Virginia National Bankshares Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results include the Company, Virginia National Bank, and its wealth-management subsidiaries. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $6.047 | $5.474 | $17.177 | $16.503 |
| Provision for loan losses | $0.224 | $(0.120) recovery | $1.367 | $0.500 |
| Noninterest income | $1.425 | $1.327 | $4.720 | $4.086 |
| Noninterest expense | $4.935 | $4.561 | $13.882 | $13.657 |
| Net income | $1.870 | $1.897 | $5.362 | $5.258 |
| Diluted earnings per share | $0.69 | $0.71 | $1.98 | $1.96 |
- Margins and efficiency: Net interest margin (FTE, non-GAAP) was 3.05% for Q3 and 3.12% for the first nine months, down from 3.54% and 3.66%, respectively, in 2019. FTE efficiency ratio improved to 65.7% for Q3 and 63.1% year to date, from 66.9% and 66.1%.
- Balance sheet at September 30: Assets were $821.0, loans $636.9, securities $144.7, deposits $694.5, and shareholders’ equity $80.5. Since December 31, 2019, assets rose $118.4, loans $97.4, and deposits $73.3. Growth was driven largely by PPP lending and customer deposits.
- Credit reserve and quality: Allowance for loan losses was $5.334, or 0.84% of loans, versus $4.209 (0.78%) at year-end 2019. Nonaccrual loans were $9,000; impaired loans were $2.2. Loans 90 or more days past due and still accruing totaled $61,000.
- Cash flow and liquidity: Nine-month operating cash flow was $6.656; investing used $124.946 and financing provided $110.877. Cash and cash equivalents declined $7.413 to $11.672. The Company reported $40.0 of FHLB advances outstanding, versus none at year-end. It said it maintained access to multiple liquidity sources.
- Capital: Company Tier 1, common equity Tier 1, total capital, and leverage ratios were 14.42%, 14.42%, 15.41%, and 9.41%, respectively. The Bank exceeded regulatory “well capitalized” thresholds.
Material changes versus comparable periods
- Q3 net income decreased 1.4% year over year, while nine-month net income increased 2.0%. Higher credit-loss provisions and expenses offset revenue growth.
- Interest income benefited from greater loan and securities balances, but lower yields—especially on loans—offset much of the volume benefit. Lower deposit costs supported net interest income; FTE net interest margin contracted.
- Nine-month noninterest income rose 15.5%, helped by loan-swap fees and securities gains. Wealth-management fees, deposit and card fees, and bank-owned life insurance earnings declined.
- Q3 noninterest expense included $0.549 of merger-related costs. Year-to-date expense also reflected these costs, partly offset by the absence of the prior-year $0.460 settlement of claims.
- Loans increased 18.1% from year-end, including $84.7 of PPP balances at quarter-end; total PPP originations were $86.9. Low-cost and noninterest-bearing deposits rose as a share of deposits.
Outlook, commentary, risks, and unusual items
- COVID-19: Management cited continuing uncertainty and the possibility of weaker asset quality and higher future provisions if economic effects persist. The Company had approved $58.4 of loan deferrals; $48.9, or 83.8%, had returned to normal payment schedules by September 30. A loss on deferred payments could require reversal of accrued interest.
- Industry exposures: Management identified retail trade and hotels/motels at $13.7 each, wholesale trade at $10.9, arts/entertainment/recreation at $6.5, caterers at $5.3, and full-service restaurants at $2.2. Amounts exclude PPP loans.
- PPP risk: PPP loans are federally guaranteed; however, loans found not to meet SBA program criteria could require additional reserves. Management stated it had performed required due diligence.
- Merger: On October 1, 2020, the Company announced an all-stock merger agreement with Fauquier Bankshares. Fauquier shareholders would receive 0.675 Company shares per share; ownership of the combined company was expected to be approximately 51.4% Company shareholders and 48.6% Fauquier shareholders. Completion remained subject to approvals and other closing conditions.
- Outlook: No quantified earnings or financial guidance was provided. Management said the allowance was adequate at quarter-end but could rise if economic conditions deteriorate. Results for the period are not necessarily indicative of full-year or future results.
- Other items: Management considered the $0.349 of securities unrealized losses temporary and reported no other-than-temporary impairment. There was no OREO at quarter-end. The filing reported no legal proceedings and said disclosure controls were effective.
Important facts for investors to verify
- Merger approvals, closing timetable, integration costs, and whether projected ownership terms change.
- Subsequent performance of deferred loans and COVID-sensitive industries, and any resulting allowance or interest-income effects.
- PPP forgiveness, fee recognition, and any SBA eligibility findings that could affect reserves.
- Deposit stability, FHLB borrowing needs, cash levels, and liquidity under stressed conditions.
- Whether margin pressure, securities gains, loan-swap fees, and other noninterest income trends persist.