Virginia National Bankshares Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The company operates a Virginia-based community bank and wealth-management businesses. Amounts below are in millions of dollars unless noted.
Financial performance and condition
| Metric | Q2 2020 / June 30, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net income | $2.088; diluted EPS $0.77 | Q2 2019: $2.115; $0.79 per diluted share |
| Six-month net income | $3.492; diluted EPS $1.29 | Six months 2019: $3.361; $1.25 per diluted share |
| Net interest income | Q2: $5.755; six months: $11.130 | Q2 2019: $5.461; six months 2019: $11.029 |
| Noninterest income | Q2: $1.626; six months: $3.295 | Q2 2019: $1.700; six months 2019: $2.759 |
| Noninterest expense | Q2: $4.404; six months: $8.947 | Q2 2019: $4.685; six months 2019: $9.096 |
| Net interest margin, FTE | Q2: 3.12%; six months: 3.16% | Q2 2019: 3.67%; six months 2019: 3.72% |
| Efficiency ratio, FTE | Q2: 59.5%; six months: 61.8% | Q2 2019: 65.2%; six months 2019: 65.8% |
| Total assets | $799.6 | $702.6 at December 31, 2019 |
| Loans / deposits | $632.4 / $714.2 | Loans: $539.5; deposits: $621.2 at December 31, 2019 |
| Allowance for loan losses | $4.917; 0.78% of total loans, or 0.90% excluding PPP loans | $4.209 at December 31, 2019; 0.78% of loans |
| Shareholders’ equity | $79.1 | $76.1 at December 31, 2019 |
For the first six months, operating cash flow was $4.932, investing cash flow was negative $80.502, and financing cash flow was $91.372. Cash and cash equivalents increased $15.802 to $34.887. The company reported no outstanding FHLB advances or balances on its other borrowing lines at June 30. Regulatory capital ratios exceeded well-capitalized requirements: common equity Tier 1 and Tier 1 were each 14.63%, total capital was 15.56%, and leverage was 9.84%.
Material changes versus comparable periods
- Q2 net income declined 1.3% year over year; six-month net income rose 3.9%. Q2 earnings reflected a higher loan-loss provision, partly offset by lower funding costs and lower expenses.
- Loans increased $92.9, or 17.2%, from year-end, primarily reflecting $86.9 of PPP originations. Deposits increased $93.0, with management attributing the rise mainly to higher PPP customer-account balances. Noninterest-bearing and other low-cost deposits represented 86.5% of deposits.
- FTE net interest margin fell 55 basis points year over year in Q2 and 56 basis points for the six-month period. Lower loan yields offset much of the benefit from higher loan volumes; reduced deposit rates supported net interest income.
- Six-month noninterest income increased $0.536, principally from higher loan-swap fees and securities-sale gains. The company recorded $0.643 of net securities gains for the half-year, compared with $0.064 in 2019.
- Q2 provision expense was $0.378, compared with a $0.064 recovery in Q2 2019. Six-month provision expense rose to $1.143 from $0.620.
Outlook, risks and unusual items
- COVID-19 and credit risk: Management said the pandemic’s duration and economic effects remained uncertain. It had not experienced COVID-related charge-offs but downgraded economic qualitative factors in its allowance methodology and cautioned that worsening conditions could require further provisions and reduce asset quality, income and capital.
- The bank had approved $56.8 of loan payment deferrals across 169 accommodations; $17.0, or 29.9%, of approved balances had returned to normal payment schedules by June 30. Short-term qualifying COVID-related modifications were not treated as troubled debt restructurings under regulatory guidance. Management warned that losses on deferred payments could require reversal of accrued interest income.
- COVID-sensitive exposures identified by management included retail trade ($18.1), hotels and motels ($14.3), wholesale trade ($11.1), arts, entertainment and recreation ($6.6), caterers ($6.3), and full-service restaurants ($6.0). These amounts exclude PPP loans to those industries.
- The bank originated 574 PPP loans totaling $86.9; loans are government-guaranteed. Management noted that loans later found not to meet program criteria could require additional reserves. PPP fees were being amortized over the loans’ contractual lives.
- Purchased student loans totaled $40.7. Their prior surety insurer entered liquidation in 2018; the company had recognized probable losses in its allowance and expected approximately $0.8 from a distribution of unearned premiums.
- Reported earnings included securities gains and loan-swap fees; Q2 2019 had included a $0.300 settlement accrual for pending and threatened legal claims, while no such expense was recorded in 2020. Q2 2019 also included a life-insurance death benefit that increased year-earlier income.
- Management stated that capital and liquidity were currently adequate, had reviewed stress tests and contingency plans, and did not provide quantitative earnings guidance. It cautioned that interim results were not necessarily indicative of full-year results. The company reported effective disclosure controls, no material control change, and no legal proceedings disclosed in this filing.
Most important facts for investors to verify
- Whether PPP loans meet program requirements, how and when forgiveness and fee recognition affect earnings, and whether associated deposits persist.
- Subsequent performance of deferred loans, especially COVID-sensitive borrower industries, and the adequacy of the allowance as economic conditions evolve.
- Loan-yield and deposit-cost trends, given the substantial year-over-year decline in net interest margin.
- How much future earnings rely on securities-sale gains and loan-swap fees, which materially supported six-month noninterest income.
- Updates on student-loan performance, uncollectible balances and any recovery from the former surety insurer’s liquidation.