FVCBankcorp, Inc. — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are to FY 2022. This is an annual report, not a standalone fourth-quarter report. FVCBankcorp is a Virginia bank holding company operating through FVCbank in the Washington, D.C. and Baltimore metropolitan areas.
Financial performance and position
| Metric | FY 2023 / Dec. 31, 2023 | FY 2022 / Dec. 31, 2022 |
|---|---|---|
| Net interest income | $54.4 million | $65.2 million |
| Net interest margin | 2.49% | 3.19% |
| Noninterest income (loss) | $(13.4) million | $2.8 million |
| Net income; diluted EPS | $3.8 million; $0.21 | $25.0 million; $1.35 |
| Core bank operating earnings (non-GAAP) | $16.3 million; diluted EPS $0.90 | $25.1 million; diluted EPS $1.36 |
| Total assets | $2.19 billion | $2.34 billion |
| Loans, net of deferred fees | $1.83 billion | $1.84 billion |
| Deposits | $1.85 billion | $1.83 billion |
| Other borrowed funds | $104.6 million | $284.6 million |
| Shareholders’ equity | $217.1 million | $202.4 million |
| Operating cash flow | $16.3 million | $22.4 million |
FY 2023 net interest income plus noninterest income (loss), the company’s stated revenue definition, was approximately $41.0 million, versus $68.1 million in FY 2022. The efficiency ratio was 89.36% versus 50.62%; return on average assets was 0.17% versus 1.18%, and return on average equity was 1.82% versus 12.34%.
Deposit costs rose sharply: interest expense on deposits increased to $47.3 million from $12.5 million, while interest income on loans rose to $98.4 million from $73.6 million. The average cost of deposits, including noninterest-bearing balances, was 2.47% versus 0.69%. The loan allowance was $18.9 million, or 1.03% of loans; net charge-offs were $375,000. The Bank reported total risk-based capital of 13.83%, CET1 of 12.80%, and a leverage ratio of 10.77%, and said it remained well capitalized.
Liquidity resources included $232.1 million of liquid assets, approximately $401.6 million of additional FHLB borrowing capacity, $118.5 million of Federal Reserve borrowing capacity, and $185.0 million of unused unsecured federal funds lines. Uninsured deposits, excluding collateralized deposits, were estimated at $574.6 million, or 31.1% of deposits.
Material changes and unusual items
- Net income fell substantially, primarily due to margin compression from higher funding costs and a $15.6 million pretax loss on securities sales. The company sold $102.5 million in book-value available-for-sale securities; the after-tax loss was $12.2 million. Management said the repositioning reduced high-cost funding and supported new lending, with an expected earn-back period of about three years.
- Total assets declined 7%, while loans were down 1%. Deposits increased 1%; noninterest-bearing deposits fell to $396.7 million, or 21.5% of deposits. Wholesale deposits were $245.3 million at year-end, and average wholesale deposits rose markedly during the year.
- FHLB advances fell to $85.0 million from $235.0 million, and federal funds purchased declined to zero from $30.0 million. The $85.0 million of year-end FHLB advances matured in the first quarter of 2024.
- FY 2023 noninterest expense increased 6% to $36.7 million, including $457,000 of office-space reduction and severance costs. The company said these actions were expected to reduce 2024 operating expenses by more than $1.0 million. FDIC insurance expense rose to $1.4 million from $620,000.
- The company adopted CECL on January 1, 2023; the adoption increased credit-loss reserves by $3.7 million and reduced retained earnings by $2.8 million after tax. The reported FY 2023 provision for credit losses was $132,000, compared with $2.6 million in 2022.
Outlook, risks and contingencies
No numerical earnings or financial guidance is provided. Management described continued growth opportunities but noted that higher interest rates, inflation and tighter monetary policy could temper growth. It plans to pursue organic growth, deepen customer relationships, selectively add branches, and consider opportunistic acquisitions while maintaining asset quality and profitability.
Credit exposure is concentrated in commercial real estate: CRE, as defined for regulatory purposes, equaled 399% of total risk-based capital; construction, development and land loans equaled 57%. About 67.8% of loans were commercial real estate and construction loans, and 87.7% were secured by real estate. Management cited heightened monitoring and underwriting, while identifying office-market weakness, higher debt costs and lower property valuations as concerns. Watchlist credits rose to $28.8 million; substandard loans increased to $22.5 million, largely reflecting one current, paying $20.0 million owner-occupied commercial loan. Nonperforming loans were $1.8 million, and there was no other real estate owned.
Additional risks include deposit competition and outflows, uninsured and concentrated deposits (one customer relationship represented 9% of deposits), reliance on brokered/wholesale funding, unrealized securities losses, interest-rate sensitivity, government-contractor exposure and cyber/vendor risks. The available-for-sale portfolio had $34.1 million of gross unrealized losses at year-end; management attributed them primarily to rate changes and said it did not intend, and did not expect to be required, to sell securities before recovery of amortized cost. The company reported no material legal proceedings and no significant cybersecurity compromise or material cyber-related financial loss to date.
Subsequent event: After year-end, the company surrendered $47.9 million of BOLI yielding 2.74%. It expected a nonrecurring $2.2 million increase to tax provision in first-quarter 2024 and planned to use proceeds to reduce high-cost funding and support lending. Management expected the transaction to improve future net interest income, margin and return on assets; projected earn-back was approximately one year.
The auditor issued an unqualified opinion on the financial statements and identified the collectively evaluated loan allowance as a critical audit matter. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal control effectiveness.
Most important facts for investors to verify
- Whether deposit pricing and funding mix stabilize enough to recover net interest margin after the sharp 2023 increase in funding costs.
- Performance, collateral values and risk-rating migration in the CRE portfolio, especially office-related credits and the $20.0 million downgraded loan; also monitor watchlist balances and allowance assumptions under CECL.
- Actual uninsured-deposit levels, large-customer retention, brokered/wholesale funding needs, and repayment or refinancing of the $85.0 million FHLB advance due in first-quarter 2024.
- Whether the securities repositioning and BOLI surrender deliver the stated funding, earnings and margin benefits, including the expected 2024 tax charge and earn-back periods.
- Progress against expense-reduction expectations and the effect of continuing technology, FDIC insurance and regulatory costs on profitability.