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Virginia National Bankshares Corp - Quarter Report: 2021 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number: 001-40305

 

VIRGINIA NATIONAL BANKSHARES CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Virginia

46-2331578

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

404 People Place

 

Charlottesville, Virginia

22911

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (434) 817-8621

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock                                                                                                  

 

VABK 

 

The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes      No  

As of August 10, 2021, the registrant had 5,306,419 shares of common stock, $2.50 par value per share, outstanding.

 


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

 

FORM 10-Q

 

TABLE OF CONTENTS

 

Part I. Financial Information

 

 

Item 1    Financial Statements

 

Page   3

Consolidated Balance Sheets (unaudited)

 

Page   3

Consolidated Statements of Income (unaudited)

 

Page   4

Consolidated Statements of Comprehensive Income (unaudited)

 

Page   5

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

 

Page   6

Consolidated Statements of Cash Flows (unaudited)

 

Page   7

Notes to Consolidated Financial Statements (unaudited)

 

Page   8

 

 

 

Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Page 36

Application of Critical Accounting Policies and Estimates

 

Page 39

Financial Condition

 

Page 40

Results of Operations

 

Page 46

 

 

 

Item 3    Quantitative and Qualitative Disclosures About Market Risk

 

Page 55

 

 

 

Item 4    Controls and Procedures

 

Page 55

 

 

 

Part II. Other Information

 

 

Item 1    Legal Proceedings

 

Page 55

Item 1A  Risk Factors

 

Page 55

Item 2    Unregistered Sales of Equity Securities and Use of Proceeds

 

Page 55

Item 3    Defaults Upon Senior Securities

 

Page 55

Item 4    Mine Safety Disclosures

 

Page 55

Item 5    Other Information

 

Page 55

Item 6    Exhibits

 

Page 56

 

 

 

Signatures

 

Page 57

 

 

2


 

 

PART I.  FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

 

 

June 30, 2021

 

 

December 31, 2020*

 

ASSETS

 

(Unaudited)

 

 

 

 

 

Cash and due from banks

 

$

29,605

 

 

$

8,116

 

Interest-bearing deposits in other banks

 

 

177,753

 

 

 

 

Federal funds sold

 

 

106,621

 

 

 

26,579

 

Securities:

 

 

 

 

 

 

 

 

Available for sale, at fair value

 

 

266,973

 

 

 

174,086

 

Restricted securities, at cost

 

 

4,272

 

 

 

3,010

 

Total securities

 

 

271,245

 

 

 

177,096

 

Loans

 

 

1,166,161

 

 

 

609,406

 

Allowance for loan losses

 

 

(5,522

)

 

 

(5,455

)

Loans, net

 

 

1,160,639

 

 

 

603,951

 

Premises and equipment, net

 

 

25,386

 

 

 

5,238

 

Bank owned life insurance

 

 

30,832

 

 

 

16,849

 

Goodwill

 

 

8,898

 

 

 

372

 

Core deposit intangible, net

 

 

8,272

 

 

 

 

Other intangible assets, net

 

 

307

 

 

 

341

 

Other real estate, net

 

 

611

 

 

 

 

Right of use asset, net

 

 

8,371

 

 

 

3,527

 

Accrued interest receivable and other assets

 

 

18,582

 

 

 

6,341

 

Total assets

 

$

1,847,122

 

 

$

848,410

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Demand deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

449,483

 

 

$

209,772

 

Interest-bearing

 

 

431,556

 

 

 

148,910

 

Money market and savings deposit accounts

 

 

577,414

 

 

 

272,980

 

Certificates of deposit and other time deposits

 

 

170,995

 

 

 

99,102

 

Total deposits

 

 

1,629,448

 

 

 

730,764

 

Advances from the FHLB

 

 

42,989

 

 

 

30,000

 

Junior subordinated debt

 

 

3,345

 

 

 

 

Lease liability

 

 

7,833

 

 

 

3,589

 

Accrued interest payable and other liabilities

 

 

4,905

 

 

 

1,459

 

Total liabilities

 

 

1,688,520

 

 

 

765,812

 

 

 

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $2.50 par value, 2,000,000 shares authorized, no

   shares outstanding

 

 

 

 

 

 

Common stock, $2.50 par value, 10,000,000 shares authorized;

     5,305,819 shares issued and outstanding as of June 30, 2021

     (includes 35,495 nonvested), and 2,714,273 shares issued

     and outstanding as of December 31, 2020 (includes 25,268

     nonvested)

 

 

13,176

 

 

 

6,722

 

Capital surplus

 

 

104,360

 

 

 

32,457

 

Retained earnings

 

 

41,201

 

 

 

41,959

 

Accumulated other comprehensive income (loss)

 

 

(135

)

 

 

1,460

 

Total shareholders' equity

 

 

158,602

 

 

 

82,598

 

Total liabilities and shareholders' equity

 

$

1,847,122

 

 

$

848,410

 

 

*

Derived from audited Consolidated Financial Statements

See Notes to Consolidated Financial Statements

3


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)

 

 

 

For the three months ended

 

 

For the six months ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

13,009

 

 

$

6,156

 

 

$

18,947

 

 

$

12,027

 

Federal funds sold

 

 

21

 

 

 

10

 

 

 

33

 

 

 

95

 

Other interest-bearing accounts

 

 

39

 

 

 

-

 

 

 

39

 

 

 

-

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

757

 

 

 

229

 

 

 

1,264

 

 

 

738

 

Tax exempt

 

 

273

 

 

 

92

 

 

 

449

 

 

 

167

 

Dividends

 

 

32

 

 

 

24

 

 

 

66

 

 

 

48

 

Total interest and dividend income

 

 

14,131

 

 

 

6,511

 

 

 

20,798

 

 

 

13,075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand and savings deposits

 

 

548

 

 

 

390

 

 

 

925

 

 

 

1,085

 

Certificates and other time deposits

 

 

324

 

 

 

366

 

 

 

604

 

 

 

860

 

Repurchase agreements and other borrowings

 

 

108

 

 

 

-

 

 

 

144

 

 

 

-

 

Total interest expense

 

 

980

 

 

 

756

 

 

 

1,673

 

 

 

1,945

 

Net interest income

 

 

13,151

 

 

 

5,755

 

 

 

19,125

 

 

 

11,130

 

Provision for (recovery of) loan losses

 

 

(141

)

 

 

378

 

 

 

210

 

 

 

1,143

 

Net interest income after provision for (recovery of) loan losses

 

 

13,292

 

 

 

5,377

 

 

 

18,915

 

 

 

9,987

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wealth management fees

 

 

980

 

 

 

228

 

 

 

1,309

 

 

 

538

 

Advisory and brokerage income

 

 

359

 

 

 

163

 

 

 

550

 

 

 

341

 

Royalty income

 

 

12

 

 

 

24

 

 

 

17

 

 

 

71

 

Deposit account fees

 

 

426

 

 

 

143

 

 

 

586

 

 

 

322

 

Debit/credit card and ATM fees

 

 

599

 

 

 

134

 

 

 

753

 

 

 

291

 

Earnings/increase in value of bank owned life insurance

 

 

199

 

 

 

109

 

 

 

306

 

 

 

216

 

Fees on mortgage sales

 

 

-

 

 

 

30

 

 

 

-

 

 

 

77

 

Gains on sales of securities

 

 

-

 

 

 

590

 

 

 

-

 

 

 

643

 

Loan swap fee income

 

 

20

 

 

 

124

 

 

 

35

 

 

 

633

 

Other

 

 

325

 

 

 

81

 

 

 

403

 

 

 

163

 

Total noninterest income

 

 

2,920

 

 

 

1,626

 

 

 

3,959

 

 

 

3,295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,741

 

 

 

2,258

 

 

 

7,143

 

 

 

4,682

 

Net occupancy

 

 

1,109

 

 

 

452

 

 

 

1,604

 

 

 

904

 

Equipment

 

 

340

 

 

 

136

 

 

 

456

 

 

 

267

 

Bank franchise tax

 

 

429

 

 

 

163

 

 

 

602

 

 

 

326

 

Computer software

 

 

216

 

 

 

136

 

 

 

383

 

 

 

276

 

Data processing

 

 

994

 

 

 

338

 

 

 

1,283

 

 

 

666

 

FDIC deposit insurance assessment

 

 

182

 

 

 

28

 

 

 

245

 

 

 

28

 

Marketing, advertising and promotion

 

 

232

 

 

 

140

 

 

 

369

 

 

 

279

 

Merger expenses

 

 

5,874

 

 

 

-

 

 

 

6,152

 

 

 

-

 

Professional fees

 

 

510

 

 

 

190

 

 

 

687

 

 

 

376

 

Core deposit intangible amortization

 

 

428

 

 

 

-

 

 

 

428

 

 

 

-

 

Other

 

 

938

 

 

 

563

 

 

 

1,422

 

 

 

1,143

 

Total noninterest expense

 

 

15,993

 

 

 

4,404

 

 

 

20,774

 

 

 

8,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

219

 

 

 

2,599

 

 

 

2,100

 

 

 

4,335

 

Provision for income taxes

 

 

72

 

 

 

511

 

 

 

448

 

 

 

843

 

Net income

 

$

147

 

 

$

2,088

 

 

$

1,652

 

 

$

3,492

 

Net income per common share, basic

 

$

0.03

 

 

$

0.77

 

 

$

0.41

 

 

$

1.29

 

Net income per common share, diluted

 

$

0.03

 

 

$

0.77

 

 

$

0.41

 

 

$

1.29

 

 

See Notes to Consolidated Financial Statements

4


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

(Unaudited)

 

 

 

For the three months ended

 

 

For the six months ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

Net income

 

$

147

 

 

$

2,088

 

 

$

1,652

 

 

$

3,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities, net of tax

   of $506 and ($394) for the three and six

   months ended June 30, 2021; and net

   of tax of $512 and $403 for the three

   and six months ended June 30, 2020,

   respectively

 

 

1,903

 

 

 

1,920

 

 

 

(1,484

)

 

 

1,514

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for realized gains

   on sales of securities, net of tax of ($0) and

   ($0) for the three and six months ended

   June 30, 2021; and net of tax of ($124) and

   ($135) for the three and six months ended

   June 30, 2020, respectively

 

 

 

 

 

(466

)

 

 

 

 

 

(508

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on interest rate swaps, net of tax

   of ($30) and ($30) for the three and six

   months ended June 30, 2021; and net

   of tax of $0 and $0 for the three

   and six months ended June 30, 2020,

   respectively

 

 

(111

)

 

 

 

 

 

(111

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

1,792

 

 

 

1,454

 

 

 

(1,595

)

 

 

1,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

1,939

 

 

$

3,542

 

 

$

57

 

 

$

4,498

 

 

See Notes to Consolidated Financial Statements

5


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(Dollars in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common

 

 

Capital

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Stock

 

 

Surplus

 

 

Earnings

 

 

Income (Loss)

 

 

Total

 

Balance, December 31, 2019

 

$

6,720

 

 

$

32,195

 

 

$

37,235

 

 

$

(43

)

 

$

76,107

 

Stock option expense

 

 

-

 

 

 

24

 

 

 

-

 

 

 

-

 

 

 

24

 

Restricted stock grant expense

 

 

-

 

 

 

15

 

 

 

-

 

 

 

-

 

 

 

15

 

Cash dividends declared ($0.30 per share)

 

 

-

 

 

 

-

 

 

 

(811

)

 

 

-

 

 

 

(811

)

Net income

 

 

-

 

 

 

-

 

 

 

1,404

 

 

 

-

 

 

 

1,404

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(448

)

 

 

(448

)

Balance, March 31, 2020

 

$

6,720

 

 

$

32,234

 

 

$

37,828

 

 

$

(491

)

 

$

76,291

 

Stock option expense

 

 

-

 

 

 

34

 

 

 

-

 

 

 

-

 

 

 

34

 

Restricted stock grant expense

 

 

-

 

 

 

39

 

 

 

-

 

 

 

-

 

 

 

39

 

Cash dividends declared ($0.30 per share)

 

 

-

 

 

 

-

 

 

 

(814

)

 

 

-

 

 

 

(814

)

Net income

 

 

-

 

 

 

-

 

 

 

2,088

 

 

 

-

 

 

 

2,088

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,454

 

 

 

1,454

 

Balance, June 30, 2020

 

$

6,720

 

 

$

32,307

 

 

$

39,102

 

 

$

963

 

 

$

79,092

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2020

 

$

6,722

 

 

$

32,457

 

 

$

41,959

 

 

$

1,460

 

 

$

82,598

 

Exercise of stock options

 

 

1

 

 

 

14

 

 

 

-

 

 

 

-

 

 

 

15

 

Stock option expense

 

 

-

 

 

 

34

 

 

 

-

 

 

 

-

 

 

 

34

 

Restricted stock grant expense

 

 

-

 

 

 

61

 

 

 

-

 

 

 

-

 

 

 

61

 

Vested stock grants

 

 

7

 

 

 

(7

)

 

 

-

 

 

 

-

 

 

 

-

 

Cash dividends declared ($0.30 per share)

 

 

-

 

 

 

-

 

 

 

(814

)

 

 

-

 

 

 

(814

)

Net income

 

 

-

 

 

 

-

 

 

 

1,505

 

 

 

-

 

 

 

1,505

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,387

)

 

 

(3,387

)

Balance, March 31, 2021

 

$

6,730

 

 

$

32,559

 

 

$

42,650

 

 

$

(1,927

)

 

$

80,012

 

Common stock issued in acquisition of Fauquier Bankshares, Inc.

 

 

6,428

 

 

 

71,608

 

 

 

 

 

 

 

 

 

 

 

78,036

 

Exercise of stock options

 

 

2

 

 

 

13

 

 

 

-

 

 

 

-

 

 

 

15

 

Stock option expense

 

 

-

 

 

 

31

 

 

 

-

 

 

 

-

 

 

 

31

 

Restricted stock grant expense

 

 

-

 

 

 

165

 

 

 

-

 

 

 

-

 

 

 

165

 

Vested stock grants

 

 

16

 

 

 

(16

)

 

 

-

 

 

 

-

 

 

 

-

 

Cash dividends declared ($0.30 per share)

 

 

-

 

 

 

-

 

 

 

(1,596

)

 

 

-

 

 

 

(1,596

)

Net income

 

 

-

 

 

 

-

 

 

 

147

 

 

 

-

 

 

 

147

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,792

 

 

 

1,792

 

Balance, June 30, 2021

 

$

13,176

 

 

$

104,360

 

 

$

41,201

 

 

$

(135

)

 

$

158,602

 

 

      

See Notes to Consolidated Financial Statements

6


 

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

 

 

For the six months ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

1,652

 

 

$

3,492

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

210

 

 

 

1,143

 

Net accretion of certain acquisition-related discounts

 

 

(804

)

 

 

-

 

Amortization of intangible assets

 

 

462

 

 

 

57

 

Net amortization and accretion of securities

 

 

661

 

 

 

210

 

Net gains on sale of securities

 

 

-

 

 

 

(643

)

Earnings on bank owned life insurance

 

 

(306

)

 

 

(216

)

Deferred tax

 

 

25

 

 

 

-

 

Depreciation and other amortization

 

 

1,406

 

 

 

915

 

Stock option expense

 

 

65

 

 

 

58

 

Stock grant expense, restricted

 

 

226

 

 

 

-

 

Net change in:

 

 

 

 

 

54

 

Accrued interest receivable and other assets

 

 

(1,939

)

 

 

(430

)

Accrued interest payable and other liabilities

 

 

2,808

 

 

 

292

 

Net cash provided by operating activities

 

 

4,466

 

 

 

4,932

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Acquisition of Fauquier Bankshares

 

 

153,278

 

 

 

-

 

Net decrease (increase) in restricted investments

 

 

358

 

 

 

(53

)

Purchases of available for sale securities

 

 

(15,217

)

 

 

(62,259

)

Proceeds from maturities, calls and principal payments of available for sale securities

 

 

12,923

 

 

 

29,161

 

Proceeds from sales of available for sale securities

 

 

 

 

 

46,075

 

Net decrease (increase) in loans

 

 

46,452

 

 

 

(93,296

)

Cash payment for wealth management book of business

 

 

-

 

 

 

(50

)

Purchase of bank premises and equipment

 

 

(818

)

 

 

(80

)

Net cash provided by (used in) investing activities

 

 

196,976

 

 

 

(80,502

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Net increase in demand deposits, NOW accounts, and money market accounts

 

 

78,892

 

 

 

105,669

 

Net increase (decrease) in certificates of deposit and other time deposits

 

 

2,167

 

 

 

(12,679

)

Net decrease in other borrowings

 

 

(23

)

 

 

 

Proceeds from stock options exercised

 

 

30

 

 

 

-

 

Cash dividends paid

 

 

(3,224

)

 

 

(1,618

)

Net cash provided by financing activities

 

 

77,842

 

 

 

91,372

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

$

279,284

 

 

$

15,802

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

 

 

Beginning of period

 

$

34,695

 

 

$

19,085

 

End of period

 

$

313,979

 

 

$

34,887

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

 

Interest

 

$

1,611

 

 

$

2,032

 

Taxes

 

$

1,042

 

 

$

375

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING

   ACTIVITIES

 

 

 

 

 

 

 

 

Unrealized (losses) gains on available for sale securities

 

$

(1,878

)

 

$

1,274

 

Unrealized (losses) gains on interest rate swaps

 

$

(141

)

 

$

 

Assets acquired in business combination

 

$

909,736

 

 

$

 

Liabilities assumed in business combination

 

$

840,226

 

 

$

 

Change in goodwill

 

$

8,526

 

 

$

 

 

 

See Notes to Consolidated Financial Statements

7


 

VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2021

 

Note 1.  Summary of Significant Accounting Policies

Principles of Consolidation: The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2020.

Nature of Operations: The accompanying unaudited consolidated financial statements include the accounts of Virginia National Bankshares Corporation (the “Company”), and its subsidiaries Virginia National Bank (the “Bank”) and Masonry Capital Management, LLC (“Masonry Capital”), a registered investment advisor.  Beginning in 2019, the services offered under the umbrella of VNB Wealth are provided by Masonry Capital or by the Bank under VNB Trust & Estate Services or Sturman Wealth Advisors, formerly known as VNB Investment Services.  All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation: The preparation of financial statements in conformity with GAAP and the reporting guidelines prescribed by regulatory authorities requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, accounting for business combinations, including loans acquired in the business combination, impairment of loans, goodwill impairment, other-than-temporary impairment of securities, other intangible assets, and fair value measurements. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

Reclassifications:  If needed, certain previously reported amounts have been reclassified to conform to current period presentation.  No such reclassifications were significant

Business Combination: On April 1, 2021, the Company completed the merger with Fauquier Bankshares, Inc. with and into the Company for total consideration paid of $78.0 million.  Additional information about this transaction is presented in Note 2 – Business Combinations.   

Recent Significant Accounting Pronouncements

Financial Instruments – Credit Losses In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”  The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03.  These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters.  Smaller reporting companies who file with the U.S. Securities and Exchange Commission (“SEC”), such as the Company, and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.  Early in 2017, the Company formed a cross-functional steering committee, including some members of senior management, to provide governance and guidance over the project plan.  The Company is capturing the additional loan data which is anticipated to be needed for this calculation.  The extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time.  Upon adoption, the impact to the allowance for credit losses (currently allowance for loan losses) will have an offsetting one-time cumulative-effect adjustment to retained earnings.  

8


 

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119.  SAB 119 updated portions of SEC interpretative guidance to align with FASB Accounting Standards Codification (“ASC”) 326, “Financial Instruments – Credit Losses.”  It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

 

LIBOR and Other Reference Rates In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022.  Subsequently, in January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.  The Company has identified all loans that are directly or indirectly impacted by LIBOR.  The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

 

Recently Adopted Accounting Developments

 

CARES Act In December 2020, the Consolidated Appropriates Act of 2021 (“CAA”) was passed.  Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), including the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) and treatment of certain loan modifications related to the COVID-19 pandemic. The adoption of the CARES Act had no material impact on the Company’s consolidated financial statements.  See further discussion of PPP loans and loan modifications in Notes 4 and 5 of the notes to the Consolidated Financial Statements.

