Virginia National Bankshares Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are principally with fiscal 2018. The company is a Virginia-based bank holding company operating Virginia National Bank and wealth, trust and investment-management businesses. Common stock trades on OTCQX as VABK.
Financial results and condition
- Profitability: Net income was $6.689 million, down 21.0% from $8.470 million; diluted EPS was $2.49 versus $3.15. Return on average assets was 1.02% (1.33% in 2018), and return on average equity was 8.99% (12.39%).
- Revenue and margins: Net interest income was $21.924 million, down 4.2%; fully taxable-equivalent (FTE) net interest income was $22.002 million, down 4.3%. FTE net interest margin fell to 3.57% from 3.80%. Noninterest income was $5.551 million, essentially unchanged, making net interest income and noninterest income together approximately $27.5 million. FTE efficiency ratio increased to 64.9% from 56.2%.
- Expenses and credit costs: Noninterest expense rose 11.7% to $17.884 million, including $460,000 for settlement of claims. Provision for loan losses declined to $1.375 million from $1.873 million. Net charge-offs increased to $2.057 million from $1.025 million; the allowance was $4.209 million, or 0.78% of loans, versus $4.891 million, or 0.91%.
- Balance sheet and funding: Total assets were $702.627 million, up from $644.800 million. Loans were $539.533 million, up modestly; deposits increased 8.5% to $621.211 million. The loan-to-deposit ratio declined to 86.9% from 93.8%. Cash and cash equivalents totaled $19.085 million. Shareholders’ equity was $76.107 million.
- Debt and liquidity: No short-term borrowings or FHLB advances were outstanding at year-end. Available borrowing arrangements totaled $89.085 million. Operating cash flow was $9.346 million, compared with $11.757 million in 2018; cash increased $211,000. The company reported no material loss expected from off-balance-sheet commitments, which totaled $130.8 million for unfunded lines, ACH authorizations and letters of credit, plus $14.4 million of commitment letters.
- Capital: The Bank’s total risk-based capital ratio was 14.98%, common equity Tier 1 ratio 14.18%, and leverage ratio 10.73%. It met the regulatory definition of well capitalized.
Material changes versus 2018
- Net income declined as noninterest expense increased by $1.870 million and net interest income fell by $972,000. Lower loan-loss provision and income-tax expense partly offset these pressures.
- Deposit costs rose faster than asset yields: interest expense increased to $4.273 million from $2.790 million. Average earning assets grew 1.8%, while FTE margin contracted 23 basis points.
- Salary and benefit expense increased $1.213 million; year-end full-time-equivalent staffing rose to 97 from 86, including commercial lending hires and expanded cybersecurity/network personnel.
- The securities portfolio grew to $115.7 million, including restricted securities, from $63.1 million. The company sold $21.1 million of available-for-sale securities and recorded $74,000 in gains on sales and calls.
- Noninterest income included a $352,000 increase in bank-owned life insurance income following a death benefit, partly offset by royalty income falling $568,000 as 2018 included performance fees related to 2017.
- 2019 included $212,000 of loan swap fees in other income and the $460,000 claims settlement expense. No swap fee income or comparable settlement expense was reported in 2018.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management stated that a relatively flat yield curve could continue to pressure net interest income in 2020.
- Key risks include interest-rate and deposit-pricing competition, local and broader economic weakness, borrower credit deterioration, commercial real estate concentration, and changes in technology and regulation. The filing also identifies prolonged economic disruption, potentially from a pandemic or other widespread public-health emergency, as a risk; it does not quantify an impact or forecast.
- Student loan exposure remains notable: purchased student loans totaled $44.7 million. The surety insurer, ReliaMax, entered liquidation in 2018 and its bonds were terminated; the company had received payment on approved claims and said the liquidator expected to communicate any distribution related to unearned premiums in the first half of 2020.
- Management was preparing for adoption of the expected-credit-loss standard (CECL), then scheduled for the company’s fiscal years beginning after December 15, 2022. The impact was not yet determinable.
- Management and the independent auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements and controls.
Important facts for investors to verify
- Whether deposit-cost pressure and the lower net interest margin persist, and how management responds to the rate environment.
- Credit performance and reserve adequacy, particularly for commercial real estate and purchased student loans; monitor charge-offs, delinquencies and the ReliaMax liquidation outcome.
- Whether expense growth, including staffing, technology and claims-related costs, moderates and improves the efficiency ratio.
- How deposit growth, liquidity sources and capital ratios evolve; confirm the availability and conditions of borrowing facilities and dividend capacity.
- Future CECL implementation assumptions and any resulting allowance or retained-earnings adjustment.