Virginia National Bankshares Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013 unless stated otherwise. The consolidated company includes Virginia National Bank and VNBTrust. Dollar amounts are in thousands unless noted.
Financial performance and condition
- Net income: $506, down 5.9% from $538 in Q1 2013. Basic and diluted EPS were $0.19 versus $0.20.
- Interest income and margin: Net interest income was $3,649, up $49 year over year. Tax-equivalent net interest margin was 3.17%, down 5 basis points; earning-asset yield was 3.37%, down 9 basis points, while cost of funds fell to 0.20% from 0.25%.
- Credit provision: No loan-loss provision was recorded, compared with $220 in Q1 2013. Allowance was $3,373, or 1.15% of loans, versus $3,360, or 1.12%, at year-end.
- Noninterest results: Noninterest income was $1,077, down $55; noninterest expense was $4,165, up $362. Trust income declined to $492 from $575. Salaries and benefits increased $209, and other expense increased $202.
- Balance sheet: Assets were $533,976, up $20,982 from year-end. Loans were $292,058, down $7,976; deposits were $460,121, up $29,661. Securities totaled $138,678, including $137,177 available for sale.
- Liquidity and funding: Cash and cash equivalents were $76,847, including $64,619 of federal funds sold. Repurchase-agreement borrowings were $13,448; the filing reports no other debt balance in the presented balance sheet. Available liquidity sources include correspondent-bank and Federal Home Loan Bank lines and Federal Reserve discount-window access, subject to conditions.
- Cash flow: Operating cash flow was $5,415, investing cash flow was $4,682, and financing cash flow was $26,678. Cash and cash equivalents increased $36,775 during the quarter.
- Capital: Shareholders’ equity was $58,912. Tier 1 risk-based capital was 17.67%, total risk-based capital 18.66%, and leverage capital approximately 11.67%; management said the company exceeded applicable “well capitalized” levels.
Material changes and management commentary
- Net income declined despite higher net interest income, principally because noninterest expense rose and noninterest income fell. Lower loan-loss and income-tax provisions partly offset those pressures.
- Net interest income benefited from a $30 prepayment penalty on an early repayment of a large commercial real estate loan, as well as lower interest expense. Loan yield fell to 4.33% from 4.61%; securities yield increased to 2.08% from 1.91%.
- Trust income was affected by lower assets under management following the 2013 sale of Swift Run Capital Management and transfers of managed accounts. VNBTrust reported $503.1 million of AUM at March 31, 2014, excluding SRC Fund assets, versus $623.9 million a year earlier. The company could not verify first-quarter royalty revenue due from SRCM and expected to record verified fees in Q2 2014.
- Management attributed part of the deposit increase to significant customer real estate transactions and expected deposits to decline in Q2 as those transactions settled and funds were distributed. Noninterest-bearing deposits were $166.0 million, or 36.1% of deposits; brokered deposits were $26.6 million.
- Loans past due were $1,107, compared with $809 at year-end; nonaccrual loans were $481, compared with $367. Impaired loans totaled $1,839, versus $1,736 at year-end; none had a specific valuation allowance. There were no loans 90 or more days past due and still accruing at March 31, 2014.
- Accumulated other comprehensive loss improved to $866 from $1,431, including $565 of first-quarter other comprehensive income, primarily unrealized securities gains. Management reported no other-than-temporary impairment in the securities portfolio.
Outlook, risks, and other items
- The filing provides no earnings or financial guidance. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- Key disclosed risks include interest-rate and market changes, economic conditions in the company’s markets, borrowers’ financial condition, loan and deposit competition, regulatory and accounting changes, technology and customer behavior, and management of these risks.
- Management identified the allowance for loan losses, deferred tax assets, and other real estate owned valuations as estimates susceptible to significant change. OREO was $2,267; the filing reports an $18 write-down and an $18 loss on sale during the quarter.
- Management believed the company would meet Basel III capital requirements on a fully phased-in basis, based on its interpretation of the rules. The new minimum requirements were scheduled to begin January 1, 2015 and phase in over four years.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no legal proceedings or other significant events.
Most important facts for investors to verify
- Whether expected Q2 deposit outflows occurred and how they affected liquidity and earning-asset deployment.
- Whether VNBTrust recorded the SRCM-related royalty revenue expected in Q2, and whether trust AUM and fee income stabilized.
- Whether higher operating expenses—particularly compensation and professional fees—persisted beyond Q1.
- Whether loan delinquencies, nonaccruals, classified loans, and the allowance remained consistent with management’s credit-quality assessment.
- How the $30,000 prepayment penalty and other nonrecurring or timing-related items affected subsequent net interest income and earnings.
- Whether interest-rate movements changed securities valuations, net interest margin, or access to contingent funding sources.