Virginia National Bankshares Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. The company operates Virginia National Bank and, during the quarter, VNB Trust & Estate Services and Masonry Capital Management. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless noted.
Financial performance
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Net interest income | $10.936 million | $13.413 million |
| Net interest margin, fully taxable equivalent (FTE) | 2.93% | 3.71% |
| Noninterest income | $2.178 million | $2.276 million |
| Noninterest expense | $8.819 million | $8.861 million |
| Net income | $3.646 million | $5.791 million |
| Diluted earnings per share | $0.68 | $1.08 |
| Return on average assets / equity | 0.91% / 9.57% | 1.48% / 17.57% |
| FTE efficiency ratio | 66.8% | 56.1% |
| Operating cash flow | $3.119 million | $7.011 million |
Net income fell about 37% year over year. FTE net interest income declined $2.5 million, while the FTE margin contracted 78 basis points. Higher average loan balances added $2.5 million to interest income, but higher funding costs more than offset this: interest expense rose $4.7 million, and the average cost of interest-bearing deposits increased from 1.09% to 2.73%. Noninterest expense was nearly flat; lower occupancy and marketing costs were partly offset by higher salaries, FDIC assessments and other costs. Q1 2024 included a $379,000 gain on early redemption of debt; Q1 2023 included a $460,000 gain on termination of an interest-rate swap.
Financial position and liquidity
- Total assets were $1.619 billion at March 31, down $26.5 million (1.6%) from year-end 2023 and up $48.0 million (3.1%) year over year.
- Loans were $1.128 billion, up $35.5 million (3.2%) from year-end. The company reported $27.0 million of organic loan production and $34.2 million of purchases of government-guaranteed loans, partly offset by $25.7 million of paydowns and amortization. Commercial real estate mortgages were 49.6% of loans.
- Deposits were $1.432 billion at quarter-end. Noninterest and low-cost accounts represented 75.6% of deposits; estimated uninsured deposits were $366.8 million, or 25.6%.
- Cash and cash equivalents were $45.5 million, including $27.7 million in federal funds sold. Q1 cash and cash equivalents increased $17.1 million, supported by $42.8 million of investing cash flow, including securities proceeds and maturities.
- Available-for-sale securities were $341.9 million fair value, down from $420.6 million at year-end. The portfolio had $54.0 million of gross unrealized losses; management attributed them primarily to market interest rates, reported timely issuer payments, and said it did not consider the losses credit-related.
- Borrowings were $20.0 million, compared with $66.5 million at year-end; federal funds purchased were zero. The company disclosed $411 million of available FHLB credit subject to evaluation and negotiation, plus other borrowing lines.
- Shareholders’ equity was $152.6 million. Company capital ratios were 17.67% Tier 1 and CET1, 18.49% total capital, and 11.24% leverage; the Bank also exceeded regulatory minimums for “well capitalized” status.
Credit quality, changes and unusual items
- Nonaccrual loans were $2.178 million, or 0.19% of loans, versus $1.852 million at year-end. Loans 90 or more days past due and still accruing totaled $876,000; the filing says $783,000 was fully government-guaranteed.
- The allowance for credit losses was $8.289 million, 0.73% of loans, down from $8.395 million at year-end. The quarter recorded an $11,000 loan-loss provision and a $33,000 recovery on unfunded commitments, for a net $22,000 recovery. Management considered the allowance adequate but cautioned it could rise if economic conditions deteriorate.
- Effective April 1, 2024, the company sold Masonry Capital Management to an officer. It expects annual revenue-share payments for six years and no further expenses related to the business. The company said the sale did not qualify as discontinued operations.
- The company repurchased 874 shares in Q1 at an average $29.60 under a plan authorizing repurchases of up to 5% of outstanding shares; quarterly dividends declared were $0.33 per share.
- Operating cash flow was $3.1 million, investing cash flow was $42.8 million, and financing cash flow was negative $28.9 million. Net cash and cash equivalents increased $17.1 million.
Outlook, risks and other disclosures
No specific earnings, revenue, margin or credit guidance was provided. Management said higher rates may support variable-rate loan and reinvestment yields, while deposit competition, time-deposit repricing and borrowing needs may raise funding costs. It also warned that falling rates could pressure margin if assets reprice faster than deposits and borrowings. Results remain exposed to economic and real-estate conditions, interest rates, deposit competition, borrower credit quality, securities values, cybersecurity and other risks described in the filing and prior annual report. Management noted that economic deterioration could increase credit losses and the required allowance.
Management reported disclosure controls were effective as of quarter-end and no material change in internal control over financial reporting. The company said ordinary-course legal proceedings were not expected, in aggregate, to have a material adverse effect. It reported no material changes to the risk factors in its 2023 Form 10-K.
Important facts for investors to verify
- Deposit figures conflict within the filing: the balance sheet shows deposits rose from $1.409 billion at December 31, 2023 to $1.432 billion at March 31, 2024, a $22.9 million increase. The MD&A text instead describes a $22.9 million decrease; its year-over-year decrease statement also conflicts with the comparative deposit table, which shows an increase.
- Repurchase disclosure needs reconciliation: the filing reports 874 shares repurchased in Q1, but also states that 20,350 shares had been repurchased “year-to-date” through May 14. Verify the period, scope and average price behind the latter figure.
- Monitor funding costs, time-deposit growth, uninsured deposit balances and the effect on net interest margin.
- Assess securities duration and unrealized losses, and whether liquidity or capital needs could require sales before recovery.
- Track loan growth, commercial real estate concentrations, criticized loan ratings, nonaccruals and allowance adequacy as economic conditions evolve.
- Evaluate the financial effect of the Masonry Capital sale and its six-year revenue-sharing arrangement after closing.