FVCBankcorp, Inc. — Q1 2020 Form 10-Q
Business context and period. FVCBankcorp is a Virginia bank holding company operating through FVCbank, a community and commercial bank serving the Washington, D.C. metropolitan area. This unaudited filing covers the three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $1.603 billion | $1.537 billion at Dec. 31, 2019 |
| Gross loans | $1.285 billion | $1.273 billion at Dec. 31, 2019 |
| Total deposits | $1.344 billion | $1.286 billion at Dec. 31, 2019 |
| Net interest income | $12.2 million | $11.8 million in Q1 2019 |
| Net interest margin, tax-equivalent | 3.37% | 3.65% in Q1 2019 |
| Provision for loan losses | $1.1 million | $515,000 in Q1 2019 |
| Net income | $3.7 million; diluted EPS $0.26 | $3.9 million; diluted EPS $0.27 in Q1 2019 |
| Operating cash flow | $6.8 million | $4.6 million in Q1 2019 |
| Cash and due from banks | $23.2 million | $14.9 million at Dec. 31, 2019 |
| Shareholders’ equity | $177.7 million; 11.1% of assets | $179.1 million; 11.7% at Dec. 31, 2019 |
- Interest and dividend income was $16.9 million and interest expense was $4.7 million. Noninterest income was $693,000; noninterest expense was $7.2 million. Return on average assets was 0.96% and return on average equity was 8.29%, versus 1.16% and 9.74%, respectively, in Q1 2019.
- Allowance for loan losses rose to $11.2 million, or 0.88% of loans net of deferred fees and costs, from $10.2 million, or 0.81%, at year-end. Net charge-offs were $71,000; annualized net charge-offs to average loans were 0.02%.
- Nonperforming assets were $12.8 million, or 0.80% of assets, versus $14.6 million, or 0.95%, at year-end. Nonperforming loans were $8.9 million; allowance coverage of nonperforming loans was 126.18%. Other real estate owned was $3.9 million.
- Liquid assets totaled $212.3 million, or 13.3% of assets, versus $174.5 million, or 11.4%, at year-end. Additional reported capacity included $138.4 million at FHLB, $49.8 million at the Federal Reserve, and $234.0 million in unsecured federal funds lines.
- Borrowings at quarter-end included $25.0 million of FHLB advances and $24.5 million of subordinated notes; no federal funds were purchased. Subordinated notes bear 6% interest through June 2021 and mature in 2026.
- The Bank reported a 12.05% Community Bank Leverage Ratio and said it remained well capitalized. Tangible book value per share was $12.57, up from $12.26 at year-end.
Material changes versus comparable periods
- Net income declined about 5% year over year. Higher net interest income from asset growth was more than offset by a higher loan-loss provision and operating expenses.
- Net interest income increased $447,000, or 3.8%, year over year, while the tax-equivalent net interest margin fell 28 basis points. Average interest-earning assets increased 11.6%; asset yield declined and the cost of interest-bearing liabilities edged up.
- The loan-loss provision more than doubled, reflecting COVID-19-related qualitative reserve adjustments and loan growth. Management specifically increased reserve factors for retail, hotel, church, and other commercial real estate exposures.
- Assets grew 4.3% and deposits 4.5% from year-end. Loan growth was 0.9%, led by commercial real estate and construction; available-for-sale securities declined 10.3%, including a $10.2 million sale.
- Nonperforming assets improved from year-end, while the allowance increased. Management attributed lower criticized-loan balances in part to problem loans being paid off during the quarter.
- The company repurchased and cancelled 487,531 shares for $7.3 million, at an average $14.90 per share, then temporarily suspended repurchases because of COVID-19 uncertainty and market volatility.
Outlook, commentary, risks, and unusual items
- COVID-19 exposure and support programs: Management said the pandemic could materially affect borrowers, credit losses, interest and fee income, liquidity, and operations, but could not quantify the full impact. As of April 16, the company had executed 43 commercial-loan deferrals totaling $83.6 million, with 99 further requests totaling $116.6 million in process. As of May 4, it had closed or received SBA approval for 660 PPP loans totaling $178 million. PPP loans carry a 1% rate and generally a two-year term; the company expected most to be forgiven and understood them to be government-guaranteed.
- Concentrations and credit: At March 31, commercial real estate, including construction, was 82.7% of the loan portfolio. Management identified $216.2 million, or 16.8% of loans, across pandemic-sensitive retail, hotel, church, and other commercial real estate subgroups. Deferrals may delay recognition of borrower deterioration; prolonged economic weakness could require further provisions and worsen asset quality.
- Interest rates and funding: The Federal Reserve cut its target rate by 150 basis points during March. Management reduced deposit rates and said the full effects on asset yields, funding costs, and margin would be seen in Q2. Management cautioned that persistently higher funding costs or deposit outflows could pressure net interest margin and liquidity.
- Liquidity and capital: Management considered liquidity and capital sufficient, while noting capital ratios could be affected by future credit losses. It anticipated using the Federal Reserve’s PPP Liquidity Facility, with a stated 0.35% rate. Municipal deposits were 7.0% of total deposits; loss of significant deposits could increase replacement funding costs.
- Unusual income items: The quarter included a $451,000 market-value loss on consumer unsecured loans held for sale and a $97,000 gain on securities sales. The filing also reported $2.2 million of after-tax unrealized gains on available-for-sale securities, partly offset by a $468,000 after-tax unrealized loss on cash-flow hedges.
- Operations and controls: Most staff shifted to remote work and branch lobbies were closed, with four drive-up locations open. Management reported no material operational or internal-control challenges to date; disclosure controls were deemed effective.
- No earnings or financial-target guidance is provided. Management cautioned that first-quarter results are not indicative of full-year results. The filing reports no material legal proceedings.
Important facts for investors to verify
- Subsequent-quarter performance of deferred loans and PPP exposures, including deferral outcomes, forgiveness, and any resulting credit or fee effects.
- Whether allowance levels and asset-quality measures reflect the eventual effect of the pandemic, particularly across the identified industry exposures and the concentrated commercial real estate portfolio.
- Q2 net interest margin and funding costs following the March rate cuts, deposit repricing, and any changes in deposit flows.
- Actual availability and use of reported liquidity facilities, and changes in municipal, wholesale, or other concentrated funding.
- Capital ratios and share repurchase policy as economic conditions evolve; repurchases were suspended after the quarter’s $7.3 million buyback.
- Potential impact of the $451,000 held-for-sale valuation loss and the carrying value and disposition of OREO.