Virginia National Bankshares Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company provides commercial banking, trust and wealth-management services. Comparisons with Q1 2021 are significantly affected by the Fauquier merger, completed April 1, 2021; Q1 2022 includes Fauquier, while Q1 2021 does not.
Financial performance
| Metric | Q1 2022 | Q1 2021 or prior date |
|---|---|---|
| Net interest income | $11.425 million | $5.974 million |
| Net interest margin, FTE | 2.59% | 2.83% |
| Noninterest income | $4.787 million | $1.039 million |
| Noninterest expense | $10.095 million | $4.781 million |
| Provision for loan losses | $148,000 | $351,000 |
| Net income | $4.924 million | $1.505 million |
| Diluted EPS | $0.92 | $0.55 |
| Return on average assets / equity | 1.03% / 12.53% | 0.68% / 7.40% |
| Cash from operating activities | $9.386 million | $3.186 million |
Net income rose 227% year over year. Net interest income growth primarily reflects the acquired Fauquier business and higher average loan and securities balances. FTE net interest margin declined 24 basis points. The FTE efficiency ratio improved to 62.0% from 67.7%.
Financial condition, liquidity and capital
- Total assets were $1.935 billion at March 31, 2022, down 1.9% from year-end 2021; the year-over-year increase was principally merger-related.
- Loans were $1.007 billion, down $54.2 million, or 5.1%, from December 31, 2021. Deposits were $1.774 billion, down $21.8 million from year-end. Loans were 56.8% of deposits.
- Cash and cash equivalents totaled $480.6 million, including $311.5 million of interest-bearing deposits at other banks and $152.5 million of federal funds sold. Cash and cash equivalents decreased $28.2 million during the quarter. The company reported $9.4 million operating cash inflow, $14.2 million investing outflow and $23.4 million financing outflow.
- Low-cost noninterest-bearing and interest-bearing transaction, money-market and savings deposits were 91.3% of deposits. The company reported no outstanding FHLB advances or balances on its other borrowing lines. Junior subordinated debt was $3.379 million.
- Available-for-sale securities had a fair value of $341.4 million, with $27.7 million in gross unrealized losses. Total shareholders’ equity declined to $146.0 million from $162.0 million at year-end, chiefly reflecting $19.4 million of other comprehensive loss, largely from securities valuation changes.
- The allowance for loan losses was $5.834 million, or 0.58% of loans; excluding acquired loans and their fair-value mark, management reported a non-GAAP ratio of 0.95%. Nonaccrual loans were $518,000. The company and bank reported capital ratios above regulatory minimums; the bank was categorized as well capitalized.
Material changes and unusual items
- Q1 noninterest income included a one-time $2.4 million payment resolving a commercial dispute. The company also reported $685,000 of related expenses, so the payment’s net contribution before tax was not the full $2.4 million.
- Higher noninterest expenses reflect the larger post-merger organization, including salaries, occupancy, data processing, FDIC assessments and $439,000 of core deposit intangible amortization. No merger-related expenses were incurred in Q1 2022, compared with $278,000 in Q1 2021.
- The merger added $7.8 million of goodwill and a core deposit intangible. Acquired loans are carried at acquisition-date fair value, affecting comparisons of loan balances and allowance ratios.
- COVID-19 loan deferrals were negligible: $670,000 at quarter-end, with the remaining deferred loan government-guaranteed. Management said it maintained underwriting standards.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management cautions that Q1 results are not necessarily indicative of full-year results. It cites uncertainty around economic conditions, inflation, labor and supply-chain pressures, interest rates, loan demand, asset quality and the continuing effects of COVID-19. Management says a downturn or renewed pandemic disruption could increase credit losses, compress net interest margin and weaken loan demand or capital.
Management considered the securities’ unrealized losses temporary, attributed them primarily to higher market interest rates, and said it had the ability and intent to hold the securities until recovery or maturity. The filing also notes possible future changes to the allowance and regulatory capital when the company adopts CECL on January 1, 2023; the effect had not yet been estimated. The company was assessing the impact of the LIBOR transition and a recently issued accounting standard on troubled debt restructurings and loan disclosures.
The company reported no material legal proceedings, no material changes to previously disclosed risk factors, effective disclosure controls, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings growth and recurring revenue reflects the Fauquier merger, versus organic performance, and whether merger integration benefits and costs are tracking expectations.
- The sustainability of earnings after excluding the $2.4 million dispute-resolution income and considering the $685,000 associated expense.
- Exposure to rising rates: margin trends, deposit pricing and retention, and the potential realization or recovery of the securities portfolio’s unrealized losses.
- Loan quality and reserve adequacy, including trends in criticized loans, the student-loan portfolio and acquired-loan marks; confirm the expected CECL transition impact when available.
- Liquidity and capital trends, particularly the quarter’s deposit outflows, the large cash position, and the effect of accumulated other comprehensive loss on equity and applicable regulatory measures.