Virginia National Bankshares Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Figures are consolidated; dollar amounts are in millions unless stated otherwise.
Business context and financial performance
The company operates Virginia National Bank and VNB Wealth Management. Banking results reflect loan and deposit growth, while VNB Wealth reported a loss. Management says results for the interim period are not necessarily indicative of full-year results.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $4.176 | $3.577 | $11.929 | $10.797 |
| Provision for loan losses | $0.088 | $0 | $0.405 | Recovery of $0.118 |
| Noninterest income | $1.222 | $1.155 | $3.661 | $3.382 |
| Noninterest expense | $4.144 | $4.256 | $12.437 | $12.695 |
| Net income | $0.839 | $0.382 | $2.021 | $1.333 |
| Diluted earnings per share | $0.34 | $0.14 | $0.79 | $0.49 |
Q3 net interest margin was 3.22%, compared with 3.03% in Q3 2014; the nine-month margin was 3.13%, versus 3.11%. The efficiency ratio improved to 76.0% for Q3 and 78.9% for the nine-month period, from 89.2% and 88.8%, respectively.
Financial position, cash flow and liquidity
- Total assets were $548.8 million at September 30, up $11.7 million from December 31, 2014 and $40.8 million year over year.
- Total loans were $390.1 million, up 24.5% from year-end 2014 and 34.7% year over year. Growth included organic production and purchases of syndicated loans and $10.8 million of student loans, the latter fully insured by a surety bond.
- Deposits totaled $471.6 million, up $14.9 million from year-end and $39.1 million year over year. Noninterest-bearing and interest-bearing transaction and money-market accounts made up 76.1% of deposits.
- Available-for-sale and restricted securities totaled $117.0 million, down $26.4 million from year-end. Management said securities were sold or called and funds redeployed toward higher-yielding loans.
- Cash and cash equivalents were $17.5 million, compared with $54.1 million at year-end 2014. For the first nine months, operating cash flow was $4.1 million, investing cash outflow was $50.6 million, and financing cash inflow was $9.9 million; cash decreased $36.6 million. Loan growth was a major use of investing cash.
- Shareholders’ equity was $56.4 million, versus $60.6 million at year-end. The company repurchased $5.8 million of shares and paid $0.689 million in dividends. It reported a 13.03% Tier 1 capital ratio, 13.85% total capital ratio and 10.09% leverage ratio; management said capital remained well above regulatory well-capitalized levels.
- Securities sold under repurchase agreements were $19.4 million. The filing does not report conventional long-term borrowings as a material funding source.
Changes, management commentary and risks
- Nine-month net income rose 51.6% year over year. Higher net interest income, noninterest income and lower noninterest expense more than offset the higher loan-loss provision and income taxes.
- Loan growth increased interest income despite lower loan yields. Management cited the continuing low-rate environment and payoffs of higher-yielding loans as pressure on yields; low funding costs supported net interest income.
- The allowance for loan losses rose to $3.513 million, while the allowance-to-loans ratio declined to 0.90% from 1.01% at year-end. Net charge-offs were $56,000 for the nine months. Nonaccrual loans were $245,000; impaired loans totaled $1.685 million, including $1.440 million of performing troubled debt restructurings. Management considered the allowance adequate.
- Other real estate owned fell to $540,000 after a $445,000 property sale and a $192,000 third-quarter writedown. Securities sales generated $69,000 in gains year to date; management considered unrealized securities losses temporary and reported no other-than-temporary impairment.
- Management expects loan growth, mortgage originations and fee initiatives to support revenue, and expense controls to improve efficiency over time. The filing provides no quantified earnings or margin guidance.
- Key stated risks include interest-rate and market changes, local and national economic conditions, borrower credit quality, competitive pricing and demand, regulation, technology, and the company’s ability to manage these risks. Loan-loss estimates, deferred tax assets and foreclosed-asset values involve significant management judgment.
- The board extended the repurchase authorization through September 18, 2016. A total of 265,212 shares had been repurchased at a weighted-average $22.89 per share, leaving 134,788 authorized shares available. The program is discretionary.
Important facts for investors to verify
- Whether rapid loan growth, including purchased and syndicated credits, is sustainable and remains consistent with underwriting and concentration limits.
- Credit quality and reserve adequacy as loans expand, particularly the allowance ratio, classified loans, delinquencies and performance of troubled debt restructurings.
- Whether deposit growth and low-cost funding can support lending needs as cash and securities have declined.
- Net interest margin sensitivity to rate changes, deposit repricing and continued compression in loan yields.
- Effects of the OREO writedown and future property disposition, and the assumptions supporting reported securities valuations.
- Progress on revenue initiatives, cost control and efficiency, alongside capital levels, dividends and future share repurchases.