FVCBankcorp, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021. FVCBankcorp is a Virginia bank holding company operating through FVCbank in the Washington, D.C. and Baltimore markets. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net income; diluted EPS | $6.6 million; $0.45 | Q1 2021: $5.6 million; $0.38 |
| Net interest income | $15.1 million | Q1 2021: $14.0 million |
| Net interest margin, tax-equivalent | 3.15% | Q1 2021: 3.22% |
| Noninterest income / expense | $1.6 million / $8.4 million | Q1 2021: $0.8 million / $7.9 million |
| Total assets | $2.09 billion | December 31, 2021: $2.20 billion |
| Loans, net | $1.50 billion | December 31, 2021: $1.49 billion |
| Deposits | $1.82 billion | December 31, 2021: $1.88 billion |
| Cash and cash equivalents at period end | $16.9 million | Q1 2021: $16.6 million |
| Stockholders’ equity | $200.9 million | December 31, 2021: $209.8 million |
Return on average assets was 1.30% and return on average equity was 12.63%. Operating earnings, a company-defined non-GAAP measure excluding merger-related expense net of tax, were $6.7 million, or $0.46 diluted EPS.
Cash flow: Operating activities provided $3.6 million; investing activities provided $51.7 million, principally reflecting a reduction in deposits at other financial institutions; financing activities used $63.0 million, including deposit outflows. Cash and cash equivalents decreased $7.7 million during the quarter.
Debt and liquidity: FHLB advances were $25.0 million and subordinated notes were $19.5 million. Liquid assets, as defined by the company, were $469.3 million, or 22.5% of assets, versus $598.7 million, or 27.2%, at year-end. Additional disclosed borrowing capacity was approximately $417.2 million at the FHLB, $75.0 million at the Federal Reserve, and $265.0 million on unsecured federal funds lines. Estimated uninsured deposits were $828.3 million.
Capital: The Bank’s Community Bank Leverage Ratio was 10.96%; management stated the Bank was well capitalized. Stockholders’ equity to assets was 9.6%, and tangible book value per share was $13.81, down from $14.70 at year-end.
Material changes and credit quality
- Net income rose 18% year over year. Net interest income increased 7%, as lower funding costs and growth in average earning assets more than offset lower asset yields. The tax-equivalent net interest margin declined to 3.15% from 3.22%.
- Noninterest income more than doubled, primarily due to $912,000 of income from the Bank’s minority investment in Atlantic Coast Mortgage (ACM). The Bank holds a 28.7% interest, subject to an earnback option of up to 3.7% over three years.
- Noninterest expense increased 7%, mainly from higher salaries and benefits and $125,000 of merger and acquisition expense. A favorable $197,000 tax adjustment related to previously capitalized merger expenses also benefited Q1 2022 results.
- Total deposits declined 3.4% from year-end, which management attributed primarily to expected withdrawal of short-term transactional deposits. Loans excluding PPP loans increased $23.1 million from year-end; PPP loans continued to run off.
- The allowance for loan losses was $13.8 million, compared with $13.8 million at year-end; Q1 included a $350,000 provision and $415,000 of net charge-offs. Nonperforming loans were $3.5 million, approximately 0.17% of assets. Special-mention loans were $4.8 million per MD&A, versus $3.0 million at year-end; substandard loans were $16.2 million, down $2.8 million.
- Commercial real estate, including construction lending, represented 73.1% of total loans. Management reported no other real estate owned and no material pattern of pandemic-related credit deterioration, while noting ongoing monitoring of affected borrowers.
Outlook, risks, and unusual items
- The filing provides no specific earnings, growth, or margin guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Rising rates materially reduced the fair value of available-for-sale securities: their fair value was $330.3 million versus $357.8 million at year-end, with $25.2 million of gross unrealized losses at quarter-end. The after-tax securities-related loss contributed to a $17.2 million quarterly other comprehensive loss and the decline in equity. Management attributed the losses to interest rates rather than credit deterioration, reported no other-than-temporary impairment, and said it did not expect to have to sell the securities before recovery.
- Interest-rate modeling showed estimated one-year net interest income increases of 1.47% under a 100-basis-point rate increase and 5.39% under a 400-basis-point increase; a 100-basis-point decrease modeled a 3.89% decline. These are model estimates, not forecasts. Economic value of equity was modeled to decline 4.81% under a 400-basis-point increase.
- The company was preparing to adopt CECL on January 1, 2023 and began parallel model runs. It also disclosed transition risks associated with replacing LIBOR with SOFR; it had stopped entering new LIBOR transactions at the end of 2021.
- Off-balance-sheet exposures included $100.6 million of commitments to grant loans, $185.5 million of unused loan and credit-line commitments, $9.3 million of letters of credit, and $92.8 million of interest-rate lock commitments. Commitment totals do not necessarily represent future cash requirements.
- The company renewed a share repurchase authorization for up to 1,080,860 shares through March 31, 2023; no shares were repurchased in Q1. Management reported no material change in previously disclosed risk factors and no material legal proceedings.
Investor facts to verify
- Whether ACM’s $912,000 contribution to quarterly noninterest income is sustainable and how the investment’s earnback terms may affect ownership.
- The sensitivity of earnings and capital to further rate increases, including the effect of unrealized securities losses and potential deposit repricing or outflows.
- Deposit stability and concentration, including the $828.3 million estimated uninsured balance and the maturity profile of large uninsured certificates of deposit.
- Credit trends in the CRE-heavy loan portfolio, including special-mention and substandard balances, charge-offs, and the upcoming CECL adoption.
- The extent to which reported results depend on one-time tax benefits, merger costs, PPP runoff, and other nonrecurring or changing items.