Virginia National Bankshares Corp annual report, FY2020

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

MetricFY2020 / year-endComparison
Net income$8.0 million; $2.94 per diluted shareUp 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 millionIncome rose 18.3%; expense rose 5.0%
Provision for loan losses$1.6 millionUp from $1.4 million in 2019
Total assets$848.4 millionUp from $702.6 million
Loans / deposits$609.4 million / $730.8 millionLoans up 13.0%; deposits up 17.6%
Shareholders’ equity$82.6 millionUp from $76.1 million
Cash flowOperating +$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 linesNo 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

  1. Track post-deferral borrower performance, criticized and delinquent loans, and any later allowance changes as COVID relief winds down.
  2. Review PPP loan forgiveness, fee recognition and any SBA guarantee or servicing issues.
  3. Reconcile the filing’s separate commercial real estate exposure figures and assess the portfolio’s local-market concentration.
  4. Confirm the Fauquier merger’s final approval, closing, integration costs, expected benefits and resulting capital and ownership structure.
  5. Monitor margin sensitivity to interest rates, the LIBOR transition, liquidity availability and the sustainability of the $1.20 annual dividend.