Virginia National Bankshares Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The company operates a commercial bank and VNB Wealth Management. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $5.327 | $4.430 | $10.381 | $8.944 |
| Provision for (recovery of) loan losses | $0.115 | $(0.275) | $0.045 | $(0.395) |
| Noninterest income | $1.327 | $1.250 | $2.576 | $2.374 |
| Noninterest expense | $3.713 | $3.759 | $7.538 | $7.556 |
| Net income | $1.920 | $1.510 | $3.655 | $2.865 |
| Diluted earnings per share | $0.80 | $0.63 | $1.52 | $1.20 |
| Net interest margin, FTE | 3.50% | 3.50% | 3.52% | 3.49% |
| Efficiency ratio, FTE | 55.5% | 66.2% | 57.9% | 66.3% |
Net income rose 27.2% in Q2 and 27.6% for the first half. Higher net interest income—supported chiefly by loan growth—was the principal contributor. The first-half increase also reflects higher noninterest income and slightly lower expenses, partly offset by a $0.440 million year-over-year swing in loan-loss provision and higher taxes.
Financial position, liquidity and capital
- At June 30, 2017, total assets were $614.5 million, up $9.5 million from year-end 2016 and $68.8 million from June 2016. Loans were $492.8 million, up $10.7 million from year-end and $68.2 million year over year; deposits were $530.4 million, up $5.8 million and $60.0 million, respectively.
- Loans were 80.2% of assets and 92.9% of deposits. Noninterest-bearing and interest-bearing transaction and money-market deposits represented 76.4% of deposits, a significant low-cost funding base.
- Cash and due from banks were $9.6 million at period-end, with no federal funds sold. Cash and cash equivalents decreased $28.9 million during the first half: operating cash flow was $4.3 million, investing cash flow $(39.1) million, and financing cash flow $5.9 million. The investing outflow largely reflected $32.8 million of securities purchases.
- Federal funds purchased and repurchase-agreement balances totaled $19.9 million at June 30, comprising $2.4 million of federal funds purchased and $17.5 million under repurchase agreements. The filing reports no conventional long-term debt balance.
- Shareholders’ equity was $63.2 million, versus $59.1 million at year-end 2016. First-half dividends declared were $0.29 per share. Reported regulatory capital ratios were 12.35% for common equity Tier 1 and Tier 1, 13.09% total capital, and 9.65% leverage; management said these exceeded applicable well-capitalized levels.
Material changes and credit quality
- Net interest income increased 20.2% in Q2 and 16.1% for the first half. First-half average earning assets increased to $598.3 million from $520.4 million, while FTE net interest margin improved 3 basis points to 3.52%.
- First-half loan growth included organic lending and purchased loans. Purchased balances included $53.1 million of student loans, $17.6 million of government-guaranteed loans and $17.6 million of syndicated loans.
- The allowance for loan losses was $3.7 million, or 0.75% of loans, compared with 0.77% at year-end 2016 and 0.75% in June 2016. The filing reports $58,000 of first-half charge-offs and $26,000 of recoveries.
- Nonaccrual loans were $153,000. Loans at least 90 days past due totaled $277,000 and were still accruing. Impaired loans were $2.4 million, with no specific valuation allowance; the company reported no other real estate owned.
- Fifty-five purchased student loans totaling $904,000 were classified as troubled debt restructurings because of extended or reduced payment terms. Management stated that the student loans are fully insured and it does not expect a loss on them.
- Available-for-sale securities were $85.4 million, compared with $56.7 million at year-end. Unrealized losses were $503,000; management attributed them primarily to interest-rate movements and considered them temporary, with no other-than-temporary impairment recognized.
Outlook, commentary and risks
- No specific earnings or financial guidance was provided. Management said prior loan growth should continue to benefit 2017 earnings, and expected the combination of improved asset mix, additional noninterest-income opportunities and expense controls to support a low efficiency ratio. Results for the first half are not necessarily indicative of full-year results.
- Q2 royalty income included a one-time $74,000 payment associated with a revision to the Swift Run Capital Management agreement. The company also cited higher advisory and brokerage income and lower data-processing costs following a renegotiated provider contract.
- Management identified estimates of the loan-loss allowance and deferred tax assets as particularly sensitive to assumptions. Risks discussed include economic and borrower conditions, interest rates, loan and deposit pricing competition, regulation, technology and the company’s execution of risk management.
- Disclosure controls were concluded effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported. The filing reported no legal proceedings or other significant events.
Important facts for investors to verify
- Whether loan and deposit growth, funding costs and net interest margin remain supportive of earnings as interest rates and asset mix change.
- The performance and credit protections of purchased student and syndicated loans, including the effectiveness and scope of student-loan insurance and guarantees.
- Allowance adequacy and any change in delinquency, criticized-loan, nonaccrual or charge-off trends.
- Liquidity and funding needs after the substantial first-half securities purchases and the decline in cash and cash equivalents.
- The sustainability of noninterest-income growth and the extent to which reported improvement depended on the one-time royalty payment.
- Potential effects of securities valuation changes and adoption of pending accounting standards, including the expected-credit-loss standard; the company was still assessing certain standards’ effects.