 

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not currently expected to have a material effect on the Company’s financial position, results of operations or cash flows.

9


 

Note 2.  Business Combinations

On April 1, 2021 (The “Effective Date”), the Company completed the merger with Fauquier Bankshares, Inc. (“Fauquier”) with and into the Company (the “Merger”), with the Company surviving, pursuant to the terms of the Agreement and Plan of Reorganization, dated September 30, 2020, between the Company and Fauquier (the “Merger Agreement”).  

Pursuant to the Merger Agreement, holders of shares of Fauquier common stock received 0.675 shares of the Company’s common stock for each share of Fauquier common stock held immediately prior to the Effective Date of the Merger, plus cash in lieu of fractional shares. In connection with the transaction, the Company issued 2,571,213 shares of its common stock to the shareholders of Fauquier and paid $4 thousand in cash lieu of fractional shares.  Each share of the Company’s common stock outstanding immediately prior to the Merger remained outstanding and was unaffected by the Merger.

Shortly after the Effective Date of the Merger, The Fauquier Bank (“TFB”), Fauquier’s wholly-owned bank subsidiary, was merged with and into Virginia National Bank, the Company’s wholly-owned bank subsidiary, with Virginia National Bank surviving. 

The Company accounted for the Merger using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the Merger and the common stock of the Company issued as consideration were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is inherently subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value.  Under ASC 805, during the measurement period of up to one year, the acquirer shall adjust the amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.  Measurement period adjustments are recognized in the reporting period in which they are determined.  The measurement period may not exceed one year from the acquisition date.  

The following table presents as of April 1, 2021 the total consideration paid by the Company in connection with the Merger, the fair values of the assets acquired and liabilities assumed, and the resulting goodwill (dollars in thousands):

 

As Recorded

 

 

 

 

As Recorded

 

 

by Fauquier

 

Fair Value

 

by Virginia National

 

 

Bankshares, Inc.

 

Adjustment

 

Bankshares

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

153,282

 

$

-

 

$

153,282

 

Securities available for sale

 

93,133

 

 

-

 

 

93,133

 

Loans, net

 

615,766

 

 

(13,123

)

 

602,643

 

Premises and equipment

 

16,276

 

 

3,872

 

 

20,148

 

Other real estate owned

 

1,356

 

 

(745

)

 

611

 

Bank-owned life insurance

 

13,677

 

 

-

 

 

13,677

 

Right-of-use assets

 

4,355

 

 

1,077

 

 

5,432

 

Core deposit intangible

 

-

 

 

8,700

 

 

8,700

 

Other assets

 

12,917

 

 

(807

)

 

12,110

 

     Total assets acquired

$

910,762

 

$

(1,026

)

$

909,736

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Deposits

 

817,499

 

 

191

 

 

817,690

 

Short-term borrowings

 

12,582

 

 

473

 

 

13,055

 

Junior subordinated debt

 

4,124

 

 

(790

)

 

3,334

 

Lease liability

 

4,440

 

 

352

 

 

4,792

 

Other liabilities

 

1,355

 

 

-

 

 

1,355

 

      Total liabilities assumed

$

840,000

 

$

226

 

$

840,226

 

Net assets acquired

 

 

 

 

 

 

$

69,510

 

Total consideration paid

 

 

 

 

 

 

 

78,036

 

Goodwill

 

 

 

 

 

 

$

8,526

 

10


 

 

In connection with the Merger, the Company recorded approximately $8.5 million of goodwill and $8.7 million of other intangible assets related to the core deposits of Fauquier.  The goodwill arising from the Merger of Fauquier is not deductible for income taxes.  The core deposit intangible asset (“CDI”) will be amortized over a period of seven years using the sum of years digits method.

Loans acquired from Fauquier (the “Acquired Loans”) had aggregate outstanding principal of $622.9 million and an estimated fair value of $602.6 million.  The discount between the outstanding principal balance and fair value of $20.3 million represents expected credit losses and adjustments for market interest rates of $21.3 million, offset by elimination of net deferred fees/costs of $979 thousand.  

As of the Effective Date, the fair value of the performing loans was $513.8 million, which was 1.7% less than the book value of the loans.  The total fair value discount on performing loans of $9.0 million consisted of a credit discount of $8.4 million and an other fair value discount of $647 thousand.  Loans that have evidence of deterioration in credit quality since origination are categorized as purchased credit impaired (“PCI”).  As of the Effective Date, the fair value of PCI loans was $87.3 million, which was 12.3% below the book value of the loans.  The total fair value mark on PCI loans of $12.3 million consisted of a credit discount of $11.2 million and an other fair value discount of $1.1 million.  

Under the acquisition method (ASC 805), the allowance for loan losses recorded in the books of Fauquier in the amount of $7.2 million was not carried over into the books of the Company.  

Information about PCI loans acquired from Fauquier as of April 1, 2021 is as follows (dollars in thousands):

 

April 1, 2021

 

Contractual principal and interest at acquisition

$

136,476

 

Nonaccretable difference

 

(33,712

)

Expected cash flows at acquisition

 

102,764

 

Accretable yield

 

(15,499

)

Basis in PCI loans at acquisition, estimated fair value

$

87,265

 

Fair values of the major categories of assets acquired and liabilities assumed as part of the Merger were determined as follows:

Cash and due from banks: The carrying amount of cash and due from banks  was used as a reasonable estimate of fair value.

Securities available for sale: The estimated fair value of investment securities available for sale was based on quoted pricing for those securities.

Loans:  The Acquired Loans were recorded at fair value at the Merger date without carryover of Fauquier's allowance for loan losses. The fair value of the Acquired Loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then discounting those cash flows based on a discount rate that would be required by a market participant. In this regard, the Acquired Loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, loan purpose and loan structure. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), updated loan-to-value ratios and lien position, and past loan performance. For valuation purposes, these pools were further disaggregated by maturity and pricing characteristics (e.g., fixed-rate, adjustable-rate, balloon maturities).

Premises and equipment:  The land and buildings acquired were recorded at fair value as determined by current appraisals by independent third parties and tax assessments at Effective Date.

Other real estate owned:  Other real estate owned was recorded at fair value based on an existing purchase contract, less estimated selling costs.

Bank owned life insurance:  The carrying amount of bank owned life insurance was used as a reasonable estimate of fair value.

11


 

Right of use assets and lease liabilities:  Lease liabilities were measured at the present value of the remaining lease payments, as if the acquired lease were a new lease of the Company at the Effective Date. Right-of-use assets were measured at the same amount as the lease liability as adjusted to reflect favorable or unfavorable terms of the lease when compared with market terms.

Core deposit intangible: The fair value of the CDI was determined based on a discounted cash flow analysis using a discount rate based on the estimated cost of equity capital for a market participant. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through the FHLB. The life of the deposit base and projected deposit attrition rates were determined using Fauquier’s historical deposit data. The CDI was estimated at $8.7 million or 1.2% of non-maturity deposits.

Deposits:  The fair value adjustment of deposits represents a premium over the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar term certificates of deposit, using a discounted cash flow method. The resulting estimated fair value adjustment of certificates of deposit ranging in maturity from one month to three years is a $191,000 premium and is being amortized into income over a period of seven months.

Short-term borrowings:  The fair value of borrowings was determined by comparison to current interest rates for similar borrowings.  The resulting fair value adjustment to short-term borrowings is a $473,000 premium which will be amortized into interest expense over the remaining life of the debt on a straight-line basis.

Junior subordinated debt:  The fair value of the junior subordinated debt was determined by forecasting the cash flows at the stated coupon rate and discount at a prevailing market rate.  The prevailing market rate was based on implied market yields for recently issued debt with similar duration, credit quality, seniority and structure, issued by institutions of similar asset size. The resulting estimated fair value adjustment of junior subordinated debt is a $790,000 discount and is being accreted over the remaining life of the debt on a straight-line basis.

The revenue and earnings amounts specific to Fauquier since the Effective Date that are included in the consolidated results for 2021 are not readily determinable.  The disclosures of these amounts are impracticable due to the merging of certain processes and systems at the Effective Date.

Merger related expenses associated with the Merger of Fauquier were $5.9 million ($4.6 million after taxes) for the three months ended June 30, 2021, $6.2 million ($4.7 million after taxes) for the six months ended June 30, 2021 and $7.7 million ($5.4 million after taxes) in the aggregate through June 30, 2021. These costs included investment banker fees, expenses related to the integration of systems and operations, change of control payments and legal and consulting expenses, which have been expensed as incurred.  There were no merger related expenses during the three and six months ended June 30, 2020.  

Note 3.  Securities

The amortized cost and fair values of securities available for sale as of June 30, 2021 and December 31, 2020 were as follows (dollars in thousands):

 

June 30, 2021

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

U.S. Government agencies

 

$

35,839

 

 

$

58

 

 

$

(669

)

 

$

35,228

 

Mortgage-backed securities/CMOs

 

 

136,503

 

 

 

842

 

 

 

(927

)

 

 

136,418

 

Municipal bonds

 

 

94,661

 

 

 

1,352

 

 

 

(686

)

 

 

95,327

 

Total Securities Available for Sale

 

$

267,003

 

 

$

2,252

 

 

$

(2,282

)

 

$

266,973

 

12


 

 

 

December 31, 2020

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

U.S. Government agencies

 

$

25,496

 

 

$

7

 

 

$

(198

)

 

$

25,305

 

Mortgage-backed securities/CMOs

 

 

77,438

 

 

 

844

 

 

 

(182

)

 

 

78,100

 

Municipal bonds

 

 

69,303

 

 

 

1,499

 

 

 

(121

)

 

 

70,681

 

Total Securities Available for Sale

 

$

172,237

 

 

$

2,350

 

 

$

(501

)

 

$

174,086

 

 

As of June 30, 2021, there were $132.7 million, or 86 issues of individual securities, held in an unrealized loss position.  These securities have an unrealized loss of $2.3 million and consisted of 46 mortgage-backed/collateralized mortgage obligations (“CMOs”), 25 municipal bonds, and 15 agency bonds.  

The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, at June 30, 2021, and December 31, 2020 (dollars in thousands):

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or more

 

 

Total

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

Fair Value

 

 

Losses

 

 

Fair Value

 

 

Losses

 

 

Fair Value

 

 

Losses

 

U.S. Government agencies

 

$

26,817

 

 

$

(669

)

 

$

 

 

$

 

 

$

26,817

 

 

$

(669

)

Mortgage-backed/CMOs

 

 

68,035

 

 

 

(897

)

 

 

1,537

 

 

 

(30

)

 

 

69,572

 

 

 

(927

)

Municipal bonds

 

 

35,582

 

 

 

(683

)

 

 

762

 

 

 

(3

)

 

 

36,344

 

 

 

(686

)

 

 

$

130,434

 

 

$

(2,249

)

 

$

2,299

 

 

$

(33

)

 

$

132,733

 

 

$

(2,282

)

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or more

 

 

Total

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

Unrealized

 

 

 

Fair Value

 

 

Losses

 

 

Fair Value

 

 

Losses

 

 

Fair Value

 

 

Losses

 

U.S. Government agencies

 

$

19,298

 

 

$

(198

)

 

$

 

 

$

 

 

$

19,298

 

 

$

(198

)

Mortgage-backed/CMOs

 

 

24,523

 

 

 

(182

)

 

 

 

 

 

 

 

 

24,523

 

 

 

(182

)

Municipal bonds

 

 

21,501

 

 

 

(121

)

 

 

 

 

 

 

 

 

21,501

 

 

 

(121

)

 

 

$

65,322

 

 

$

(501

)

 

$

 

 

$

 

 

$

65,322

 

 

$

(501

)

 

The Company’s securities portfolio is primarily made up of fixed rate instruments, the prices of which move inversely with interest rates.  Any unrealized losses are considered by management to be driven by increases in market interest rates over the yields available at the time the underlying securities were purchased.  The fair value is expected to recover as the instruments approach their maturity date or repricing date or if market yields for such investments decline.  At the end of any accounting period, the portfolio may have both unrealized gains and losses.  Management does not believe any of the securities in an unrealized loss position are impaired due to credit quality.  Accordingly, as of June 30, 2021, management believes the impairments detailed in the table above are temporary, and no impairment loss has been realized in the Company’s consolidated income statement.

An “other-than-temporary impairment” (“OTTI”) is considered to exist if either of the following conditions are met: it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the security’s entire amortized cost basis (even if the Company does not intend to sell).  In the event that a security would suffer impairment for a reason that was “other than temporary,” the Company would be expected to write down the security’s value to its new fair value, and the amount of the write down would be included in earnings as a realized loss.  As of June 30, 2021, management has concluded that none of its investment securities have an OTTI based upon the information available.  Additionally, management has the ability to hold any security with an unrealized loss until maturity or until such time as the value of the security has recovered from its unrealized loss position.

Securities having carrying values of $10.4 million at June 30, 2021 were pledged as collateral to secure deposits and for other purposes and facilitate borrowing from the Federal Reserve Bank of Richmond (“FRB”).  At December 31, 2020, securities having carrying values of $6.0 million were similarly pledged.

13


 

For the six months ended June 30, 2021, there were no sales of securities. For the six months ended June 30, 2020, proceeds from the sales of securities amounted to $46.1 million, with realized gains of $655 thousand and realized losses of $12 thousand.    

Restricted securities are securities with limited marketability and consist of stock in the FRB, the Federal Home Loan Bank of Atlanta (“FHLB”), and CBB Financial Corporation, the holding company for Community Bankers Bank.  Additionally with the Fauquier merger, the Company acquired an investment in an SBA loan fund of $500 thousand.  These restricted securities, totaling $4.3 million and $3.0 million as of June 30, 2021 and December 31, 2020, are carried at cost.

 

Note 4.  Loans

The composition of the loan portfolio by major loan classifications at June 30, 2021 and December 31, 2020 appears below (dollars in thousands).  

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Commercial

 

$

160,473

 

 

$

118,688

 

Real estate construction and land

 

 

96,421

 

 

 

22,509

 

1-4 family residential mortgages

 

 

381,801

 

 

 

132,966

 

Commercial mortgages

 

 

455,795

 

 

 

277,109

 

Consumer

 

 

71,671

 

 

 

58,134

 

Total loans

 

 

1,166,161

 

 

 

609,406

 

Less:  Allowance for loan losses

 

 

(5,522

)

 

 

(5,455

)

Net loans

 

$

1,160,639

 

 

$

603,951

 

 

Primarily within the second quarter of 2020 and the first quarter of 2021, the Company, including Virginia National Bank and The Fauquier Bank prior to the Merger, assisted nonprofit organizations and local businesses by funding a combined total of $207.5 million of Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans, which were designed to provide economic relief to small businesses adversely impacted by COVID-19. As of June 30, 2021, the Company had PPP loans of $68.8 million outstanding on its balance sheet, with the remainder having been forgiven by the SBA.

The balances in the table above include unamortized premiums and net deferred loan costs (fees) on PPP loans and loans purchased prior to the Merger. As of June 30, 2021 and December 31, 2020, unamortized premiums on loans purchased prior to the Merger were $1.4 million and $1.8 million, respectively.  Net deferred loan costs (fees) totaled $(1.7) million and $(931) thousand as of June 30, 2021 and December 31, 2020, respectively.  The deferred fees increased $805 thousand due to the fees collected from the SBA for the additional PPP loans funded during the six months ended June 30, 2021. Net deferred fees on PPP loans and loans purchased prior to the Merger are being amortized over the contractual life of the underlying loans. As loans are forgiven by the SBA, accounting principles allow for the accelerated recognition of unamortized fees at that time.  

Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of accounting.  The table above includes a net fair value mark of $12.4 million on the purchased impaired loans and $8.2 million on the purchased performing loans as of June 30, 2021 on the loans acquired in the Merger.   See Note 2 – Business Combinations for more information on fair value of  loan balances acquired in the Merger.

The outstanding principal balance and the carrying amount at June 30, 2021 on these Acquired Loans were as follows:

 

14


 

 

 

 

June 30, 2021

 

 

 

Acquired Loans -

Purchased

Credit Impaired

 

 

Acquired Loans - Purchased Performing

 

 

Acquired

Loans -

Total

 

Outstanding principal balance

 

$

87,930

 

 

$

470,189

 

 

$

558,119

 

Carrying amount:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,983

 

 

$

61,013

 

 

$

62,996

 

Real estate construction and land

 

 

27,972

 

 

 

31,953

 

 

 

59,925

 

1-4 family residential mortgages

 

 

17,324

 

 

 

215,898

 

 

 

233,222

 

Commercial mortgages

 

 

25,348

 

 

 

145,570

 

 

 

170,918

 

Consumer

 

 

2,925

 

 

 

7,552

 

 

 

10,477

 

Total Acquired Loans

 

$

75,552

 

 

$

461,986

 

 

$

537,538

 

 

 


15


 

 

The following table presents a summary of the change in the accretable yield of loans classified as purchased credit impaired:

 

 

June 30, 2021

 

 

 

 

 

 

 

 

Accretable yield, beginning of period

 

$

 

 

Additions

 

 

15,499

 

 

Accretion

 

 

(858

)

 

Accretable yield, end of period

 

$

14,641

 

 

 

 

 

 

 

 

 

Accounting guidance requires certain disclosures about investments in impaired loans, the allowance for loan losses and interest income recognized on impaired loans.  A loan is considered impaired when it is probable that the Company will be unable to collect all principal and interest amounts when due according to the contractual terms of the loan agreement.  Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and current economic conditions.

The following tables reflect the breakdown by class of the Company’s loans classified as impaired loans, excluding Acquired Loans that are not impaired, as of June 30, 2021 and December 31, 2020.  These loans are reported at their recorded investment, which is the carrying amount of the loan as reflected on the Company’s balance sheet, net of charge-offs and other amounts applied to reduce the net book balance.  Average recorded investment in impaired loans is computed using an average of month-end balances for these loans for either the six months ended June 30, 2021 or the twelve months ended December 31, 2020.  Interest income recognized is for the six months ended June 30, 2021 or the twelve months ended December 31, 2020 (dollars in thousands).

 

June 30, 2021

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Associated

Allowance

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate construction and land

 

$

 

 

$

 

 

$

-

 

 

$

4

 

 

$

-

 

1-4 family residential mortgages

 

 

103

 

 

 

103

 

 

 

-

 

 

 

105

 

 

 

3

 

Total impaired loans without a valuation allowance

 

 

103

 

 

 

103

 

 

 

-

 

 

 

109

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a valuation allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

955

 

 

 

955

 

 

 

4

 

 

 

1,004

 

 

 

27

 

Total impaired loans with a valuation allowance

 

 

955

 

 

 

955

 

 

 

4

 

 

 

1,004

 

 

 

27

 

Total impaired loans

 

$

1,058

 

 

$

1,058

 

 

$

4

 

 

$

1,113

 

 

$

30

 

 

December 31, 2020

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Associated

Allowance

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate construction and land

 

$

8

 

 

$

55

 

 

$

-

 

 

$

97

 

 

$

-

 

1-4 family residential mortgages

 

 

109

 

 

 

109

 

 

 

-

 

 

 

113

 

 

 

6

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

781

 

 

 

48

 

Total impaired loans without a valuation allowance

 

 

117

 

 

 

164

 

 

 

-

 

 

 

991

 

 

 

54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a valuation allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

1,156

 

 

 

1,156

 

 

 

4

 

 

 

1,145

 

 

 

70

 

Total impaired loans with a valuation allowance

 

 

1,156

 

 

 

1,156

 

 

 

4

 

 

 

1,145

 

 

 

70

 

Total impaired loans

 

$

1,273

 

 

$

1,320

 

 

$

4

 

 

$

2,136

 

 

$

124

 

 

16


 

 

Included in the impaired loans are non-accrual loans.  Generally, a loan is placed on non-accrual when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more.  Any unpaid interest previously accrued on those loans is reversed from income.  Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote.  Interest payments received on such loans are applied as a reduction of the loan principal balance.  Interest income on other non-accrual loans is recognized only to the extent of interest payments received.  The recorded investment in non-accrual loans is shown below by class (dollars in thousands):

 

 

 

June 30, 2021

 

 

December 31, 2020

 

Real estate construction and land

 

$

 

 

$

8

 

Consumer

 

 

17

 

 

 

-

 

Total non-accrual loans

 

$

17

 

 

$

8

 

 

Additionally, troubled debt restructurings (“TDRs”) are considered impaired loans.  TDRs occur when the Company agrees to modify the original terms of a loan by granting a concession that it would not otherwise consider due to the deterioration in the financial condition of the borrower.  These concessions are done in an attempt to improve the paying capacity of the borrower, and in some cases to avoid foreclosure, and are made with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated.  These concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.

