Virginia National Bankshares (VABK) - 2024 Q2 - Quarterly Results

Executive Summary The company reported reduced net income and EPS for Q2 and YTD 2024, offset by strong loan growth, solid credit quality, and robust capital Earnings Announcement and Key Highlights Net income and diluted EPS declined in Q2 and YTD 2024 due to higher cost of funds and lower credit mark accretion, despite strong loan growth and capital Net Income and Diluted EPS (Q2 & YTD 2024 vs. 2023) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :--------------------- | :------------ | :------------ | :------------ | :------------ | | Net Income | $4.2 million | $5.7 million | $7.8 million | $11.4 million | | Diluted EPS | $0.77 | $1.05 | $1.45 | $2.13 | - Declines in 2024 net income for both quarterly and year-to-date periods are attributed to increased cost of funds and significantly lower accretion of the credit mark related to purchased loans compared to 2023[3] - Loan balances increased 6% in the first half of 2024 and 19% year-over-year, with credit quality metrics remaining solid. Capital and liquidity positions are strong and stable[3] - Virginia National Bankshares Corporation has been included again in the Russell 2000 index, which is expected to enhance stock liquidity[3] Financial Performance Overview The company experienced a decline in net income and EPS, but key performance ratios showed mixed trends with some improvements from Q4 2023 Net Income and Earnings Per Share The Company's net income and diluted earnings per share saw a decrease in both the second quarter and year-to-date periods of 2024 compared to 2023, reflecting a challenging interest rate environment Net Income and Diluted EPS (Q2 & YTD 2024 vs. 2023) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :--------------------- | :------------ | :------------ | :------------ | :------------ | | Net Income | $4,159 | $5,651 | $7,805 | $11,442 | | Diluted EPS | $0.77 | $1.05 | $1.45 | $2.13 | Key Performance Ratios Key performance indicators showed mixed trends in Q2 2024. Return on average assets and equity improved from Q4 2023, as did the net interest margin and efficiency ratio. The loan-to-deposit ratio also increased, while capital ratios remained strong Key Performance Ratios (Q2 2024 vs. Q4 2023) | Metric | Q2 2024 | Q4 2023 | | :-------------------------- | :-------- | :-------- | | Return on average assets | 1.05% | 0.79% | | Return on average equity | 11.07% | 9.03% | | Net interest margin (FTE) | 3.04% | 2.89% | | Loan-to-deposit ratio | 84.3% | 77.5% | | Efficiency ratio (FTE) | 62.7% | 64.0% | Capital Ratios (Q2 2024 vs. Q2 2023) | Metric | Q2 2024 | Q2 2023 | | :-------------------------- | :-------- | :-------- | | Tier 1 leverage ratio | 11.47% | 11.20% | | Total risk-based capital ratio | 18.64% | 18.80% | Balance Sheet Highlights The company achieved significant loan growth and reduced borrowings, while deposits saw a slight decrease from year-end 2023 Loans and Deposits The Company experienced continued loan growth in Q2 2024, with gross loans increasing significantly year-over-year. Total deposits saw a slight decrease from December 2023 but an increase year-over-year, with a notable portion held in Insured Cash Sweep (ICS) plans Gross Loans Outstanding | Date | Amount ($ millions) | | :------------- | :------------------ | | June 30, 2024 | $1,200 | | Dec 31, 2023 | $1,134.5 | | June 30, 2023 | $1,015.1 | | Change: | | | vs. Dec 31, 2023 | +$65.5 (+6.0%) | | vs. June 30, 2023 | +$184.9 (+19.0%) | Total Deposits | Date | Amount ($ millions) | | :------------- | :------------------ | | June 30, 2024 | $1,373.8 | | Dec 31, 2023 | $1,409.1 | | June 30, 2023 | $1,348.1 | | Change: | | | vs. Dec 31, 2023 | -$35.3 (-2.5%) | | vs. June 30, 2023 | +$25.8 (+1.9%) | - Deposit balances held in Insured Cash Sweep (ICS) plans amounted to $144.8 million as of June 30, 2024[5] Securities and Borrowings Securities balances declined as funds were repurposed to higher-yielding assets and to reduce outstanding borrowings. The Company significantly reduced its outstanding borrowings and maintains substantial unused borrowing facilities Total Securities | Date | Amount ($ thousands) | | :------------- | :------------------- | | June 30, 2024 | $291,365 | | Dec 31, 2023 | $428,980 | | June 30, 2023 | $481,306 | | Change: | | | vs. Dec 31, 2023 | -$137,615 | Outstanding Borrowings | Date | Amount ($ thousands) | | :------------- | :------------------- | | June 30, 2024 | $30,000 | | Dec 31, 2023 | $66,500 | | June 30, 2023 | $59,666 | | Change: | |\ | vs. Dec 31, 2023 | -$36,500 (-54.9%) | | vs. June 30, 2023 | -$29,666 (-49.7%) | - The Company had unused