Virginia National Bankshares Corporation — Q3 2018 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2018. The company is a Virginia-based bank holding company operating Virginia National Bank and wealth-management services. Effective July 1, 2018, VNBTrust was merged into the Bank; wealth services continue under the VNB Wealth name. Dollar amounts below are in millions unless otherwise noted.
Financial performance and condition
| Metric | Q3 2018 / Sept. 30, 2018 | Comparison |
|---|---|---|
| Net income | $2.16; diluted EPS $0.84 | Q3 2017: $1.75; diluted EPS $0.68 |
| Net interest income | $5.79 GAAP; $5.81 fully taxable-equivalent (FTE) | Q3 2017: $5.48 GAAP; $5.52 FTE |
| Net interest margin | 3.80% FTE | 3.70% in Q3 2017 |
| Noninterest income / expense | $1.27 / $4.09 | Q3 2017: $1.16 / $3.92 |
| Net income, nine months | $6.79; diluted EPS $2.65 | 2017: $5.40; diluted EPS $2.13 |
| Total assets | $626.8 | $643.9 at Dec. 31, 2017 |
| Loans / allowance for loan losses | $527.3 / $4.68; allowance 0.89% of loans | $528.8 / $4.04; allowance 0.76% at Dec. 31, 2017 |
| Deposits | $538.5 | $543.0 at Dec. 31, 2017; $507.3 at Sept. 30, 2017 |
| Repurchase agreements and other borrowings | $17.2 | $34.1 at Dec. 31, 2017 |
| Cash and cash equivalents | $8.76 | $18.28 at Dec. 31, 2017 |
For the first nine months, operating cash flow was $8.90; investing activities provided $4.38 and financing activities used $22.79. Cash and cash equivalents declined $9.52 from the start of the year. The filing reports regulatory capital ratios of 13.37% for common equity Tier 1 and Tier 1, 14.26% total capital, and 10.93% leverage, all above the stated “well capitalized” thresholds.
Material changes versus comparable periods
- Q3 net income rose 23.8% year over year; nine-month net income rose 25.7%. Management attributed the improvement primarily to higher net interest income, with lower income-tax expense also contributing.
- Nine-month net interest income (FTE) increased 8.0%, reflecting higher average loan balances and yields. FTE net interest margin increased 23 basis points to 3.81% for the nine-month period.
- Nine-month noninterest income increased 14.9%, including a $371 thousand increase in royalty income from annual performance fees, higher wealth-management and mortgage-sale fees, and the absence of prior-year securities-sale losses. Noninterest expense increased 5.9%.
- Loans were up 5.2% year over year but slightly down from year-end 2017. Deposits increased year over year but declined modestly from year-end.
- Unrealized losses on available-for-sale securities increased to $2.48 million from $1.19 million at year-end; management attributed losses primarily to higher market interest rates and considered them temporary, with no credit impairment recognized.
Outlook, management commentary, and risks
- Management stated that the allowance was adequate at September 30, 2018. The nine-month provision for loan losses rose to $890 thousand from $213 thousand, principally because the insurer of the purchased student-loan portfolio became insolvent.
- ReliaMax Surety’s insolvency ended insurance coverage for student loans in default after July 27, 2018. The company expected to file claims for eligible loans and, based on information from the liquidator, expected to collect principal and interest outstanding on qualifying loans as of that date. Loans becoming 120 days or more past due afterward are subject to charge-off. Student loans classified as nonaccrual rose to $445 thousand; total nonaccrual loans were $566 thousand.
- The company reported 68 purchased student loans totaling $1.1 million as performing troubled debt restructurings. Credit quality, the insurer liquidation and recoveries, and the increased allowance are important areas to monitor.
- Management expects improved earning-asset mix and higher yields to support net interest income, while additional noninterest income opportunities and expense controls may support efficiency. No specific earnings or growth guidance was provided; management cautioned that interim results are not necessarily indicative of full-year results.
- Key risks identified include interest-rate and market changes, local and broader economic conditions, borrower creditworthiness, competition for loans and deposits, regulation, technology, personnel retention, and execution of acquisitions or expansion. The company noted that rising rates can affect securities values, funding costs, and borrower and depositor behavior.
- The 2017 Tax Act lowered the corporate tax rate; the effective tax rate was 19.6% for both Q3 and the first nine months of 2018, versus 31.7% and 31.9%, respectively, in 2017. The company anticipated that upcoming lease accounting would increase reported assets and liabilities but not materially affect net income; the impact of the expected-credit-loss standard remained undetermined.
- The Bank implemented insured cash sweep deposit products during the quarter, with $16.5 million included in checking and savings balances at period-end. VNBTrust’s merger into the Bank also changed segment reporting. The Bank closed its Orange, Virginia office effective April 13, 2018.
Most important facts for investors to verify
- Progress and recoveries in the ReliaMax liquidation, including amounts and timing of claims, and the ultimate credit losses on purchased student loans.
- Whether the $4.68 million loan-loss allowance remains adequate as student-loan delinquencies, nonaccruals, and charge-offs develop.
- Deposit stability and funding costs, including the mix of time, CDARS, ICS, and other deposits, and the sustainability of the high loan-to-deposit ratio.
- Effects of higher rates on net interest margin, securities’ unrealized losses, deposit pricing, and loan demand.
- Drivers and recurrence of royalty income and other noninterest income, alongside the company’s rising operating expenses.
- Capital ratios and liquidity trends; the filing’s period-end cash balance was lower than at year-end 2017, despite stated intent to maintain sufficient liquidity.