In accordance with regulatory guidance, the Company has approved for certain customers who have been adversely affected by COVID-19 to defer principal-only, or principal and interest.  Such short-term modifications, which were made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs.  While interest will continue to accrue to income, in accordance with GAAP, if the Company ultimately incurs a credit loss on these deferred payments, interest income would need to be reversed and therefore, interest income in future periods could be negatively impacted.  A total of $59.7 million in loan deferments have been approved since the beginning of the pandemic.  As of June 30, 2021, $57.7 million, or 96.6%, of the total loan deferments approved have returned to normal payment schedules and are now current.  

Based on regulatory guidance on student lending, the Company has classified 57 of its student loans purchased (“Purchased Student Loans”), which exclude the student loans acquired from Fauquier that are 98% guaranteed by the U. S. Government (the “Acquired Student Loans”), as TDRs for a total of $1.0 million as of June 30, 2021.  These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered TDRs.  Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance.  Initially, all student loans were fully insured by a surety bond, and the Company did not expect to experience a loss on these loans.  Based on the loss of insurance after July 27, 2018 due to the insolvency of the insurer, management has evaluated these loans individually for impairment and included any expected loss in the allowance for loan losses; interest continues to accrue on these TDRs during any deferment and forbearance periods.

The following provides a summary, by class, of TDRs that continue to accrue interest under the terms of the restructuring agreement, which are considered to be performing, and TDRs that have been placed in non-accrual status, which are considered to be nonperforming (dollars in thousands).

 

Troubled debt restructurings

 

June 30, 2021

 

 

December 31, 2020

 

 

 

No. of

 

 

Recorded

 

 

No. of

 

 

Recorded

 

 

 

Loans

 

 

Investment

 

 

Loans

 

 

Investment

 

Performing TDRs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential mortgages

 

 

1

 

 

$

103

 

 

 

1

 

 

$

109

 

Consumer

 

 

57

 

 

 

955

 

 

 

75

 

 

 

1,156

 

Total performing TDRs

 

 

58

 

 

$

1,058

 

 

 

76

 

 

$

1,265

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming TDRs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate construction and land development

 

 

0

 

 

$

-

 

 

 

1

 

 

$

8

 

Total nonperforming TDRs

 

 

0

 

 

$

-

 

 

 

1

 

 

$

8

 

Total TDRs

 

 

58

 

 

$

1,058

 

 

 

77

 

 

$

1,273

 

 

17


 

 

A summary of loans shown above that were modified under the terms of a TDR during the three and six months ended June 30, 2021 and 2020 is shown below by class (dollars in thousands).  The Post-Modification Recorded Balance reflects the period end balances, inclusive of any interest capitalized to principal, partial principal paydowns, and principal charge-offs since the modification date.  Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

 

 

 

For the three months ended

 

 

For the three months ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

Number

of Loans

 

 

Pre-

Modification

Recorded

Balance

 

 

Post-

Modification

Recorded

Balance

 

 

Number

of Loans

 

 

Pre-

Modification

Recorded

Balance

 

 

Post-

Modification

Recorded

Balance

 

Consumer

 

 

0

 

 

$

 

 

$

 

 

 

6

 

 

$

49

 

 

$

49

 

Total loans modified during the period

 

 

0

 

 

$

 

 

$

 

 

 

6

 

 

$

49

 

 

$

49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

 

 

For the six months ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

Number

of Loans

 

 

Pre-

Modification

Recorded

Balance

 

 

Post-

Modification

Recorded

Balance

 

 

Number

of Loans

 

 

Pre-

Modification

Recorded

Balance

 

 

Post-

Modification

Recorded

Balance

 

Consumer

 

 

6

 

 

$

63

 

 

$

63

 

 

 

11

 

 

$

109

 

 

$

109

 

Total loans modified during the period

 

 

6

 

 

$

63

 

 

$

63

 

 

 

11

 

 

$

109

 

 

$

109

 

 

During the six months ended June 30, 2021, there were three loans modified as a TDR that subsequently defaulted which had been modified as a TDR during the twelve months prior to default.  These student loans had balances of $22 thousand prior to being charged off. There were five loans modified as a TDR that subsequently defaulted during the year ended December 31, 2020 which had been modified as a TDR during the twelve months prior to default.  These student loans had balances totaling $48 thousand prior to being charged off.

There was one loan secured by 1-4 family residential property, from the Acquired Loans, that was in the process of foreclosure with a principal balance of $220 thousand at June 30, 2021 and no loans secured by 1-4 family residential property were in the process of foreclosure at December 31, 2020.

Note 5.  Allowance for Loan Losses

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s quarterly evaluation of the collectability of the loan portfolio, credit concentrations, historical loss experience, specific impaired loans, and economic conditions. To determine the total allowance for loan losses, the Company estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows.  

For purposes of determining the allowance for loan losses on the outstanding loans that were not Acquired Loans (the “Non-Acquired Loans”), the Company has segmented certain loans in the portfolio by product type.  Within these segments, the Company has sub-segmented its portfolio by classes within the segments, based on the associated risks within these classes.  Note that under the acquisition method of accounting (ASC 805), the allowance for loan losses recorded in the books of Fauquier was not carried over into the books of the Company.  

 

Management utilizes a loss migration model for determining the quantitative risk assigned to unimpaired loans in order to capture historical loss information at the loan level, track loss migration through risk grade deterioration, and increase efficiencies related to performing the calculations.  The quantitative risk factor for each loan class primarily utilizes a migration analysis loss method based on loss history for the prior twelve quarters.

The migration analysis loss method is used for all loan pools except for the following:

 

Student loans purchased (excluding Acquired Student Loans) - On June 27, 2018, the Company was notified that ReliaMax Surety Company (“ReliaMax Surety”), the South Dakota insurance company which issued surety bonds for the student loan pools, was placed into liquidation due to insolvency.  As such, the historical charge-off rate on this portfolio is determined by using the Company’s own losses/charge-offs since July 1, 2018 together with prior insurance claim history. For reporting periods prior to June 30, 2018, the Company did not charge off student

18


 

 

loans as the insurance covered the past due loans, but the Company did apply qualitative factors to calculate a reserve on these loans, net of the deposit reserve accounts held by the Company for this group of loans.

 

Commercial and industrial government guaranteed loans and PPP loans - These loans require no reserve as these are 100% guaranteed by either the SBA or the United States Department of Agriculture.  

Under the migration analysis method, average loss rates are calculated at the risk grade and class levels by dividing the twelve-quarter average net charge-off amount by the twelve-quarter average loan balances.  Qualitative factors are combined with these quantitative factors to arrive at the overall general allowances.

The Company’s internal creditworthiness grading system is based on experiences with similarly graded loans. The Company performs regular credit reviews of the loan portfolio to review the credit quality and adherence to its underwriting standards. Additionally, external reviews of a portion of the credits are conducted annually.

Loans that trend upward on the risk ratings scale, toward more positive risk ratings, generally exhibit lower risk factor characteristics. Conversely, loans that migrate toward more negative ratings generally will result in a higher risk factor being applied to those related loan balances.


19


 

 

Risk Ratings and Historical Loss Factor Assigned

Excellent

A 0% historical loss factor is applied, as these loans are secured by cash or fully guaranteed by a U.S. government agency and represent a minimal risk.  The Company has never experienced a loss within this category.

Good

A 0% historical loss factor is applied, as these loans represent a low risk and are secured by marketable collateral within margin. In an abundance of caution, a nominal loss reserve is applied to these loans. The Company has never experienced a loss within this category.

Pass

A historical loss factor for loans rated “Pass” is applied to current balances of like-rated loans, pooled by class.  Loans with the following risk ratings are pooled by class and considered together as “Pass”:

Satisfactory – modest risk loans where the borrower has strong and liquid financial statements and more than adequate cash flow

Average – average risk loans where the borrower has reasonable debt service capacity

Marginal – acceptable risk loans where the borrower has acceptable financial statements but is leveraged

Watch

These loans have an acceptable risk but require more attention than normal servicing.  A historical loss factor for loans rated “Watch” is applied to current balances of like-rated loans pooled by class.

Special Mention

These potential problem loans are currently protected but are potentially weak.  A historical loss factor for loans rated “Special Mention” is applied to current balances of like-rated loans pooled by class.

Substandard

These problem loans are inadequately protected by the sound worth and paying capacity of the borrower and/or the value of any collateral pledged.  These loans may be considered impaired and evaluated on an individual basis.  Otherwise, a historical loss factor for loans rated “Substandard” is applied to current balances of all other “Substandard” loans pooled by class.

Doubtful

Loans with this rating have significant deterioration in the sound worth and paying capacity of the borrower and/or the value of any collateral pledged, making collection or liquidation of the loan in full highly questionable.  These loans would be considered impaired and evaluated on an individual basis.  

The following represents the loan portfolio designated by the internal risk ratings assigned to each credit as of June 30, 2021 and December 31, 2020 (dollars in thousands). There were no loans rated “Doubtful” as of either period.

 

June 30, 2021

 

Excellent

 

 

Good

 

 

Pass

 

 

Watch

 

 

Special

Mention

 

 

Sub-

standard

 

 

TOTAL

 

Commercial

 

$

100,879

 

 

$

14,189

 

 

$

44,911

 

 

$

39

 

 

$

236

 

 

$

219

 

 

$

160,473

 

Real estate construction and land

 

 

-

 

 

 

-

 

 

 

94,159

 

 

 

-

 

 

 

1,595

 

 

 

667

 

 

 

96,421

 

1-4 family residential mortgages

 

 

-

 

 

 

-

 

 

 

368,975

 

 

 

2,873

 

 

 

663

 

 

 

9,290

 

 

 

381,801

 

Commercial mortgages

 

 

-

 

 

 

3,344

 

 

 

429,966

 

 

 

5,604

 

 

 

1,517

 

 

 

15,364

 

 

 

455,795

 

Consumer

 

 

544

 

 

 

25,691

 

 

 

44,227

 

 

 

1,122

 

 

 

32

 

 

 

55

 

 

 

71,671

 

Total Loans

 

$

101,423

 

 

$

43,224

 

 

$

982,238

 

 

$

9,638

 

 

$

4,043

 

 

$

25,595

 

 

$

1,166,161

 

 

 

20


 

 

 

December 31, 2020

 

Excellent

 

 

Good

 

 

Pass

 

 

Watch

 

 

Special

Mention

 

 

Sub-

standard

 

 

TOTAL

 

Commercial

 

$

87,014

 

 

$

14,336

 

 

$

16,126

 

 

$

485

 

 

$

-

 

 

$

727

 

 

$

118,688

 

Real estate construction and land

 

 

-

 

 

 

-

 

 

 

22,305

 

 

 

-

 

 

 

-

 

 

 

204

 

 

 

22,509

 

1-4 family residential mortgages

 

 

-

 

 

 

-

 

 

 

126,910

 

 

 

3,634

 

 

 

1,357

 

 

 

1,065

 

 

 

132,966

 

Commercial mortgages

 

 

-

 

 

 

-

 

 

 

261,663

 

 

 

5,854

 

 

 

-

 

 

 

9,592

 

 

 

277,109

 

Consumer

 

 

1,012

 

 

 

18,929

 

 

 

36,573

 

 

 

1,373

 

 

 

64

 

 

 

183

 

 

 

58,134

 

Total Loans

 

$

88,026

 

 

$

33,265

 

 

$

463,577

 

 

$

11,346

 

 

$

1,421

 

 

$

11,771

 

 

$

609,406

 

 

In addition, the adequacy of the Company’s allowance for loan losses is evaluated through reference to eight qualitative factors, listed below and ranked in order of importance:

 

1)

Changes in national and local economic conditions, including the condition of various market segments;

 

2)

Changes in the value of underlying collateral;

 

3)

Changes in volume of classified assets, measured as a percentage of capital;

 

4)

Changes in volume of delinquent loans;

 

5)

The existence and effect of any concentrations of credit and changes in the level of such concentrations;

 

6)

Changes in lending policies and procedures, including underwriting standards;

 

7)

Changes in the experience, ability and depth of lending management and staff; and

 

8)

Changes in the level of policy exceptions.

It has been the Company’s experience that the first five factors drive losses to a much greater extent than the last three factors; therefore, the first five factors are weighted more heavily. Qualitative factors are not assessed against loans rated “Excellent” or “Good,” as the Company has never experienced a loss within these categories.

As of March 31, 2020 and June 30, 2020, the Company downgraded the economic qualitative factors within its ALLL model in light of the effects of COVID-19 on the economy.  No additional downgrades of such factors were taken during the quarters ended September 30, 2020, December 31, 2020 or March 31, 2021.  During the quarter ended June 30, 2021, the Company upgraded the economic qualitative factors, resulting in a release of a portion of the reserves for loan losses related to the pandemic, as credit deterioration since the onset of COVID-19 has so far not been experienced to the extent anticipated. If economic conditions improve or worsen, the Company could experience changes in the required ALLL.  It is possible that asset quality metrics could decline in the future if there is a resurgence of COVID-19 cases that disrupts economic activity.

For each segment and class of loans, management must exercise significant judgment to determine the estimation method that fits the credit risk characteristics of its various segments. Although this evaluation is inherently subjective, qualified management utilizes its significant knowledge and experience related to both the Company’s markets and the history of the Company’s loan losses.

Impaired loans are individually evaluated and, if deemed appropriate, a specific allocation is made for these loans. In reviewing the loans classified as impaired loans totaling $1.1 million at June 30, 2021, a specific valuation allowance was recognized after consideration was given for each borrowing as to the fair value of the collateral on the loan or the present value of expected future cash flows from the borrower.  The $4 thousand in the allowance total shown below as individually evaluated for impairment was attributed to the impaired student loans that required an allowance as of June 30, 2021 due to the loss of the insurance on this portfolio as discussed previously.

21


 

A summary of the transactions in the Allowance for Loan Losses by major loan portfolio segment for the six months ended June 30, 2021 and the year ended December 31, 2020 appears below (dollars in thousands):

 

Allowance for Loan Losses Rollforward by Portfolio Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the period ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

Loans

 

 

Real Estate

Construction

and Land

 

 

Real Estate

Mortgages

 

 

Consumer

Loans

 

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of beginning of year

 

$

209

 

 

$

160

 

 

$

3,897

 

 

$

1,189

 

 

$

5,455

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

(397

)

 

 

(397

)

Recoveries

 

 

181

 

 

 

2

 

 

 

3

 

 

 

68

 

 

 

254

 

Provision for (recovery of) loan losses

 

 

(257

)

 

 

79

 

 

 

50

 

 

 

338

 

 

 

210

 

Ending Balance

 

$

133

 

 

$

241

 

 

$

3,950

 

 

$

1,198

 

 

$

5,522

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

 

$

 

 

$

 

 

$

4

 

 

$

4

 

Collectively evaluated for impairment

 

 

133

 

 

 

241

 

 

 

3,950

 

 

 

1,194

 

 

 

5,518

 

Acquired loans - purchased credit impaired

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

 

$

 

 

$

103

 

 

$

955

 

 

$

1,058

 

Collectively evaluated for impairment

 

 

158,490

 

 

 

68,449

 

 

 

794,821

 

 

 

67,791

 

 

 

1,089,551

 

Acquired loans - purchased credit impaired

 

 

1,983

 

 

 

27,972

 

 

 

42,672

 

 

 

2,925

 

 

 

75,552

 

Ending Balance

 

$

160,473

 

 

$

96,421

 

 

$

837,596

 

 

$

71,671

 

 

 

1,166,161

 

 

As of and for the period ended December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

Loans

 

 

Real Estate

Construction

and Land

 

 

Real Estate

Mortgages

 

 

Consumer

Loans

 

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of beginning of year

 

$

302

 

 

$

109

 

 

$

2,684

 

 

$

1,114

 

 

$

4,209

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

(805

)

 

 

(805

)

Recoveries

 

 

28

 

 

 

-

 

 

 

1

 

 

 

400

 

 

 

429

 

Provision for (recovery of) loan losses

 

 

(121

)

 

 

51

 

 

 

1,212

 

 

 

480

 

 

 

1,622

 

Ending Balance

 

$

209

 

 

$

160

 

 

$

3,897

 

 

$

1,189

 

 

$

5,455

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

 

$

 

 

$

 

 

$

4

 

 

$

4

 

Collectively evaluated for impairment

 

 

209

 

 

 

160

 

 

 

3,897

 

 

 

1,185

 

 

 

5,451

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

 

$

8

 

 

$

109

 

 

$

1,156

 

 

$

1,273

 

Collectively evaluated for impairment

 

 

118,688

 

 

 

22,501

 

 

 

409,966

 

 

 

56,978

 

 

 

608,133

 

Ending Balance

 

$

118,688

 

 

$

22,509

 

 

$

410,075

 

 

$

58,134

 

 

$

609,406

 

 

As previously mentioned, one of the major factors that the Company uses in evaluating the adequacy of its allowance for loan losses is changes in the volume of delinquent loans.  Management monitors payment activity on a regular basis.  For all classes of loans, the Company considers the entire balance of the loan to be contractually delinquent if the minimum payment is not received by the due date.  Interest and fees continue to accrue on past due loans until they are placed in nonaccrual or charged off.

22


 

The following tables show the aging of past due loans as of June 30, 2021 and December 31, 2020 (dollars in thousands).

 

Past Due Aging as of

June 30, 2021

 

30-59

Days Past

Due

 

 

60-89

Days Past

Due

 

 

90 Days or

More Past

Due

 

 

Total Past

Due

 

 

PCI

 

 

Current

 

 

Total

Loans

 

 

90 Days

Past Due

and Still

Accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

790

 

 

$

77

 

 

$

1,117

 

 

$

1,984

 

 

$

1,983

 

 

$

156,506

 

 

$

160,473

 

 

$

1,117

 

Real estate construction and land

 

 

51

 

 

 

-

 

 

 

-

 

 

 

51

 

 

 

27,972

 

 

 

68,398

 

 

 

96,421

 

 

 

-

 

1-4 family residential mortgages

 

 

1,528

 

 

 

-

 

 

 

280

 

 

 

1,808

 

 

 

17,324

 

 

 

362,669

 

 

 

381,801

 

 

 

280

 

Commercial mortgages

 

 

1,923

 

 

 

-

 

 

 

-

 

 

 

1,923

 

 

 

25,348

 

 

 

428,524

 

 

 

455,795

 

 

 

-

 

Consumer loans

 

 

304

 

 

 

44

 

 

 

158

 

 

 

506

 

 

 

2,925

 

 

 

68,240

 

 

 

71,671

 

 

 

141

 

Total Loans

 

$

4,596

 

 

$

121

 

 

$

1,555

 

 

$

6,272

 

 

$

75,552

 

 

$

1,084,337

 

 

$

1,166,161

 

 

$

1,538

 

 

Past Due Aging as of

December 31, 2020

 

30-59

Days Past

Due

 

 

60-89

Days Past

Due

 

 

90 Days or

More Past

Due

 

 

Total Past

Due

 

 

Current

 

 

Total

Loans

 

 

90 Days

Past Due

and Still

Accruing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,130

 

 

$

470

 

 

$

-

 

 

$

1,600

 

 

$

117,088

 

 

$

118,688

 

 

$

-

 

Real estate construction and land

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

22,509

 

 

 

22,509

 

 

 

-

 

1-4 family residential mortgages

 

 

501

 

 

 

-

 

 

 

-

 

 

 

501

 

 

 

132,465

 

 

 

132,966

 

 

 

-

 

Commercial mortgages

 

 

46

 

 

 

-

 

 

 

-

 

 

 

46

 

 

 

277,063

 

 

 

277,109

 

 

 

-

 

Consumer loans

 

 

298

 

 

 

66

 

 

 

137

 

 

 

501

 

 

 

57,633

 

 

 

58,134

 

 

 

137

 

Total Loans

 

$

1,975

 

 

$

536

 

 

$

137

 

 

$

2,648

 

 

$

606,758

 

 

$

609,406

 

 

$

137

 

 

 

NOTE 6: Goodwill and Other Intangible Assets

The carrying amount of goodwill was $8.9 million and $372 thousand at June 30, 2021 and December 31, 2020, respectively. The following table presents the changes in goodwill during the six months ended June 30, 2021.  There were no changes in the recorded balance of goodwill during the three and six months ended June 30, 2020.

