Virginia National Bankshares Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019 unless stated otherwise. The company is a Virginia-based bank holding company with commercial banking, wealth advisory, trust and estate, and investment-management operations. Financial statements are unaudited.
Key financial results and position
- Profit: Net income was $1.404 million, up 12.7% from $1.246 million in Q1 2019. Diluted earnings per share were $0.52 versus $0.46.
- Interest and margins: Net interest income was $5.375 million, down 3.5% on a fully taxable-equivalent basis. Net interest margin (FTE) fell to 3.20% from 3.78%; lower loan yields and higher deposit costs weighed on results.
- Noninterest income and expense: Noninterest income rose 57.6% to $1.669 million, primarily due to $509,000 of loan swap fee income, compared with $8,000 a year earlier. Noninterest expense increased 3.0% to $4.543 million. The FTE efficiency ratio improved to 64.3% from 66.4%.
- Credit costs: Provision for loan losses was $765,000 versus $684,000. The allowance was $4.704 million, or 0.85% of loans, compared with $4.209 million, or 0.78%, at year-end. Management said the increase reflected a weaker economic outlook associated with COVID-19.
- Assets and loans: Total assets were $717.1 million, up $14.5 million from year-end. Loans were $554.0 million, up $14.4 million; deposits were $635.1 million, up $13.9 million. Commercial real estate represented 46.8% of loans.
- Liquidity and funding: Cash and cash equivalents were $31.6 million at quarter-end, including $12.3 million in federal funds sold. Operating cash flow was $2.9 million; cash increased $12.5 million during the quarter. Deposits were the primary funding source, and 84.0% were noninterest-bearing or low-cost transaction, money-market, and savings accounts.
- Debt and capital: No FHLB advances or correspondent-bank line borrowings were outstanding. Regulatory capital ratios were 13.21% for common equity Tier 1 and Tier 1, 14.04% total capital, and 10.59% leverage; the company reported these exceeded well-capitalized thresholds.
- Equity and dividend: Shareholders’ equity was $76.3 million. The company declared cash dividends of $0.30 per share for the quarter.
Changes versus comparable periods
- Compared with Q1 2019, net income and diluted EPS increased, but net interest income and FTE margin declined. The rise in noninterest income—principally loan swap fees—more than offset the lower net interest income and higher expenses.
- Average earning assets increased, including securities, while average loan yield declined from 4.64% to 4.41%. Average interest-bearing deposit cost increased from 0.90% to 1.04%.
- Compared with December 31, 2019, loans and deposits grew, while the securities portfolio declined to $103.8 million from $115.7 million. Accumulated other comprehensive loss widened to $491,000 from $43,000, largely reflecting securities valuation changes.
- Nonaccrual loans were $273,000, down from $299,000 at year-end; impaired loans were $2.4 million versus $2.5 million. Loans 90 or more days past due and still accruing totaled $733,000.
Outlook, risks, contingencies and unusual items
- COVID-19 exposure: Management noted substantial uncertainty about the pandemic’s duration and economic impact. It downgraded economic qualitative factors in its loan-loss methodology, said the allowance could rise as conditions deteriorate, and cautioned that asset quality, collateral values, interest income, capital, and results could be adversely affected.
- Borrower relief and PPP: As of May 6, 2020, the company reported 155 loan deferrals covering $18.3 million in balances, including 131 student-loan deferrals totaling $1.8 million. It had also closed 495 SBA Paycheck Protection Program loans totaling $83.9 million. These are post-quarter figures; PPP loans are fully government-guaranteed, but eligibility issues could require additional provision.
- Industry concentrations: Management identified retail trade ($18.5 million), hotels and motels ($14.5 million), caterers ($6.3 million), and full-service restaurants ($6.1 million) as loan exposures considered at higher risk of significant pandemic impact.
- Credit and securities: Management reported no COVID-related charge-offs through the filing’s discussion and considered securities unrealized losses temporary, citing no identified credit impairment and the ability to hold securities through recovery or maturity. Available-for-sale securities had $1.829 million of gross unrealized losses at quarter-end.
- Other unusual item: The company expected approximately $800,000 from distributions of unearned premiums following the insolvency of the surety insurer for purchased student loans. Student loans remain exposed to losses because the insurer’s coverage ended in 2018.
- Guidance: No quantified earnings or financial guidance was provided. Management stated that the allowance would most likely increase during 2020 if economic conditions continued to deteriorate; first-quarter results were not necessarily indicative of full-year results.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no legal proceedings.
Important facts for investors to verify
- Whether COVID-19-related deferrals convert into delinquencies, nonaccrual loans, charge-offs, or further allowance increases.
- Subsequent performance of higher-risk industry exposures and the extent of any continuing loan modifications or PPP eligibility issues.
- Whether the $509,000 loan swap fee income and expected student-loan insurer distribution recur; assess earnings without these items.
- Deposit pricing and mix, loan yields, and the trajectory of net interest margin following rate changes.
- Changes in securities fair values, liquidity resources, capital ratios, and the concentration and performance of commercial real estate and purchased student loans.