capital ratios were 17.96% CET1, 17.96% Tier 1, 18.76% total capital and 11.26% leverage. The Bank also exceeded applicable well-capitalized thresholds.
The quarterly dividend was $0.33 per share. A buyback plan of up to 5% of outstanding common shares was authorized in Q2; no shares had been repurchased by September 30.

Credit, securities and material changes

The allowance for credit losses was $7.8 million, or 0.76% of loans, compared with $5.6 million and 0.59% at year-end. The increase includes the impact of adopting CECL; adoption reduced opening retained earnings by $1.9 million. Management said the allowance was adequate but could rise if economic conditions deteriorate.
Nonaccrual loans were $1.1 million, or 0.11% of loans. Loans 90 or more days past due and still accruing were $854,000; management said $783,000 was fully government-guaranteed. No loans were modified for borrowers experiencing financial difficulty during the quarter or nine-month period.
Available-for-sale securities had a $390.8 million fair value and $461.4 million amortized cost, an unrealized loss of $70.6 million. Most loss-position securities had been in that position for at least 12 months. Management attributed the losses to higher market rates, reported no securities ACL, and said it had the ability and intent to hold affected securities until recovery or maturity.
During the first nine months, the company sold $49.9 million of AFS securities at a $206,000 pretax loss to reinvest in higher-yielding assets. It also recognized a $460,000 gain on terminating an interest-rate swap. A $710,000 BOLI death benefit contributed to higher Q3 noninterest income.
Loan growth included $91.3 million of organic production and $53.6 million of purchased government-guaranteed loans, partly offset by $60.8 million in paydowns and amortization. The company said such guaranteed loans do not require an ACL.

Outlook, risks and contingencies

Management expects deposit costs to continue rising amid competition and time-deposit repricing; some near-term funding may come from higher-cost borrowings. Higher rates may support loan and securities yields, but the net effect on margin is uncertain. Management said falling rates could also pressure margin because assets are generally expected to reprice faster than deposits and borrowings.
Risks identified include inflation and interest-rate changes, local economic and real-estate weakness, borrower condition, deposit and loan pricing competition, credit quality and ACL assumptions, securities valuations, cybersecurity, technology and regulatory changes. Management cautioned that interim results are not necessarily indicative of full-year results.
Management reported no material changes to the risk factors in the 2022 Form 10-K. Ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were assessed as effective; no material internal-control changes were reported.
No specific earnings or financial guidance was provided in the filing.

Important facts for investors to verify

Whether deposit inflows continue and how deposit repricing, time-deposit maturities and borrowing use affect funding costs and net interest margin.
The company’s capacity to manage liquidity and collateral needs, including the $43.0 million FHLB borrowing and the reported available funding lines.
Whether the $70.6 million unrealized AFS securities loss remains recoverable without forced sales, particularly if funding conditions tighten or rates change.
Developments in commercial real-estate credit quality, criticized loans, nonaccruals and the adequacy of the CECL allowance as forecasts and portfolio mix change.
The sustainability of earnings excluding unusual items, including the BOLI death benefit and prior-year dispute and property-sale gains.