      

Sturman Wealth Advisors

 

Fauquier

 

Total

 

Balance as of January 1, 2021

$

372

 

$

-

 

$

372

 

Acquisition of Fauquier Bankshares, Inc.

 

-

 

 

8,526

 

 

8,526

 

Balance at June 30, 2021

$

372

 

$

8,526

 

$

8,898

 

23


 

 

The Corporation had $8.6 million and $341 thousand of other intangible assets as of June 30, 2021 and December 31, 2020, respectively.  Other intangible assets were recognized in connection with the core deposits acquired from Fauquier in 2021 and the book of business, including interest in the client relationships of an officer, acquired by VNB Wealth in 2016, Sturman Wealth Advisors.  The following table summarizes the gross carrying amounts and accumulated amortization of other intangible assets (dollars in thousands):

 

 

June 30,

2021

 

 

December 31,

2020

 

 

Gross Carrying Amount

 

Accumulated Amortization

 

 

Gross Carrying Amount

 

Accumulated Amortization

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

    Core deposit intangible

$

8,700

 

$

(428

)

 

$

-

 

$

-

 

    Customer relationships intangible

 

773

 

 

(466

)

 

 

773

 

 

(432

)

         Total

$

9,473

 

$

(894

)

 

$

773

 

$

(432

)

Amortization expense was $445 thousand and $17 thousand for the three months ended June 30, 2021 and 2020, respectively and $462 thousand and $57 thousand for the six months ended June 30, 2021 and 2020, respectively.

Estimated future amortization expense as of June 30, 2021 is as follows (dollars in thousands):

 

Core

 

Customer

 

 

Deposit

 

Relationships

 

 

Intangible

 

Intangible

 

For the six months ending December 31, 2021

$

823

 

$

34

 

For the year ending December 31, 2022

 

1,517

 

 

67

 

For the year ending December 31, 2023

 

1,345

 

 

67

 

For the year ending December 31, 2024

 

1,172

 

 

67

 

For the year ending December 31, 2025

 

999

 

 

67

 

Thereafter

 

2,416

 

 

5

 

Total

$

8,272

 

$

307

 

 

Note 7.  Net Income Per Share

 

The table below shows the weighted average number of shares used in computing net income per common share and the effect of the weighted average number of shares of potential dilutive common stock for the three and six months ended June 30, 2021 and 2020. Diluted net income per share is computed based on the weighted average number of shares of common stock equivalents outstanding, to the extent dilutive.  The Company’s common stock equivalents relate to outstanding common stock options. Unvested restricted stock as noted in the Consolidated Balance Sheets as of June 30, 2021 and June 30, 2020 is included in the calculation of basic and diluted net income per share (dollars below reported in thousands except per share data).

24


 

 

Three Months Ended

 

June 30, 2021

 

 

June 30, 2020

 

 

 

Net

Income

 

 

Weighted

Average

Shares

 

 

Per

Share

Amount

 

 

Net

Income

 

 

Weighted

Average

Shares

 

 

Per

Share

Amount

 

Basic net income per share

 

$

147

 

 

 

5,305,277

 

 

$

0.03

 

 

$

2,088

 

 

 

2,710,019

 

 

$

0.77

 

Effect of dilutive stock options

 

 

-

 

 

 

15,013

 

 

 

-

 

 

 

-

 

 

 

625

 

 

 

-

 

Diluted net income per share

 

$

147

 

 

 

5,320,290

 

 

$

0.03

 

 

$

2,088

 

 

 

2,710,644

 

 

$

0.77

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

June 30, 2021

 

 

June 30, 2020

 

 

 

Net

Income

 

 

Weighted

Average

Shares

 

 

Per

Share

Amount

 

 

Net

Income

 

 

Weighted

Average

Shares

 

 

Per

Share

Amount

 

Basic net income per share

 

$

1,652

 

 

 

4,019,700

 

 

$

0.41

 

 

$

3,492

 

 

 

2,701,411

 

 

$

1.29

 

Effect of dilutive stock options

 

 

-

 

 

 

11,601

 

 

 

-

 

 

 

-

 

 

 

900

 

 

 

-

 

Diluted net income per share

 

$

1,652

 

 

$

4,031,301

 

 

$

0.41

 

 

$

3,492

 

 

$

2,702,311

 

 

$

1.29

 

 

For the three and six months ended June 30, 2021, there were 78,301 option shares considered anti-dilutive and excluded from this calculation. For the three and six months ended June 30, 2020, there were 105,404 and 104,301 option shares, respectively, considered anti-dilutive and excluded from this calculation.

Note 8.  Stock Incentive Plans

At the Annual Shareholders Meeting on May 21, 2014, shareholders approved the Virginia National Bankshares Corporation 2014 Stock Incentive Plan (“2014 Plan”). The 2014 Plan makes available up to 275,625 shares of the Company’s common stock, as adjusted by prior issued stock dividends, to be issued to plan participants. The 2014 Plan provides for granting of both incentive and nonqualified stock options, as well as restricted stock, unrestricted stock and other stock based awards.  No new grants will be issued under the 2005 Stock Incentive Plan (“2005 Plan”) as this plan has expired.

For the 2014 Plan and the 2005 Plan (the “Plans”), the option price of incentive stock options cannot be less than the fair value of the stock at the time an option is granted. Nonqualified stock options may be granted at prices established by the Board of Directors, including prices less than the fair value on the date of grant. Outstanding stock options generally expire ten years from the grant date. Stock options generally vest by the fourth or fifth anniversary of the date of the grant.

25


 

A summary of the shares issued and available under each of the Plans is shown below as of June 30, 2021.  Share data and exercise price range per share have been adjusted to reflect prior issued stock dividends.  Although the 2005 Plan has expired and no new grants will be issued under this plan, there were options issued before the plan expired that are still outstanding as shown below.

 

 

 

2005 Plan

 

 

2014 Plan

 

Aggregate shares issuable

 

 

253,575

 

 

 

275,625

 

Options issued, net of forfeited and expired options

 

 

(59,870

)

 

 

(146,506

)

Unrestricted stock issued

 

 

-

 

 

 

(11,535

)

Restricted stock grants issued

 

 

-

 

 

 

(49,898

)

Cancelled due to Plan expiration

 

 

(193,705

)

 

 

-

 

Remaining available for grant

 

 

-

 

 

 

67,686

 

 

 

 

 

 

 

 

 

 

Stock grants issued and outstanding:

 

 

 

 

 

 

 

 

Total vested and unvested shares

 

 

 

 

 

57,036

 

Fully vested shares

 

 

 

 

 

21,541

 

 

 

 

 

 

 

 

 

 

Option grants issued and outstanding:

 

 

 

 

 

 

 

 

Total vested and unvested shares

 

 

1,379

 

 

 

144,301

 

Fully vested shares

 

 

1,379

 

 

 

47,293

 

 

 

 

 

 

 

 

 

 

Exercise price range

 

$13.69

 

 

$23.75 to $42.62

 

 

The Company accounts for all of its stock incentive plans under recognition and measurement accounting principles which require that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. Stock-based compensation arrangements include stock options and restricted stock. All stock-based payments to employees are required to be valued at a fair value on the date of grant and expensed based on that fair value over the applicable vesting period.

Stock Options

Changes in the stock options outstanding related to the Plans are summarized below (dollars in thousands except per share data):

 

 

 

June 30, 2021

 

 

 

Number of Options

 

 

Weighted Average

Exercise Price

 

 

Aggregate

Intrinsic Value

 

Outstanding at January 1, 2021

 

 

146,783

 

 

$

33.51

 

 

$

-

 

Issued

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(1,103

)

 

 

27.39

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2021

 

 

145,680

 

 

$

33.56

 

 

$

996

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at June 30, 2021

 

 

48,672

 

 

$

39.42

 

 

$

106

 

 

For the six months ended June 30, 2021 and 2020, the Company recognized $65 thousand and $58 thousand, respectively, in compensation expense for stock options.  As of June 30, 2021, there was $362 thousand in unrecognized compensation expense remaining to be recognized in future reporting periods through 2025. The fair value of any stock option grant is estimated at the grant date using the Black-Scholes pricing model.  No stock option grants were issued during the three months ended June 30, 2021, or during the three months ended June 30, 2020.  No stock option grants were issued in the six months ended June 30, 2021, and 420 stock options grants were issued during the six months ended June 30, 2020.

 

26


 

 

The fair value of each option granted in the six months ended June 30, 2021 and 2020 was estimated based on the assumptions noted in the following table:

 

 

 

For the six months ended

 

 

 

June 30, 2021

 

June 30, 2020

 

Expected volatility1

 

N/A

 

22.97%

 

Expected dividends2

 

N/A

 

4.75%

 

Expected term (in years)3

 

N/A

 

 

6.50

 

Risk-free rate4

 

N/A

 

0.68%

 

 

 

1

Based on the monthly historical volatility of the Company’s stock price over the expected life of the options.

 

 

2

Calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant.

 

 

3

Based on the average of the contractual life and vesting period for the respective option.

 

 

4

Based upon an interpolated U.S. Treasury yield curve interest rate that corresponds to the contractual life of the option, in effect at the time of the grant.

 

Summary information pertaining to options outstanding at June 30, 2021 is shown below. Share and per share data have been adjusted to reflect the prior stock dividends issued.

 

 

 

Options Outstanding

 

 

Options Exercisable

 

Exercise Price

 

Number of

Options

Outstanding

 

 

Weighted-

Average

Remaining

Contractual Life

 

Weighted-

Average

Exercise

Price

 

 

Number of

Options

Exercisable

 

 

Weighted-

Average

Exercise

Price

 

$13.69 to $20.00

 

 

1,379

 

 

1.6 Years

 

$

13.69

 

 

 

1,379

 

 

$

13.69

 

$20.01 to $30.00

 

 

66,000

 

 

9.0 Years

 

 

24.64

 

 

 

5,200

 

 

 

26.00

 

$30.01 to $40.00

 

 

20,820

 

 

7.7 Years

 

 

38.14

 

 

 

7,608

 

 

 

38.73

 

$40.01 to $42.62

 

 

57,481

 

 

6.9 Years

 

 

42.62

 

 

 

34,485

 

 

 

42.62

 

Total

 

 

145,680

 

 

7.9 Years

 

$

33.56

 

 

 

48,672

 

 

$

39.42

 

 

Stock Grants

Restricted stock grants – During the three and six months ended June 30, 2021,5,730 and 19,233 restricted shares, respectively, were granted to employees and non-employee directors, vesting over a four- or five-year period.  During the three and six months ended June 30, 2020, 11,900 and 22,268 restricted shares, respectively, were granted.  For the three and six months ended June 30, 2021, $165 thousand and $226 thousand, respectively, was expensed as a result of restricted stock grants.  For the three and six months ended June 30, 2020, $39 thousand and $54 thousand, respectively, in expense was incurred.   As of June 30, 2021, there was $1.1 million in unrecognized compensation expense for restricted stock grants remaining to be recognized in future reporting periods through 2026.  

Changes in the restricted stock grants outstanding during the six months ended June 30, 2021 are summarized below (dollars in thousands except per share data):

 

 

 

June 30, 2021

 

 

 

Number of Shares

 

 

Weighted Average

Grant Date

Fair Value

Per Share

 

 

Aggregate

Intrinsic Value

 

Nonvested as of January 1, 2021

 

 

25,268

 

 

$

26.60

 

 

$

982

 

Issued

 

 

19,233

 

 

 

30.20

 

 

748

 

Vested

 

 

(9,006

)

 

 

26.01

 

 

 

(350

)

Nonvested at June 30, 2021

 

 

35,495

 

 

$

28.70

 

 

$

1,380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27


 

 

 

Note 9.  Fair Value Measurements

Determination of Fair Value

The Company follows ASC 820, “Fair Value Measurements and Disclosures,” to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This codification clarifies that the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

 

Level 1 –

 

Valuation is based on quoted prices in active markets for identical assets and liabilities.

 

 

 

 

 

Level 2 –

 

Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

 

 

 

 

 

Level 3 –

 

Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market

 

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

28


 

The following tables present the balances measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020 (dollars in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at June 30, 2021 Using:

 

 

 

 

 

 

 

Quoted Prices

in Active

Markets for

Identical Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

Description

 

Balance

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

35,228

 

 

$

-

 

 

$

35,228

 

 

$

-

 

Mortgage-backed securities/CMOs

 

 

136,418

 

 

 

-

 

 

 

136,418

 

 

 

-

 

Municipal bonds

 

 

95,327

 

 

 

-

 

 

 

95,327

 

 

 

-

 

Total securities available for sale

 

$

266,973

 

 

$

-

 

 

$

266,973

 

 

$

-

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2020 Using:

 

 

 

 

 

 

 

Quoted Prices

in Active

Markets for

Identical Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

Description

 

Balance

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

25,305

 

 

$

-

 

 

$

25,305

 

 

$

-

 

Mortgage-backed securities/CMOs

 

 

78,100

 

 

 

-

 

 

 

78,100

 

 

 

-

 

Municipal bonds

 

 

70,681

 

 

 

-

 

 

 

70,681

 

 

 

-

 

Total securities available for sale

 

$

174,086

 

 

$

-

 

 

$

174,086

 

 

$

-

 

 

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

Other Real Estate Owned

Other real estate owned (“OREO”) is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the Allowance for Loan Losses.  Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Consolidated Statements of Income. As of June 30, 2021, the Company had one OREO property acquired through the merger with Fauquier which is carried at a fair value of $611 thousand.  As of December 31, 2020, the Company had no OREO property.

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either (a) the observable market price of the loan or the fair value of the collateral, or (b) using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data

29


 

(Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3.

Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest are not recorded at fair value, and are therefore excluded from fair value disclosure requirements.

The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).

Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had impaired loans, excluding acquired impaired loans, of $1.1 million as of June 30, 2021 and $1.3 million as of December 31, 2020. All impaired loans were measured based on expected future cash flows discounted at the loan’s effective interest rate, or fair value of collateral, as noted above.

The following table presents the Company’s assets that were measured at fair value on a nonrecurring basis as of June 30, 2021.  There were no such assets to report as of December 31, 2020.

 

 

 

 

 

 

 

Fair Value Measurements at June 30, 2021 Using:

 

 

 

 

 

 

 

Quoted Prices

in Active

Markets for

Identical Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

Description

 

Balance

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Real Estate Owned

 

$

611

 

 

$

 

 

$

 

 

$

611

 

For the assets measured at fair value on a nonrecurring basis as of June 30, 2021, the following table displays quantitative information about Level 3 Fair Value Measurements (dollars in thousands):

 

Description

 

Fair Value

 

 

Valuation Technique

 

Unobservable Inputs

 

Weighted Average

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Other Real Estate Owned

 

$

611

 

 

Market comparables

 

Discount applied to bonafide offer *

 

 

6.0

%

* A discount percentage is applied based on age of independent appraisals, current market conditions, and cost to sell.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASC 825, “Financial Instruments,” requires disclosures about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.  

Interest rate swaps

The Company recognizes interest rate swaps at fair value.  The Company has contracted with a third-party to provide valuations for interest rate swaps using standard valuation techniques.  The Company’s interest rate swaps are classified as Level 2.

 

30


 

 

The carrying values and estimated fair values of the Company's financial instruments as of June 30, 2021 and December 31, 2020 are as follows (dollars in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at June 30, 2021 Using:

 

 

 

 

 

 

 

Quoted Prices

in Active

Markets for

Identical Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

 

 

 

 

 

 

Carrying value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalent

 

$

313,979

 

 

$

313,979

 

 

$

-

 

 

$

-

 

 

$

313,979

 

Available for sale securities

 

 

266,973

 

 

 

-

 

 

 

266,973

 

 

 

-

 

 

 

266,973

 

Loans, net

 

 

1,160,639

 

 

 

-

 

 

 

-

 

 

 

1,174,565

 

 

 

1,174,565

 

Bank owned life insurance

 

 

30,775

 

 

 

-

 

 

 

30,775

 

 

 

-

 

 

 

30,775

 

Other real estate, net

 

 

611

 

 

 

-

 

 

 

-

 

 

 

611

 

 

 

611

 

Accrued interest receivable

 

 

4,197

 

 

 

-

 

 

 

1,135

 

 

 

3,062

 

 

 

4,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest-bearing transaction, money market, and savings accounts

 

$

1,458,453

 

 

$

-

 

 

$

1,458,453

 

 

$

-

 

 

$

1,458,453

 

Certificates of deposit and other time deposits

 

 

170,995

 

 

 

-

 

 

 

171,295

 

 

 

-

 

 

 

171,295

 

Borrowings

 

 

42,989

 

 

 

-

 

 

 

42,741

 

 

 

-

 

 

 

42,741

 

Junior subordinated debt

 

 

3,345

 

 

 

-

 

 

 

-

 

 

 

3,345

 

 

 

3,345

 

Accrued interest payable

 

 

221

 

 

 

-

 

 

 

221

 

 

 

-

 

 

 

221

 

Interest rate swaps

 

 

291

 

 

 

 

 

 

 

291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2020 Using:

 

 

 

 

 

 

 

Quoted Prices

in Active

Markets for

Identical Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

 

 

 

 

 

 

Carrying value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalent

 

$

34,695

 

 

$

34,695

 

 

$

-

 

 

$

-

 

 

$

34,695

 

Available for sale securities

 

 

174,086

 

 

 

-

 

 

 

174,086

 

 

 

-

 

 

 

174,086

 

Loans, net

 

 

603,951

 

 

 

-

 

 

 

-

 

 

 

602,859

 

 

 

602,859

 

Bank owned life insurance

 

 

16,849

 

 

 

-

 

 

 

16,849

 

 

 

-

 

 

 

16,849

 

Accrued interest receivable

 

 

2,904

 

 

 

-

 

 

 

729

 

 

 

2,175

 

 

 

2,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest-bearing transaction and money market accounts

 

$

631,662

 

 

$

-

 

 

$

631,662

 

 

$

-

 

 

$

631,662

 

Certificates of deposit and other time deposits

 

 

99,102

 

 

 

-

 

 

 

99,580

 

 

 

-

 

 

 

99,580

 

Borrowings

 

 

30,000

 

 

 

-

 

 

 

30,000

 

 

 

-

 

 

 

30,000

 

Accrued interest payable

 

 

159

 

 

 

-

 

 

 

159

 

 

 

-

 

 

 

159

 

 

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. Consequently, the fair values of the Company’s financial instruments will fluctuate when interest rate levels change, and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk; however, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of

31


 

assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Note 10.  Other Comprehensive Income

A component of the Company’s other comprehensive income, in addition to net income from operations, is the recognition of the unrealized gains and losses on available for sale securities, net of income taxes.  Reclassifications of realized gains and losses on available for sale securities are reported in the income statement as “Gains on sales of securities” with the corresponding income tax effect reflected as a component of income tax expense.  There were no sales of securities in the first two quarters of 2021.  Amounts reclassified out of accumulated other comprehensive income are presented below for the three and six months ended June 30, 2021 and 2020 (dollars in thousands).

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

Available for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gains on sales of securities

 

$

 

 

$

590

 

 

$

 

 

$

643

 

Tax effect

 

---

 

 

 

(124

)

 

---

 

 

 

(135

)

Realized gains, net of tax

 

$

 

 

$

466

 

 

$

 

 

$

508

 

 

The following table presents the cumulative balances of the components of accumulated other comprehensive income (loss), net of deferred taxes of $36 thousand and ($389) thousand, as of June 30, 2021 and December 31, 2020, respectively (dollars in thousands).  