borrowing facilities of approximately $196.7 million as of June 30, 2024[9] Net Interest Income Analysis Net interest income decreased year-over-year due to higher funding costs, though net interest margin improved quarter-over-quarter Net Interest Income and Margin Net interest income decreased year-over-year in Q2 2024, primarily due to higher interest expense on deposits and borrowings. However, the net interest margin (FTE) improved quarter-over-quarter, driven by an increase in loan yields Net Interest Income | Period | Amount ($ thousands) | | :--------------- | :------------------- | | Q2 2024 | $11,181 | | Q2 2023 | $13,703 | | Change (YoY): | -$2,522 (-18.4%) | Net Interest Margin (FTE) | Period | Rate | | :--------------- | :-------- | | Q2 2024 | 3.04% | | Q4 2023 | 2.89% | | Q2 2023 | 3.83% | - The increase in net interest margin compared to Q4 2023 was primarily due to an increase in yield on loans from 5.47% to 5.71%[11] Yields and Cost of Funds Loan yields decreased year-over-year, partly due to lower accretion of the credit mark on purchased loans. The overall cost of funds and cost of interest-bearing deposits increased significantly year-over-year but showed signs of stabilization in the first half of 2024 Yield on Loans | Period | Rate | | :--------------- | :-------- | | Q2 2024 | 5.71% | | Q2 2023 | 6.35% | | YTD 2024 | 5.67% | | YTD 2023 | 5.96% | Overall Cost of Funds | Period | Rate | | :--------------- | :-------- | | Q2 2024 | 210 bps | | Q2 2023 | 133 bps | | Change (YoY): | +77 bps | - The accretion of the credit mark related to purchased loans positively impacted interest income by 31 bps in Q2 2024, down from 88 bps in Q2 2023[11] Noninterest Income and Expense Noninterest income decreased, while noninterest expense also declined, reflecting cost management efforts Noninterest Income Noninterest income decreased in Q2 2024 compared to the prior year, primarily driven by lower fees from wealth management, deposit accounts, debit/credit cards, and ATMs Total Noninterest Income | Period | Amount ($ thousands) | | :--------------- | :------------------- | | Q2 2024 | $1,691 | | Q2 2023 | $2,045 | | Change (YoY): | -$354 (-17.3%) | - The decrease was primarily due to lower wealth management, deposit account, debit card, credit card, and ATM fees[13] Noninterest Expense Noninterest expense decreased in Q2 2024 compared to the prior year, mainly due to reductions in compensation, occupancy, data processing, and marketing costs, reflecting efforts to right-size the branch network post-merger Total Noninterest Expense | Period | Amount ($ thousands) | | :--------------- | :------------------- | | Q2 2024 | $8,122 | | Q2 2023 | $8,564 | | Change (YoY): | -$442 (-5.2%) | - The decrease was primarily a result of lower compensation, occupancy, and data processing costs due to branch network right-sizing from the merger, and reduced marketing, advertising, and promotion expense[34] Asset Quality Nonperforming assets increased, but the Allowance for Credit Losses decreased due to a rise in government-guaranteed loans Nonperforming Assets Nonperforming assets (NPA) and non-accrual loans increased as of June 30, 2024, compared to prior periods. However, a significant portion of past due loans are government-guaranteed, mitigating some risk Nonperforming Assets (NPA) | Date | Amount ($ thousands) | | :------------- | :------------------- | | June 30, 2024 | $4,000 | | Dec 31, 2023 | $2,700 | | June 30, 2023 | $1,300 | | NPA as % of total assets: | | | June 30, 2024 | 0.25% | | Dec 31, 2023 | 0.17% | | June 30, 2023 | 0.08% | Non-accrual Loans | Date | Amount ($ thousands) | | :------------- | :------------------- | | June 30, 2024 | $2,400 | | Dec 31, 2023 | $1,900 | | June 30, 2023 | $1,200 | - Loans 90 days or more past due and still accruing interest amounted to $1.6 million as of June 30, 2024, with $1.5 million being 100% government-guaranteed[10] Allowance for Credit Losses The Allowance for Credit Losses (ACL) as a percentage of total loans decreased, primarily driven by the proportionate increase in government-guaranteed loans, which do not require an ACL. The Company recorded a net recovery of provision for credit losses in Q2 2024 Allowance for Credit Losses (ACL) as % of Total Loans | Date | Rate | | :------------- | :-------- | | June 30, 2024 | 0.69% | | Dec 31, 2023 | 0.77% | | June 30, 2023 | 0.81% | - The decrease in ACL as a percentage of total loans is due to the increase in government-guaranteed loans, which do not require an ACL[10] - For Q2 2024, the Company recorded a net recovery of provision for credit losses of $338 thousand, primarily from a previously charged-off