Virginia National Bankshares Corporation — Q1 2019 Form 10-Q
Business context and period: Regional bank holding company with commercial banking, investment services, trust and estate services, and investment management operations. Results cover the three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018 unless noted. The company reorganized its wealth-management operations after merging VNBTrust into the Bank in July 2018 and began reporting four segments in 2019.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior date |
|---|---|---|
| Net income | $1.246 million; diluted EPS $0.49 | $2.796 million; diluted EPS $1.09 in Q1 2018 |
| Net interest income | $5.568 million GAAP; $5.589 million FTE | $5.696 million GAAP; $5.719 million FTE in Q1 2018 |
| Net interest margin | 3.78% FTE | 3.85% FTE in Q1 2018 |
| Noninterest income / expense | $1.059 million / $4.411 million | $1.714 million / $4.017 million in Q1 2018 |
| Provision for loan losses | $684,000 | $96,000 recovery in Q1 2018 |
| Total assets | $635.8 million | $644.8 million at December 31, 2018 |
| Loans / allowance | $528.4 million / $4.905 million; allowance 0.93% of loans | $537.2 million / $4.891 million; 0.91% at December 31, 2018 |
| Deposits | $557.2 million | $572.5 million at December 31, 2018 |
| Shareholders’ equity | $72.5 million | $70.7 million at December 31, 2018 |
| Operating cash flow | $2.713 million; cash and cash equivalents ended at $14.604 million | $4.206 million operating cash flow in Q1 2018 |
The efficiency ratio (FTE) was 66.4%, compared with 54.0% in Q1 2018. Regulatory capital ratios were 14.16% for common equity Tier 1 and Tier 1, 15.12% total capital, and 11.37% leverage; management said these exceeded “well capitalized” thresholds. The company reported no outstanding FHLB advances, repurchase agreements, or federal funds purchased at March 31, 2019. Operating lease liabilities were $4.113 million.
Material changes and management commentary
- Net income fell 55.4% year over year. Management attributed the decline primarily to a $780,000 year-over-year increase in loan-loss provision, a $514,000 decline in royalty income, and a $394,000 increase in noninterest expense.
- Interest income rose, but higher deposit costs more than offset the benefit: interest expense increased $463,000 year over year. The average rate paid on interest-bearing deposits rose to 0.90% from 0.42%.
- Royalty income was $4,000 versus $518,000 in Q1 2018, when performance-related income was recorded. Salaries and benefits increased $355,000, including staffing for the Richmond market and cyber/network security, as well as stock grants. Data processing expense increased $64,000.
- Loans declined $8.8 million from year-end, while deposits declined $15.3 million. The loan-to-deposit ratio was 94.8%. The allowance for loan losses increased to 0.93% of loans from 0.75% a year earlier.
- Operating cash flow was positive, but financing activities used $15.995 million, primarily reflecting deposit movements; cash and cash equivalents decreased $4.270 million during the quarter.
Outlook, risks and unusual items
- No quantified earnings or financial guidance was provided. Management said improved earning-asset mix and higher yields should support net interest income, while expenses are expected to continue rising as the company invests for growth and enters new markets.
- The insolvency and liquidation of ReliaMax Surety in 2018 ended insurance coverage on the purchased student-loan portfolio. The company filed claims for eligible loans and said it expected to collect principal and interest outstanding as of the policy termination date, based on information from the liquidator. Loans becoming at least 120 days past due after that date are charged off. Q1 2019 included $709,000 of charge-offs, primarily within consumer loans, and the provision reflected increased student-loan credit risk.
- Purchased student loans totaled $51.8 million. Nonaccrual loans were $552,000; impaired loans were $2.8 million. Management considered the allowance adequate, but its estimate depends on credit conditions, collateral values, loss history, and other judgments.
- Other stated risks include changes in interest rates, local and general economic conditions, borrower credit quality, deposit and loan competition, regulation, technology, and the ability to retain key personnel. Management identified interest-rate risk from repricing and customer behavior.
- The company adopted the lease accounting standard on January 1, 2019, recognizing approximately $4.3 million of right-of-use assets and lease liabilities. It was assessing the impact of the expected-credit-loss standard, with the eventual effect described as indeterminable.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no legal proceedings.
Key facts for investors to verify
- Progress and recoveries on claims against the ReliaMax liquidator, and the remaining credit exposure and loss assumptions for student loans.
- Drivers of the higher loan-loss provision, charge-offs, and allowance coverage, including subsequent-period delinquency and loan-quality trends.
- Whether deposit pricing pressures continue to weigh on net interest margin and earnings.
- Whether royalty income remains low and how recurring revenue and expenses develop as the company expands into new markets.
- Future deposit stability, liquidity, and the high loan-to-deposit ratio, as well as the effect of lease commitments and CECL adoption on financial results and capital.