 

 

 

June 30, 2021

 

 

December 31, 2020

 

Accumulated other comprehensive income (loss) on securities

 

$

(24

)

 

$

1,460

 

Accumulated other comprehensive income (loss) on interest rate swap

 

 

(111

)

 

---

 

Total accumulated other comprehensive income (loss)

 

$

(135

)

 

$

1,460

 

 

Note 11.  Segment Reporting

The Company has four reportable segments.  Each reportable segment is a strategic business unit that offers different products and services.  They are managed separately, because each segment appeals to different markets and, accordingly, require different technology and marketing strategies.  The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report.  

The four reportable segments are:

 

Bank - The commercial banking segment involves making loans and generating deposits from individuals, businesses and charitable organizations.  Loan fee income, service charges from deposit accounts, and other non-interest-related fees, such as fees for debit cards and ATM usage and fees for treasury management services, generate additional income for the Bank segment.

 

Sturman Wealth Advisors – Sturman Wealth Advisors, formerly known as VNB Investment Services, offers wealth management and investment advisory services.  Revenue for this segment is generated primarily from investment advisory and financial planning fees, with a small and decreasing portion attributable to brokerage commissions.  

 

VNB Trust & Estate Services – VNB Trust & Estate Services offers corporate trustee services, trust and estate administration, IRA administration and custody services.  Revenue for this segment is generated from administration, service and custody fees, as well as management fees that are derived from Assets Under Management and, prior to 2020, incentive income that was based on the investment returns generated on performance-based Assets Under Management.  Investment management services currently are offered through in-house and third-party managers.  In addition, royalty income, in the form of fixed and incentive fees, from the sale of Swift Run Capital Management, LLC in 2013 is reported as income of VNB Trust & Estate Services.  More information on royalty income and the related sale can be found under Summary of Significant Accounting Policies in Note 1 of the notes to consolidated financial statements, which is found in Item 8. Financial Statements and Supplementary Data, in the Company’s Form 10-K Report for December 31, 2020.

32


 

 

Masonry Capital - Masonry Capital offers investment management services for separately managed accounts and a private investment fund employing a value-based, catalyst-driven investment strategy.  Revenue for this segment is generated from management fees that are derived from Assets Under Management and incentive income that is based on the investment returns generated on performance-based Assets Under Management.

A management fee for administrative and technology support services provided by the Bank is allocated to the other three lines of business.  For both the three months ended June 30, 2021 and 2020, management fees totaling $25 thousand were charged by the Bank and eliminated in consolidated totals.  For both the six months ended June 30, 2021 and 2020, management fees totaling $50 thousand were charged by the Bank and eliminated in consolidated totals.

Segment information for the three and six months ended June 30, 2021 and 2020 is shown in the following tables (dollars in thousands). Note that asset information is not reported below, as the assets of Sturman Wealth Advisors and VNB Trust & Estate Services are reported at the Bank level; also, assets specifically allocated to the lines of business other than the Bank are insignificant and are no longer provided to the chief operating decision maker.  

 

Three months ended June 30, 2021

 

Bank

 

 

Sturman Wealth Advisors

 

 

VNB Trust &

Estate

Services

 

 

Masonry

Capital

 

 

Consolidated

 

Net interest income

 

$

13,151

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

13,151

 

Provision for (recovery of) loan losses

 

 

(141

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(141

)

Noninterest income

 

 

2,356

 

 

 

202

 

 

 

203

 

 

 

159

 

 

 

2,920

 

Noninterest expense

 

 

15,416

 

 

 

167

 

 

 

215

 

 

 

195

 

 

 

15,993

 

Income (loss) before income taxes

 

 

232

 

 

 

35

 

 

 

(12

)

 

 

(36

)

 

 

219

 

Provision for (benefit from) income taxes

 

 

75

 

 

 

7

 

 

 

(3

)

 

 

(7

)

 

 

72

 

Net income (loss)

 

$

157

 

 

$

28

 

 

$

(9

)

 

$

(29

)

 

$

147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2021

 

Bank

 

 

Sturman Wealth Advisors

 

 

VNB Trust &

Estate

Services

 

 

Masonry

Capital

 

 

Consolidated

 

Net interest income

 

$

19,125

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

19,125

 

Provision for loan losses

 

 

210

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

210

 

Noninterest income

 

 

2,870

 

 

 

393

 

 

 

404

 

 

 

292

 

 

 

3,959

 

Noninterest expense

 

 

19,671

 

 

 

327

 

 

 

421

 

 

 

355

 

 

 

20,774

 

Income (loss) before income taxes

 

 

2,114

 

 

 

66

 

 

 

(17

)

 

 

(63

)

 

 

2,100

 

Provision for income taxes

 

 

451

 

 

 

14

 

 

 

(4

)

 

 

(13

)

 

 

448

 

Net income (loss)

 

$

1,663

 

 

$

52

 

 

$

(13

)

 

$

(50

)

 

$

1,652

 

 

 

33


 

 

Three months ended June 30, 2020

 

Bank

 

 

Sturman Wealth Advisors

 

 

VNB Trust &

Estate

Services

 

 

Masonry

Capital

 

 

Consolidated

 

Net interest income

 

$

5,755

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

5,755

 

Provision for loan losses

 

 

378

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

378

 

Noninterest income

 

 

1,211

 

 

 

162

 

 

 

175

 

 

 

78

 

 

 

1,626

 

Noninterest expense

 

 

3,811

 

 

 

154

 

 

 

234

 

 

 

205

 

 

 

4,404

 

Income (loss) before income taxes

 

 

2,777

 

 

 

8

 

 

 

(59

)

 

 

(127

)

 

 

2,599

 

Provision for (benefit from) income taxes

 

 

547

 

 

 

2

 

 

 

(12

)

 

 

(26

)

 

 

511

 

Net income (loss)

 

$

2,230

 

 

$

6

 

 

$

(47

)

 

$

(101

)

 

$

2,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2020

 

Bank

 

 

Sturman Wealth Advisors

 

 

VNB Trust &

Estate

Services

 

 

Masonry

Capital

 

 

Consolidated

 

Net interest income

 

$

11,130

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

11,130

 

Provision for loan losses

 

 

1,143

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,143

 

Noninterest income

 

 

2,346

 

 

 

340

 

 

 

433

 

 

 

176

 

 

 

3,295

 

Noninterest expense

 

 

7,774

 

 

 

328

 

 

 

472

 

 

 

373

 

 

 

8,947

 

Income (loss) before income taxes

 

 

4,559

 

 

 

12

 

 

 

(39

)

 

 

(197

)

 

 

4,335

 

Provision for income taxes

 

 

889

 

 

 

3

 

 

 

(8

)

 

 

(41

)

 

 

843

 

Net income (loss)

 

$

3,670

 

 

$

9

 

 

$

(31

)

 

$

(156

)

 

$

3,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 12.  Leases

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows.  Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease for a term similar to the length of the lease, including any probable renewal options available.  Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term.  Payments for leases with terms longer than twelve months are included in the determination of the lease liability. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.

Each of the Company’s long-term lease agreements are classified as operating leases.  Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised.  The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The following tables present information about the Company’s leases (dollars in thousands):

 

 

 

June 30, 2021

 

 

June 30, 2020

 

Lease liability

 

$

7,833

 

 

$

3,966

 

Right-of-use asset

 

$

8,371

 

 

$

3,923

 

Weighted average remaining lease term

 

6.37 years

 

 

5.55 years

 

Weighted average discount rate

 

 

1.98

%

 

 

2.56

%

 

 

34


 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Lease Expense

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Operating lease expense

 

$

427

 

 

$

204

 

 

$

649

 

 

$

408

 

Short-term lease expense

 

 

32

 

 

 

29

 

 

 

61

 

 

 

57

 

Total lease expense

 

$

459

 

 

$

233

 

 

$

710

 

 

$

465

 

Cash paid for amounts included in lease liabilities

 

$

389

 

 

$

199

 

 

$

608

 

 

$

398

 

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):

Undiscounted Cash Flow

 

June 30, 2021

 

Six months ending December 31, 2021

 

$

781

 

Twelve months ending December 31, 2022

 

 

1,534

 

Twelve months ending December 31, 2023

 

 

1,462

 

Twelve months ending December 31, 2024

 

 

1,175

 

Twelve months ending December 31, 2025

 

 

968

 

Twelve months ending December 31, 2026

 

 

622

 

Thereafter

 

 

1,771

 

Total undiscounted cash flows

 

$

8,313

 

Less:  Discount

 

 

(480

)

Lease liability

 

$

7,833

 

 

35


 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited consolidated financial statements, and notes thereto, of Virginia National Bankshares Corporation (the “Company”) included in this report and the audited consolidated financial statements, and notes thereto, of the Company included in the Company’s Form 10-K for the year ended December 31, 2020. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results for the year ending December 31, 2021 or any future period.

FORWARD-LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS

Certain statements contained or incorporated by reference in this quarterly report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, statements with respect to the Company’s operations, performance, future strategy and goals, and are often characterized by use of qualified words such as “expect,” “believe,” “estimate,” “project,” “anticipate,” “intend,” “will,” “should,” or words of similar meaning or other statements concerning the opinions or judgement of the Company and its management about future events. While Company management believes such statements to be reasonable, future events and predictions are subject to circumstances that are not within the control of the Company and its management.  Actual results may differ materially from those included in the forward-looking statements due to a number of factors, including, without limitation, the effects of and changes in: general economic and market conditions, including the effects of declines in real estate values, an increase in unemployment levels and general economic contraction as a result of COVID-19 or other pandemics; fluctuations in interest rates, deposits, loan demand, and asset quality; assumptions that underlie the Company’s allowance for loan losses (“ALLL”); the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (e.g., COVID-19 or other pandemics), and of governmental and societal responses thereto; the performance of vendors or other parties with which the Company does business; competition; technology; changes in laws, regulations and guidance; changes in accounting principles or guidelines; performance of assets under management;  expected revenue synergies and cost savings from the recently completed merger with Fauquier Bankshares, Inc. (“Fauquier”) may not be fully realized or realized within the expected timeframe; the businesses of the Company and Fauquier may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; revenues following the merger may be lower than expected; customer and employee relationships and business operations may be disrupted by the merger; and other factors impacting financial services businesses.  Many of these factors and additional risks and uncertainties are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and other reports filed from time to time by the Company with the Securities and Exchange Commission (“SEC”). These statements speak only as of the date made, and the Company does not undertake to update any forward-looking statements to reflect changes or events that may occur after this release.

MERGER WITH FAUQUIER BANKSHARES, INC., AND THE FAUQUIER BANK

On April 1, 2021, the Company completed its merger with Fauquier. The merger of Fauquier with and into the Company (the “Merger”) was effected pursuant to the terms and conditions of the Agreement and Plan of Reorganization, dated as of September 30, 2020, between the Company and Fauquier, and a related Plan of Merger (together, the “Merger Agreement”). Immediately after the Merger, The Fauquier Bank, Fauquier’s wholly-owned bank subsidiary, merged with and into Virginia National Bank (the “Bank”), the Company’s wholly-owned bank subsidiary.

Pursuant to the Merger Agreement, former holders of shares of Fauquier common stock received 0.675 shares of the Company’s common stock for each share of Fauquier common stock held immediately prior to the Merger, with cash paid in lieu of fractional shares. Each share of common stock of the Company outstanding immediately prior to the Merger remained outstanding and was unaffected by the Merger.

Refer to Note 2 - Business Combinations, in the Notes to Consolidated Financial Statements, for further detail on the accounting policy for business combinations, fair values of assets and liabilities assumed, assumptions used in determining the fair values of assets and liabilities and the resulting goodwill.


36


 

 

OVERVIEW

Our primary financial goal is to maximize the Company’s earnings to increase long-term shareholder value.  We monitor three key financial performance measures to determine our success in realizing this goal: 1) return on average assets (ROAA), 2) return on average equity (ROAE), and 3) net income per share (EPS).  

Return on average assets (“ROAA”) for the second quarter of 2021 was 0.03% compared to 1.07% realized in the same period in the prior year.  ROAA excluding the impact of merger expenses (a non-GAAP financial measure) would have been 1.02% for the second quarter of 2021. ROAA for the six months ended June 30, 2021 was 0.24% compared to 0.93% realized in the same period in the prior year.  ROAA excluding the impact of merger expenses (a non-GAAP financial measure) would have been 0.93% for the six months ended June 30, 2021, equaling the ROAA for the prior comparable period.

 

Return on average equity (“ROAE”) for the second quarter of 2021 was 0.37% compared to 10.64% realized in same period in the prior year.  ROAE excluding the impact of merger expenses (a non-GAAP financial measure) would have been 11.89% for the second quarter of 2021.  ROAE for the six months ended June 30, 2021 was 2.76% compared to 8.98% realized in same period in the prior year.  ROAE excluding the impact of merger expenses (a non-GAAP financial measure) would have been 10.66% for the six months ended June 30, 2021, exceeding the ROAE from the comparable period in the prior year.  

 

The Company incurred $5.9 million in merger expenses during the second quarter of 2021 related to the combination with Fauquier, which closed on April 1, 2021.  Of this total, $2.2 million was incurred for system deconversion, termination and conversion fees, $1.5 million was accrued for the change-of-control payment for Marc Bogan resulting from his resignation, $1.1 million related to buyer investment banker fees, $510 thousand was associated with valuation and integration professional fees, $269 thousand related to other personnel expenses, $235 thousand was incurred for regulatory and shareholder expenses, and $150 thousand was recognized for legal expenses.  This pre-tax expense of $5.9 million represents $1.11 per diluted share for the second quarter of 2021. The Company incurred $6.2 million in merger expenses during the six months ended June 30, 2021.  First quarter expenses of $278 thousand related primarily to professional fees.

 

Net income per share was $0.03 for the second quarter of 2021, compared to $0.77 for the second quarter in the prior year.  Net income per share, excluding merger expenses (a non-GAAP financial measure), would have been $0.89 in the current quarter, exceeding the net income per share of the comparable prior period.  Net income per share was $0.41 for the first half of 2021, compared to $1.29 for the same period in the prior year.  Net income per share, excluding merger expenses (a non-GAAP financial measure), would have been $1.33 for the first half of 2021, exceeding the net income per share of the comparable prior period.

 

We also manage our capital levels through growth, quarterly cash dividends, periodic stock dividends and share repurchases, when prudent, while maintaining a strong capital position. Refer to the Results of Operations, Non-GAAP Presentation section, later in this  Management’s Discussion and Analysis for more discussion on these financial performance measures.

IMPACT OF COVID-19

Continuing cases of COVID-19, including the emergence of variants of the COVID-19 virus, continue to be a public health concern in the Company’s markets. While more than 50% of adults in the U.S. and in Virginia are fully vaccinated against COVID-19, the rate of vaccinations appears to have peaked during the second quarter of 2021, and the Delta variant has shown that there remains a threat of a resurgence of cases. There have been encouraging signs of strength in the economic recovery, including growth in consumer spending and improvement in the labor market, but many businesses continue to face difficulty in hiring desirable employees and meeting consumer demand, and certain portions of the global supply chain remain challenged by shortages and delays that first occurred due to the initial COVID-19 outbreak. There remains uncertainty about the pace of economic recovery, including uncertainty related to the labor market, inflation and fiscal and monetary policy responses from the federal government. There remains a risk that consumers and borrowers who have been supported during the pandemic by government stimulus measures may not return to employment and may not be able to repay debts as agreed following the cessation of government stimulus programs, including expanded unemployment benefits.

Management continues to carefully monitor the pandemic and its impact on the Company’s markets, customers and employees, and believes that the pandemic continues to present risks of elevated loan losses, sustained net interest margin compression and falling demand for loans; however, at this time management cannot determine the ultimate impact of the pandemic on the results of operations of the Company.

37


 

Financial Condition and Results of Operations

Throughout the onset of this pandemic, the Company has maintained its high standards of credit quality on organic loan funding to limit credit risk exposure.  

During the year ended December 31, 2020, we provided an additional $1.6 million for loan losses primarily by downgrading the qualitative economic factors within the ALLL model in light of the effects of COVID-19 on the economy. As of June 30, 2021, credit deterioration since the onset of the COVID-19 pandemic has so far not been experienced to the extent previously anticipated, and therefore, during the second quarter of 2021, we released a portion of these added reserves through a reversal of provision for loan losses. The Company continues to maintain reserves for loan losses at June 30, 2021 related to the pandemic and believe that our allowance for loan losses will be adequate to absorb probable losses that are inherent in our loan portfolio. If loan losses ultimately are not realized to the extent of the reserves provided for during the pandemic, our allowance for loan losses may be reduced in future periods through further reversals of provision for loan losses, which could benefit our results of operations for any such future period. However, if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases or the emergence of variants of the COVID-19 virus that threaten to disrupt economic activity, additional provision for loan losses may be required in future periods.

Interest income could be reduced due to the economic impact of COVID-19.  In accordance with guidance from regulators, the Company is working with borrowers who were adversely affected by COVID-19 to defer principal only, or principal and interest.  While interest will continue to accrue to income, in accordance with accounting principles generally accepted in the United States (“GAAP”), if the Company ultimately incurs a credit loss on these deferred payments, interest income would need to be reversed and therefore, interest income in future periods could be negatively affected.  Since the beginning of the pandemic, the Company has accommodated 194 deferrals on outstanding loan balances of $59.7 million (of which 131 deferrals on outstanding loan balances of $1.8 million were related to student loans).  As of June 30, 2021, $57.7 million in loan balances, or 96.6% of the total loan deferments approved, have returned to normal payment schedules and are now current, leaving a remaining balance of deferments of $2.0 million.  Of this remaining balance, $1.9 million, or 92.8%, are 100% government-guaranteed loans for which the deferrals were approved by the United States Department of Agriculture; and $144 thousand, or 7.2%, are student loans, which are private student loans not subject to potential federal forgiveness. In accordance with interagency guidance issued in March 2020 and the CARES Act, these short-term deferrals are not considered troubled debt restructurings (“TDRs”).

Primarily within the second quarter of 2020 and the first quarter of 2021, the Company devoted significant resources to accept PPP applications, a program designed to provide a direct incentive for small businesses to keep employees on their payroll.  In total, the Company, including Virginia National Bank and The Fauquier Bank, funded $207.5 million in PPP loans, with average origination fees of 3.9%, assisting many nonprofits and local businesses through this program.  As of June 30, 2021, 66.9% of the total dollars of PPP loans had been forgiven by the SBA, with $68.8 million outstanding. Loans funded through the PPP are fully guaranteed by the U.S. government.  The Company believes that it performed the required due diligence pursuant to the established SBA criteria; nonetheless, if a determination is made that certain loans did not meet the criteria established for the program, the Company may be required to establish additional ALLL through provision for loan loss expense which will negatively impact net income.

Capital and Liquidity

As of June 30, 2021, capital ratios of the Company were in excess of regulatory requirements.  While currently included in the category of “well capitalized” by bank regulators, a prolonged economic recession could adversely impact reported and regulatory capital ratios. The Company maintains access to multiple sources of liquidity.  Management has also revisited its capital and liquidity stress tests, as well as capital and liquidity contingency plans to validate how the Company can react effectively to the economic downturn caused by this pandemic.

Goodwill

The Company’s goodwill was recognized in connection with the acquisition of Fauquier in 2021 and Sturman Wealth Management in 2016.  The Company reviews the carrying value of goodwill at least annually or more frequently if certain impairment indicators exists.  In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If, after assessing the events and circumstance, the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the no further testing is required and the goodwill of the reporting unit is not impaired.  If the Company elects to bypass the qualitative assessment or if the conclusion is that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists.   As of June 30, 2021, the goodwill on the balance sheet was not deemed to be impaired.  However,

38


 

management may determine that goodwill is required to be evaluated for impairment in the future due to the presence of a triggering event, which may have a negative impact on the Company’s results of operations.  

