Fvcbankcorp, Inc. quarterly report, Q1 FY2019

FVCBankcorp, Inc. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018 unless otherwise noted. Figures are unaudited and in U.S. dollars. FVCBankcorp is a bank holding company operating through FVCbank in the Washington, D.C. region. Its October 2018 acquisition of Colombo Bank added five locations in Washington, D.C., Maryland, and Baltimore.

Financial results and condition

Metric	Q1 2019 / March 31, 2019	Comparable period / prior year-end
Total assets	$1.420 billion	$1.352 billion at Dec. 31, 2018
Net loans	$1.169 billion	$1.128 billion at Dec. 31, 2018
Total deposits	$1.213 billion	$1.162 billion at Dec. 31, 2018
Net interest income	$11.764 million	$8.763 million in Q1 2018
Noninterest income	$738,000	$385,000 in Q1 2018
Net income	$3.926 million	$2.997 million in Q1 2018
Diluted EPS	$0.27	$0.25 in Q1 2018
Cash from operating activities	$4.593 million	$3.319 million in Q1 2018

Interest income was $15.960 million and interest expense was $4.196 million. Tax-equivalent net interest margin was 3.65%, up from 3.39% in Q1 2018. Average earning-asset yield increased to 4.89% from 4.39%, while the cost of interest-bearing liabilities rose to 1.79% from 1.34%.
Provision for loan losses was $515,000, versus $358,000. Noninterest expense rose to $6.904 million from $5.260 million, including $67,000 of merger and acquisition expense. The effective tax rate was 22.8%, compared with 15.1%.
Reported annualized return on average assets was 1.16% and return on average equity was 9.74%; excluding merger costs, management reported 1.17% and 9.86%, respectively.
Cash and cash equivalents increased $3.969 million during the quarter. Investing activities used $51.263 million, chiefly reflecting $42.604 million of net loan growth and $16.535 million of securities purchases; financing activities provided $50.639 million, largely from deposit growth.
Stockholders’ equity was $163.993 million. Bank total risk-based capital was 13.48%, and the Bank was reported as “well capitalized.” Subordinated notes were $24.427 million, bearing a 6% rate; there were no federal funds purchased or FHLB advances outstanding at quarter-end.

Material changes and operating developments

Compared with Q1 2018, net income increased about 31%, net interest income increased about 34%, and total assets and deposits were substantially larger, reflecting organic growth and the Colombo acquisition. Management attributed higher income primarily to loan growth and acquired earning assets.
Compared with December 31, 2018, assets increased 5.0%, net loans increased 3.7%, and deposits increased 4.3%. Commercial construction loans grew to $188.7 million from $153.3 million.
Noninterest income increased mainly because of loan swap fees. Higher salaries, occupancy, data processing, and other operating costs reflected added staff, locations, and support for the larger organization following the acquisition.
Adoption of lease accounting on January 1, 2019 resulted in recognition of $11.885 million of right-of-use assets and $12.178 million of lease liabilities at March 31; the filing reports an $86,000 cumulative retained-earnings adjustment.

Credit quality, liquidity, risks, and outlook

Nonperforming assets were $7.657 million, or 0.54% of assets, versus $7.435 million, or 0.55%, at year-end. Nonperforming loans were $3.791 million; the allowance was $9.512 million, or 0.81% of loans, and equaled 250.91% of nonperforming loans.
Performing troubled debt restructurings rose to $4.092 million from $203,000, primarily due to one commercial real estate loan restructured during the quarter. Management said no specific reserve was required for that loan. One OREO property was valued at $3.866 million and was being marketed for sale.
Commercial real estate, including construction loans, represented 74.8% of the loan portfolio. Management identified deterioration in economic conditions, real estate values, employment, or borrower finances as potential sources of higher credit losses. It also disclosed municipal deposits equal to 10.8% of deposits and noted that replacement funding could cost more if significant municipal funds left.
Liquid assets were reported at $181.5 million, or 12.8% of assets. Additional disclosed capacity included approximately $178.1 million from the FHLB, $61.3 million from the Federal Reserve, and $169.0 million in unsecured federal funds lines, subject to applicable approvals and conditions.
The Bank’s interest-rate model showed net interest income increasing 1.8% under a +100-basis-point shock and 1.5% under +400 basis points over one year; the modeled two-year increases were 4.1% and 6.8%. Economic value of equity was modeled to decline 3.25% under +100 basis points and 18.88% under +400 basis points.
The filing provides no specific earnings or growth guidance. Management said it expected to maintain sufficient liquidity and described continued loan growth and expansion as priorities. The company was implementing the expected-credit-loss standard, with parallel model runs expected by the end of Q3 2019; the impact had not yet been determined.
No material legal proceedings or material changes to the risk factors from the 2018 Form 10-K were reported. Management concluded disclosure controls were effective.

Important facts for investors to verify

Reconcile the MD&A’s discussion of net interest income: the financial statements report $11.764 million for Q1 2019 and $8.763 million for Q1 2018, while parts of the MD&A describe approximately $16.0 million and $11.3 million as “net interest income”; those amounts correspond to total interest income in the statements.
Track credit trends, particularly the new $4.092 million TDR, higher nonaccrual loans, the 74.8% commercial real estate/construction concentration, and the valuation and sale of the OREO property.
Assess deposit pricing and retention, including municipal and wholesale funding, as interest-bearing deposit costs rose and time deposits increased.
Monitor whether Colombo-related growth produces revenue sufficient to offset higher operating costs, and whether expected credit-loss implementation changes reserves.
Review the full filing for regulatory capital, liquidity availability, and interest-rate sensitivity assumptions; modeled results are not forecasts of actual performance.