Virginia National Bankshares Corp. — 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021; it is not a standalone fourth-quarter report. The company provides community banking and wealth, trust, and investment-management services, primarily in Virginia. On April 1, 2021, it completed its acquisition of Fauquier Bankshares, issuing 2,571,213 shares and combining Fauquier’s bank with Virginia National Bank. The acquisition materially increased the company’s size, so year-over-year comparisons reflect both the merger and underlying performance.
Key financial metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Total assets, year-end | $1.972 billion | $848.4 million |
| Net interest income | $45.0 million; $45.3 million FTE | $23.9 million; $24.0 million FTE |
| Net interest margin, FTE | 2.94% | 3.17% |
| Net income | $10.1 million | $8.0 million |
| Diluted EPS | $2.14 | $2.95 |
| Operating net income excluding merger expenses, non-GAAP | $15.6 million | $8.7 million |
| Operating diluted EPS excluding merger expenses, non-GAAP | $3.32 | $3.21 |
| Cash provided by operating activities | $13.1 million | $9.3 million |
| Cash and cash equivalents, year-end | $508.8 million | $34.7 million |
| Total deposits, year-end | $1.796 billion | $730.8 million |
| Total loans, year-end | $1.061 billion | $609.4 million |
| FHLB borrowings, year-end | None | $30.0 million |
- Revenue and earnings: Net interest income rose substantially, primarily from the acquired loan portfolio and lower deposit funding costs. Noninterest income increased 59.4% to $10.5 million, including growth in wealth and trust fees and performance fees. Noninterest expense more than doubled to $42.5 million, including $7.4 million of merger and related costs and $1.4 million of acquired core-deposit intangible amortization. Net income rose 26.2%, while diluted EPS fell as the share count increased following the stock-funded acquisition and merger costs weighed on reported results.
- Margins and efficiency: FTE net interest margin declined 23 basis points to 2.94%. The FTE efficiency ratio rose to 76.3% from 61.4%, primarily due to merger-related costs. Reported return on average assets was 0.61% and return on average equity was 7.17%; excluding merger expenses, management reported 0.94% and 11.08%, respectively.
- Credit: Provision for loan losses decreased to $1.0 million from $1.6 million. The allowance for loan losses was $6.0 million, or 0.56% of total loans; management said the lower reported ratio reflected acquired loans recorded at fair value without an acquired allowance. Excluding acquired-loan marks, the company reported a 0.95% allowance-to-loans ratio, a non-GAAP measure. Net charge-offs were $485,000, or 0.05% of average loans. Nonaccrual loans were $495,000; loans 90 days past due and still accruing were $801,000.
- Liquidity and funding: Year-end cash and cash equivalents were $508.8 million. Low-cost checking, money-market, and savings accounts represented 91.0% of deposits. The company reported $109.2 million of available borrowing lines and no year-end FHLB advances. The loan-to-deposit ratio was 59.1%. Estimated uninsured deposits were $585.6 million.
- Capital and debt: The Bank’s year-end CET1 and Tier 1 risk-based capital ratios were each 14.15%, total risk-based capital was 14.72%, and leverage was 7.69%; the Bank met the regulatory “well capitalized” thresholds. Year-end junior subordinated debt was $3.4 million, with a rate tied to three-month LIBOR plus 1.70% and maturity in 2036.
Material changes versus the prior comparable period
- The Fauquier acquisition added substantial loans, deposits, securities, employees, branches, and other assets and liabilities. Total loans increased 74.1% and deposits increased 145.8%; these changes are not organic growth alone.
- Average earning assets more than doubled. Despite lower funding costs and higher loan volumes, the FTE margin contracted from 3.17% to 2.94%.
- Merger and merger-related expense increased to $7.4 million from $1.0 million. Management’s non-GAAP exclusions should be considered alongside, not instead of, GAAP results.
- Net unrealized losses on available-for-sale securities widened: at year-end 2021, gross unrealized losses were $4.2 million versus $501,000 a year earlier. The company attributed the losses primarily to higher market interest rates and said it did not intend, and did not expect to be required, to sell the securities before recovery.
- The company prepaid all acquired FHLB advances in the third quarter. A $243,000 prepayment penalty was more than offset by accelerated fair-value-mark accretion, producing a reported net benefit of $173,000.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no formal earnings or financial guidance. Management noted that the Federal Reserve began raising rates in 2022 and that members signaled further increases; it also said a relatively flat yield curve could continue to pressure net interest income. Results remain sensitive to deposit pricing, asset repricing, competition, and customer behavior.
- Credit and COVID-19: Management said credit deterioration had been less severe than anticipated and upgraded certain pandemic-related qualitative allowance factors in 2021. Of $59.0 million in pandemic-related loan deferrals approved cumulatively, $57.8 million had returned to normal payment schedules by year-end. Remaining deferrals were $1.2 million across two government-guaranteed loans. Management cautioned that future deterioration remains possible.
- PPP: The company and Fauquier funded $207.5 million of Paycheck Protection Program loans. About 89.9% of the total dollars had been forgiven by year-end, leaving $20.7 million outstanding. The loans were government-guaranteed; the company noted potential losses if loans were found not to meet program criteria.
- Acquisition and accounting: The merger generated $7.8 million of goodwill and a $9.7 million core deposit intangible. Goodwill was not considered impaired at year-end. Acquisition-date loan valuations and allowance estimates involved significant judgment; these were identified as critical audit matters.
- Subsequent event: In February 2022, the company received a one-time $2.4 million payment to resolve a commercial dispute. The filing does not specify the payment’s income-statement classification or after-tax effect.
- Other risks: Material exposures include commercial real estate and other real-estate-secured lending, interest-rate changes, deposit competition and liquidity, merger integration, cybersecurity and third-party systems, COVID-19-related uncertainty, and the transition away from LIBOR. The company had begun offering SOFR- and prime-linked lending and stopped originating new LIBOR-indexed products.
- Audit and controls: The independent auditor issued an unqualified opinion on the financial statements. The auditor did not attest to internal control over financial reporting; management reported that disclosure controls and internal controls were effective. The auditor highlighted allowance qualitative factors and acquired-loan fair value as critical audit matters.
Important facts for investors to verify
- How much of the reported increase in earnings and revenue reflects the Fauquier acquisition versus ongoing organic performance, and whether anticipated integration savings and benefits are being realized.
- Whether merger-related costs are truly nonrecurring, and the reconciliation and sustainability of management’s non-GAAP earnings measures.
- Credit quality in the acquired and commercial real estate portfolios, subsequent delinquencies, charge-offs, and the adequacy of the allowance—particularly as pandemic relief ends and economic conditions change.
- The sensitivity of net interest income and deposit costs to rate increases, deposit migration, and the shape of the yield curve; also verify the LIBOR fallback arrangements for the subordinated debt and existing contracts.
- The duration and potential capital impact of the $4.2 million unrealized securities losses, and any implications if liquidity needs require securities sales.
- The treatment and after-tax impact of the February 2022 $2.4 million dispute settlement, which the filing describes only as a one-time payment.
- The concentration of uninsured deposits and the availability and collateral requirements of reported backup borrowing capacity.