Operations, Processes, Controls and Business Continuity Plan

The Company reacted quickly to the COVID-19 pandemic.  We began internal social distancing in mid-March of 2020, as well as distancing from the public by keeping our drive-thru services available, and encouraging customers to conduct transactions at ATMs, through online banking and/or the mobile app.  The Company also increased consumer and business mobile deposit limits to encourage customers to make deposits remotely from the safety of their home or business. The Company implemented a schedule whereby most staff members are working remotely at any given time, allowing the remaining essential staff to create more distance between each other within the offices.  We temporarily increased the number of staff in the client service center to assist more customers by telephone and encourage them to utilize online and mobile banking.  The client service center was also temporarily moved to a larger location to allow for appropriate social distancing.  In addition, the Company enhanced disinfecting procedures to include hospital-grade cleaning solution and foggers, increased the frequency of cleaning and issued personal protective equipment, including N-95 and disposable face masks, face shields, sneeze guards, gloves and thermometers, to employees, along with specific instructions for use, to enhance their safety.  We also installed disinfecting protective strips to high touch areas and placed free-standing air filter machines throughout our facilities. We purchased COVID-19 instant test kits that we have on-site, ready to be deployed when needed, and we provided antibody testing options to all employees.  Management provides frequent email communications and social media updates regarding COVID-19, helpful tips and status of Company initiatives, as well as warning customers of potential scams during this pandemic.  Beginning mid-July of 2020, the Company took steps to resume normal branch activities with specific guidelines in place to continue protecting our customers and employees.  

The Company’s preparedness resulted in minimal impact to the Company’s operations as a result of COVID-19.  Business continuity planning allowed for successful deployment of most of our employees to work in a remote environment.  No material operational or internal control risks have been identified to date, and the Company has enhanced fraud-related controls.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accounting and reporting policies followed by the Company conform, in all material respects, to GAAP and to general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The Company considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s consolidated financial statements. The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations.

For additional information regarding critical accounting policies, refer to the Application of Critical Accounting Policies and Critical Accounting Estimates section under Item 7 in the Company’s 2020 Form 10-K.  The only significant changes in the Company’s application of critical accounting policies since December 31, 2020 relates to loans acquired in a business combination, as follows.

Loans acquired in a business combination:  Acquired Loans are classified as either i) purchased credit-impaired (PCI) loans or ii) purchased performing loans and are recorded at fair value on the date of acquisition. PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. When determining fair value, PCI loans are aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.  

39


 

On a quarterly basis, we evaluate our estimate of cash flows expected to be collected on PCI loans. Estimates of cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses resulting in an increase to the allowance for loan losses. Subsequent significant increases in cash flows may result in a reversal of post-acquisition provision for loan losses or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan or pool(s) of loans. Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or in part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount.

PCI loans are not classified nonperforming loans by the Company at the time they are acquired, regardless of whether they had been classified as nonperforming by the previous holder of such loans, and they will not be classified as nonperforming so long as, at quarterly re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans.

The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the Acquired Loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses may be required for any deterioration in these loans in future periods.

FINANCIAL CONDITION

Total assets

The total assets of the Company as of June 30, 2021 were $1.8 billion. This is a $998.7 million, or 117.7%, increase from the $848.4 million total assets reported at December 31, 2020 and a $1.0 billion, or 131.0%, increase from the $799.6 million reported at June 30, 2020. These increases were substantially due to the acquisition of Fauquier, which became effective April 1, 2021.

Interest-bearing deposits in other banks

The Company had $177.8 million of interest-bearing deposits in other banks as of June 30, 2021, compared to zero as of December 31, 2020 and June 30, 2020, as the current balance included accounts held by Fauquier, primarily at the Federal Reserve Bank of Richmond.

Federal funds sold

The Company had overnight federal funds sold of $106.6 million as of June 30, 2021, compared to $26.6 million as of December 31, 2020 and $24.8 million as of June 30, 2020. Any excess funds are sold on a daily basis in the federal funds market.  The Company intends to maintain sufficient liquidity at all times to meet its funding commitments.

The Company continues to participate in the Excess Balance Account (“EBA”) of the Federal Reserve Bank of Richmond (“FRB”). The EBA is a limited-purpose account at the FRB for the maintenance of excess cash balances held by financial institutions. The EBA eliminates the potential of concentration risk that comes with depositing excess balances with one or multiple correspondent banks.

Securities

The Company’s investment securities portfolio as of June 30, 2021 totaled $271.2 million, an increase of $94.1 million compared with the $177.1 million reported at December 31, 2020 and an increase of $166.7 million from the $104.5 million reported at June 30, 2020.  The increases are primarily due to the inclusion of the investment securities portfolio of Fauquier upon effective date of the merger as of April 1, 2021.  Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company.  At June 30, 2021 and December 31, 2020, the investment securities holdings represented 14.7% and 20.9% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling $4.3 million as of June 30, 2021, compared to $3.0 million as of December 31, 2020 and $1.7 million as of June 30, 2020. These securities represent stock in the FRB, the Federal Home Loan Bank of Atlanta (“FHLB”), CBB Financial Corporation, the holding company for Community Bankers Bank, and stock in an SBA loan fund. The level of FRB and FHLB stock that the Company is required to hold is determined in accordance with membership guidelines provided by the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the FHLB, respectively. Stock ownership in the bank holding company

40


 

for Community Bankers’ Bank provides the Company with several benefits that are not available to non-shareholder correspondent banks. None of these restricted securities are traded on the open market and can only be redeemed by the respective issuer.

At June 30, 2021, the unrestricted securities portfolio totaled $267.0 million. The following table summarizes the Company's available for sale securities by type as of June 30, 2021, December 31, 2020, and June 30, 2020 (dollars in thousands):

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

June 30, 2020

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

Balance

 

 

of Total

 

 

Balance

 

 

of Total

 

 

Balance

 

 

of Total

 

U.S. Government agencies

 

$

35,228

 

 

 

13.2

%

 

$

25,305

 

 

 

14.5

%

 

$

9,037

 

 

 

8.8

%

Mortgage-backed securities/CMOs

 

 

136,418

 

 

 

51.1

%

 

 

78,100

 

 

 

44.9

%

 

 

58,402

 

 

 

56.8

%

Municipal bonds

 

 

95,327

 

 

 

35.7

%

 

 

70,681

 

 

 

40.6

%

 

 

35,333

 

 

 

34.4

%

Total available for sale securities

 

$

266,973

 

 

 

100.0

%

 

$

174,086

 

 

 

100.0

%

 

$

102,772

 

 

 

100.0

%

 

The securities are held primarily for earnings, liquidity, and asset/liability management purposes and are reviewed quarterly for possible other-than-temporary impairments.  During this review, management analyzes the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer, and the Company’s intent and ability to hold the security to recovery or maturity.  These factors are analyzed for each individual security.

Loan portfolio

A management objective is to grow loan balances while maintaining the asset quality of the loan portfolio. The Company seeks to achieve this objective by maintaining rigorous underwriting standards coupled with regular evaluation of the creditworthiness of, and the designation of lending limits for, each borrowing relationship. The portfolio strategies include seeking industry, loan size, and loan type diversification to minimize credit exposure and originating loans in markets with which the Company is familiar. The predominant market area for the loans shown below includes the cities of Charlottesville, Winchester and Richmond, the counties of Albemarle, Fauquier, Prince William and Frederick, and areas in the Commonwealth of Virginia that are within a 75-mile radius of any office of the Company.

As of June 30, 2021, total loans were $1.2 billion, compared to $609.4 million as of December 31, 2020 and $632.4 million at June 30, 2020. Loans as a percentage of total assets at June 30, 2021 were 63.1%, compared to 79.1% as of June 30, 2020. Loans as a percentage of deposits at June 30, 2021 were 71.6%, compared to 88.5% as of June 30, 2020.

The following table summarizes the Company's loan portfolio by type of loan as of June 30, 2021, December 31, 2020, and June 30, 2020 (dollars in thousands):

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

June 30, 2020

 

 

 

Balance

 

 

Percent

of Total

 

 

Balance

 

 

Percent

of Total

 

 

Balance

 

 

Percent

of Total

 

Commercial

 

$

160,473

 

 

 

13.8

%

 

$

118,688

 

 

 

19.5

%

 

$

162,036

 

 

 

25.6

%

Real estate construction and land

 

 

96,421

 

 

 

8.3

%

 

 

22,509

 

 

 

3.7

%

 

 

26,500

 

 

 

4.2

%

1-4 family residential mortgages

 

 

381,801

 

 

 

32.7

%

 

 

132,966

 

 

 

21.8

%

 

 

129,051

 

 

 

20.4

%

Commercial mortgages

 

 

455,795

 

 

 

39.1

%

 

 

277,109

 

 

 

45.5

%

 

 

251,420

 

 

 

39.8

%

Consumer

 

 

71,671

 

 

 

6.1

%

 

 

58,134

 

 

 

9.5

%

 

 

63,387

 

 

 

10.0

%

Total loans

 

$

1,166,161

 

 

 

100.0

%

 

$

609,406

 

 

 

100.0

%

 

$

632,394

 

 

 

100.0

%

 

Loan balances increased $556.8 million, or 91.4%, since December 31, 2020 and increased $533.8 million, or 84.4%, from June 30, 2020.  The increases are primarily due to the inclusion of Fauquier’s loans of $602.6 million, net of the fair value mark, as of the effective date of the merger of April 1, 2021, for which the carrying amount as of June 30, 2021 amounts to $537.5 million.  The increase from the same period in the prior year was offset by the decline in PPP loans of $18.1 million due to loan forgiveness.  As of June 30, 2021, 67% of the total dollars of PPP loans had been forgiven by the SBA, with $68.8 million outstanding.

41


 

Loan quality

Non-accrual loans totaled $17 thousand at June 30, 2021, compared to the $8 thousand and $11 thousand reported at December 31, 2020 and June 30, 2020, respectively.

The Company had loans in its portfolio totaling $2.8 million, $137 thousand and $1.1 million, as of June 30, 2021, December 31, 2020 and June 30, 2020, respectively, that were 90 or more days past due, with all such loans still accruing interest as the Company deemed them to be collectible.  The balance as of June 30, 2021 includes three government-guaranteed loans in the amount $1.7 million and 54 federally insured student loans totaling $572 thousand.  This past due total only includes four non-insured student loans that are 90 days or more past due and still accruing interesting, amounting to $52 thousand.

At June 30, 2021, the Company had loans classified as impaired loans in the amount of $1.1 million, a decline compared to $1.3 million at December 31, 2020 and $2.1 million at June 30, 2020.  Based on regulatory guidance on student lending, the Company has classified 57 of its Purchased Student Loans as TDRs for a total of $1.0 million as of June 30, 2021.  These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered TDRs.  Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance.  Management has evaluated these loans individually for impairment and included any probable loss in the allowance for loan loss; interest continues to accrue on these TDRs during any deferment and forbearance periods.

Management identifies potential problem loans through its periodic loan review process and considers potential problem loans as those loans classified as special mention, substandard, or doubtful.

Allowance for loan losses

In general, the Company determines the adequacy of its ALLL by considering the risk classification and delinquency status of loans and other factors.  Management may also establish specific allowances for loans which management believes require allowances greater than those allocated according to their risk classification.  The purpose of the allowance is to provide for losses inherent in the loan portfolio.  Since risks to the loan portfolio include general economic trends as well as conditions affecting individual borrowers, the allowance is an estimate.  The Company is committed to determining, on an ongoing basis, the adequacy of its ALLL.  The Company applies historical loss rates to various pools of loans based on risk rating classifications.  In addition, the adequacy of the ALLL is further evaluated by applying estimates of loss that could be attributable to any one of the following eight qualitative factors:

 

1)

Changes in national and local economic conditions, including the condition of various market segments;

 

2)

Changes in the value of underlying collateral;

 

3)

Changes in volume of classified assets, measured as a percentage of capital;

 

4)

Changes in volume of delinquent loans;

 

5)

The existence and effect of any concentrations of credit and changes in the level of such concentrations;

 

6)

Changes in lending policies and procedures, including underwriting standards;

 

7)

Changes in the experience, ability and depth of lending management and staff; and

 

8)

Changes in the level of policy exceptions.

The Company utilizes a loss migration model, which uses loan level attributes to track the movement of loans through various risk classifications in order to estimate the percentage of losses likely in the portfolio.  As of March 31, 2020 and June 30, 2020, the Company downgraded the economic qualitative factors within its ALLL model in light of the effects of COVID-19 on the economy.  No additional downgrades of such factors were taken during the quarter ended September 30, 2020, December 31, 2020 or March 31, 2021.  As of June 30, 2021, credit deterioration since the onset of the pandemic has so far not been experienced to the extent previously anticipated and therefore, during the second quarter of 2021, we released a portion of these added reserves through a reversal of provision for loan losses.  If economic conditions improve or worsen, the Company could experience changes in the required ALLL.  It is possible that asset quality metrics could decline in the future if there are further challenges to the economic recovery, including a resurgence in COVID-19 cases or the emergence of variants of the COVID-19 virus.

42


 

The relationship of the ALLL to total loans appears below (dollars in thousands):

 

 

 

June 30,

2021

 

 

December 31,

2020

 

 

June 30,

2020

 

Loans held for investment at period-end

 

$

1,166,161

 

 

$

609,406

 

 

$

632,394

 

Allowance for loan losses

 

$

5,522

 

 

$

5,455

 

 

$

4,917

 

Allowance as a percent of period-end loans

 

 

0.47

%

 

 

0.90

%

 

 

0.78

%

The ALLL as a percentage of loans was 0.47% as of June 30, 2021, 0.90% as of December 31, 2020, and 0.78% as of June 30, 2020.  The percentage decrease as compared to year-end and the same period in the prior year relate to the elimination of Fauquier’s ALLL as the Acquired Loans were recorded at fair value.  The ALLL as a percentage of loans, excluding the impact of Acquired Loans and the fair value mark (a non-GAAP financial measure), would have been 0.88% as of June 30, 2021.  The ALLL as a percentage of loans, excluding PPP loans (a non-GAAP financial measure), would have been 0.51% as of June 30, 2021 and 0.98% as of December 31, 2020.  Refer to the Reconciliation of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP ALLL as a percentage of loans.  

 

Provisions for loan losses totaling $210 thousand and $1.1 million were recorded in the six months ended June 30, 2021 and 2020, respectively.  The following is a summary of the changes in the ALLL for the six months ended June 30, 2021 and 2020 (dollars in thousands):

 

 

 

2021

 

 

2020

 

Allowance for loan losses, January 1

 

$

5,455

 

 

$

4,209

 

Charge-offs

 

 

(397

)

 

 

(581

)

Recoveries

 

 

254

 

 

 

146

 

Provision for loan losses

 

 

210

 

 

 

1,143

 

Allowance for loan losses, June 30

 

$

5,522

 

 

$

4,917

 

 

For additional insight into management’s approach and methodology in estimating the ALLL, please refer to the earlier discussion of “Allowance for Loan Losses” in Note 5 of the Notes to Consolidated Financial Statements.  In addition, Note 5 includes details regarding the rollforward of the allowance by loan portfolio segments. The rollforward tables indicate the activity for loans that are charged-off, amounts received from borrowers as recoveries of previously charged-off loan balances, and the allocation by loan portfolio segment of the provision made during the period. The events that can positively impact the amount of allowance in a given loan segment include any one or all of the following: the recovery of a previously charged-off loan balance; the decline in the amount of classified or delinquent loans in a loan segment from the previous period, which most commonly occurs when these loans are repaid or are foreclosed; or when there are improvements in the ratios used to estimate the probability of loan losses. Improvements to the ratios could include lower historical loss rates, improvements to any of the qualitative factors mentioned above, or reduced loss expectations for individually-classified loans.

Management reviews the ALLL on a quarterly basis to ensure it is adequate based upon the calculated probable losses inherent in the portfolio. Management believes the ALLL was adequately provided for as of June 30, 2021 and acknowledges that the ALLL may increase throughout the year as economic conditions may continue to deteriorate for the foreseeable future.   

Premises and equipment

The Company’s premises and equipment, net of depreciation, as of June 30, 2021 totaled $25.4 million compared to $5.2 million as of December 31, 2020 and $5.7 million as of June 30, 2020, with the increases due to the inclusion of Fauquier’s land and buildings at fair value effective April 1, 2021. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of assets. Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon disposition, assets and related accumulated depreciation are removed from the books, and any resulting gain or loss is charged to income.

43


 

As of June 30, 2021, the Company occupied sixteen full-service banking facilities throughout Albemarle, Fauquier and Prince William counties and the cities of Charlottesville and Winchester, Virginia. The Company also operates a drive-through location at 301 East Water Street, Charlottesville, Virginia. The Company entered into a lease for branch and office space in Richmond, Virginia during the first quarter of 2020 and anticipates opening the office during the second half of 2021.

The five-story office building at 404 People Place, Charlottesville, Virginia, located in Albemarle County, also serves as the Company’s corporate headquarters, operations center, and offices of both Masonry Capital and Sturman Wealth Advisors.  VNB Trust & Estate Services is located at 112 Third Street, SE, Charlottesville, Virginia, which is part of the same leased space that the Company uses to operate the drive-through location at 301 East Water Street, Charlottesville, Virginia.  TFB Wealth Management is located at 10 Courthouse Square, Warrenton, Virginia.

Both the Arlington Boulevard facility in Charlottesville and the People Place facility in Albemarle County also contain office space that is currently under lease to tenants.

Leases

As of June 30, 2021, the Company has recorded $8.4 million of right-of-use assets and $7.8 million of lease liabilities, in accordance with Accounting Standards Update 2016-02 “Leases” (Topic 842).  As of December 31, 2020, $3.5 million of right-of-use assets and $3.6 million of lease liabilities were included on the balance sheet.  The increase is due to the inclusion of Fauquier’s leases effective April 1, 2021, at fair value.  Right-of-use assets are assets that represent the Company’s right to use, or control the use of, a specified asset for the lease term, offset by the lease liability, which is the Company’s obligation to make lease payments arising from a lease, measured on a discounted basis.  

Deposits

Deposit accounts represent the Company’s primary source of funds and are comprised of demand deposits, interest-bearing checking, money market, and savings accounts as well as time deposits. These deposits have been provided predominantly by individuals, businesses and charitable organizations in the Charlottesville, Albemarle, Fauquier, Prince William, Richmond and Winchester areas.

Total deposits as of June 30, 2021 were $1.6 billion, an increase of $898.7 million compared to the balances of $730.8 million at December 31, 2020, and an increase of $915.2 million compared to the $714.2 million total as of June 30, 2020.  The primary reason for the increases in the periodic comparisons is the inclusion of Fauquier’s deposits of $817.7 million, at fair value, effective upon the merger date of April 1, 2021, as well as increased balances in PPP customer accounts.  

 

Deposit accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

June 30, 2021

 

 

December 31, 2020

 

 

June 30, 2020

 

 

 

Balance

 

 

% of Total

Deposits

 

 

Balance

 

 

% of Total

Deposits

 

 

Balance

 

 

% of Total

Deposits

 

No cost and low cost deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest demand deposits

 

$

449,483

 

 

 

27.6

%

 

$

209,772

 

 

 

28.71

%

 

$

197,227

 

 

 

27.6

%

Interest checking accounts

 

 

431,556

 

 

 

26.5

%

 

 

148,910

 

 

 

20.37

%

 

 

136,274

 

 

 

19.1

%

Money market and savings deposit accounts

 

 

577,414

 

 

 

35.4

%

 

 

272,980

 

 

 

37.36

%

 

 

284,101

 

 

 

39.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total noninterest and low cost deposit accounts

 

 

1,458,453

 

 

 

89.5

%

 

 

631,662

 

 

 

86.4

%

 

 

617,602

 

 

 

86.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposit accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

162,217

 

 

 

10.0

%

 

 

90,615

 

 

 

12.4

%

 

 

88,071

 

 

 

12.3

%

CDARS deposits

 

 

8,778

 

 

 

0.5

%

 

 

8,487

 

 

 

1.2

%

 

 

8,528

 

 

 

1.2

%

Total certificates of deposit and other time deposits

 

 

170,995

 

 

 

10.5

%

 

 

99,102

 

 

 

13.6

%

 

 

96,599

 

 

 

13.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposit account balances

 

$

1,629,448

 

 

 

100.0

%

 

$

730,764

 

 

 

100.0

%

 

$

714,201

 

 

 

100.0

%

 

44


 

 

Noninterest-bearing demand deposits on June 30, 2021 were $449.5 million, representing 27.6% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled $1.0 billion, and represented 61.9% of total deposits at June 30, 2021. Collectively, noninterest-bearing and interest-bearing transaction and money market accounts represented 89.5% of total deposit accounts at June 30, 2021. These account types are an excellent source of low-cost funding for the Company.

