Virginia National Bankshares Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparisons are primarily with 2017. The company is a Virginia-based bank holding company operating Virginia National Bank and wealth-management businesses.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $22.9 million | $21.4 million |
| Net interest margin (FTE) | 3.80% | 3.63% |
| Noninterest income | $5.5 million | $5.9 million |
| Noninterest expense | $16.0 million | $15.9 million |
| Provision for loan losses | $1.9 million | $418,000 |
| Net income | $8.5 million | $6.6 million |
| Diluted earnings per share | $3.31 | $2.58 |
| Operating cash flow | $11.8 million | $8.8 million |
Net income increased 29.2%; however, pretax income declined to $10.5 million from $11.0 million. The lower 2018 tax provision of $2.1 million, versus $4.4 million in 2017, was a major contributor to the earnings increase. The 2017 comparison included a one-time $963,000 deferred-tax charge from the Tax Act. Management estimates the reduction in the tax rate positively affected 2018 net income by $1.4 million. The 2018 effective tax rate was 19.6%.
Return on average assets was 1.33% (1.05% in 2017); return on average equity was 12.39% (10.36%). The FTE efficiency ratio improved to 56.2% from 58.0%. Total assets were $644.8 million, shareholders’ equity $70.7 million, and total deposits $572.5 million at year-end.
Loans totaled $537.2 million, up $8.4 million year over year; deposits rose 5.4% to $572.5 million. The loan-to-deposit ratio was 93.8%, compared with 97.4%. Cash and cash equivalents ended the year at $18.9 million. The company had no outstanding borrowings at year-end, versus $34.1 million in repurchase agreements and FHLB advances at the end of 2017; available borrowing lines totaled $76.4 million.
Net cash provided by operating activities was $11.8 million; investing activities used $4.4 million and financing activities used $6.7 million. The allowance for loan losses was $4.9 million, or 0.91% of loans, compared with $4.0 million and 0.76% a year earlier. Net charge-offs were $1.0 million, or 0.19% of average loans, versus $63,000 and 0.01%.
Regulatory capital remained strong: the Bank’s total risk-based capital ratio was 14.41%, common equity Tier 1 ratio 13.47%, and leverage ratio 11.05%. Each exceeded applicable “well capitalized” thresholds.
Material changes versus 2017
- Net interest income (FTE) grew 6.8%, supported by higher average loan balances and yields; average loans increased 7.3% and loan yield rose to 4.53% from 4.24%. Funding costs also increased, with interest expense rising to $2.8 million from $1.2 million.
- Loan-loss provision rose to $1.9 million from $418,000, largely following the insolvency and liquidation of ReliaMax Surety, which had insured purchased student loans. The company recorded $1.1 million in charge-offs, primarily in consumer loans.
- Noninterest income fell 6.0%, chiefly because wealth-management performance fees were only $12,000 versus $825,000 in 2017. Royalty income increased by $355,000, partly offsetting the decline.
- Deposits increased while year-end borrowings fell to zero. The company discontinued its repurchase-agreement product at year-end and introduced Insured Cash Sweep deposits.
- VNBTrust merged into Virginia National Bank effective July 1, 2018, and the company formed Masonry Capital Management, a registered investment adviser. It also closed its Orange, Virginia office in April.
- The company declared $1.09 per share in cash dividends in 2018, compared with $0.64 in 2017, and distributed a 5% stock dividend.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said a relatively flat yield curve could continue to pressure net interest income in 2019. Rate simulations showed net interest income increasing 4.64% under an immediate 100-basis-point rise and decreasing 3.29% under a 100-basis-point decline; actual outcomes depend on assumptions and customer behavior.
- The ReliaMax liquidation creates uncertainty around claims on student loans that were in default by July 27, 2018. The company reported $445,000 of student loans on nonaccrual and said it expected payment on claims filed with the liquidator. Student loans becoming at least 120 days past due after the bond termination are subject to charge-off.
- Credit exposure is concentrated in real estate lending: commercial real estate loans were $254.7 million, and real estate loans overall represented 65.7% of total loans. Nonaccrual loans rose to $615,000 from $177,000; loans over 90 days past due and still accruing were $895,000.
- Other risks cited include local economic and borrower conditions, competition for loans and deposits, interest-rate movements, regulatory and tax changes, cybersecurity threats, and the company’s ability to manage growth and risk. Off-balance-sheet commitments, including unfunded lines and letters of credit, totaled $114.2 million; separate commitment letters were $9.5 million.
- The company adopted lease accounting on January 1, 2019, recording a $4.0 million right-of-use asset and corresponding lease liability. It was assessing the future credit-loss standard; the effect was not yet determinable.
- Management reported no anticipated material loss from ordinary-course legal proceedings. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Progress and recoveries from the ReliaMax liquidation, and subsequent charge-offs or delinquencies in the purchased student-loan portfolio.
- Whether the increased loan-loss provision and charge-offs represent a contained student-loan event or broader deterioration in credit quality.
- Deposit pricing, funding costs, loan growth and margin performance as interest rates and competition change.
- Wealth-management fee trends, including the sustainability of recurring fees after the sharp fall in performance fees.
- Capital, liquidity and dividend capacity, including the impact of regulatory requirements and future credit-loss accounting.