Virginia National Bankshares Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are primarily with December 31, 2016, and operating results with Q1 2016. The consolidated company includes Virginia National Bank and VNB Wealth Management.
Financial performance and position
- Profit: Net income was $1.735 million, up 28% from $1.355 million. Diluted earnings per share rose to $0.72 from $0.57.
- Revenue and margins: Net interest income increased 12% to $5.054 million; noninterest income rose 11% to $1.249 million. Net interest margin was 3.54% on a fully taxable-equivalent basis, versus 3.48%. The FTE efficiency ratio improved to 60.4% from 66.8%.
- Expenses and taxes: Noninterest expense was $3.825 million, up 0.7%. Income tax provision was $813,000; the effective tax rate was 31.9%, compared with 30.9%.
- Cash flow: Operating activities provided $2.449 million; investing activities used $16.508 million, including $13.166 million for available-for-sale securities purchases. Financing activities provided $31.223 million, largely reflecting deposit growth. Cash and cash equivalents increased $17.164 million to $55.664 million.
- Balance sheet and liquidity: Total assets were $638.8 million, up $33.8 million from year-end. Deposits rose $38.0 million to $562.7 million; federal funds sold were $45.5 million. Loans totaled $487.5 million, up $5.4 million. Shareholders’ equity was $61.0 million.
- Funding and debt: Securities sold under repurchase agreements were $13.0 million, down from $19.7 million at year-end. The filing does not show conventional long-term borrowings on the presented balance sheet.
- Credit and capital: Allowance for loan losses was $3.633 million, or 0.75% of loans, versus 0.77% at year-end. The company recorded a $70,000 recovery of loan-loss provision; nonaccrual loans were $160,000. Reported capital ratios were 12.24% for common equity Tier 1 and Tier 1, 12.98% total capital, and 9.84% leverage.
Material changes and management commentary
- Year-over-year earnings growth reflected higher net interest income and noninterest income, partly offset by higher taxes, a smaller loan-loss recovery, and modestly higher expenses.
- Management attributed improved net interest income to loan growth and a stronger earning-asset mix. Loans increased 14.8% year over year; management said prior loan growth should continue to benefit 2017 results, while noting Q1 growth was modest.
- Deposits increased $83.9 million year over year, with growth concentrated in money-market accounts. Management said it intends to maintain sufficient liquidity for funding commitments.
- Management reported low delinquency and nonaccrual levels and considered the allowance adequate. The allowance estimate is judgmental and depends on credit conditions, borrower performance, collateral values, and risk classifications.
Outlook, risks, and unusual items
- No specific earnings or financial guidance is provided. Management cautions that Q1 results are not necessarily indicative of full-year results.
- Key disclosed risks include changes in interest rates and the economy, local market conditions, borrower financial strength, loan and deposit pricing competition, regulation, technology, and the company’s management of these risks. Fixed-rate securities may lose fair value as market rates rise.
- The securities portfolio included $843,000 of unrealized losses at March 31, 2017. Management considered these losses temporary and not credit-related and reported no other-than-temporary impairment.
- Fifty-three purchased student loans totaling $912,000 were classified as performing troubled debt restructurings following regulatory guidance. The loans are insured, and management did not expect losses on them.
- A $156,000 contingent liability remained for three future annual payments related to the VNB Wealth book-of-business purchase. No legal proceedings or other significant events were reported.
Most important facts for investors to verify
- Whether deposit growth and low-cost funding continue, and how funding costs respond to interest-rate changes.
- Loan growth, purchased-loan exposure, delinquency trends, and the adequacy of the allowance under the company’s migration-based loss methodology.
- Whether securities unrealized losses remain temporary and whether the portfolio’s reported composition and fair values are consistent across the filing.
- The sustainability of improved net interest margin, efficiency ratio, and earnings growth, including the effect of taxes and noninterest income.
- Future effects and implementation costs of accounting standards the company was still assessing, particularly expected-credit-loss and lease guidance.