Virginia National Bankshares Corporation — FY2015 Form 10-K
Reporting period: Year ended December 31, 2015; comparisons are primarily with FY2014. This is an annual filing, not a standalone fourth-quarter report. The company is a Virginia-based bank holding company whose principal operating subsidiary is Virginia National Bank; it also provides wealth-management services through VNB Wealth.
Financial performance and position
| Metric | FY2015 / year-end 2015 | FY2014 / year-end 2014 |
|---|---|---|
| Net income | $3.12 million; diluted EPS $1.23 | $1.90 million; diluted EPS $0.70 |
| Net interest income | $16.31 million | $14.45 million |
| Net interest margin | 3.19% | 3.07% |
| Noninterest income | $4.87 million | $5.60 million |
| Noninterest expense | $16.40 million | $17.39 million |
| Provision for loan losses | $463,000 | $306,000 |
| Total assets | $567.5 million | $537.1 million |
| Total loans | $423.7 million | $313.3 million |
| Total deposits | $486.5 million | $456.7 million |
| Cash and cash equivalents | $43.5 million | $54.1 million |
| Shareholders’ equity | $56.3 million | $60.6 million |
- Net income rose 64.4%. Management attributed the improvement principally to higher interest income and lower noninterest expense.
- Efficiency ratio improved to 76.6% from 85.7%. Return on average assets was 0.56% versus 0.37%; return on average equity was 5.34% versus 3.16%.
- Net cash provided by operating activities was $5.54 million, compared with $7.65 million. Investing activities used $43.82 million, largely reflecting loan growth; financing activities provided $27.70 million. Cash and cash equivalents declined $10.58 million during 2015.
- The allowance for loan losses was $3.57 million, or 0.84% of loans, versus $3.16 million, or 1.01%. Net charge-offs were $60,000, compared with $502,000 in 2014.
- Regulatory capital remained above minimums: consolidated Tier 1 and total risk-based ratios were 12.60% and 13.39%; the Bank’s were 12.31% and 13.10%. Bank Tier 1 leverage was 9.81%. The Bank was classified as well capitalized.
- The filing reports no outstanding balances on borrowing lines at year-end; available lines totaled $71.5 million. Repurchase-agreement liabilities were $23.2 million. The filing does not report conventional long-term debt in the balance sheet.
Material changes and operating drivers
- Loans increased 35.2% year over year, while the loan-to-deposit ratio rose to 87.1% from 68.6%. Growth included approximately $70.7 million of net organic lending, $27.0 million of syndicated loans and $36.4 million of purchased student loans; the student-loan portfolio was supported by a surety bond.
- Investment securities fell to $76.5 million from $143.4 million as management shifted funds toward higher-yielding loans. The portfolio had $447,000 in gross unrealized gains and $625,000 in gross unrealized losses; management considered the losses temporary and interest-rate-related.
- Noninterest income declined 13.0%, mainly because trust performance fees fell to $16,000 from $523,000 and royalty income associated with the former fund-management business fell. Increased customer fees and mortgage-sale fees partly offset the decline.
- Noninterest expense declined 5.7%, reflecting lower salaries and benefits, marketing, professional fees and OREO costs. Staffing was 94 full-time equivalents at year-end, down from 101.
- The Bank segment earned $3.82 million in 2015, versus $1.77 million. VNB Wealth recorded a $699,000 loss, versus $127,000 of income.
- The company repurchased 288,497 shares under its program through year-end, including a large purchase from the former fund’s limited partnership. The program authorized up to 400,000 shares and was extended through September 18, 2016.
Outlook, risks and unusual items
- No numeric earnings, growth or margin guidance is provided. Management expected some downward pressure on loan yields into early 2016 and said a relatively flat yield curve could continue to weigh on results.
- Key risks include interest-rate and market movements, local economic conditions, borrower performance, intense loan and deposit competition, credit concentrations, and regulatory and consumer-compliance requirements. Management also highlighted continuing cybersecurity threats.
- Credit quality indicators were generally favorable: three non-accrual loans totaled $191,000; there were no loans 90 days past due and still accruing. Classified assets rose to $8.5 million from $4.9 million, while the allowance ratio declined partly because of portfolio growth and loans requiring little or no reserve.
- Off-balance-sheet commitments included $106.4 million of unfunded lines of credit, $15.2 million of ACH exposure and $6.5 million of letters of credit. Management did not anticipate material losses from these commitments.
- The remaining $1.2 million OREO property reported at year-end 2014 was sold during 2015; year-end 2015 OREO was zero. A subsequent event was VNB Wealth’s February 2016 purchase of client relationships valued at $31.5 million for a $1.2 million purchase price payable over five years.
- Auditors issued an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Investor facts to verify
- Whether rapid loan growth, including syndicated and purchased student loans, can be sustained without weakening underwriting or asset quality.
- How the lower allowance-to-loans ratio and increase in classified assets reconcile with management’s credit-risk assessment and reserve methodology.
- Whether loan growth and the higher loan-to-deposit ratio affect funding costs, liquidity, and capital as the securities portfolio shrinks.
- Whether the wealth-management business can restore profitability after lower performance fees and the FY2015 segment loss.
- The performance and accounting treatment of the February 2016 client-relationship acquisition, and the effect of ongoing share repurchases and dividends on capital and shareholder returns.
- Potential sensitivity to interest-rate changes and the assumptions underlying management’s net-interest-income simulations.