FVCBankcorp, Inc. — Q2 2020 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2020. FVCBankcorp is a Virginia bank holding company operating through FVCbank in the Washington, D.C. metropolitan area. The quarter reflects the effects of COVID-19, including participation in the SBA Paycheck Protection Program (PPP) and borrower payment deferrals. Financial amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $12.7 | $12.4 | $24.9 | $24.1 |
| Provision for loan losses | $1.8 | $0.5 | $2.8 | $1.0 |
| Noninterest income | $0.7 | $0.5 | $1.4 | $1.3 |
| Noninterest expenses | $8.0 | $7.3 | $15.2 | $14.2 |
| Net income | $2.9 | $4.1 | $6.6 | $8.0 |
| Diluted EPS | $0.21 | $0.28 | $0.46 | $0.54 |
| Net interest margin, tax-equivalent | 3.16% | 3.59% | 3.26% | 3.62% |
- Balance sheet at June 30: Total assets were $1.78 billion, up 15.9% from year-end 2019; gross loans were $1.485 billion and deposits were $1.519 billion. Total stockholders’ equity was $180.7 million, or 10.1% of assets.
- Cash flow, six months: Operating activities provided $9.1 million; investing activities used $224.7 million, mainly reflecting $199.4 million of net loan growth and $46.8 million more in interest-bearing deposits; financing activities provided $226.3 million. Cash and cash equivalents ended at $25.6 million.
- Debt and funding: Borrowings totaled $49.5 million, comprising $25.0 million of FHLB advances and $24.5 million of subordinated notes; there were no federal funds purchased at quarter-end. Subordinated notes carry a 6% fixed rate through June 2021, then reset to three-month LIBOR plus 487 basis points, subject to the disclosed terms.
- Liquidity and capital: Management reported liquid assets of $212.4 million, or 11.9% of assets, and additional borrowing capacity of approximately $120.9 million at the FHLB, $51.4 million at the Federal Reserve, and $234.0 million in unsecured federal funds lines. The Bank’s community bank leverage ratio was 11.05%; management said the Bank remained well capitalized.
- Credit quality: The allowance for loan losses was $12.9 million, 0.87% of loans net of deferred fees and costs, versus 0.81% at year-end. Nonperforming assets were $12.4 million, or 0.69% of assets, versus $14.6 million, or 0.95%, at year-end. Annualized net charge-offs were 0.02% for the first half.
Material changes versus comparable periods
- Q2 net income fell to $2.9 million from $4.1 million; first-half net income fell to $6.6 million from $8.0 million. Higher credit-loss provisions and a $676,000 branch-closure impairment charge weighed on results.
- Net interest income increased, but margin contracted as lower market rates reduced asset yields. In Q2, interest-earning asset yield declined to 4.03% from 4.91%, while the cost of interest-bearing liabilities declined to 1.30% from 1.87%.
- Loans grew 16.3% and deposits 18.2% from December 31, 2019. PPP lending was a significant driver: 755 loans totaling $169.4 million, net of deferred fees, were closed or SBA-approved by June 30. The filing reports PPP loans at a 1% contractual rate, with deferred fees affecting recognized yield.
- Available-for-sale securities declined to $121.8 million from $141.3 million at year-end. The company sold approximately $10.2 million of securities and recognized a $97,000 gain.
- The company repurchased 487,531 shares for $7.3 million during the first quarter 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
- Management provided no quantified earnings or revenue guidance. It said the extent and duration of COVID-19 effects were uncertain and could not be reliably projected.
- COVID-related deferrals covered 277 loans with $360.2 million outstanding at June 30 (24.4% of the loan portfolio). By July 31, modified loans had fallen to 165 loans totaling $226.7 million; 15 borrowers with $28.2 million outstanding had requested a second 90-day deferral. Management stated these short-term modifications were not treated as troubled debt restructurings under applicable interagency guidance.
- PPP loans are described as fully guaranteed by the U.S. government; management expected most to be forgiven. Changes to the guarantee or forgiveness assumptions could require additional loan-loss provisions. PPP loans are excluded from the allowance, and the filing notes they receive a zero risk weight under applicable capital rules.
- Management identified pandemic-sensitive exposures, including retail, hotels, churches, and other special-purpose commercial real estate. Commercial real estate, including construction lending, represented 67.9% of total loans. A prolonged downturn, collateral declines, borrower distress, or delayed recognition of deterioration during deferrals could increase provisions and losses.
- Two branches were scheduled to close in early Q4 2020. The $676,000 impairment charge related to right-of-use assets and leasehold improvements; management estimated annual occupancy savings of about $350,000 and other savings of about $250,000, with savings expected after closure.
- The company reclassified its consumer unsecured loans-held-for-sale portfolio to held-for-investment at the lower of cost or market in Q2 as that market weakened. It recorded a $451,000 loss on the market-value adjustment in the first half; the portfolio was $8.8 million at June 30.
- Other identified risks include potentially lower interest and fee income, deposit outflows or higher funding costs, regulatory and capital effects, goodwill or intangible impairment, PPP-related liability or reputational exposure, cyber and payment fraud, and LIBOR transition risk. Management reported no material operational or internal-control challenges to date and stated disclosure controls were effective.
- Off-balance-sheet commitments at June 30 included $33.9 million to grant loans, $193.5 million of unused loan and credit-line commitments, and $8.2 million of commercial and standby letters of credit. The filing reported no material legal proceedings.
Important facts for investors to verify
- Subsequent performance and payment status of deferred loans, especially the second-deferral borrowers and pandemic-sensitive commercial real estate segments.
- PPP loan funding, fee recognition, forgiveness and guarantee treatment, and the effect on future interest income and capital.
- Whether the $12.9 million allowance adequately reflects emerging credit losses, given pandemic uncertainty and the then-current incurred-loss methodology.
- Liquidity assumptions, including deposit stability, municipal and other large depositor concentrations, and availability and cost of contingent borrowing sources.
- Net interest margin trends after rate reductions, excess liquidity, and low-yield PPP lending; and whether projected branch savings materialize after closure.
- Capital disclosures use the Bank’s CBLR framework at June 30; compare capital measures on a consistent basis and assess sensitivity to future losses.
- Management’s non-GAAP “Operating Earnings” exclude specified impairment and merger costs; compare these figures with GAAP net income and review the reconciliation.