Business context and reporting period
Virginia National Bankshares Corporation is a Virginia-based bank holding company operating Virginia National Bank and wealth, trust and investment-management businesses. This Form 10-K covers the fiscal year ended December 31, 2020; it reports annual results, not a standalone fourth-quarter period. The bank primarily serves Charlottesville, Albemarle County, Winchester and Richmond-area markets.
Financial results and position
| Metric | FY2020 / year-end | Comparison |
|---|---|---|
| Net income | $8.0 million; $2.94 per diluted share | Up 19.3% from $6.7 million; $2.49 per diluted share in 2019 |
| Net interest income | $23.9 million GAAP; $24.0 million fully taxable-equivalent (FTE) | GAAP up $2.0 million; FTE net interest margin fell to 3.17% from 3.57% |
| Noninterest income / expense | $6.6 million / $18.8 million | Income rose 18.3%; expense rose 5.0% |
| Provision for loan losses | $1.6 million | Up from $1.4 million in 2019 |
| Total assets | $848.4 million | Up from $702.6 million |
| Loans / deposits | $609.4 million / $730.8 million | Loans up 13.0%; deposits up 17.6% |
| Shareholders’ equity | $82.6 million | Up from $76.1 million |
| Cash flow | Operating +$9.3 million; investing −$129.9 million; financing +$136.3 million; cash and equivalents increased $15.6 million to $34.7 million | — |
| Borrowings and liquidity | $30.0 million in FHLB advances; $78.9 million in available borrowing lines | No FHLB advances outstanding at year-end 2019 |
Profit growth was supported by higher net interest and noninterest income. Average earning assets increased 22.8%, while lower deposit costs helped offset falling asset yields. The FTE efficiency ratio improved to 61.4% from 64.9%. Net interest margin declined as earning-asset yields fell; management said a relatively flat yield curve could continue to pressure net interest income in 2021.
Material changes and credit
- FY2020 loan growth included $86.9 million of PPP originations, with $54.2 million outstanding at year-end, net of deferred fees. PPP fees contributed $2.1 million of reported income. Organic, non-PPP loans also grew by $42.4 million.
- Deposits rose substantially, particularly noninterest-bearing and low-cost accounts. The loan-to-deposit ratio improved to 83.4% from 86.9%.
- The allowance for loan losses rose to $5.5 million, or 0.90% of loans (0.98% excluding PPP loans), from $4.2 million, or 0.78%. Net charge-offs declined to $376,000 from $2.1 million. Nonaccrual loans were $8,000 versus $299,000.
- Real-estate-secured loans were 67.3% of the portfolio. Commercial real estate mortgage loans totaled $282.8 million. The filing separately cites $204.1 million of commercial real estate credit exposure; the definitions are not clearly reconciled in the provided text.
- Available-for-sale securities increased to $174.1 million from $114.0 million; the company recorded $743,000 in gains on securities sales and calls.
Outlook, risks, contingencies and unusual items
- COVID-19 created uncertainty around borrower repayment, collateral values, credit-loss estimates and future margins. The company downgraded economic qualitative factors in its loan-loss model in the first half of 2020 and made no further such downgrades in the second half.
- Of $59.0 million in pandemic-related loan deferrals approved, $55.7 million had returned to normal payment schedules by year-end; $3.3 million remained deferred, including $2.8 million guaranteed by the USDA. Management cautioned that deterioration could emerge as relief ends.
- The company incurred $988,000 of proposed-merger expenses in 2020 and approximately $185,000 of direct COVID-related expenses. Merger-adjusted operating returns are presented as non-GAAP measures.
- The proposed all-stock merger with Fauquier Bankshares would exchange 0.675 Virginia National shares per Fauquier share; existing Virginia National shareholders were expected to own approximately 51.4% of the combined company. Shareholder approvals and other closing conditions remained outstanding when the filing was signed; votes were scheduled for March 25, 2021.
- Key risks include COVID-related credit stress, real-estate and commercial-loan concentrations, interest-rate and LIBOR transition risk, competition, cybersecurity and third-party service disruptions, and merger completion and integration. The company reported $128.1 million of unfunded lines, ACH authorizations and letters of credit, plus $4.0 million of commitment letters; it did not anticipate material losses from these commitments. Management said ordinary-course legal proceedings were not expected, in aggregate, to have a material adverse effect.
- The company paid $1.20 per share in cash dividends during 2020. The board may change or suspend dividends, and payment depends in part on regulatory limits and bank subsidiary distributions.
- The independent auditor gave an unqualified opinion on the financial statements. The allowance for loan losses’ qualitative factors were identified as a critical audit matter. The auditor did not provide an opinion on internal-control effectiveness; management reported disclosure controls and internal controls over financial reporting were effective.
Important facts for investors to verify
- Track post-deferral borrower performance, criticized and delinquent loans, and any later allowance changes as COVID relief winds down.
- Review PPP loan forgiveness, fee recognition and any SBA guarantee or servicing issues.
- Reconcile the filing’s separate commercial real estate exposure figures and assess the portfolio’s local-market concentration.
- Confirm the Fauquier merger’s final approval, closing, integration costs, expected benefits and resulting capital and ownership structure.
- Monitor margin sensitivity to interest rates, the LIBOR transition, liquidity availability and the sustainability of the $1.20 annual dividend.