Virginia National Bankshares Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company is a bank holding company whose subsidiaries provide commercial banking and wealth management services. Financial amounts are in U.S. dollars; unless otherwise indicated, amounts below are in millions.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $5.483 | $4.537 | $15.864 | $13.481 |
| Provision for (recovery of) loan losses | $0.168 | $0.104 | $0.213 | $(0.291) |
| Noninterest income | $1.158 | $1.413 | $3.734 | $3.787 |
| Noninterest expense | $3.917 | $3.821 | $11.455 | $11.377 |
| Net income | $1.745 | $1.396 | $5.400 | $4.261 |
| Diluted earnings per share | $0.72 | $0.59 | $2.24 | $1.79 |
| Net interest margin, fully taxable-equivalent | 3.70% | 3.41% | 3.58% | 3.46% |
| Efficiency ratio, fully taxable-equivalent | 58.6% | 63.8% | 58.1% | 65.4% |
- Q3 net income rose 25.0%; nine-month net income rose 26.7%. Management attributed the improvement principally to higher net interest income, supported by loan growth and a higher-yielding asset mix.
- For the first nine months, the $2.383 million increase in fully taxable-equivalent net interest income was partly offset by higher taxes, a $0.504 million adverse year-over-year change in loan-loss provision, slightly higher expenses, and lower noninterest income.
- Q3 noninterest income fell $0.255 million, mainly because securities sales generated a $78,000 loss versus a $181,000 gain a year earlier. Nine-month securities sales and calls produced a $74,000 loss versus $189,000 in gains in 2016.
- Nine-month royalty income increased $178,000, partly due to a one-time payment in Q2 related to a revised Swift Run Capital Management agreement. Advisory and brokerage income also increased.
Financial position, liquidity and credit
- Assets and loans: Total assets were $610.3 million at September 30, up $5.3 million from year-end 2016 and $40.8 million year over year. Loans were $501.0 million, up $18.9 million from year-end and $70.1 million year over year. Loans represented 82.1% of assets and 98.8% of deposits.
- Deposits and funding: Deposits were $507.3 million, down $17.4 million from year-end but up $12.1 million year over year. Noninterest and low-cost deposits were 77.5% of deposits. Repurchase agreements and other borrowings totaled $37.0 million, compared with $19.7 million at year-end. This included $25 million borrowed from the FHLB during Q3; the company had no FHLB borrowing at year-end 2016.
- Cash and securities: Cash and cash equivalents were $10.3 million, down from $38.5 million at year-end; federal funds sold were $3.2 million versus $28.5 million. Total securities were $73.8 million, including $71.0 million available for sale, up from $58.4 million at year-end. Management sold lower-yielding securities to reinvest in higher-yielding securities or fund loans.
- Cash flow: Nine-month operating cash flow was $6.5 million; investing activities used $34.6 million, largely reflecting securities purchases and loan growth; financing activities used $0.1 million. Cash and cash equivalents declined $28.2 million. The company said it intends to maintain sufficient liquidity to meet funding commitments.
- Credit quality: The allowance for loan losses was $3.824 million, or 0.76% of loans, versus 0.77% at year-end 2016 and 0.76% a year earlier. Nonaccrual loans were $186,000; impaired loans totaled $2.45 million, with no specific valuation allowance. Loans 90 or more days past due totaled $342,000 and were still accruing. Management considered the allowance adequate.
- Capital: Shareholders’ equity was $64.8 million, up from $59.1 million at year-end. At September 30, the company reported a 12.75% common equity Tier 1 ratio, 12.75% Tier 1 ratio, 13.51% total capital ratio and 10.30% leverage ratio; management said these exceeded regulatory well-capitalized levels.
Changes, outlook and risks
- Management said loan growth and the recent securities portfolio repositioning should continue to support net interest income. It also cited potential additional noninterest income and ongoing expense control as supports for a low efficiency ratio. The filing provides no specific earnings or balance-sheet guidance.
- Purchased loans included $51.4 million of student loans insured by surety bonds, $22.7 million of government-guaranteed loans and $17.3 million of syndicated loans. Management described loan purchases as a secondary growth strategy and noted potential premium write-offs on early repayment of government-guaranteed loans.
- There were 61 purchased student loans totaling $937,000 classified as TDRs after borrowers received payment extensions or reductions. The company said these loans were fully insured and it did not expect losses on them.
- Available-for-sale securities had $575,000 of unrealized losses at quarter-end. Management attributed these mainly to market interest-rate increases, viewed them as temporary rather than credit-related, and stated it could hold the securities until recovery or maturity. Securities values remain sensitive to interest-rate movements.
- Key risks identified include changes in interest rates and local economic conditions, borrower financial condition, loan and deposit pricing competition, regulation and accounting changes, technology and personnel risks, and the accuracy of loan-loss estimates. The expected impact of the forthcoming credit-loss standard (CECL) was not yet determinable; adoption was scheduled for 2020.
- A $156,000 contingent liability remained for payments due under the 2016 wealth-management book-of-business purchase. The filing reports no legal proceedings or other significant events. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan growth and net interest margin remain sustainable, particularly as the loan-to-deposit ratio reached 98.8% and deposits declined from year-end.
- The sources and cost of funding, including the $25 million FHLB advance, and the company’s liquidity position following the decrease in cash and federal funds sold.
- Credit performance and reserve adequacy as the loan portfolio expands, including purchased, syndicated and government-guaranteed exposures and student-loan TDRs.
- Whether securities repositioning improves future earnings enough to offset realized losses and interest-rate risk.
- The repeatability of noninterest income, given the one-time royalty payment and period-to-period volatility in securities gains and losses.