FVCBankcorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. FVCBankcorp is a Virginia bank holding company operating through FVCbank in the Washington, D.C. and Baltimore metropolitan areas. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $14.2 | $12.7 | $28.2 | $24.9 |
| Provision for loan losses | $0 | $1.8 | $0 | $2.8 |
| Noninterest income | $0.7 | $0.7 | $1.5 | $1.4 |
| Noninterest expense | $8.2 | $8.0 | $16.1 | $15.2 |
| Net income | $5.2 | $2.9 | $10.7 | $6.6 |
| Diluted earnings per share | $0.36 | $0.21 | $0.74 | $0.46 |
| Tax-equivalent net interest margin | 3.07% | 3.16% | 3.15% | 3.26% |
- Q2 net income rose about 79% year over year; first-half net income rose about 62%. Lower deposit costs and no loan-loss provision drove much of the improvement. Q2 2020 included $0.7 million of branch impairment costs and a $1.8 million provision.
- Q2 net interest income increased 11.7%; management attributed the improvement chiefly to lower deposit interest expense. The average yield on earning assets declined, and the net interest margin narrowed.
- Annualized return on average assets and equity were 1.06% and 10.41% for Q2, compared with 0.67% and 6.41% a year earlier. First-half measures were 1.13% and 10.96%, versus 0.81% and 7.35%.
- First-half cash from operations was $13.1 million, investing activities used $157.7 million, and financing activities provided $148.6 million. Cash and cash equivalents increased $4.0 million to $24.9 million.
- At June 30, total assets were $1.98 billion, up 8.4% from year-end 2020. Net loans were $1.46 billion; deposits were $1.68 billion, up 9.6%. The allowance for loan losses was $14.4 million, or 0.97% of loans net of deferred fees and costs, compared with $15.0 million and 1.02% at year-end.
- Nonperforming assets were $7.9 million, or 0.40% of assets, down from $9.5 million and 0.52% at year-end. Annualized first-half net charge-offs were 0.08% of average loans, compared with 0.02% in 2020.
- Stockholders’ equity was $200.7 million; the Bank’s Community Bank Leverage Ratio was 11.48%, and management reported the Bank was well capitalized. Tangible book value per share was $14.10.
- Borrowings totaled approximately $69.1 million: $25.0 million of FHLB advances and $44.1 million of subordinated notes. The notes include fixed-to-floating rate terms; one issue began resetting to a LIBOR-based rate in June 2021.
- Liquid assets were $415.8 million, or 21.1% of assets, versus $267.2 million, or 14.7%, at year-end. Additional stated capacity included $251.8 million at the FHLB, $92.3 million at the Federal Reserve, and $269.0 million of unsecured federal funds lines.
Material changes and developments
- Deposits and assets expanded, while net loans grew only modestly overall. Excluding PPP loans, loans increased $61.7 million, or 4.7%, during the first half; second-quarter warehouse lending contributed $58.0 million to loan growth.
- Gross PPP loans were $101.9 million at June 30, down from $155.8 million at year-end following forgiveness. The filing also reports $99.5 million net of deferred fees and costs in its COVID discussion. First-half accelerated accretion of PPP deferred fees contributed to interest income.
- Available-for-sale securities increased to $200.4 million from $126.2 million at year-end. The portfolio had $966,000 of gross unrealized losses, which the company attributed primarily to interest-rate changes rather than credit impairment; first-half other comprehensive loss was $885,000.
- On July 14, 2021, after quarter-end, the company announced an all-stock merger of equals with Blue Ridge Bankshares, subject to shareholder and regulatory approvals. Merger-related audit, legal and consulting costs contributed to higher Q2 and first-half expenses.
- A new authorization permits repurchases of up to 1,080,860 shares through December 31, 2021, subject to earlier termination; no shares were repurchased in the first half.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said liquidity sources remained strong and believed resources were sufficient to meet liquidity needs; results for the interim periods are not necessarily indicative of full-year results.
- COVID-19 remains a risk to borrower repayment, fee and interest income, asset quality, funding costs, liquidity and business continuity. One hotel participation loan totaling $9.7 million remained on payment deferral at quarter-end. Pandemic-impacted loan categories totaled $756.4 million, including retail, mixed-use, hotel and other commercial real estate exposures.
- Commercial real estate, including construction loans, represented 70.3% of total loans. Management cautioned that economic deterioration or declines in collateral values could increase credit losses and the allowance. CECL adoption is scheduled for January 1, 2023.
- Management described the balance sheet as asset-sensitive: its model estimated that a 100-basis-point rate increase would raise one-year net interest income by 1.85%, while a 400-basis-point increase would raise it by 8.75%. These model results depend on assumptions and are not forecasts of actual performance.
- Merger risks include failure or delay to obtain approvals, integration and employee or customer disruption, and inability to realize expected benefits. Under certain termination circumstances, the company may owe Blue Ridge a $12.3 million termination fee. The merger agreement also limits pursuit of competing proposals.
- The filing reported no material legal proceedings, effective disclosure controls, and no material changes in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether the Blue Ridge merger receives required approvals and closes on expected terms and timing, and the consequences if it does not.
- PPP loan forgiveness, deferred-fee accretion and runoff, and the credit performance of the remaining deferred loan and pandemic-impacted portfolios.
- Whether allowance levels remain adequate as credit conditions evolve, particularly given commercial real estate concentration and upcoming CECL implementation.
- Deposit growth, funding costs, liquidity availability and the effect of changing interest rates on net interest margin and earnings.
- Execution of the share repurchase authorization and any material merger-related costs or changes in operating performance.