Virginia National Bankshares (VABK) - 2019 Q4 - Annual Report

Part I Business Virginia National Bankshares Corporation is a bank holding company providing comprehensive banking services primarily in Virginia communities - The Company is a bank holding company incorporated in Virginia, with its main operating subsidiary being Virginia National Bank, a national banking association established in 1998[10][12] - The Bank offers a comprehensive suite of financial services, including various deposit accounts, commercial and consumer loans, and wealth management services[17][18][19] - The Company operates in a highly competitive financial services market, facing competition from other commercial banks, credit unions, and non-banking enterprises[22][23][25] - As of December 31, 2019, the Company had 97 full-time equivalent employees[82] Supervision and Regulation The Company and its subsidiary bank are extensively regulated by federal and state authorities and exceeded all minimum capital requirements as of year-end 2019 - The Company is regulated as a bank holding company by the Federal Reserve and the Virginia State Corporation Commission (SCC), while the Bank is supervised by the Office of the Comptroller of the Currency (OCC)[27][39] - The Bank is subject to the Community Reinvestment Act (CRA) and received a "satisfactory" rating in its most recent examination[59] - The Bank is subject to numerous consumer protection laws, with oversight from the OCC and rules enacted by the Consumer Financial Protection Bureau (CFPB)[67] Capital Ratios as of December 31, 2019 | Ratio | Company | Bank | Minimum Requirement (with buffer) | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 14.28% | 14.18% | 7.0% | | Tier 1 Capital | 14.28% | 14.18% | 8.5% | | Total Capital | 15.08% | 14.98% | 10.5% | | Leverage Ratio | 10.81% | 10.73% | 4.0% | Risk Factors This section is not required for the registrant - Not required[84] Unresolved Staff Comments The company reports no unresolved staff comments - None[84] Properties The Company operates five full-service banking facilities in Charlottesville, Winchester, and Albemarle County through a mix of owned and leased properties - The Company occupies five full-service banking facilities in Charlottesville, Winchester, and Albemarle County[84] - The main office, operations center, and headquarters for its wealth management divisions are located at 404 People Place, Charlottesville, Virginia[84] - The main office building was constructed by the Bank on a pad site leased from an entity managed by a director of the Company[85] Legal Proceedings The Company is involved in ordinary course legal proceedings that are not expected to have a material adverse effect on its financial condition - In the ordinary course of operations, the Company and its subsidiaries are parties to various legal proceedings which management believes will not have a material adverse effect[89] Mine Safety Disclosures This section is not applicable to the registrant - Not applicable[90] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock trades on the OTCQX, with details on share count, dividends, and historical pricing provided - The Company's common stock is quoted on the OTCQX under the symbol VABK, with 2,692,005 shares outstanding as of December 31, 2019[92] - The Company's Board of Directors declared 5% stock dividends in both 2019 (paid July 5) and 2018 (paid April 13)[95] Quarterly Stock Performance and Dividends (2019 vs. 2018) | Quarter | 2019 High Bid | 2019 Low Bid | 2019 Dividend | 2018 High Bid | 2018 Low Bid | 2018 Dividend | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | First | $37.38 | $32.81 | $0.30 | $42.00 | $39.00 | $0.19 | | Second | $37.21 | $35.90 | $0.30 | $48.00 | $41.15 | $0.30 | | Third | $37.06 | $35.77 | $0.30 | $49.00 | $45.30 | $0.30 | | Fourth | $37.69 | $37.07 | $0.30 | $46.05 | $34.50 | $0.30 | | Total | | | $1.20 | | | $1.09 | Selected Financial Data This section is not required for the registrant - Not required[99] Management's Discussion and Analysis of Financial Condition and Results of Operations The analysis reveals a decrease in 2019 net income due to higher expenses and lower net interest income, despite growth in assets and deposits Results of Operations Net income decreased by 21.0% in 2019 to $6.7 million, driven primarily by increased noninterest expense and reduced net interest income - The $1.8 million decrease in net income from 2018 to 2019 was primarily driven by a $1.9 million increase in noninterest expense and a $972,000 decrease in net interest income[112] Key Performance Ratios (2019 vs. 2018) | Ratio | 2019 | 2018 | | :--- | :--- | :--- | | Return on average assets | 1.02% | 1.33% | | Return on average equity | 8.99% | 12.39% | | Efficiency ratio (FTE) | 64.90% | 56.16% | Balance Sheet Analysis Total assets grew to $702.6 million, supported by an 8.5% increase in deposits, while the loan portfolio saw slight growth - The loan portfolio totaled $539.5 million at year-end 2019, a slight increase of $2.3 million from 2018, with growth in real estate mortgage loans[156][162][163] - The allowance for loan losses as a percentage of total loans was 0.78% at December 31, 2019, compared to 0.91% at December 31, 2018[133] - Total deposits grew by $48.7 