Virginia National Bankshares Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. The company is a Virginia bank holding company operating Virginia National Bank and VNB Wealth Management, serving communities in Virginia. Financial statements were audited by Yount, Hyde & Barbour, P.C., which issued an unqualified opinion.
Financial performance and condition
- Net income: $5.748 million, or $2.41 diluted EPS, versus $3.121 million and $1.23 in 2015; net income rose 84.2%.
- Revenue and earnings: Net interest income was $18.274 million, up 12.1%; noninterest income was $5.483 million, up 12.6%. Pretax income was $8.350 million versus $4.318 million. Income tax expense increased to $2.602 million from $1.197 million; the effective tax rate was 31.2% versus 27.7%.
- Margins and returns: Net interest margin (fully taxable-equivalent, non-GAAP) improved to 3.49% from 3.19%. Return on average assets was 1.02% versus 0.56%; return on average equity was 9.86% versus 5.34%. The FTE efficiency ratio improved to 63.9% from 76.6%.
- Balance sheet: Total assets were $605.0 million, up from $567.5 million. Loans totaled $482.1 million, up 13.8%; deposits were $524.7 million, up 7.9%. Shareholders’ equity was $59.1 million versus $56.3 million.
- Credit costs: Provision for loan losses declined to $111,000 from $463,000. The allowance was $3.688 million, or 0.77% of loans, versus $3.567 million and 0.84%. Net recoveries were $10,000. Nonaccrual loans were $167,000; performing troubled debt restructurings totaled $2.255 million, including $889,000 of student loans.
- Cash flow and liquidity: Operating cash flow was $5.292 million, versus $5.540 million. Investing activities used $42.874 million, mainly reflecting loan growth; financing activities provided $32.555 million. Cash and cash equivalents ended at $38.5 million, down from $43.5 million. The bank reported $73.259 million in available borrowing lines with no outstanding balances. The loan-to-deposit ratio rose to 91.9% from 87.1%.
- Debt and capital: The balance sheet reports no outstanding borrowing-line balances; repurchase agreements were $19.7 million. Company total, Tier 1, and common equity Tier 1 capital ratios were 12.66%, 11.91%, and 11.91%; the bank’s were 12.41%, 11.67%, and 11.67%. Both were above applicable requirements, and the bank was classified as well capitalized.
Changes versus 2015 and notable items
- Profit growth reflected higher net interest income, increased noninterest income, lower noninterest expense, and a smaller loan-loss provision. Expenses fell 6.7% to $15.296 million, including a $1.055 million reduction in salaries and benefits; year-end staffing declined from 94 to 85 full-time equivalents.
- The company shifted funding from securities into loans: securities declined to $58.4 million from $76.5 million. Loans grew significantly, including a $51.2 million increase in the fourth quarter. Purchased loans totaled $81.6 million, including $56.9 million in student loans, $19.1 million in syndicated loans, and $5.6 million in government-guaranteed loans.
- VNB Wealth purchased a client book of business in February 2016 for $1.2 million, payable over five years. It recorded $372,000 of goodwill and $773,000 of identifiable intangible assets. VNB Wealth improved from a $699,000 loss in 2015 to breakeven in 2016; the Bank segment earned $5.748 million.
- Trust income included $403,000 of performance fees, compared with $16,000 in 2015. The repurchase program expired in September 2016 after 343,559 shares were repurchased over its life; 55,062 were bought in 2016. Annual dividends declared increased to $0.49 per share from $0.375.
- The company closed its Loudoun Mall Winchester branch on October 28, 2016 and said it was seeking another Winchester location. It changed its allowance methodology during 2016 to a loan-migration model; management estimated this change increased the year’s provision by $41,000 relative to the prior methodology.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance was provided. Management said a relatively flat yield curve could continue to pressure 2017 results; modeled net interest income changed by +7.8% under a 100-basis-point rate increase and −8.1% under a 100-basis-point decrease, subject to model assumptions.
- Key risks include interest-rate and liquidity exposure, local economic and borrower conditions, competitive loan and deposit pricing, and concentration in commercial real estate. Purchased student loans are described as fully insured by surety bonds, but their growth, delinquencies, and regulatory classification as restructurings merit monitoring.
- Available-for-sale securities had $1.237 million of gross unrealized losses at year-end, which management considered temporary and primarily interest-rate-related. The filing reports no derivative instruments.
- Off-balance-sheet commitments included $96.685 million of unfunded credit lines, $14.854 million of ACH exposure, and $6.328 million of letters of credit; management did not anticipate material losses. Legal proceedings in the ordinary course were not expected to have an adverse effect in aggregate.
- Forward-looking statements are subject to risks including economic conditions, interest rates, regulation, competition, technology and cybersecurity. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal control.
Important facts for investors to verify
- Whether fourth-quarter loan growth and the 91.9% loan-to-deposit ratio were sustainable, and how liquidity performed after year-end.
- The credit performance, insurance coverage and recoverability of purchased student loans, including loans past due and classified as TDRs.
- Whether the lower allowance ratio remains appropriate under the revised loss-migration methodology as the portfolio grows and changes mix.
- Deposit stability and repricing risk, particularly the $89.0 million of certificates of deposit of at least $100,000, approximately 97.5% of which matured within twelve months.
- The impact of interest-rate movements on securities values, funding costs, loan yields and net interest income; year-end securities unrealized losses were $1.237 million.
- The return and integration of the acquired VNB Wealth relationships, future purchase payments, and the durability of performance-fee income.