Virginia National Bankshares Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless otherwise noted. The company is a Virginia-based bank holding company with commercial banking and wealth-management businesses. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. Per-share data reflects the 5% stock dividend issued in July 2019.
Financial performance and condition
- Q3 earnings: Net income was $1.90 million, down 12.2%; diluted EPS was $0.71 versus $0.80. Nine-month net income was $5.26 million, down 22.5%; diluted EPS was $1.96 versus $2.52.
- Revenue and margins: Q3 net interest income was $5.47 million versus $5.79 million; nine-month net interest income was $16.50 million versus $17.18 million. Fully taxable-equivalent net interest margin was 3.54% for Q3 (3.80% prior year) and 3.66% for nine months (3.81% prior year). Noninterest income was $1.33 million for Q3, up 4.5%, and $4.09 million for nine months, down 4.8%.
- Expenses and efficiency: Noninterest expense rose 11.5% to $4.56 million in Q3 and 12.6% to $13.66 million in nine months. The FTE efficiency ratio worsened to 66.9% in Q3 from 57.7%, and to 66.1% for nine months from 56.3%.
- Credit provision and asset quality: Q3 included a $120,000 recovery of loan losses, versus a $285,000 provision in Q3 2018. Nine-month provision was $500,000 versus $890,000. The allowance was $3.98 million, or 0.76% of loans, versus $4.89 million and 0.91% at year-end 2018. Nonaccrual loans were $337,000; impaired loans were $2.6 million.
- Balance sheet and liquidity: Assets were $660.8 million, up $16.0 million from year-end. Loans were $522.1 million, down $15.1 million; deposits were $579.4 million, up $6.9 million. Cash and cash equivalents were $27.9 million versus $18.9 million at year-end. The loan-to-deposit ratio was 90.1% at September 30, 2019, versus 97.9% a year earlier.
- Cash flow, nine months: Operating cash flow was $4.60 million, compared with $8.90 million; investing cash flow was negative $0.29 million, compared with positive $4.38 million; financing cash flow was positive $4.67 million, compared with negative $22.79 million. Cash and cash equivalents increased $8.98 million, versus a $9.52 million decrease.
- Debt and capital: No FHLB advances, repurchase agreements, or federal funds lines were outstanding at September 30, 2019. The company reported a $3.78 million operating lease liability. Regulatory capital ratios were 14.76% for both common equity Tier 1 and Tier 1, 15.55% total capital, and 11.42% leverage; management said these exceeded well-capitalized thresholds.
Material changes versus prior periods
- Earnings declined as deposit interest costs increased, noninterest expenses rose, and prior-year royalty income was not repeated. In nine months, salaries and benefits increased $778,000; royalty income fell $556,000, largely due to a performance-fee payment in Q1 2018 that did not recur.
- Q3 net interest margin compression reflected higher deposit costs and lower average loan balances. For nine months, higher loan yields raised interest income, but higher deposit rates drove interest expense up $1.1 million.
- Investment securities increased $16.5 million from year-end to $79.6 million. The portfolio included $77.9 million of available-for-sale securities, primarily mortgage-backed securities and CMOs.
- Loans decreased from year-end despite $24.8 million of new organic fundings and $7.1 million of government-guaranteed loan purchases, due mainly to repayments, payoffs, and $1.6 million of charge-offs.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management said expenses may continue to rise as the company invests for growth and enters new markets, and that it continues to evaluate expense containment. Results for the quarter and nine months are not necessarily indicative of full-year results.
- Management attributed the Q3 loan-loss recovery partly to selling a shared national credit, lower student-loan delinquencies, and reduced organic loan balances; it considered the allowance adequate at September 30.
- The company recorded $460,000 of expense to settle two claims seeking approximately $2.7 million. It had accrued $300,000 in Q2 and recognized a further $160,000 in Q3. Management reported no material pending claims after settlement.
- The $47.5 million purchased student-loan portfolio was affected by the 2018 insolvency and liquidation of its surety insurer. The company filed claims for eligible defaults and anticipated payment on approved claims; 76 loans totaling $1.3 million were classified as performing troubled debt restructurings. Credit performance, recoveries, and any uncovered losses remain relevant risks.
- Management identified interest-rate and economic conditions, borrower financial condition, competition, technology, regulation, staffing, and credit-estimation assumptions among factors that could cause results to differ from forward-looking statements. The company is assessing CECL adoption; as a smaller reporting company, it cited an effective date for fiscal years beginning after December 15, 2022 and said the impact was not yet determinable.
- The company adopted lease accounting on January 1, 2019, recognizing a $4.3 million right-of-use asset and lease liability at adoption. It decided not to opt into the community bank leverage ratio framework.
Important facts for investors to verify
- Whether deposit pricing and funding mix continue to pressure net interest margin and earnings.
- Whether loan balances stabilize or grow, and how the commercial real-estate and student-loan portfolios perform.
- Actual recovery of eligible student-loan insurance claims and changes in delinquencies, charge-offs, and the allowance.
- Whether higher staffing, technology, and expansion costs produce sufficient revenue growth; note that the $460,000 claims settlement reduced nine-month net income by $363,000 after tax, according to management.
- Whether securities valuations, interest-rate exposure, and the future CECL allowance materially affect reported equity or earnings.