Virginia National Bankshares Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in millions unless otherwise noted. Comparisons are affected by the April 1, 2021 acquisition of Fauquier Bankshares; 2021 includes its results only from the acquisition date, so growth does not represent purely organic change.
Business context and material changes
The company provides commercial banking and wealth, trust and investment management services through Virginia National Bank and its subsidiaries. It completed the Fauquier merger for approximately $78.0 million in stock consideration, issuing 2.57 million shares. The acquired business added substantial assets, loans, deposits, goodwill and core-deposit intangibles. Merger-related expenses were $1.9 million in Q3 and $8.1 million for the first nine months.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $13.5 | $6.0 | $32.6 | $17.2 |
| Net interest margin, FTE | 3.08% | 3.05% | 3.03% | 3.12% |
| Noninterest income | $3.5 | $1.4 | $7.4 | $4.7 |
| Noninterest expense | $12.8 | $4.9 | $33.6 | $13.9 |
| Provision for loan losses | $0.3 | $0.2 | $0.5 | $1.4 |
| Net income | $3.1 | $1.9 | $4.8 | $5.4 |
| Diluted EPS | $0.59 | $0.69 | $1.07 | $1.98 |
| Efficiency ratio, FTE | 75.2% | 65.7% | 83.5% | 63.1% |
Q3 net income rose 68%, while diluted EPS declined as the merger increased shares outstanding. Management’s non-GAAP results excluding merger costs were $4.6 million, or $0.86 diluted EPS, for Q3 and $11.0 million, or $2.45 diluted EPS, year to date. These adjusted figures are not GAAP measures. Fee income growth reflected the combined company; Q3 “other” income also included partial recoveries related to student-loan insurance and previously charged-off Fauquier loans. No securities were sold in 2021, compared with gains on sales in 2020.
Financial position, cash flow and liquidity
- At September 30, total assets were $1.912 billion, loans $1.112 billion, deposits $1.737 billion and shareholders’ equity $159.9 million. Loans and deposits rose sharply from year-end, primarily because of the Fauquier acquisition.
- Cash and cash equivalents were $425.5 million, including $254.2 million in interest-bearing deposits at other banks and $152.4 million of federal funds sold. Available-for-sale securities were $277.0 million.
- For the first nine months, operating cash flow was $7.1 million, investing cash flow was positive $242.3 million and financing cash flow was positive $141.5 million. Cash and cash equivalents increased $390.8 million to $425.5 million. The acquisition and resulting balance-sheet changes materially affect these flows.
- The company had no FHLB advances outstanding at quarter-end after repaying them during Q3; it recorded $3.4 million of junior subordinated debt and $7.5 million of lease liabilities. A $60 million off-balance-sheet letter of credit was outstanding. Other listed borrowing facilities had no outstanding balances.
- 90.5% of deposits were noninterest-bearing or low-cost transaction, money-market and savings balances. Loans were 64.0% of deposits. The company and bank reported regulatory capital ratios above applicable minimums; the bank met the “well capitalized” thresholds.
Credit, outlook, risks and unusual items
- The allowance for loan losses was $5.6 million, or 0.51% of total loans; excluding acquired loans and their fair-value mark, management reported a non-GAAP ratio of 0.90%. The acquired portfolio was recorded at fair value without carrying forward Fauquier’s prior allowance.
- Nonaccrual loans totaled $777,000. COVID-related loan deferrals were $1.2 million across three loans, almost all government-guaranteed. PPP loans totaled $36.7 million outstanding at September 30; the company had originated $207.5 million in total, with most forgiven.
- Management said credit deterioration from the pandemic had been less than previously expected and had released some pandemic-related reserves in Q2; it made no further economic-factor adjustment in Q3. It cautioned that renewed pandemic disruption or weaker economic conditions could increase future credit losses and provisions.
- Management cited uncertainty around the economic recovery, employment, inflation, supply chains, interest rates, loan demand and asset quality. It also warned that merger synergies may not be fully realized and integration could be more costly, difficult or disruptive than expected. No specific earnings guidance was provided.
- Available-for-sale securities had $2.4 million of unrealized losses; management attributed them to market interest rates and considered them temporary, with no impairment loss recognized. Goodwill of $8.9 million was not deemed impaired at quarter-end.
- The company identified allowance estimates, acquisition accounting and acquired-loan cash-flow estimates among significant judgment areas. It was assessing expected-credit-loss standard adoption, required for it after December 15, 2022, and its transition away from LIBOR.
Important facts for investors to verify
- How much post-merger revenue and earnings growth is recurring and organic, versus acquired or driven by purchase-accounting accretion, recoveries and other unusual items.
- Whether integration costs, the elevated efficiency ratio and core-deposit intangible amortization decline as expected; no formal expense or synergy guidance is stated.
- Credit quality in acquired loans, commercial real estate and purchased student loans, and the adequacy of the allowance as pandemic support measures end.
- Deposit stability, deployment of substantial cash balances, net interest margin sensitivity to changing rates, and the effect of repaid FHLB borrowing.
- Whether acquired-loan fair values, goodwill and intangible-asset estimates change during the acquisition measurement period, and the impact of future credit-loss accounting adoption.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no legal proceedings or material changes to previously disclosed risk factors.