Virginia National Bankshares Corporation — Q1 2023 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2023, for Virginia National Bankshares Corporation and its subsidiaries. The Bank provides commercial banking, trust and estate services; Masonry Capital provides investment management. Sturman Wealth Advisors was sold in December 2022, affecting year-over-year comparisons.
Key financial results
| Metric | Q1 2023 | Comparable period / change |
|---|---|---|
| Net interest income | $13.4 million; $13.5 million FTE | $11.4 million GAAP; $11.5 million FTE in Q1 2022 |
| Net interest margin | 3.69%; 3.71% FTE | 2.57%; 2.59% FTE in Q1 2022 |
| Net income | $5.8 million | $4.9 million, up $867,000 |
| Diluted earnings per share | $1.08 | $0.92 in Q1 2022 |
| Return on average assets / equity | 1.48% / 17.57% | 1.03% / 12.53% in Q1 2022 |
| Noninterest income | $2.3 million | $4.8 million, down 52.5% |
| Noninterest expense | $8.9 million | $10.1 million, down 12.2% |
| Efficiency ratio | 56.5%; 56.1% FTE | 62.3%; 62.0% FTE in Q1 2022 |
Financial condition, cash flow and liquidity
- At March 31, total assets were $1.572 billion, down $51.8 million (3.2%) from year-end 2022. Loans, net of allowance, were $932.2 million; deposits were $1.397 billion; and shareholders’ equity was $141.5 million.
- Deposits declined $81.1 million, or 5.5%, from year-end. Noninterest-bearing deposits were $448.1 million (32.1% of deposits); estimated uninsured deposits were $370.6 million (26.5%). Management attributed deposit declines to its 2022 decision to delay raising deposit rates.
- Cash and cash equivalents were $35.3 million, down $4.9 million during the quarter. Operating cash flow was $6.6 million; investing activities provided $51.7 million; financing activities used $63.1 million. Financing cash outflow included a $135.7 million decline in demand, checking, money-market and savings accounts, partly offset by $54.6 million growth in time deposits and $19.3 million of new borrowings.
- Borrowings were $19.3 million at quarter-end, versus none at December 31, 2022. The company reported $405 million of available FHLB credit subject to evaluation and negotiation, a $114 million aggregate of unsecured federal funds lines, and a $4 million secured Federal Reserve discount-window line; the latter facilities had no outstanding balances.
- Regulatory capital ratios were strong: company Tier 1, common equity Tier 1, total capital and leverage ratios were 17.62%, 17.62%, 18.41% and 10.67%, respectively. The Bank also exceeded regulatory “well capitalized” thresholds.
- The company declared cash dividends of $0.33 per share during the quarter. Tangible book value per share, a non-GAAP measure, was $23.89, versus $22.31 at year-end.
Material changes and unusual items
- Net interest income benefited from higher asset yields and a larger average securities portfolio. FTE net interest margin rose 112 basis points year over year. However, interest expense increased about $2.0 million, and the average cost of interest-bearing deposits climbed from 0.29% to 1.09%.
- Q1 2022 noninterest income included $2.4 million from resolution of a commercial dispute, which did not recur. Q1 2023 included a $460,000 gain on termination of an interest-rate swap and a $206,000 loss on sales of available-for-sale securities. The company sold securities with $49.9 million book value to fund operating needs.
- Noninterest expense fell $1.2 million, primarily from lower salaries and benefits associated with reduced headcount and lower professional fees following merger-related efficiencies.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $2.5 million and the reserve for unfunded commitments by approximately $253,000, and reduced opening retained earnings by $1.9 million after tax. The loan allowance was $7.8 million at March 31, compared with $5.6 million at year-end; the periods use different accounting methodologies.
- Loan balances were $940.0 million, up 0.4% from year-end but below $1.007 billion a year earlier. First-quarter organic production of $27.5 million was largely offset by paydowns. Nonaccrual loans increased to $1.2 million from $673,000 at year-end; management reported low overall problem-loan levels.
- Available-for-sale securities had $54.3 million of gross unrealized losses at quarter-end; accumulated other comprehensive loss was $42.9 million. Management attributed the securities losses to higher market interest rates, reported no material credit-loss allowance, and said it could hold the securities until recovery or maturity.
Outlook, commentary and risks
No specific earnings or balance-sheet guidance was provided. Management expects deposit costs to continue rising as competition increases and time deposits reprice; borrowings may remain part of near-term funding. Higher rates may support yields on variable-rate loans and new investments, but management cautioned that the effect on net interest margin depends on loan growth, deposit competition, borrowing needs and rate movements. It also noted that margin could be pressured if rates decline because assets are expected to reprice faster than deposits and borrowings.
Management considered the allowance adequate at March 31 but said it could increase as economic conditions deteriorate. Identified risks include inflation, higher interest rates, recession and local real-estate declines, borrower financial condition, deposit and loan competition, securities values, credit-loss estimates, cybersecurity and technology risks. The filing reported no material changes to previously disclosed risk factors, no legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether deposit outflows continue, and how the company’s deposit pricing affects retention, funding costs and use of borrowings.
- Whether margin expansion persists as deposit costs rise and loans and securities reprice.
- Credit quality trends, including nonaccrual loans, commercial real-estate exposure and the adequacy of the CECL allowance under changing economic forecasts.
- The liquidity and capital implications of the securities portfolio’s unrealized losses, including whether securities must be sold before recovery.
- The sustainability of earnings after accounting for the prior-year commercial-dispute gain and the current-period swap-termination gain and securities-sale loss.