The Company also offers insured cash sweep (“ICS®”) deposit products.  ICS® deposit balances of $29.2 million and $121.7 million are included in the interest checking accounts and the money market and savings deposit accounts balances, respectively, in the table above, as of June 30, 2021.  As of December 31, 2020, ICS® deposit balances of $28.0 million and $81.1 million are included in the interest checking accounts and the money market and savings deposit account balances, respectively.  All ICS accounts consist of reciprocal balances for the Company’s customers.

The remaining 10.5% and 13.6% of total deposits consisted of certificates of deposit and other time deposit accounts totaling $171.0 million and $99.1 million at June 30, 2021 and December 31, 2020, respectively. Included in these deposit totals are Certificate of Deposit Account Registry Service CDs, known as CDARSTM, whereby depositors can obtain Federal Deposit Insurance Corporation (“FDIC”) deposit insurance on account balances of up to $50 million. CDARSTM deposits totaled $8.8 million as of June 30, 2021 and $ 8.5 million as of December 31, 2020, all of which were reciprocal balances for the Company’s customers.

Borrowings

Short-term borrowings, consisting primarily of FHLB advances and federal funds purchased, are additional sources of funds for the Company. The level of these borrowings is determined by various factors, including customer demand and the Company's ability to earn a favorable spread on the funds obtained.

The Company has a collateral dependent line of credit with the FHLB. As of June 30, 2021 and December 31, 2020, the Company had $43.0 million and $30 million in outstanding balances from FHLB advances, respectively.  As of June 30, 2020, the Company had no outstanding balances from FHLB advances.  

Additional borrowing arrangements maintained by the Company include formal federal funds lines with five major regional correspondent banks and the Federal Reserve discount window. The Company had no outstanding balances on these lines or facilities as of June 30, 2021, December 31, 2020 or June 30, 2020.

Shareholders' equity and regulatory capital ratios

The following table displays the changes in shareholders' equity for the Company from December 31, 2020 to June 30, 2021 (dollars in thousands):

Equity, December 31, 2020

 

$

82,598

 

Net income

 

 

1,652

 

Acquisition of Fauquier Bankshares, Inc.

 

 

78,036

 

Other comprehensive loss

 

 

(1,595

)

Cash dividends declared

 

 

(2,410

)

Equity increase due to exercise of stock options

 

 

30

 

Equity increase due to expensing of stock options

 

 

65

 

Equity increase due to expensing of restricted stock

 

 

226

 

Equity, June 30, 2021

 

$

158,602

 

 

The Basel III capital rules require banks and bank holding companies to comply with the following minimum capital ratios: (i) a ratio of common equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%); (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).

45


 

The Company’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 12.96%, 12.96%, 13.47% and 7.66%, respectively, as of June 30, 2021, thus exceeding the minimum requirements. The Bank’s Tier 1, common equity Tier 1, total capital to risk-weighted assets, and leverage ratios were 13.26%, 13.26%, 13.77% and 7.86%, respectively, as of June 30, 2021, also exceeding the minimum requirements.

As of June 30, 2021, the Bank exceeded all of the following minimum capital ratios in order to be considered “well capitalized” under the “prompt corrective action” regulations, as revised: (i) a common equity Tier 1 capital ratio of at least 6.5%; (ii) a Tier 1 capital to risk-weighted assets ratio of at least 8.0%; (iii) a total capital to risk-weighted assets ratio of at least 10.0%; and (iv) a leverage ratio of at least 5.0%.

 

RESULTS OF OPERATIONS

Non-GAAP presentations

The Company, in referring to its net income and net interest income, is referring to income computed in accordance with GAAP, unless otherwise noted.  Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations also refer to various calculations that are non-GAAP presentations.  They include:

 

Performance measures exclude nonrecurring merger expenses, which were incurred in connection with change-in-control, severance, due diligence, legal, and other professional fees associated with the merger with Fauquier.  Management believes that the exclusion of the significant one-time effect of merger expenses provides users of the Company’s financial information a presentation of the Company’s financial results that is representative of its ongoing operations.  In this non-GAAP presentation, the merger expenses incurred is added to the Company’s net income.  

 

Fully taxable-equivalent (“FTE”) adjustments Net interest margin and efficiency ratios are presented on an FTE basis, consistent with SEC guidance in Industry Guide 3 which states that tax exempt income may be calculated on a tax equivalent basis.  This is a non-GAAP presentation. The FTE basis adjusts for the tax-exempt status of net interest income from certain investments using a federal tax rate of 21%, where applicable, to increase tax-exempt interest income to a taxable-equivalent basis.

 

Efficiency ratio – One of the ratios the Company monitors in its evaluation of operations is the efficiency ratio, which measures the cost to produce one dollar of revenue.  The Company computes its efficiency ratio (FTE) by dividing noninterest expense by the sum of net interest income (FTE) and noninterest income.  A lower ratio is an indicator of increased operational efficiency. This non-GAAP metric is used to assist investors in understanding how management assesses its ability to generate revenues from its non-funding-related expense base, as well as to align presentation of this financial measure with peers in the industry.  The Company believes this measure to be the preferred industry measurement of operational efficiency, which is consistent with FDIC studies.

 

Net interest margin Net interest margin (FTE) is calculated as net interest income, computed on an FTE basis, expressed as a percentage of average earning assets.  The Company believes this measure to be the preferred industry measurement of net interest margin and that it enhances comparability of net interest margin among peers in the industry.

 

The ALLL as a percentage of loans, excluding the impact of acquired loans and the related fair value mark, excluded the fair value of Acquired Loans from Fauquier.  Management believes that the exclusion of the Acquired Loans provides users of the Company’s financial information a presentation of the Company’s ALLL percentage that is representative of its ongoing operations.

 

The ALLL as a percentage of loans, excluding PPP loans, measure eliminates the impact of PPP loans.  Management believes that the elimination of the impact of PPP loans provides users of the Company’s financial information a presentation of the Company’s ALLL percentage that is representative of its ongoing operations.

 

Tangible book value per share excludes the impact of the balances of goodwill and other intangibles.  Tangible book value per share is often regarded as a more meaningful comparative ratio than book value per share as calculated under GAAP, to evaluate use of equity, financial condition and capital strength.  

Management uses these non-GAAP measures to evaluate the Company’s operating performance on a basis comparable to other financial periods.  Net income is discussed in Management’s Discussion and Analysis on a GAAP basis unless noted as “non-GAAP.”

46


 

 

The reconcilement below shows how these non-GAAP measures are computed from their respective GAAP measures (dollars in thousands):

 

Reconcilement of Non-GAAP Measures:

 

As of or for the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30,

2021

 

 

June 30,

2020

 

 

June 30,

2021

 

 

June 30,

2020

 

Performance measures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets ("ROAA")

 

 

0.03

%

 

 

1.07

%

 

 

0.24

%

 

 

0.93

%

Impact of merger expenses, net of tax

 

 

0.99

%

 

 

 

 

 

0.69

%

 

 

 

ROAA, excluding merger expenses (non-GAAP)

 

 

1.02

%

 

 

1.07

%

 

 

0.93

%

 

 

0.93

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average equity ("ROAE")

 

 

0.37

%

 

 

10.64

%

 

 

2.76

%

 

 

8.98

%

Impact of merger expenses, net of tax

 

 

11.51

%

 

 

 

 

 

7.90

%

 

 

 

ROAE, excluding merger expenses (non-GAAP)

 

 

11.88

%

 

 

10.64

%

 

 

10.66

%

 

 

8.98

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

147

 

 

$

2,088

 

 

$

1,652

 

 

$

3,492

 

Impact of merger expenses, net of tax

 

 

4,553

 

 

 

-

 

 

 

4,722

 

 

 

-

 

Net income, excluding merger expenses (non-GAAP)

 

$

4,700

 

 

$

2,088

 

 

$

6,374

 

 

$

3,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share, basic and diluted

 

$

0.03

 

 

$

0.77

 

 

$

0.41

 

 

$

1.29

 

Impact of merger expenses, net of tax

 

 

0.86

 

 

 

-

 

 

 

0.92

 

 

 

-

 

Net income per share, excluding merger expenses (non-GAAP), basic and diluted

 

$

0.89

 

 

$

0.77

 

 

$

1.33

 

 

$

1.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fully tax-equivalent measures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

13,151

 

 

$

5,755

 

 

$

19,125

 

 

$

11,130

 

Fully tax-equivalent adjustment

 

 

73

 

 

 

25

 

 

 

120

 

 

 

45

 

Net interest income (FTE)

 

$

13,224

 

 

$

5,780

 

 

$

19,245

 

 

$

11,175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

 

99.5

%

 

 

59.7

%

 

 

90.0

%

 

 

62.0

%

Fully tax-equivalent adjustment

 

 

-0.4

%

 

 

-0.2

%

 

 

-0.5

%

 

 

-0.2

%

Efficiency ratio (FTE)

 

 

99.1

%

 

 

59.5

%

 

 

89.5

%

 

 

61.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

3.03

%

 

 

3.11

%

 

 

3.02

%

 

 

3.14

%

Fully tax-equivalent adjustment

 

 

0.02

%

 

 

0.01

%

 

 

-0.02

%

 

 

0.02

%

Net interest margin (FTE)

 

 

3.05

%

 

 

3.12

%

 

 

3.00

%

 

 

3.16

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other financial measures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL to total loans

 

 

0.47

%

 

 

0.78

%

 

 

 

 

 

 

 

 

Impact of acquired loans and fair value mark

 

 

0.41

%

 

 

0.00

%

 

 

 

 

 

 

 

 

ALLL to total loans, excluding acquired loans and

fair value mark (non-GAAP)

 

 

0.88

%

 

 

0.78

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL to total loans

 

 

0.47

%

 

 

0.78

%

 

 

 

 

 

 

 

 

Impact of PPP loans

 

 

0.04

%

 

 

0.12

%

 

 

 

 

 

 

 

 

ALLL to total loans, excluding PPP loans (non-GAAP)

 

 

0.51

%

 

 

0.90

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value per share

 

$

29.89

 

 

$

29.14

 

 

 

 

 

 

 

 

 

Impact of intangible assets

 

 

(3.29

)

 

 

(0.28

)

 

 

 

 

 

 

 

 

Tangible book value per share (non-GAAP)

 

$

26.60

 

 

$

28.86

 

 

 

 

 

 

 

 

 

 

47


 

 

Net income

Net income for the three months ended June 30, 2021 was $147 thousand, a $1.9 million or 93.0% decrease compared to net income reported for the three months ended June 30, 2020.  Net income per diluted share was $0.03 for the quarter ended June 30, 2021 compared to $0.77 per diluted share for the same quarter in the prior year.  The entirety of the decrease in net income for the three months ended June 30, 2021, when compared to the same period of 2020, was attributable to $5.9 million in pre-tax ($4.6 million after-tax) merger expenses incurred in the second quarter of 2021.  Excluding merger costs, the Company would have posted net income of $0.89 per diluted share (a non-GAAP financial measure).

Net interest income

Net interest income (FTE) for the three months ended June 30, 2021 was $13.2 million, a $7.4 million or 128.8% increase compared to net interest income (FTE) of $5.8 million for the three months ended June 30, 2020.  Net interest income (FTE) increased primarily due to the inclusion of Fauquier’s net interest income (FTE) for the current quarter, as the merger was effective April 1, 2021.  Net interest income (FTE) was also positively impacted by the decrease in rates paid on deposit accounts, which decreased interest expense by $431 thousand, offset by the increased volume of deposits, which increased interest expense by $547 thousand. The increased volume of loans, also a result of the merger with Fauquier, increasing from an average of $618.1 million in the second quarter of 2020 to $1.2 billion in the second quarter of 2021, positively impacted interest income by $6.4 million.  The higher average yield earned on loans, increasing from 4.01% to 4.30% for the periods noted, positively impacted interest income by $500 thousand.  In addition, the fair value accretion on loans acquired positively impacted net interest income by 16 basis points during the three months ended June 30, 2021. The increase in volume of securities held, increasing from an average balance of $68.7 million for the second quarter of 2020 to $270.2 million for the second quarter of 2021, positively impacted net interest income by $865 thousand, while the decline in yield earned on such securities decreased from 2.15% to 1.68% for the periods noted, negatively impacted net interest income by $97 thousand.

Net interest income (FTE) for the six months ended June 30, 2021 was $19.2 million, an $8.1 million or 72.2% increase compared to net interest income (FTE) of $11.2 million for the six months ended June 30, 2020  Net interest income (FTE) increased primarily due to the inclusion of Fauquier’s net interest income (FTE) for the first half of the current year as the merger was effective April 1, 2021.  Net interest income (FTE) was also positively impacted by the decrease in rates paid on deposit accounts, which decreased interest expense by $1.2 million, offset partially by the increased volume of deposits, which increased interest expense by $938 thousand. The increased volume of loans, also a result of the merger with Fauquier, increasing from an average of $577.0 million in the six months ended June 30, 2020 to $910.0 million in the six months ended June 30, 2021, positively impacted interest income by $6.9 million.  The increase in volume of securities held, increasing from an average balance of $91.5 million for the six months ended June 30, 2020 to $222.0 million for the six months ended June 30, 2021, positively impacted net interest income by $1.2 million, while the decline in yield earned on such securities decreased from 2.18% to 1.65% for the periods noted, negatively impacted net interest income by $335 thousand.

Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets for the period. The level of interest rates, together with the volume and mix of earning assets and interest-bearing liabilities, impact net interest income (FTE) and net interest margin (FTE). The net interest margin (FTE) of 3.05% for the three months ended June 30, 2021 was 7 basis points lower than the 3.12% for the three months ended June 30, 2020.  The net interest margin (FTE) of 3.00% for the six months ended June 30, 2021 was 16 basis points lower than the 3.16% for the six months ended June 30, 2020.  Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP net interest margin.

Interest expense increased $224 thousand for the three months ended June 30, 2021 compared to the same period in the prior year, due to increased volume of deposits from the Fauquier merger, as average interest-bearing deposits increased $681.8 million for the period noted, negatively impacting interest expense by $547 thousand, offset by lower rates paid on deposits, positively impacting interest expense by $431 thousand.  The rate paid on interest-bearing deposits averaged 30 basis points in the three months ended June 30, 2021, compared to 62 basis points for the three months ended June 30, 2020. Average balances of borrowed funds, from FHLB advances, increased from zero in the three months ended June 30, 2020 to $43.0 million in the three months ended June 30, 2021, causing an increase in interest expense on borrowed funds of $59 thousand. Average balances of junior subordinated debt, increased from zero in the three months ended June 30, 2020 to $3.3 million in the three months ended June 30, 2021, causing an increase in interest expense on borrowed funds of $49 thousand.  

48


 

Interest expense decreased $272 thousand for the six months ended June 30, 2021 compared to the same period in the prior year, due primarily to the lower rates paid on deposits, positively impacting interest expense by $1.2 million, offset by the increased volume of deposits from the Fauquier merger, as average interest-bearing deposits increased $373.5 million for the period noted, negatively impacting interest expense by $794 thousand.  The rate paid on interest-bearing deposits averaged 36 basis points in the six months ended June 30, 2021, compared to 83 basis points for the six months ended June 30, 2020.  Average balances of borrowed funds, from FHLB advances, increased from zero in the six months ended June 30, 2020 to $36.60 million in the six months ended June 30, 2021, causing an increase in interest expense on borrowed funds of $95 thousand.  Average balances of junior subordinated debt, increased from zero in the six months ended June 30, 2020 to $1.3 million in the six months ended June 30, 2021, causing an increase in interest expense on borrowed funds of $49 thousand.  


49


 

 

The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest-bearing liabilities, for the three and six months ended June 30, 2021 and 2020.  These tables also include rate/volume analyses for these same periods (dollars in thousands).

Consolidated Average Balance Sheet and Analysis of Net Interest Income

 

 

 

For the three months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

Change in Interest Income/ Expense

 

 

 

Average

 

 

Interest

 

 

Average

 

 

Average

 

 

Interest

 

 

Average

 

 

Change Due to : 4

 

 

Total

 

 

 

Balance

 

 

Income/

 

 

Yield/Cost

 

 

Balance

 

 

Income/

 

 

Yield/Cost

 

 

Volume

 

 

Rate

 

 

Increase/

 

(dollars in thousands)

 

 

 

 

 

Expense

 

 

 

 

 

 

 

 

 

 

Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Decrease)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable Securities

 

$

211,827

 

 

$

792

 

 

 

1.50

%

 

$

53,953

 

 

$

253

 

 

 

1.88

%

 

$

600

 

 

$

(61

)

 

$

539

 

Tax Exempt Securities 1

 

 

58,398

 

 

 

346

 

 

 

2.37

%

 

 

14,793

 

 

 

117

 

 

 

3.16

%

 

 

265

 

 

 

(36

)

 

 

229

 

Total Securities 1

 

 

270,225

 

 

 

1,138

 

 

 

1.68

%

 

 

68,746

 

 

 

370

 

 

 

2.15

%

 

 

865

 

 

 

(97

)

 

 

768

 

Total Loans

 

 

1,214,123

 

 

 

13,009

 

 

 

4.30

%

 

 

618,096

 

 

 

6,156

 

 

 

4.01

%

 

 

6,353

 

 

 

500

 

 

 

6,853

 

Fed Funds Sold

 

 

106,934

 

 

 

21

 

 

 

0.08

%

 

 

57,920

 

 

 

10

 

 

 

0.07

%

 

 

9

 

 

 

2

 

 

 

11

 

Other interest-bearing deposits

 

 

149,056

 

 

 

36

 

 

 

0.10

%

 

 

 

 

 

 

 

 

 

 

 

36

 

 

 

0

 

 

 

36

 

Total Earning Assets

 

 

1,740,338

 

 

 

14,204

 

 

 

3.27

%

 

 

744,762

 

 

 

6,536

 

 

 

3.53

%

 

 

7,263

 

 

 

405

 

 

 

7,668

 

Less: Allowance for Loan Losses

 

 

(5,732

)

 

 

 

 

 

 

 

 

 

 

(4,788

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Non-Earning Assets

 

 

124,287

 

 

 

 

 

 

 

 

 

 

 

46,543

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,858,893

 

 

 

 

 

 

 

 

 

 

$

786,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Checking

 

$

437,611

 

 

$

93

 

 

 

0.09

%

 

$

131,333

 

 

$

26

 

 

 

0.08

%

 

$

65

 

 

$

2

 

 

$

67

 

Money Market and Savings Deposits

 

 

561,940

 

 

 

455

 

 

 

0.32

%

 

 

257,174

 

 

 

365

 

 

 

0.57

%

 

 

296

 

 

 

(206

)

 

 

90

 

Time Deposits

 

 

169,556

 

 

 

324

 

 

 

0.77

%

 

 

98,762

 

 

 

365

 

 

 

1.49

%

 

 

186

 

 

 

(227

)

 

 

(41

)

Total Interest-Bearing Deposits

 

 

1,169,107

 

 

 

872

 

 

 

0.30

%

 

 

487,269

 

 

 

756

 

 

 

0.62

%

 

 

547

 

 

 

(431

)

 

 

116

 

Short term borrowings

 

 

43,030

 

 

 

59

 

 

 

0.55

%

 

 

 

 

 

 

 

 

 

 

 

59

 

 

 

 

 

 

59

 

Junior subordinated debt

 

 

3,334

 

 

 

49

 

 

 

5.89

%

 

 

 

 

 

 

 

 

 

 

 

49

 

 

 

0

 

 

 

49

 

Total Interest-Bearing Liabilities

 

 

1,215,471

 

 

 

980

 

 

 

0.32

%

 

 

487,269

 

 

 

756

 

 

 

0.62

%

 

 

655

 

 

 

(431

)

 

 

224

 

Non-Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

471,078

 

 

 

 

 

 

 

 

 

 

 

216,747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

14,109

 

 

 

 

 

 

 

 

 

 

 

3,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

1,700,658

 

 

 

 

 

 

 

 

 

 

 

707,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

158,235

 

 

 

 

 

 

 

 

 

 

 

78,924

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities & Shareholders' Equity

 

$

1,858,893

 

 

 

 

 

 

 

 

 

 

$

786,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (FTE)

 

 

 

 

 

$

13,224

 

 

 

 

 

 

 

 

 

 

$

5,780

 

 

 

 

 

 

$

6,608

 

 

$

836

 

 

$

7,444

 

Interest Rate Spread 2

 

 

 

 

 

 

 

 

 

 

2.95

%

 

 

 

 

 

 

 

 

 

 

2.91

%

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense as a Percentage of Average Earning Assets

 

 

 

 

 

 

 

 

 

 

0.23

%

 

 

 

 

 

 

 

 

 

 

0.41

%

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Margin (FTE) 3

 

 

 

 

 

 

 

 

 

 

3.05

%

 

 

 

 

 

 

 

 

 

 

3.12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations earlier in this section.

