Virginia National Bankshares Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Dollar amounts below are in millions unless stated otherwise. Results include Fauquier Bankshares only from its April 1, 2021 acquisition, limiting comparability with prior periods.
Business context and financial performance
The company operates a Virginia community bank and wealth-management businesses. It completed its merger with Fauquier Bankshares on April 1, issuing approximately 2.57 million shares; the merger materially expanded the balance sheet and operations.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $13.15 | $5.76 | $19.13 | $11.13 |
| Noninterest income | $2.92 | $1.63 | $3.96 | $3.30 |
| Noninterest expense | $15.99 | $4.40 | $20.77 | $8.95 |
| Net income | $0.15 | $2.09 | $1.65 | $3.49 |
| Diluted EPS | $0.03 | $0.77 | $0.41 | $1.29 |
| Net interest margin, FTE | 3.05% | 3.12% | 3.00% | 3.16% |
- Q2 net interest income rose primarily because of Fauquier’s contribution and higher loan and securities balances. FTE net interest income was $13.22 million in Q2 and $19.25 million for the first half.
- Management reported adjusted, non-GAAP diluted EPS excluding merger expenses of $0.89 for Q2 and $1.33 for the first half. These adjustments are not GAAP results.
- Q2 FTE efficiency ratio was 99.1% (59.5% a year earlier); first-half ratio was 89.5% (61.8%). Merger costs were the main reason for the increases.
Financial position, liquidity, and capital
- At June 30, assets were $1.847 billion, loans $1.166 billion, deposits $1.629 billion, and shareholders’ equity $158.6 million. The balance-sheet expansion chiefly reflects the acquisition.
- Cash and cash equivalents were $313.98 million, versus $34.70 million at year-end 2020. Six-month operating cash flow was $4.47 million; reported investing cash flow was $196.98 million and financing cash flow was $77.84 million. Investing cash flow includes the acquisition-related presentation.
- Deposits were 89.5% noninterest-bearing and other low-cost transaction, money-market, and savings accounts. Loans were 71.6% of deposits.
- Borrowings included $42.99 million of FHLB advances and $3.35 million of junior subordinated debt. The company reported access to additional FHLB, correspondent-bank, and Federal Reserve borrowing facilities, with no balances outstanding on the latter lines.
- Company regulatory capital ratios were 12.96% Tier 1, 12.96% common equity Tier 1, 13.47% total capital, and 7.66% leverage. The Bank reported ratios of 13.26%, 13.26%, 13.77%, and 7.86%, respectively, and met the stated “well capitalized” thresholds.
- The allowance for loan losses was $5.52 million, or 0.47% of loans; management’s non-GAAP ratio excluding acquired loans and fair-value marks was 0.88%. The reported allowance ratio is affected by acquisition accounting.
Material changes, outlook, and risks
- Q2 included $5.87 million of merger expenses; first-half expenses were $6.15 million and cumulative merger-related costs through June 30 were $7.7 million. Costs included systems conversion, change-of-control payments, advisory and professional fees, and integration expenses. The filing says Fauquier-specific post-merger revenue and earnings could not readily be determined.
- The acquisition added $8.53 million of goodwill and an $8.7 million core-deposit intangible. Goodwill was not deemed impaired at June 30; acquired-loan fair values and related estimates remain subject to measurement-period adjustments.
- Management reversed $141,000 of loan-loss provision in Q2, citing less credit deterioration than anticipated, and upgraded economic qualitative reserve factors. It said future reserve needs could rise if recovery weakens or COVID-19 cases disrupt activity.
- COVID-19-related loan deferrals approved totaled $59.7 million; $57.7 million had returned to normal payment schedules by June 30. PPP originations totaled $207.5 million, with $68.8 million still outstanding; PPP loans are government-guaranteed, though eligibility or compliance issues could require additional reserves.
- Management cited continuing uncertainty around the pandemic, employment, inflation, supply chains, interest rates, loan demand, asset quality, and government stimulus. It also warned that Fauquier integration, expected synergies, cost savings, revenue, and customer or employee relationships may not meet expectations. No specific earnings guidance was provided.
- There were $2.28 million of unrealized losses on securities available for sale. Management considered these temporary and not credit-related, and stated it could hold the securities until recovery or maturity.
Most important facts for investors to verify
- Whether post-merger integration delivers the anticipated cost savings and revenue benefits, and how recurring expenses compare after one-time merger costs subside.
- Underlying earnings and margins after considering acquisition effects, loan fair-value accretion, and the company’s non-GAAP merger-cost adjustments.
- Credit performance of acquired loans, the adequacy of the allowance, PPP loan forgiveness and compliance, and any renewed COVID-19-related borrower stress.
- Deposit stability and funding costs, liquidity deployment, and sensitivity of net interest income and securities values to interest-rate changes.
- Capital ratios, goodwill and intangible-asset valuation, and any acquisition measurement-period adjustments or impairment indicators.