Virginia National Bankshares Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparative figures are for 2016 unless stated otherwise. The company is a Virginia bank holding company operating Virginia National Bank and VNB Wealth Management, primarily in central and northern Virginia.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets | $643.9 million | $605.0 million |
| Net interest income | $21.4 million | $18.3 million |
| Net interest income, fully taxable-equivalent | $21.5 million | $18.4 million |
| Noninterest income | $5.9 million | $5.5 million |
| Net income | $6.6 million | $5.7 million |
| Diluted earnings per share | $2.71 | $2.41 |
| Net interest margin, fully taxable-equivalent | 3.63% | 3.49% |
| Efficiency ratio, fully taxable-equivalent | 58.0% | 63.9% |
| Return on average assets | 1.05% | 1.02% |
| Return on average equity | 10.36% | 9.86% |
- Growth and funding: Loans were $528.8 million, up 9.7%; deposits were $543.0 million, up 3.5%. The loan-to-deposit ratio rose to 97.4% from 91.9%. Shareholders’ equity was $65.1 million.
- Cash flow: Operating activities generated $8.8 million; investing activities used $61.3 million; financing activities provided $32.3 million. Cash and cash equivalents ended the year at $18.3 million, down from $38.5 million.
- Borrowings and liquidity: Repurchase agreements and other borrowings totaled $34.1 million, including a $15.0 million FHLB advance. Available borrowing lines were $64.4 million, of which $15.0 million was outstanding under the FHLB facility.
- Capital: At year-end, consolidated Tier 1, common equity Tier 1, total risk-based capital, and leverage ratios were 12.23%, 12.23%, 12.99%, and 10.58%, respectively. The Bank also exceeded applicable well-capitalized thresholds.
Material changes versus 2016
- Net income increased 14.0%, while management’s non-GAAP net operating income, excluding the Tax Act charge, was $7.5 million, up 31%.
- Net interest income (FTE) rose 16.8%, principally reflecting higher average earning assets and loan growth; the FTE margin improved 14 basis points.
- The provision for loan losses increased to $418,000 from $111,000. The allowance was $4.0 million, or 0.76% of loans, versus 0.77% in 2016.
- Noninterest income grew 7.2%, supported by trust performance fees, advisory and brokerage activity, and royalty income. The royalty increase included a one-time payment related to a revised agreement. Securities sales shifted from $197,000 in gains in 2016 to $75,000 in losses in 2017.
- Noninterest expense increased 3.8% to $15.9 million. Salaries and benefits rose, while data-processing costs declined. Year-end staffing fell to 81 full-time equivalents from 85.
- Deposits increased, but short-term borrowings rose from $19.7 million to $34.1 million; the company also used $19.2 million in repurchase agreements.
- Dividends declared increased to $0.64 per share from $0.49. The stock repurchase program had expired in September 2016; no shares were repurchased in 2017.
Outlook, risks, and unusual items
- Tax Act: The 2017 results include a $963,000 noncash deferred-tax-asset remeasurement charge following the federal corporate tax-rate reduction. The estimate was provisional and subject to refinement; the filing states accounting was expected to be completed when the 2017 tax return was filed in 2018.
- Management outlook: Management said a relatively flat yield curve could continue to pressure net interest income in 2018. The filing provides no numerical earnings or growth guidance.
- Planned changes: The company expected to form a registered investment adviser and merge VNBTrust into the Bank in the second quarter of 2018, subject to regulatory approvals. It also planned to close its Orange, Virginia branch on April 13, 2018, with messenger service continuing for affected customers.
- Credit and concentration risks: Commercial real estate represented about 43.5% of total loans; all real estate loans represented 61.1%. Purchased loans totaled $100.8 million, including $64.6 million in student loans. Student loans were covered by surety bonds, but performance, coverage, and the company’s reliance on purchased loans merit monitoring.
- Nonaccrual loans were $177,000; loans at least 90 days past due and still accruing were $289,000, largely purchased student loans. Performing troubled debt restructurings totaled $2.4 million, including student loans classified as TDRs under regulatory guidance.
- Interest-rate sensitivity modeling indicated two-year net interest income could increase 3.30% under a 100-basis-point upward shock and decline 7.16% under a 100-basis-point downward shock. Results depend on modeling assumptions and customer behavior.
- Other disclosed risks include competition, local economic conditions, borrower credit quality, deposit pricing and retention, regulation, cybersecurity, and changes in interest rates. Management did not expect ordinary-course legal proceedings, in aggregate, to materially affect the business or financial condition.
Important facts for investors to verify
- Whether the provisional $963,000 Tax Act adjustment changed when the company completed its 2017 tax accounting and return.
- Credit performance, insurance coverage, and concentration of purchased student, syndicated, and government-guaranteed loans; monitor delinquencies, TDRs, and allowance adequacy as the portfolio grows.
- Funding implications of a 97.4% loan-to-deposit ratio, rising FHLB borrowing, and the $84.0 million of time deposits of at least $100,000, most scheduled to mature within twelve months.
- Actual sensitivity of net interest income and deposit costs to rate changes and a flat yield curve compared with the filing’s model assumptions.
- Completion, regulatory approval, and costs of the planned VNB Wealth restructuring and the Orange branch closure.
- The company reported an unqualified audit opinion on its financial statements and effective management disclosure controls and internal control over financial reporting; the smaller reporting company was not required to obtain an auditor attestation of internal control.