Business context and reporting period
Virginia National Bankshares Corporation, a Virginia bank holding company with banking and wealth-management businesses, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. Comparisons are with the corresponding 2018 periods unless otherwise noted. Per-share data is adjusted for the 5% stock dividend issued July 5, 2019.
Key financial metrics
| Metric | Q2 2019 | Six months 2019 |
|---|---|---|
| Net income | $2.115 million, up 15.5% | $3.361 million, down 27.4% |
| Diluted EPS | $0.79, versus $0.68 | $1.25, versus $1.72 |
| Net interest income, GAAP | $5.461 million, down 4.1% | $11.029 million, down 3.2% |
| Net interest margin, FTE | 3.67%, versus 3.78% | 3.72%, versus 3.81% |
| Noninterest income | $1.700 million, up 30.1% | $2.759 million, down 8.7% |
| Noninterest expense | $4.685 million, up 16.3% | $9.096 million, up 13.1% |
At June 30, 2019, total assets were $633.8 million, down $11.0 million from year-end 2018; loans were $521.8 million, down $15.4 million; deposits were $553.5 million, down $19.0 million; and shareholders’ equity was $74.3 million. Cash and cash equivalents were $24.8 million. The loan-to-deposit ratio was 94.3%. The company reported no outstanding FHLB advances or other listed borrowings at quarter-end. Regulatory capital ratios were strong: common equity Tier 1 and Tier 1 each 14.71%, total capital 15.68%, and leverage 11.51%.
For the first six months, operating cash flow was $4.5 million, investing cash flow was $21.8 million, and financing cash outflow was $20.4 million; cash and cash equivalents increased $5.9 million to $24.8 million. The allowance for loan losses was $4.8 million, or 0.92% of loans. Nonaccrual loans were $390,000; loans 90 days or more past due and still accruing totaled $617,000.
Material changes versus prior comparable periods
- Quarterly net income rose despite lower net interest income, chiefly reflecting a $765,000 favorable year-over-year change in provision for loan losses and $355,000 more bank-owned life insurance income. The latter included a death benefit.
- First-half earnings fell as royalty income declined $544,000, salaries and benefits increased $694,000, and the company recorded a $300,000 legal contingency accrual. Higher bank-owned life insurance income partly offset these items.
- Deposit pricing pressure reduced net interest income: interest expense rose $400,000 in Q2 and $862,000 for the half-year. Higher deposit rates more than offset higher loan yields; lower borrowing costs provided a partial offset.
- The Q2 efficiency ratio (FTE) worsened to 65.2% from 57.3%, reflecting higher expenses. Management cited staffing for the Richmond market and cyber/network security, in addition to the legal accrual.
- The securities portfolio declined to $58.5 million from $63.1 million at year-end. In June, the company sold about $10.4 million of securities, recognizing a $64,000 gain, to reposition for higher yield; about $6.9 million had been reinvested by quarter-end.
Outlook, risks, contingencies and unusual items
No specific earnings or financial guidance was provided. Management said a stronger asset mix and higher earning-asset yields could support net interest income, while expenses may continue to rise as the company invests for growth and enters new markets. The filing highlights sensitivity to interest rates, local and national economic conditions, borrower credit quality, deposit and loan competition, regulation, technology, staffing and execution of expansion plans.
- The company accrued $300,000 for pending and threatened legal proceedings concerning the same matter. Management disputed the claims and said it would defend them. The filing’s legal-proceedings item states “None,” while Note 11 describes the accrual; investors should reconcile this presentation.
- Purchased student loans totaled $49.9 million. Their surety insurer, ReliaMax, entered liquidation in 2018 and coverage ended July 27, 2018. The company filed claims for eligible defaults and recognized an allowance for estimated losses; 68 loans totaling $1.2 million were classified as performing troubled debt restructurings.
- Management considered the $214,000 unrealized loss on available-for-sale securities temporary and reported no other-than-temporary impairment. Securities values remain exposed to interest-rate movements.
- Operating lease adoption added a $3.9 million lease liability and right-of-use asset at June 30, 2019.
- The company was assessing the impact of the expected-credit-loss standard (CECL). The FASB had announced a proposed delay for smaller reporting companies; the filing said that, if approved, adoption would be for fiscal years beginning after December 15, 2022.
Important facts for investors to verify
- Whether deposit costs continue rising faster than loan yields and how that affects net interest margin.
- Credit performance and loss recoveries for the student-loan portfolio following the insurer’s liquidation, including the status of claims and TDRs.
- The eventual outcome and potential additional exposure from the legal matter underlying the $300,000 accrual, including the difference between Note 11 and the legal-proceedings disclosure.
- Whether loan balances stabilize or resume growth, and how deposit trends affect liquidity and the 94.3% loan-to-deposit ratio.
- How much of quarterly and first-half earnings reflects nonrecurring items, particularly the life-insurance death benefit, securities gain and legal accrual.
- The final CECL adoption date and its expected effect on the allowance and retained earnings; the filing says the impact was not yet determinable.