Virginia National Bankshares Corporation — Q1 2016 Form 10-Q
Business context and reporting period
Bank holding company operating Virginia National Bank and VNB Wealth. This unaudited filing covers the three months ended March 31, 2016; comparisons are primarily with Q1 2015 and, for balance-sheet items, December 31, 2015.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparison |
|---|---|---|
| Net interest income | $4.514 million | $3.775 million in Q1 2015 |
| Net interest margin, tax-equivalent | 3.48% | 3.00% in Q1 2015; 3.34% in Q4 2015 |
| Noninterest income | $1.124 million | $1.184 million in Q1 2015 |
| Noninterest expense | $3.797 million | $4.118 million in Q1 2015 |
| Income before taxes | $1.961 million | $0.524 million in Q1 2015 |
| Net income; diluted EPS | $1.355 million; $0.57 | $0.415 million; $0.15 in Q1 2015 |
| Efficiency ratio | 66.8% | 82.1% in Q1 2015 |
| Operating cash flow | $1.804 million | $1.419 million in Q1 2015 |
| Total assets | $555.8 million | Down $11.7 million from year-end; up $11.9 million year over year |
| Total loans | $424.6 million | Up $0.9 million from year-end and $84.0 million year over year |
| Deposits | $478.8 million | Down $7.7 million from year-end; up $17.2 million year over year |
| Cash and cash equivalents | $33.6 million | Down $9.9 million from year-end |
| Repurchase agreements | $18.5 million | Down $4.6 million from year-end; no long-term borrowings are shown |
| Shareholders’ equity | $56.6 million | $56.3 million at year-end |
The allowance for loan losses was $3.44 million, or 0.81% of loans, versus 0.84% at year-end and 1.00% a year earlier. Net charge-offs were $7,000. Regulatory capital ratios were 12.28% for common equity Tier 1 and Tier 1, 13.04% total capital, and 9.91% leverage.
Material changes versus comparable periods
- Net income increased $940,000 year over year. Management attributed the improvement principally to $739,000 higher net interest income, a $437,000 favorable swing in loan-loss provision, and $321,000 lower noninterest expense; higher taxes and lower noninterest income partly offset the gains.
- Higher loan balances and a shift from lower-yielding securities and federal funds to loans lifted the average earning-asset yield and margin. Average loans increased $98.4 million year over year, while average securities and federal funds declined.
- Loan growth slowed to $924,000 in Q1 after strong growth in prior quarters. Securities fell $83.2 million year over year as the company redirected funds toward loans.
- Noninterest expense declined mainly because salaries and benefits were lower by $398,000. Noninterest income decreased by $60,000, including lower trust and royalty income and a $25,000 loss on asset sales.
Outlook, commentary, risks and unusual items
- Management expects meaningful loan growth in 2016, but not at 2015’s pace, and may use loan purchases to supplement organic growth. It said the prior loan expansion should continue to benefit earnings.
- VNB Wealth acquired a book of business effective February 1, with $31.5 million in associated assets under management. The $1.2 million purchase price is payable over five years; the filing records $372,000 of goodwill and $756,000 of net identifiable intangibles. Management said the transaction closed one month later than anticipated, affecting Q1 revenue.
- The provision for loan losses was a $120,000 recovery in Q1 2016 versus a $317,000 provision in Q1 2015. Management considered the allowance adequate. Nonaccrual loans were $185,000; impaired loans totaled $1.6 million, including $1.4 million in performing troubled debt restructurings. Loans 90 or more days past due and still accruing totaled $74,000.
- Available-for-sale securities had $191,000 of unrealized losses at quarter-end. Management considered the losses temporary and not credit-related. The portfolio is exposed to interest-rate movements.
- Funding included $478.8 million of deposits, of which 75.8% were noninterest-bearing or lower-cost transaction and money-market accounts. Deposits and repurchase balances together declined from year-end. The filing cites liquidity, interest-rate, credit, economic, pricing, competitive, regulatory, and technology risks; it provides no formal earnings guidance.
- The company repurchased 55,062 shares for $1.26 million in Q1 and declared a $0.10-per-share dividend. No legal proceedings or other significant events were reported. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the sharp earnings improvement and 3.48% net interest margin persist as loan growth moderates and interest rates or funding costs change.
- Credit quality, reserve adequacy, and exposure to commercial real estate, syndicated loans, and purchased student loans; verify the extent and terms of the student-loan surety bond.
- Whether deposit outflows and lower cash balances affect liquidity or require higher-cost funding.
- Revenue realization, retention, and future payment obligations related to the acquired VNB Wealth book of business.
- Whether lower expenses reflect sustainable efficiencies and how remaining share-repurchase authorization and dividends affect capital.