million (8.5%) to $621.2 million in 2019, primarily due to growth in interest-bearing transaction and money market accounts[189][190] Balance Sheet Highlights (December 31) | (in millions) | 2019 | 2018 | | :--- | :--- | :--- | | Total Assets | $702.6 | $644.8 | | Total Securities | $115.7 | $63.1 | | Net Loans | $535.3 | $532.3 | | Total Deposits | $621.2 | $572.5 | | Total Shareholders' Equity | $76.1 | $70.7 | Asset/Liability Management The Company manages interest rate risk through an asset-sensitive balance sheet and maintains strong liquidity and capital positions - The Company's balance sheet is asset-sensitive, with income simulation modeling showing that a 100 basis point rate increase would increase net interest income by 2.64%[205][211] - Primary liquidity is sourced from customer deposits, with secondary sources including $89.1 million in available borrowing lines from correspondent banks and the FHLB[215][217] - The Company and Bank remain well-capitalized under Basel III rules, with capital ratios significantly exceeding minimum requirements[223] Quantitative and Qualitative Disclosures About Market Risk This section is not required for a smaller reporting company - Not required for smaller reporting company[228] Financial Statements and Supplementary Data This section presents the Company's audited consolidated financial statements and supplementary data for the years ended December 31, 2019 and 2018 - The independent registered public accounting firm, Yount, Hyde & Barbour, P.C., issued an unqualified opinion on the consolidated financial statements and internal controls[230][231] Consolidated Financial Highlights (in thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Balance Sheet | | | | Total Assets | $702,627 | $644,800 | | Net Loans | $535,324 | $532,299 | | Total Deposits | $621,211 | $572,533 | | Total Shareholders' Equity | $76,107 | $70,742 | | Income Statement | | | | Net Interest Income | $21,924 | $22,896 | | Provision for Loan Losses | $1,375 | $1,873 | | Noninterest Income | $5,551 | $5,530 | | Noninterest Expense | $17,884 | $16,014 | | Net Income | $6,689 | $8,470 | Note 4 – Allowance for Loan Losses The allowance for loan losses decreased to $4.2 million in 2019, driven by net charge-offs of $2.1 million that exceeded the provision of $1.4 million - The Company uses a loss migration model for most loan classes, supplemented by eight qualitative factors, to determine the allowance for loan losses[358][378] Allowance for Loan Losses Activity (in thousands) | | 2019 | 2018 | | :--- | :--- | :--- | | Beginning Balance | $4,891 | $4,043 | | Charge-offs | (2,259) | (1,097) | | Recoveries | 202 | 72 | | Net Charge-offs | (2,057) | (1,025) | | Provision for loan losses | 1,375 | 1,873 | | Ending Balance | $4,209 | $4,891 | Note 13 – Capital Requirements The Bank exceeded all Basel III minimum capital requirements as of December 31, 2019, and was categorized as "well capitalized" - The Bank has decided not to opt into the optional community bank leverage ratio (CBLR) framework and will continue to calculate its regulatory capital under the Basel III framework[427] Bank Capital Ratios (December 31, 2019) | Ratio | Actual Ratio | Minimum to be Well Capitalized | | :--- | :--- | :--- | | Total Capital (to RWA) | 14.98% | 10.00% | | Common Equity Tier 1 (to RWA) | 14.18% | 6.50% | | Tier 1 Capital (to RWA) | 14.18% | 8.00% | | Tier 1 Capital (to Average Assets) | 10.73% | 5.00% | Note 21 – Segment Reporting The Company operates four reportable segments, with the Bank segment being the primary contributor to net income in 2019 - Prior to January 1, 2019, the Company had two reportable segments: the Bank, which earned $7.9 million in 2018, and VNB Wealth, which earned $592,000[485][486] Segment Net Income (Loss) for 2019 (in thousands) | Segment | Net Income (Loss) | | :--- | :--- | | Bank | $6,798 | | Sturman Wealth Advisors | $11 | | VNB Trust & Estate Services | $90 | | Masonry Capital | ($210) | | Consolidated Total | $6,689 | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[494] Controls and Procedures Management concluded that the Company's disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2019 - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period[496] - Management's assessment concluded that the Company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[498] - There were no changes in internal control over financial reporting during the year that materially affected, or are reasonably likely to materially affect, these controls[500] Other Information The company reports no other information - None[508] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accounting Fees Required information for Items 10 through 14 is incorporated by reference from the Company's 2020 Definitive Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Company's 2020 Definitive Proxy Statement[510][511][512] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Form 10-K report - The consolidated financial statements are located in Part II, Item 8 of this report[517] - An index of exhibits is provided, including Articles of Incorporation, Bylaws, Stock Incentive Plans, and required SEC certifications[519] Form 10-K Summary This section is not applicable to the registrant - Not applicable[521]