FVCBankcorp, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. FVCBankcorp is a Virginia bank holding company serving the Washington, D.C. metropolitan area through FVCbank. Results reflect the October 2018 acquisition of Colombo Bank, which added five locations. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $12.4 | $9.4 | $24.1 | $18.1 |
| Provision for loan losses | $0.5 | $0.3 | $1.0 | $0.6 |
| Noninterest income | $0.5 | $0.4 | $1.3 | $0.7 |
| Noninterest expense | $7.3 | $5.8 | $14.2 | $11.1 |
| Net income | $4.1 | $3.1 | $8.0 | $6.1 |
| Diluted EPS | $0.28 | $0.26 | $0.54 | $0.50 |
- Net interest margin on a tax-equivalent basis was 3.59% in Q2 2019 versus 3.50%; for the six-month period it was 3.62% versus 3.45%. Average earning assets grew substantially, while the cost of interest-bearing deposits also rose.
- Q2 return on average assets was 1.13% in both years; return on average equity was 9.78% versus 12.00%. Six-month figures were 1.14% and 9.76% in 2019, versus 1.13% and 12.02% in 2018.
- At June 30, total assets were $1,484.6, loans net of allowance were $1,224.4, deposits were $1,269.4, and stockholders’ equity was $170.2. From December 31, 2018, these increased 9.8%, 8.6%, 9.2%, and $11.8, respectively.
Cash flow, debt and liquidity
- For the first six months, operating cash flow was $8.9; investing cash flow was negative $111.1, principally reflecting $98.6 of net loan growth and a $10.0 BOLI purchase; financing cash flow was $108.0, including deposit growth. Cash and due from banks ended at $15.2, up $5.8 from year-end.
- Subordinated notes, net of issuance costs, were $24.4 at June 30, with a 6.00% fixed rate through June 2021 and maturity in 2026. The company reported no federal funds purchased or FHLB advances outstanding at period-end.
- Management reported liquid assets of $178.8, or 12.0% of total assets, and available borrowing capacity of approximately $165.8 at the FHLB, $59.1 at the Federal Reserve and $199.0 through unsecured federal funds lines. These facilities are subject to lender approval and collateral or other conditions.
- The Bank’s total risk-based capital ratio was 13.21%, down from 14.02% at year-end; management said the Bank remained “well capitalized.”
Material changes and credit quality
- Compared with Q2 2018, net income increased 33%; net interest income increased 32%. Growth in earning assets, including Colombo-acquired assets, was the principal driver. Deposit pricing and interest expense also increased.
- Q2 2018 included $0.397 of merger expense, compared with $0.016 in Q2 2019. Excluding merger expense, management reported Q2 2018 net income of $3.4 and diluted EPS of $0.28, versus $4.1 and $0.28 in Q2 2019.
- Noninterest expense rose year over year, particularly salaries and benefits and occupancy costs, reflecting staffing, locations and support for the larger post-acquisition organization. Six-month loan-swap fee income was $0.347 versus $0.035; management expects this fee income to decline from prior levels given the yield-curve environment.
- Nonperforming assets increased to $13.9 from $7.4 at year-end, or 0.93% of assets versus 0.55%. Nonperforming loans were $10.0; the allowance was $10.0, equal to 0.81% of loans and 100.07% of nonperforming loans. Management said loans 90 days or more past due were eight matured, well-collateralized loans awaiting final payment.
- Originated special-mention loans increased to $26.2 from $8.6 at year-end; four loans were added in Q2. Substandard originated loans increased to $7.0 from $2.8. Management said these special-mention loans were secured and had no specific reserve; $0.398 of specific reserves was allocated to impaired loans.
- Commercial real estate, including construction, comprised 77.1% of the loan portfolio. Management identifies real-estate values, local economic conditions and loan concentrations as potential sources of credit losses. One new $3.9 troubled debt restructuring was recorded during the first half, and one TDR defaulted within 12 months of restructuring.
Outlook, risks and other items
- No specific earnings or growth guidance was provided. Management said its 2019 effective tax rate was expected to exceed the federal statutory rate, citing the additional states entered through Colombo and limited tax-exempt income.
- Management described loan growth as strong and said it intended to maintain disciplined underwriting and liquidity. It cautioned that economic weakness, real-estate deterioration, deposit outflows, rising funding costs, interest-rate movements, regulatory changes and acquisition integration could adversely affect results.
- The company reported an asset-sensitive interest-rate position: modeled one-year net interest income increased 1.11% under a +100 basis-point shock and 2.99% under +400 basis points. Under +400 basis points, modeled economic value of equity declined 11.64%. These are model estimates, not forecasts.
- Adoption of lease accounting in January 2019 resulted in recognition of $11.8 of operating lease right-of-use assets and $12.2 of lease liabilities at June 30; adoption reduced retained earnings by $0.086. No material legal proceedings or material changes to previously disclosed risk factors were reported. Management stated disclosure controls were effective.
Important facts for investors to verify
- Whether the rise in nonperforming assets, special-mention and substandard loans, and TDR activity continues, and how collateral values support management’s loss estimates.
- How loan and deposit growth, funding costs and net interest margin evolve as deposit rates and market interest rates change.
- Whether Colombo-related staffing, occupancy and integration costs are offset by sustainable revenue growth; distinguish reported results from management’s non-GAAP merger-adjusted figures.
- How much of the reported liquidity and borrowing capacity is immediately available under applicable collateral, lender-approval and stress conditions, including exposure to municipal and other large deposits.
- The timing and financial impact of the expected decline in loan-swap fees, the 2019 tax-rate outlook and implementation of the expected-credit-loss accounting standard.