FVCBankcorp, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. FVCBankcorp is a Virginia bank holding company operating through FVCbank, serving the Washington, D.C. and Baltimore metropolitan areas. Results are unaudited.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $13.6 million | $12.1 million | $38.5 million | $36.2 million |
| Provision for loan losses | $1.7 million | $0.2 million | $4.5 million | $1.3 million |
| Net income | $3.9 million | $4.1 million | $10.5 million | $12.1 million |
| Diluted EPS | $0.28 | $0.28 | $0.74 | $0.82 |
| Net interest margin, tax-equivalent | 3.30% | 3.41% | 3.27% | 3.55% |
| Return on average assets | 0.89% | 1.10% | 0.84% | 1.13% |
| Return on average equity | 8.44% | 9.46% | 7.72% | 9.65% |
Noninterest income was $0.8 million for Q3 and $2.2 million year to date. Noninterest expense was $7.7 million and $23.0 million, respectively. Net income for the nine-month period also reflected a $676,000 branch-closure impairment charge; the company reported a $451,000 loss related to loans held for sale.
At September 30, 2020, total assets were $1.79 billion, up 16.7% from year-end 2019. Gross loans were $1.50 billion, up 17.9% net of deferred fees and costs; deposits were $1.51 billion, up 17.8%. Stockholders’ equity was $184.5 million, and tangible book value per share was $13.06. The allowance for loan losses was $14.6 million, or 0.97% of loans net of deferred fees and costs, versus $10.2 million and 0.81% at December 31, 2019.
Cash and due from banks were $22.1 million and interest-bearing deposits at other institutions were $73.8 million. Management reported liquid assets of approximately $206.8 million, or 11.5% of total assets. For the first nine months, operating cash flow was $14.4 million, investing cash outflow was $243.8 million, financing cash inflow was $236.6 million, and cash and cash equivalents increased $7.2 million.
Borrowings at September 30 included $15.0 million of federal funds purchased, $25.0 million of FHLB advances, and $24.5 million of subordinated notes. The Bank’s Community Bank Leverage Ratio was 11.02%; management stated the Bank was well capitalized. A subsequent $20 million subordinated-note placement was completed October 13, 2020.
Material changes and management commentary
- Net income declined 5.4% in Q3 and 13.4% for the nine-month period year over year. Lower deposit funding costs lifted net interest income, but lower asset yields reduced margin.
- Loan growth included $170.3 million of PPP originations, net of deferred fees, across 755 loans. PPP loans are generally 1% loans and are guaranteed by the SBA; the company recorded no loan-loss allowance for them.
- Provision expense rose as management increased qualitative reserves for pandemic-sensitive borrowers and loan segments. Commercial real estate, including construction, represented 68.1% of total loans.
- During the first and second quarters, 277 loans totaling $360.2 million received payment deferrals. By October 31, remaining deferred balances were $37.6 million across 22 loans; one previously modified hotel loan of $9.7 million was on the watchlist.
- Nonperforming assets were $11.9 million, or 0.66% of assets, compared with $14.6 million, or 0.95%, at year-end 2019. Substandard originated loans increased $5.3 million to $15.2 million.
- Two branches were scheduled to close in early Q4. Management estimated annual savings of about $350,000 in occupancy and $250,000 in personnel costs, with savings expected after closure.
- The company repurchased 487,531 shares for $7.3 million during Q1, then temporarily suspended repurchases amid COVID-19 uncertainty.
Outlook, risks and contingencies
The filing provides no quantitative earnings or revenue guidance. Management said it could not estimate the full financial effect of COVID-19. Risks include borrower payment deterioration and collateral declines, further loan-loss provisions, fee waivers, pressure on net interest margin from low rates or higher funding costs, deposit outflows, and possible goodwill or intangible-asset impairment. Deferrals may delay identification of credit deterioration. Management reported no material operational or internal-control challenges to date and said liquidity sources remained available.
Liquidity backstops included approximately $102.9 million of additional FHLB capacity, $136.6 million of Federal Reserve borrowing capacity, and $254.0 million of unsecured federal funds lines, subject to availability and applicable conditions. Unfunded loan commitments were $171.0 million and letters of credit were $8.8 million at quarter-end. Management reported no material legal proceedings.
The October 2020 $20 million notes carry a 4.875% fixed rate for five years, then reset to three-month SOFR plus 471 basis points. Proceeds were intended for general corporate purposes, including supporting bank capital and potentially repaying part of the existing $25 million subordinated debt callable June 30, 2021.
Investor verification priorities
- Track remaining payment deferrals, especially the $9.7 million hotel exposure, and subsequent delinquency, nonaccrual, charge-off, and reserve trends.
- Assess whether the $14.6 million allowance adequately reflects COVID-19 risks, particularly the CRE concentration and PPP exposure excluded from reserves.
- Verify PPP forgiveness, fee recognition, and any effect on loan yields, liquidity, and capital.
- Monitor deposit stability, wholesale funding costs, and the availability of disclosed borrowing facilities.
- Confirm realized branch-closure savings and any further impairment charges or stock-repurchase decisions.
- Review the terms and use of proceeds of the new subordinated notes and any repayment of existing notes.