Business Context and Reporting Period
Virginia National Bankshares Corporation (Nasdaq: VABK) reported unaudited results for the three months ended March 31, 2021. The quarter’s financial statements do not include Fauquier Bankshares, Inc. On April 1, 2021, the company completed its all-stock merger with Fauquier; former Fauquier shareholders received 0.675 VABK shares per share, and VABK issued 2,571,213 shares valued at $78.0 million.
Key Financial Metrics
| Metric | Q1 2021 / March 31, 2021 | Comparable / prior period |
|---|---|---|
| Total assets | $918.4 million | $848.4 million at Dec. 31, 2020 |
| Net income | $1.505 million; $0.55 diluted EPS | $1.404 million; $0.52 diluted EPS in Q1 2020 |
| Net interest income | $5.974 million; $6.021 million FTE | $5.375 million; $5.395 million FTE in Q1 2020 |
| Net interest margin | 2.83% FTE | 3.20% FTE in Q1 2020 |
| Noninterest income / expense | $1.039 million / $4.781 million | $1.669 million / $4.543 million in Q1 2020 |
| Loans / allowance | $621.1 million / $5.6 million; allowance 0.90% of loans | $609.4 million / $5.5 million at Dec. 31, 2020 |
| Deposits / borrowings | $804.2 million / $30.0 million FHLB advances | $730.8 million / $30.0 million at Dec. 31, 2020 |
| Cash and cash equivalents | $94.5 million at March 31 | $34.7 million at start of quarter |
| Shareholders’ equity | $80.0 million | $82.6 million at Dec. 31, 2020 |
Operating cash flow was $3.2 million; investing activities used $15.2 million and financing activities provided $71.8 million. Cash increased $59.8 million during the quarter. The company declared dividends of $0.30 per share. Regulatory capital ratios exceeded minimum requirements: company Tier 1, common equity Tier 1, total capital and leverage ratios were 14.49%, 14.49%, 15.49% and 9.02%, respectively; the Bank was classified as well capitalized.
Material Changes Versus Prior Period
- Net income rose 7.2% year over year, supported by higher net interest income and a lower loan-loss provision. The provision was $351,000 versus $765,000 in Q1 2020.
- Net interest income increased 11.1% GAAP, mainly as lower deposit rates reduced interest expense. The FTE net interest margin nevertheless fell 37 basis points, reflecting lower yields on loans and securities.
- Noninterest income decreased 37.7%, chiefly because loan swap fee income fell by $494,000; Q1 2020 also included securities gains and mortgage-sale fees that did not recur.
- Noninterest expense increased 5.2%, including $278,000 of merger costs. The FTE efficiency ratio rose to 67.7% from 64.3%.
- Total assets increased 8.2% from year-end, deposits grew $73.4 million and loans grew $11.7 million. Cash and federal funds sold increased substantially amid deposit growth. Accumulated other comprehensive income declined by $3.4 million, primarily from unrealized losses on available-for-sale securities; management considered the losses temporary and not credit-related.
Outlook, Management Commentary, Risks and Unusual Items
The filing provides no quantified earnings or financial guidance. Management said Q1 results are not necessarily indicative of full-year results. It reported $278,000 in merger-related expense and noted the post-quarter Fauquier integration may be more difficult, costly or time-consuming than expected; anticipated revenue synergies and cost savings may not be fully realized.
COVID-19 remains a risk to borrowers, asset quality, interest income and capital. Of $59.0 million in loan deferrals approved since the pandemic began, $57.5 million (97.4%) had returned to normal payment schedules by March 31, leaving $1.5 million deferred. The company had funded $123.1 million in PPP loans; 43% of total PPP dollars had been forgiven, with $70.2 million outstanding. PPP loans are government-guaranteed, but SBA eligibility findings could require additional loss provisions. Management said economic factors in its allowance model were previously downgraded and had not been further downgraded in Q1; asset quality could weaken if economic effects persist.
Credit indicators included $5,000 of nonaccrual loans, $399,000 past due 90 days or more and still accruing, and $1.2 million of impaired loans. The allowance was 1.02% of loans excluding PPP balances (non-GAAP). Management judged the allowance adequate at quarter-end but said it could increase if economic conditions deteriorate. The portfolio also has exposure to industries affected by COVID-19, including travel accommodations, retail, restaurants, wholesale trade, arts and recreation, and caterers.
Available-for-sale securities had $3.5 million of gross unrealized losses at March 31, 2021, compared with $501,000 at year-end. Management attributed the losses to market interest-rate changes, concluded there was no other-than-temporary impairment, and stated it could hold the securities until recovery or maturity. Other risks include interest-rate changes, deposit and loan demand, credit-loss estimates, commercial real estate conditions, and merger integration. Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material operational or control issues identified from COVID-19. No legal proceedings were reported.
Important Facts for Investors to Verify
- Post-merger results, integration costs, realized expense savings and revenue synergies, since the Q1 statements exclude Fauquier.
- Loan and deposit trends after the sharp pandemic-era deposit growth, including funding mix and liquidity deployment.
- PPP forgiveness, remaining deferred loans, borrower performance in higher-risk industries, and any subsequent changes in credit quality or the allowance.
- Whether securities unrealized losses remain temporary and how interest-rate movements affect net interest margin and capital.
- Merger-related and other nonrecurring expenses, and the sustainability of earnings given lower fee income and a higher efficiency ratio.