Virginia National Bankshares (VABK) - 2021 Q2 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements Unaudited consolidated financial statements for Q2 2021 show significant balance sheet growth from the Fauquier merger, though net income was reduced by one-time expenses Consolidated Balance Sheets Total assets more than doubled to $1.85 billion by June 30, 2021, from $848.4 million, primarily due to the Fauquier acquisition which significantly increased loans, deposits, and shareholders' equity Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 (Unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $1,847,122 | $848,410 | | Cash and cash equivalents | $313,979 | $34,695 | | Loans, net | $1,160,639 | $603,951 | | Goodwill | $8,898 | $372 | | Total Liabilities | $1,688,520 | $765,812 | | Total deposits | $1,629,448 | $730,764 | | Total Shareholders' Equity | $158,602 | $82,598 | Consolidated Statements of Income Q2 2021 net income significantly decreased to $147 thousand due to $5.9 million in merger expenses, despite net interest income more than doubling to $13.2 million post-merger Consolidated Income Statement Summary (in thousands, except per share data) | Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $13,151 | $5,755 | $19,125 | $11,130 | | Provision for (recovery of) loan losses | ($141) | $378 | $210 | $1,143 | | Noninterest Income | $2,920 | $1,626 | $3,959 | $3,295 | | Noninterest Expense | $15,993 | $4,404 | $20,774 | $8,947 | | Merger expenses | $5,874 | $0 | $6,152 | $0 | | Net Income | $147 | $2,088 | $1,652 | $3,492 | | Net Income per Share, diluted | $0.03 | $0.77 | $0.41 | $1.29 | Notes to Consolidated Financial Statements Notes detail accounting policies, the Fauquier merger's impact on loans and securities, changes in ALLL methodology for acquired loans, and segment performance - On April 1, 2021, the Company completed its merger with Fauquier Bankshares, Inc. for a total consideration of $78.0 million. The acquisition resulted in the recognition of $8.5 million in goodwill and a $8.7 million core deposit intangible asset[19][26][31] - The loan portfolio grew to $1.17 billion from $609 million at year-end 2020, largely due to the merger, with $68.8 million in outstanding Paycheck Protection Program (PPP) loans as of June 30, 2021[54] - The allowance for loan losses (ALLL) stood at $5.5 million, with the ratio of ALLL to total loans decreasing to 0.47% from 0.90% at year-end 2020, primarily due to merger accounting for acquired loans[71][191] - The Bank segment is the primary contributor to net income, generating $1.66 million for the first six months of 2021, while other segments reported net losses[139][140][143] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Fauquier merger's significant impact on financial condition and results, highlighting asset growth, one-time expenses, and ongoing COVID-19 effects Overview and Impact of COVID-19 Q2 2021 performance metrics were distorted by merger expenses; adjusted non-GAAP figures show stronger ROAA and ROAE, with most COVID-19 loan deferments returning to normal Q2 2021 Performance Metrics (GAAP vs. Non-GAAP) | Metric | Q2 2021 (GAAP) | Q2 2021 (Non-GAAP, excluding merger expenses) | | :--- | :--- | :--- | | ROAA | 0.03% | 1.02% | | ROAE | 0.37% | 11.89% | | Net Income per Share | $0.03 | $0.89 | - The company incurred $5.9 million in pre-tax merger expenses during Q2 2021, equating to $1.11 per diluted share[159] - As of June 30, 2021, $57.7 million (96.6%) of total approved loan deferments returned to normal payment schedules, with a remaining balance of $2.0 million in deferrals[162] - The company funded a total of $207.5 million in PPP loans, with $68.8 million remaining outstanding after SBA forgiveness as of June 30, 2021[163] Financial Condition The Fauquier merger transformed financial condition, boosting total assets to $1.8 billion, loans to $1.2 billion, and deposits to $1.6 billion, while capital ratios remained strong - Total assets increased by $998.7 million (117.7%) to $1.8 billion from December 31, 2020, primarily due to the Fauquier acquisition[176] - The loan portfolio increased by $556.8 million (91.4%) since year-end 2020, with acquired loans from Fauquier having a carrying amount of $537.5 million at June 30, 2021[184] - Total deposits increased by $898.7 million to $1.6 billion since year-end 2020, with the merger contributing $817.7 million in deposits at fair value[200] - The company's and the Bank's capital ratios as of June 30, 2021, exceeded all minimum regulatory requirements to be considered "well capitalized"[210][211] Results of Operations Q2 2021 net income fell to $147 thousand due to merger expenses, despite significant growth in net interest income, while net interest margin compressed slightly and noninterest expenses rose - Net income for Q2 2021 was $147 thousand, a decrease of $1.9 million from Q2 2020, entirely attributable to $5.9 million in pre-tax merger expenses[214] - Net interest income (FTE) for Q2 2021 increased by $7.4 million (128.8%) compared to Q2 2020, primarily due to the inclusion of Fauquier's operations[215] - Net interest margin (FTE) was 3.05% for Q2 2021, a 7 basis point decrease from 3.12% in Q2 2020[217] - A recovery of loan losses of $141 thousand was recorded in Q2 2021, compared to a $378 thousand provision in Q2 2020, as the company released some reserves added during the pandemic[228] - Noninterest expense increased 263.1% in Q2 2021 compared to Q2 2020, driven by the $5.9 million in merger expenses and the addition of Fauquier's operating costs[234] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section is not required for smaller reporting companies - Disclosure is not required for this item[239] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[241] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[241] Part II. Other Information Item 1. Legal Proceedings The company reported no legal proceedings during the period - There are no legal proceedings to report[242] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the company's Form 10-K for the year ended December 31, 2020 - No material changes from the risk factors described in the Company's Form 10-K for the year ended December 31, 2020[242] Item 6. Exhibits This section lists exhibits filed with Form 10-Q, including CEO/CFO certifications and financial statements in Inline XBRL format - The report includes required certifications from the Principal Executive Officer and Principal Financial Officer, as well as financial data in Inline XBRL format[244]