(2)

Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.

(3)

Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.

(4)

The impact on the net interest income (FTE) resulting from changes in average balances and average rates is shown for the period indicated. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.


50


 

 

Consolidated Average Balance Sheet and Analysis of Net Interest Income

 

 

 

For the Six Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

Change in Interest Income/ Expense

 

 

 

Average

 

 

Interest

 

 

Average

 

 

Average

 

 

Interest

 

 

Average

 

 

Change Due to : 4

 

 

Total

 

 

 

Balance

 

 

Income/

 

 

Yield/Cost

 

 

Balance

 

 

Income/

 

 

Yield/Cost

 

 

Volume

 

 

Rate

 

 

Increase/

 

(dollars in thousands)

 

 

 

 

 

Expense

 

 

 

 

 

 

 

 

 

 

Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Decrease)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable Securities

 

$

176,151

 

 

$

1,264

 

 

 

1.44

%

 

$

78,370

 

 

$

786

 

 

 

2.01

%

 

$

753

 

 

$

(275

)

 

$

478

 

Tax Exempt Securities (1)

 

 

45,818

 

 

 

569

 

 

 

2.48

%

 

 

13,109

 

 

 

212

 

 

 

3.23

%

 

 

417

 

 

 

(60

)

 

 

357

 

Total Securities (1)

 

 

221,969

 

 

 

1,833

 

 

 

1.65

%

 

 

91,479

 

 

 

998

 

 

 

2.18

%

 

 

1,170

 

 

 

(335

)

 

 

835

 

Total Loans

 

 

910,040

 

 

 

18,947

 

 

 

4.20

%

 

 

576,952

 

 

 

12,027

 

 

 

4.19

%

 

 

6,935

 

 

 

(15

)

 

 

6,920

 

Fed Funds Sold

 

 

87,276

 

 

 

72

 

 

 

0.17

%

 

 

43,409

 

 

 

95

 

 

 

0.44

%

 

 

59

 

 

 

(82

)

 

 

(23

)

Other interest-bearing deposits

 

 

74,475

 

 

 

66

 

 

 

0.18

%

 

 

 

 

 

 

 

 

 

 

 

66

 

 

 

0

 

 

 

66

 

Total Earning Assets

 

 

1,293,760

 

 

 

20,918

 

 

 

3.26

%

 

 

711,840

 

 

 

13,120

 

 

 

3.71

%

 

 

8,230

 

 

 

(432

)

 

 

7,798

 

Less: Allowance for Loan Losses

 

 

(5,624

)

 

 

 

 

 

 

 

 

 

 

(4,523

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Non-Earning Assets

 

 

84,069

 

 

 

 

 

 

 

 

 

 

 

45,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,372,205

 

 

 

 

 

 

 

 

 

 

$

752,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Checking

 

$

291,025

 

 

$

119

 

 

 

0.08

%

 

$

127,026

 

 

$

57

 

 

 

0.09

%

 

$

67

 

 

$

(5

)

 

$

62

 

Money Market and Savings Deposits

 

 

422,048

 

 

 

806

 

 

 

0.39

%

 

 

243,036

 

 

 

1,029

 

 

 

0.85

%

 

 

520

 

 

 

(743

)

 

 

(223

)

Time Deposits

 

 

134,355

 

 

 

604

 

 

 

0.91

%

 

 

103,851

 

 

 

859

 

 

 

1.66

%

 

 

207

 

 

 

(462

)

 

 

(255

)

Total Interest-Bearing Deposits

 

 

847,428

 

 

 

1,529

 

 

 

0.36

%

 

 

473,913

 

 

 

1,945

 

 

 

0.83

%

 

 

794

 

 

 

(1,210

)

 

 

(416

)

Short term borrowings

 

 

36,551

 

 

 

95

 

 

 

0.52

%

 

 

 

 

 

 

 

 

 

 

 

95

 

 

 

 

 

 

95

 

Junior subordinated debt

 

 

1,255

 

 

 

49

 

 

 

7.87

%

 

 

 

 

 

 

 

 

 

 

 

49

 

 

 

 

 

 

49

 

Total Interest-Bearing Liabilities

 

 

885,234

 

 

 

1,673

 

 

 

0.38

%

 

 

473,913

 

 

 

1,945

 

 

 

0.83

%

 

 

938

 

 

 

(1,210

)

 

 

(272

)

Non-Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

363,709

 

 

 

 

 

 

 

 

 

 

 

197,312

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

2,877

 

 

 

 

 

 

 

 

 

 

 

3,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

1,251,820

 

 

 

 

 

 

 

 

 

 

 

674,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

120,385

 

 

 

 

 

 

 

 

 

 

 

78,235

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities & Shareholders' Equity

 

$

1,372,205

 

 

 

 

 

 

 

 

 

 

$

752,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (FTE)

 

 

 

 

 

$

19,245

 

 

 

 

 

 

 

 

 

 

$

11,175

 

 

 

 

 

 

$

7,292

 

 

$

778

 

 

$

8,070

 

Interest Rate Spread 2

 

 

 

 

 

 

 

 

 

 

2.88

%

 

 

 

 

 

 

 

 

 

 

2.88

%

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense as a Percentage of Average Earning Assets

 

 

 

 

 

 

 

 

 

 

0.26

%

 

 

 

 

 

 

 

 

 

 

0.55

%

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Margin (FTE) 3

 

 

 

 

 

 

 

 

 

 

3.00

%

 

 

 

 

 

 

 

 

 

 

3.16

%

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Tax-exempt income for investment securities has been adjusted to a fully tax-equivalent basis (FTE), using a Federal income tax rate of 21%. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP Presentations earlier in this section.

(2)

Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.

(3)

Net interest margin (FTE) is net interest income expressed as a percentage of average earning assets.

(4)

The impact on the net interest income (FTE) resulting from changes in average balances and average rates is shown for the period indicated. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

 

51


 

 

Provision for loan losses

A recovery of loan losses of $141 thousand was recognized during the three months ended June 30, 2021 compared to a provision for loan losses of $378 thousand recognized during the three months ended June 30, 2020, and a provision for loan losses of $210 thousand was recognized during the six months ended June 30, 2021, compared to $1.1 million recognized during the six months ended June 30, 2020.  During the first two quarters of 2020, the Company increased the economic qualitative factors in the ALLL calculation due to the deterioration in the economic outlook resulting from the impact of COVID-19.  During the second quarter of 2021, the Company released of a portion of the reserves that were added during 2020 since the credit deterioration has so far not been experienced to the extent previously anticipated.

The period-end ALLL as a percentage of assets was 0.47% as of June 30, 2021, 0.90% as of December 31, 2020 and 0.78% as of June 30, 2020.  The percentage decrease as compared to the prior year end and the same period in the prior year was due to the addition of purchased loans upon the acquisition of Fauquier, and the elimination of their ALLL as the loans were acquired and booked at fair value.  The ALLL as of June 30, 2021, excluding the impact of the Acquired Loans and the fair value mark, would have been 0.88%.  Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to Non-GAAP ALLL.

Further discussion of management’s assessment of the ALLL is provided earlier in the report and in Note 5 – Allowance for Loan Losses, found in the Notes to the Consolidated Financial Statements.  In management’s opinion, the allowance was adequately provided for at June 30, 2021.  The ALLL calculation, provision for loan losses, asset quality and collateral values may be significantly impacted by deterioration in economic conditions.  We have downgraded, then upgraded slightly, the qualitative factors pertaining to economic conditions within our ALLL methodology; should economic conditions worsen, we could experience further increases in our required ALLL and record additional provision for loan loss exposure.

Noninterest income

The components of noninterest income for the three months ended June 30, 2021 and 2020 are shown below (dollars in thousands):

 

 

 

For the three months ended

 

 

Variance

 

 

 

June 30,

2021

 

 

June 30,

2020

 

 

$

 

 

%

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wealth management fees

 

$

980

 

 

$

228

 

 

$

752

 

 

 

329.8

%

Advisory and brokerage income

 

 

359

 

 

 

163

 

 

 

196

 

 

 

120.2

%

Royalty income

 

 

12

 

 

 

24

 

 

 

(12

)

 

 

-50.0

%

Deposit account fees

 

 

426

 

 

 

143

 

 

 

283

 

 

 

197.9

%

Debit/credit card and ATM fees

 

 

599

 

 

 

134

 

 

 

465

 

 

 

347.0

%

Earnings/increase in value of bank owned life insurance

 

 

199

 

 

 

109

 

 

 

90

 

 

 

82.6

%

Fees on mortgage sales

 

 

-

 

 

 

30

 

 

 

(30

)

 

 

-100.0

%

Gains on sales of securities

 

 

-

 

 

 

590

 

 

 

(590

)

 

 

-100.0

%

Loan swap fee income

 

 

20

 

 

 

124

 

 

 

(104

)

 

 

-83.9

%

Other

 

 

325

 

 

 

81

 

 

 

244

 

 

 

301.2

%

Total noninterest income

 

$

2,920

 

 

$

1,626

 

 

$

1,294

 

 

 

79.6

%

 

Noninterest income for the three months ended June 30, 2021 of $2.9 million was $1.3 million or 79.6% higher than the amount recorded for the three months ended June 30, 2020.  Noninterest income increased predominantly due to the inclusion of TFB’s wealth management fees of $647 thousand, advisory and brokerage income of $157 thousand, deposit fees of $258 thousand and debit card income of $418 thousand.  Gains on sales of securities declined from the second quarter of the prior year by $590 thousand, as no securities were sold and swap fee income declined $104 thousand, as swap arrangements are not as attractive to borrowers in the current rate environment.

52


 

The components of noninterest income for the six months ended June 30, 2021 and 2020 are shown below (dollars in thousands):

 

 

For the Six Months Ended

 

 

Variance

 

 

 

June 30,

2021

 

 

June 30,

2020

 

 

$

 

 

%

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wealth management fees

 

$

1,309

 

 

$

538

 

 

$

771

 

 

 

143.3

%

Advisory and brokerage income

 

 

550

 

 

 

341

 

 

 

209

 

 

 

61.3

%

Royalty income

 

 

17

 

 

 

71

 

 

 

(54

)

 

 

-76.1

%

Deposit account fees

 

 

586

 

 

 

322

 

 

 

264

 

 

 

82.0

%

Debit/credit card and ATM fees

 

 

753

 

 

 

291

 

 

 

462

 

 

 

158.8

%

Earnings/increase in value of bank owned life insurance

 

 

306

 

 

 

216

 

 

 

90

 

 

 

41.7

%

Fees on mortgage sales

 

 

-

 

 

 

77

 

 

 

(77

)

 

 

-100.0

%

Gains on sales of securities

 

 

-

 

 

 

643

 

 

 

(643

)

 

 

-100.0

%

Loan swap fee income

 

 

35

 

 

 

633

 

 

 

(598

)

 

 

-94.5

%

Other

 

 

403

 

 

 

163

 

 

 

240

 

 

 

147.2

%

Total noninterest income

 

$

3,959

 

 

$

3,295

 

 

$

664

 

 

 

20.2

%

 

Noninterest income for the six months ended June 30, 2021 of $4.0 million was $664 thousand or 20.2% higher than the amount recorded for the six months ended June 30, 2020.  Noninterest income increased predominantly due to the inclusion of TFB’s wealth management fees of $647 thousand, advisory and brokerage income of $157 thousand, deposit fees of $258 thousand and debit card income of $418 thousand, which are the same increases as noted above, as the effective date of the merger was April 1, 2021 and therefore, only TFB’s second quarter is included in the year-to-date figures.  Gains on sales of securities declined from the second quarter of the prior year by $643 thousand, as no securities were sold and swap fee income declined $598 thousand, as swap arrangements are not as attractive to borrowers in the current rate environment.

 

Noninterest expense

The components of noninterest expense for the three months ended June 30, 2021 and 2020 are shown below (dollars in thousands):

 

 

 

For the three months ended

 

 

Variance

 

 

 

June 30,

2021

 

 

June 30,

2020

 

 

$

 

 

%

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

4,741

 

 

$

2,258

 

 

$

2,483

 

 

 

110.0

%

Net occupancy

 

 

1,109

 

 

 

452

 

 

 

657

 

 

 

145.4

%

Equipment

 

 

340

 

 

 

136

 

 

 

204

 

 

 

150.0

%

ATM, debit and credit card

 

 

73

 

 

 

41

 

 

 

32

 

 

 

78.0

%

Bank franchise tax

 

 

429

 

 

 

163

 

 

 

266

 

 

 

163.2

%

Computer software

 

 

216

 

 

 

136

 

 

 

80

 

 

 

58.8

%

Data processing

 

 

994

 

 

 

338

 

 

 

656

 

 

 

194.1

%

FDIC deposit insurance assessment

 

 

182

 

 

 

28

 

 

 

154

 

 

 

550.0

%

Loan expenses

 

 

145

 

 

 

66

 

 

 

79

 

 

 

119.7

%

Marketing, advertising and promotion

 

 

232

 

 

 

140

 

 

 

92

 

 

 

65.7

%

Merger expenses

 

 

5,874

 

 

 

-

 

 

 

5,874

 

 

N/A

 

Professional fees

 

 

510

 

 

 

190

 

 

 

320

 

 

 

168.4

%

Core deposit intangible amortization

 

 

428

 

 

 

-

 

 

 

428

 

 

N/A

 

Other

 

 

720

 

 

 

456

 

 

 

264

 

 

 

57.9

%

Total noninterest expense

 

$

15,993

 

 

$

4,404

 

 

$

11,589

 

 

 

263.1

%

 

53


 

 

Noninterest expense for the quarter ended June 30, 2021 of $16.0 million was $11.6 million or 263.1% higher than the quarter ended June 30, 2020.  The predominant reason for the increase was that the Company incurred $5.9 million in merger-related expenses during the three months ended June 30, 2021. Additionally, the second quarter of 2021 includes the salaries of the employees of the combined company, as the effective date of merger with Fauquier was April 1, 2021.  

The components of noninterest expense for the six months ended June 30, 2021 and 2020 are shown below (dollars in thousands):

 

 

For the Six Months Ended

 

 

Variance

 

 

 

June 30,

2021

 

 

June 30,

2020

 

 

$

 

 

%

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

7,143

 

 

$

4,682

 

 

$

2,461

 

 

 

52.6

%

Net occupancy

 

 

1,604

 

 

 

904

 

 

 

700

 

 

 

77.4

%

Equipment

 

 

456

 

 

 

267

 

 

 

189

 

 

 

70.8

%

ATM, debit and credit card

 

 

115

 

 

 

94

 

 

 

21

 

 

 

22.3

%

Bank franchise tax

 

 

602

 

 

 

326

 

 

 

276

 

 

 

84.7

%

Computer software

 

 

383

 

 

 

276

 

 

 

107

 

 

 

38.8

%

Data processing

 

 

1,283

 

 

 

666

 

 

 

617

 

 

 

92.6

%

FDIC deposit insurance assessment

 

 

245

 

 

 

28

 

 

 

217

 

 

 

775.0

%

Loan expenses

 

 

208

 

 

 

157

 

 

 

51

 

 

 

32.5

%

Marketing, advertising and promotion

 

 

369

 

 

 

279

 

 

 

90

 

 

 

32.3

%

Merger expenses

 

 

6,152

 

 

 

-

 

 

 

6,152

 

 

N/A

 

Professional fees

 

 

687

 

 

 

376

 

 

 

311

 

 

 

82.7

%

Core deposit intangible amortization

 

 

428

 

 

 

-

 

 

 

428

 

 

N/A

 

Other

 

 

1,099

 

 

 

892

 

 

 

207

 

 

 

23.2

%

Total noninterest expense

 

$

20,774

 

 

$

8,947

 

 

$

11,827

 

 

 

132.2

%

 

Noninterest expense for the six months ended June 30, 2021 of $20.8 million was $11.8 million or 132.2% higher than the six months ended June 30, 2020.  The predominant reason for the increase was that the Company incurred $6.2 million in merger-related expenses during the six months ended June 30, 2021. Additionally, the first half of 2021 includes the salaries of the employees of the combined company, as the effective date of merger with Fauquier was April 1, 2021.  

 

The efficiency ratio (FTE) of 99.1% for the three months ended June 30, 2021 was elevated compared to the 59.5% for the same quarter of 2020, due primarily to the increase in noninterest expense, as described above. The efficiency ratio (FTE) of 89.5% for the six months ended June 30, 2021 was elevated compared to the 61.8% for the same period of 2020, also due to the increase in noninterest expense, as described above.  Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP efficiency ratio.

Provision for Income Taxes

For the three months ended June 30, 2021 and 2020, the Company provided $72 thousand and $511 thousand for Federal income taxes, respectively, resulting in an effective income tax rate of 32.9% and 19.7%, respectively.  The effective income tax rate for the three months ended June 30, 2021 was higher than the prior year, as certain merger related expenses are non-deductible for tax purposes.  For the six months ended June 30, 2021 and 2020, the Company provided $448 thousand and $843 thousand for Federal income taxes, respectively, resulting in an effective income tax rate of 21.3% and 19.4%, respectively. The effective income tax rate for the six months ended June 30, 2021 was higher than the prior year, as certain merger related expenses are non-deductible for tax purposes.  For all periods, the effective income tax rate differed from the U.S. statutory rate of 21% due to the effect of tax-exempt income from life insurance policies and municipal bonds.

OTHER SIGNIFICANT EVENTS

None

54


 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required

ITEM 4.  CONTROLS AND PROCEDURES

The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective at the reasonable assurance level. There was no change in the internal control over financial reporting that occurred during the quarter ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

PART II.  OTHER INFORMATION

None

ITEM 1A.  RISK FACTORS.

There have been no material changes from the risk factors described in the Company’s Form 10-K for the year ended December 31, 2020.  The risks described may not be the only risks facing us.  Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition and/or operating results.  

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4.  MINE SAFETY DISCLOSURES.

Not applicable

ITEM 5.  OTHER INFORMATION.

(a)

Required 8-K disclosures.

None

55


 

(b)

Changes in procedures for director nominations by security holders.

None

 

ITEM 6.  EXHIBITS.

 

Exhibit

Number

 

Description of Exhibit

 

 

 

 

 

 

31.1

 

302 Certification of Principal Executive Officer

 

 

 

31.2

 

302 Certification of Principal Financial Officer

 

 

 

32.1

 

906 Certification

 

 

 

101

 

The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline eXtensible Business Reporting Language, pursuant to Rule 405 of Regulation S-T (1): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) Consolidated Statements of Stockholders' Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited), tagged as blocks of text and including detailed tags

 

104

 

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101.0)

 

56


 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

VIRGINIA NATIONAL BANKSHARES CORPORATION

(Registrant)

 

 

 

By:

 

/s/ Glenn W. Rust

 

 

Glenn W. Rust

 

 

President and Chief Executive Officer

(principal executive officer)

 

 

 

Date:

 

August 13, 2021

 

 

 

By:

 

/s/ Tara Y. Harrison

 

 

Tara Y. Harrison

 

 

Executive Vice President and Chief Financial Officer

 

 

(principal financial and accounting officer)

 

Date:

 

August 13, 2021

 

57