loan[10] Capital and Shareholder Returns Book value per share increased, and the company continued its dividend payments and share repurchase program Book Value Book value per share and tangible book value per share both increased year-over-year, supported by retained income and stable unrealized losses in the investment portfolio Book Value Per Share | Date | Amount ($) | | :------------- | :--------- | | June 30, 2024 | $28.70 | | June 30, 2023 | $26.54 | Tangible Book Value Per Share (Non-GAAP) | Date | Amount ($) | | :------------- | :--------- | | June 30, 2024 | $26.43 | | June 30, 2023 | $24.01 | Dividends and Share Repurchase The Company declared and paid cash dividends and continued its share repurchase plan during Q2 2024, repurchasing shares at an average price of $27.32 Cash Dividends Declared and Paid (Q2 2024) | Metric | Amount ($) | | :------------- | :----------- | | Total Dividends | $1.8 million | | Per Share | $0.33 | Share Repurchase Activity (Q2 & YTD 2024) | Period | Shares Repurchased | Average Price Per Share ($) | | :------------- | :----------------- | :-------------------------- | | Q2 2024 | 19,476 | $27.32 | | Year-to-date | 20,350 | $27.42 | Income Taxes Effective tax rates remained below the statutory rate due to tax credits and tax-exempt income Effective Tax Rates The effective tax rates for Q2 2024 and Q2 2023 were lower than the statutory rate, primarily due to the recognition of low-income housing tax credits and tax-exempt income from municipal bonds and bank-owned life insurance policies Effective Tax Rates | Period | Rate | | :----- | :---- | | Q2 2024 | 18.3% | | Q2 2023 | 18.4% | - The lower effective tax rates are due to low-income housing tax credits and tax-exempt income from municipal bonds and bank-owned life insurance policies[14] Company Information This section provides an overview of the company, its services, stock listing, and important disclaimers regarding financial reporting About Virginia National Bankshares Corporation Virginia National Bankshares Corporation is the bank holding company for Virginia National Bank, offering a full range of banking and financial services through its offices in Virginia. Its common stock trades on the Nasdaq Capital Market under 'VABK' - Virginia National Bankshares Corporation is headquartered in Charlottesville, Virginia, and operates nine banking offices in Fauquier and Prince William counties, three in Charlottesville and Albemarle County, and offices in Winchester and Richmond, Virginia[16] - The Bank offers a full range of banking and related financial services to individuals, businesses, and charitable organizations, including fiduciary services through VNB Trust and Estate Services[16] - The Company's common stock trades on the Nasdaq Capital Market under the symbol 'VABK'[16] Non-GAAP Financial Measures The Company uses certain non-GAAP financial measures to supplement the evaluation of its performance, believing they provide useful supplemental information for understanding core business operating results, while cautioning they should not substitute GAAP results - Management uses non-GAAP measures to supplement GAAP for evaluating performance and understanding core business operating results[17] - Non-GAAP disclosures should not be viewed as a substitute for or more important than GAAP results, nor are they necessarily comparable to non-GAAP measures presented by other companies[17] Forward-Looking Statements The release contains forward-looking statements subject to various risks and uncertainties, including economic conditions, interest rates, regulatory changes, and market disruptions, which could cause actual results to differ materially from expectations - Statements in the release may contain forward-looking statements, characterized by words like 'expect,' 'believe,' 'estimate,' 'project,' 'anticipate,' 'intend,' 'will,' 'should,' or similar meanings[40] - Actual results may differ materially due to factors such as inflation, interest rates, market fluctuations, liquidity, capital requirements, economic conditions, regulatory changes, and cybersecurity threats[40] Consolidated Financial Statements This section presents the company's detailed balance sheets, income statements, and average balance data Consolidated Balance Sheets The consolidated balance sheets provide a snapshot of the Company's financial position, showing total assets, liabilities, and shareholders' equity as of June 30, 2024, December 31, 2023, and June 30, 2023 Consolidated Balance Sheet Summary ($ thousands) | Metric | June 30, 2024 | Dec 31, 2023 | June 30, 2023 | | :------------------------- | :------------ | :------------ | :------------ | | Total Assets | $1,573,820 | $1,646,017 | $1,584,088 | | Total Liabilities | $1,419,656 | $1,492,977 | $1,441,649 | | Total Shareholders' Equity | $154,164 | $153,040 | $142,439 | Consolidated Statements of Income The consolidated statements of income detail the Company's revenues and expenses, leading to net income for the three and six months ended June 30, 2024 and 2023 Consolidated Statements of Income Summary ($ thousands) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :------------------------- | :------------ | :------------ | :------------ | :------------ | | Total Interest & Dividend Income | $18,663 | $18,332 | $37,223 | $34,702 | | Total Interest Expense | $7,482 | $4,629 | $15,106 | $7,586 | | Net Interest Income | $11,181 | $13,703 | $22,117 | $27,116 | | Total Noninterest Income | $1,691 | $2,045 | $3,869 | $4,321 | | Total Noninterest Expense | $8,122 | $8,564 | $16,941 | $17,425 | | Net Income | $4,159 | $5,651 | $7,805 | $11,442 | Average Balances, Income and Expenses, Yields and Rates This section provides a detailed breakdown of average balances for interest-earning assets and interest-bearing liabilities, along with their corresponding interest income/expense and average yields/costs for the three and six months ended June 30, 2024 and 2023 Average Balances, Income, Yields & Rates (Q2 2024 vs. Q2 2023) ($ thousands) | Metric | Q2 2024 Average Balance | Q2 2024 Interest Income/Expense | Q2 2024 Average Yield/Cost | Q2 2023 Average Balance | Q2 2023 Interest Income/Expense | Q2 2023 Average Yield/Cost | | :------------------------- | :---------------------- | :------------------------------ | :------------------------- | :---------------------- | :------------------------------ | :------------------------- | | Total Earning Assets | $1,491,821 | $18,750 | 5.06% | $1,443,048 | $18,418 | 5.12% | | Total Interest-Bearing Liabilities | $1,063,413 | $7,482 | 2.83% | $981,361 | $4,629 | 1.89% | | Net Interest Income (FTE) | | $11,268 | | | $13,789 | | | Interest Rate Spread | | | 2.23% | | | 3.23% | | Cost of Funds | | | 2.10% | | | 1.33% | | Net Interest Margin (FTE) | | | 3.04% | | | 3.83% | Average Balances, Income, Yields & Rates (YTD 2024 vs. YTD 2023) ($ thousands) | Metric | YTD 2024 Average Balance | YTD 2024 Interest Income/Expense | YTD 2024 Average Yield/Cost | YTD 2023 Average Balance | YTD 2023 Interest Income/Expense | YTD 2023 Average Yield/Cost | | :------------------------- | :----------------------- | :------------------------------- | :-------------------------- | :----------------------- | :------------------------------- | :-------------------------- | | Total Earning Assets | $1,502,882 | $37,397 | 5.00% | $1,459,051 | $34,877 | 4.82% | | Total Interest-Bearing Liabilities | $1,072,704 | $15,106 | 2.83% | $977,972 | $7,586 | 1.56% | | Net Interest Income (FTE) | | $22,291 | | | $27,291 | | | Interest Rate Spread | | | 2.17% | | | 3.26% | | Cost of Funds | | | 2.11% | | | 1.08% | | Net Interest Margin (FTE) | | | 2.98% | | | 3.77% | Reconciliation of Non-GAAP Financial Measures This section reconciles GAAP to non-GAAP measures, providing additional insights into financial performance Non-GAAP Reconciliations This section provides reconciliations of various GAAP financial measures to their non-GAAP fully tax-equivalent (FTE) counterparts and tangible book value per share, offering a clearer view of operational efficiency and underlying financial performance Net Interest Income (FTE) Reconciliation ($ thousands) | Metric | Q2 2024 | Q1 2024 | Q4 2023 | Q3 2023 | Q2 2023 | | :-------------------------- | :------------ | :------------ | :------------ | :------------ | :------------ | | Net interest income (GAAP) | $11,181 | $10,936 | $10,753 | $11,100 | $13,703 | | FTE adjustment | $87 | $87 | $86 | $87 | $86 | | Net interest income (FTE) | $11,268 | $11,023 | $10,839 | $11,187 | $13,789 | Efficiency Ratio (FTE) Reconciliation | Metric | Q2 2024 | Q1 2024 | Q4 2023 | Q3 2023 | Q2 2023 | | :-------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Efficiency ratio (GAAP) | 63.1% | 67.2% | 64.4% | 60.7% | 54.4% | | FTE adjustment | -0.4% | -0.4% | -0.4% | -0.4% | -0.3% | | Efficiency ratio (FTE) | 62.7% | 66.8% | 64.0% | 60.3% | 54.1% | Tangible Book Value Per Share Reconciliation ($) | Metric | Q2 2024 | Q1 2024 | Q4 2023 | Q3 2023 | Q2 2023 | | :-------------------------- | :------ | :------ | :------ | :------ | :------ | | Book value per share | $28.70 | $28.31 | $28.52 | $25.29 | $26.54 | | Impact of intangible assets | (2.27) | (2.32) | (2.40) | (2.46) | (2.53) | | Tangible book value per share (non-GAAP) | $26.43 | $25.99 | $26.12 | $22.83 | $24.01 |