Virginia National Bankshares Corporation — Q2 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2018. The company operates a commercial bank and wealth-management business. Amounts below are in U.S. dollars; financial statement figures are generally in thousands unless stated otherwise. Per-share data reflects the 5% stock dividend issued April 13, 2018.
Financial performance and condition
| Metric | Q2 2018 / June 30, 2018 | Comparable period / prior date |
|---|---|---|
| Net income | $1.832 million; diluted EPS $0.72 | Q2 2017: $1.920 million; diluted EPS $0.76 |
| Six-month net income | $4.628 million; diluted EPS $1.81 | First half 2017: $3.655 million; diluted EPS $1.45 |
| Net interest income | Q2: $5.692 million; first half: $11.388 million | Q2 2017: $5.327 million; first half 2017: $10.381 million |
| Net interest margin, FTE | Q2: 3.78%; first half: 3.81% | Q2 2017: 3.50%; first half 2017: 3.52% |
| Provision for loan losses | Q2: $701,000; first half: $605,000 | Q2 2017: $115,000; first half 2017: $45,000 |
| Total assets | $654.7 million | $643.9 million at Dec. 31, 2017 |
| Loans / deposits | Loans $535.0 million; deposits $536.7 million; loan-to-deposit ratio 99.7% | Loans $528.8 million and deposits $543.0 million at Dec. 31, 2017 |
| Allowance for loan losses | $4.698 million, or 0.88% of loans | $4.043 million, or 0.76%, at Dec. 31, 2017 |
| Borrowings | $48.4 million | $34.1 million at Dec. 31, 2017 |
| Shareholders’ equity | $67.9 million | $65.1 million at Dec. 31, 2017 |
Revenue, expenses and margins. Q2 noninterest income was $1.307 million, down 1.5% year over year; noninterest expense was $4.027 million, up 8.5%. First-half noninterest income rose 17.3% to $3.021 million, including increased royalty income, while noninterest expense rose 6.7% to $8.044 million. The FTE efficiency ratio was 57.3% in Q2 versus 55.5% a year earlier, and 55.6% for the first half versus 57.9%.
Cash flow and liquidity. For the first half, operating activities provided $5.744 million, investing activities used $4.809 million, and financing activities provided $7.356 million. Cash and cash equivalents ended the period at $26.568 million, up from $18.277 million at the start of the period. Deposits declined $6.2 million from year-end, while loans increased $6.2 million. Management stated it intends to maintain sufficient liquidity to meet funding commitments. The filing reports regulatory capital ratios of 12.90% for common equity Tier 1 and Tier 1, 13.78% for total capital, and 10.70% for leverage; it describes capital as well above applicable “well capitalized” levels.
Material changes and unusual items
- Q2 net income declined 4.6% year over year, principally because the provision for loan losses increased $586,000 and noninterest expense increased $314,000. Lower income-tax expense partly offset these items.
- First-half net income increased 26.6%, supported by higher net interest income, noninterest income and lower income-tax expense, partly offset by higher credit provisions and operating expenses.
- ReliaMax Surety, which had insured the company’s purchased student-loan portfolio, was placed into liquidation due to insolvency. The company recorded higher provisions and evaluated affected loans individually. At June 30, $59.7 million of purchased student loans were outstanding; $319,000 were classified as nonaccrual. Management expected to file claims for qualifying loans in default as of July 27, 2018 and expected to collect their principal, but coverage does not apply to student loans that become 120 days or more past due after that date.
- Royalty income included annual performance fees from an agreement with Swift Run Capital Management; Q2 2017 had included a one-time $74,000 payment, contributing to lower Q2 royalty income in 2018.
- Effective July 1, 2018, VNBTrust was merged into Virginia National Bank; trust and fiduciary services continue under the VNB Wealth Management name. The company also said it was forming a registered investment adviser to expand its investment-management offering.
- The Bank closed its Orange, Virginia office effective April 13, 2018. A 5% stock dividend was distributed during the quarter; it did not change total shareholders’ equity.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management said an improved earning-asset mix and higher yields should support net interest income, while additional noninterest-income opportunities and expense-control efforts may support performance. It cautioned that interim results are not necessarily indicative of full-year results. Key disclosed risks include interest-rate and market changes, local and broader economic conditions, borrower credit quality, loan-loss-estimate uncertainty, competition for loans and deposits, regulation, technology and execution of expansion initiatives. Management’s assessment that securities’ unrealized losses were temporary was based largely on interest-rate movements; it reported $2.2 million of unrealized losses on available-for-sale securities at June 30 and no other-than-temporary impairment.
The company was assessing the future impact of the expected-credit-loss standard (ASU 2016-13); the adoption effect was not yet determinable and could include a one-time retained-earnings adjustment. It expected the new lease standard to increase reported assets and liabilities, but not materially affect net income.
Important facts for investors to verify
- Progress and recoveries from the ReliaMax liquidation, including the amount and timing of student-loan claims and losses on loans no longer covered.
- Whether the higher loan-loss provision and allowance adequately reflect student-loan exposure and broader portfolio credit risk.
- Funding and liquidity trends, given the 99.7% loan-to-deposit ratio, deposit mix changes and increased borrowings.
- Whether higher loan yields and net interest margin persist as deposit and borrowing costs rise.
- Recurring versus timing-related noninterest income, especially royalty performance fees, and the effect of ongoing expense growth.
- Execution and costs of the registered investment adviser plans, the VNBTrust merger, and adoption of new accounting standards.