Virginia National Bankshares Corporation — Q1 2018 Form 10-Q
Business context and reporting period. The filing reports consolidated results for the three months ended March 31, 2018, compared with Q1 2017, and financial position at March 31, 2018. The company operates a commercial bank and VNB Wealth segment. Amounts below are in U.S. dollars; financial statement amounts are generally in thousands unless stated otherwise.
Key financial metrics
| Metric | Q1 2018 / March 31, 2018 | Comparable / prior date |
|---|---|---|
| Net interest income | $5.696 million | $5.054 million in Q1 2017 |
| Net income | $2.796 million; $1.09 diluted EPS | $1.735 million; $0.69 diluted EPS in Q1 2017 |
| Net interest margin (FTE) | 3.85% | 3.54% in Q1 2017 |
| Efficiency ratio (FTE) | 54.0% | 60.4% in Q1 2017 |
| Total assets | $625.5 million | $643.9 million at Dec. 31, 2017 |
| Total loans / allowance | $524.7 million / $4.0 million | $528.8 million / $4.0 million at Dec. 31, 2017 |
| Total deposits | $524.8 million | $543.0 million at Dec. 31, 2017 |
| Cash and cash equivalents | $6.9 million at quarter-end | Cash flow statement reports a $11.4 million quarterly decrease |
| Borrowings and repurchase agreements | $31.5 million | $34.1 million at Dec. 31, 2017 |
| Shareholders’ equity | $66.8 million | $65.1 million at Dec. 31, 2017 |
Results, changes, and financial condition
- Net income rose 61.2% year over year. Net interest income increased 12.7%, supported by higher average earning assets and loan balances; the FTE earning-asset yield increased to 4.15% from 3.73%.
- Noninterest income increased 37.2% to $1.714 million, chiefly because royalty income rose to $518,000 from $68,000. Management attributed the increase to annual performance fees under its agreement with Swift Run Capital Management. Noninterest expense increased 5.0% to $4.017 million, including higher salary, marketing, and professional-fee costs.
- The company recorded a $96,000 recovery of loan-loss provision, versus a $70,000 recovery in Q1 2017. The allowance was 0.75% of loans, and management considered it adequate. Nonaccrual loans were $171,000; impaired loans were $2.6 million, with no specific allowance allocated. Loans at least 90 days past due totaled $377,000 and were still accruing.
- Assets declined $18.4 million from year-end, primarily as deposits fell $18.1 million. Deposits were down $37.8 million from March 2017; loans were up $37.2 million year over year. Loans equaled 100.0% of deposits at quarter-end, versus 86.6% a year earlier. Low-cost and noninterest-bearing accounts represented 80.1% of deposits.
- Operating cash flow was $4.2 million and investing cash flow was $5.5 million; financing cash outflow was $21.0 million, mainly reflecting deposit and repurchase-agreement declines. Quarter-end cash and cash equivalents were approximately $6.9 million.
- Available-for-sale securities were $64.9 million, with $2.1 million of gross unrealized losses. Accumulated other comprehensive loss increased to $1.6 million from $883,000 at year-end. Management attributed the securities losses mainly to interest-rate movements, considered them temporary, and reported no other-than-temporary impairment.
- Regulatory capital ratios remained above well-capitalized thresholds: common equity Tier 1 and Tier 1 each 12.79%, total capital 13.53%, and leverage 10.60%.
Outlook, commentary, risks, and unusual items
- No quantitative earnings or financial guidance was provided. Management said improved earning-asset mix and yields, additional noninterest-income opportunities, and cost-containment efforts should support future results; these are forward-looking statements, not guarantees.
- The company planned to form a registered investment adviser and merge VNBTrust into the Bank later in 2018, subject to regulatory approvals. It said these changes could broaden the reach of its investment strategy while continuing trust and fiduciary services.
- The Orange, Virginia office closed effective April 13, 2018, after the reporting date; expanded messenger service was to remain available to customers in the area.
- A 5% stock dividend was approved March 16 and issued April 13, 2018. Per-share and share data were retroactively adjusted in the filing.
- Management identified risks including interest-rate and market changes, local and national economic conditions, borrower credit quality, loan and deposit pricing competition, regulatory and accounting changes, technology and staffing, and assumptions used to estimate credit losses. The filing reported no legal proceedings.
- The company adopted ASU 2016-01 and ASC 606 in Q1; management reported no material financial-statement impact. It was assessing the future impact of the expected-credit-loss standard, with the amount not yet determinable. It anticipated lease-standard adoption would increase assets and liabilities, but not materially affect net income.
Important facts for investors to verify
- Whether the unusually large year-over-year royalty-income increase is recurring and how performance fees are determined.
- Deposit retention, funding costs, and liquidity given the 100.0% loans-to-deposits ratio and quarter-end cash decline.
- Loan portfolio trends, especially criticized credit ratings, delinquency, purchased student loans, and the adequacy of the allowance.
- Potential effects of rising rates on securities values, funding costs, and net interest margin.
- Timing, regulatory approval, costs, and expected benefits of the planned wealth-business restructuring.
- The effects of the post-quarter office closure and 5% stock dividend on operations and per-share comparisons.