FVCBankcorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022 unless noted. FVCBankcorp is a Virginia bank holding company operating through FVCbank in the Washington, D.C. and Baltimore markets.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable period / December 31, 2022 |
|---|---|---|
| Total assets | $2.349 billion | $2.344 billion |
| Net interest income | $14.0 million | $15.1 million in Q1 2022 |
| Net interest margin | 2.60% | 3.15% in Q1 2022 |
| Net income; diluted EPS | $621,000; $0.03 | $6.6 million; $0.36 in Q1 2022 |
| Noninterest income | Loss of $4.6 million | Income of $1.6 million in Q1 2022 |
| Noninterest expense | $9.0 million | $8.4 million in Q1 2022 |
| Loans, net | $1.809 billion | $1.824 billion |
| Deposits | $1.910 billion | $1.830 billion |
| FHLB advances; federal funds purchased | $189 million; none | $235 million; $30 million |
| Stockholders’ equity | $204.2 million | $202.4 million |
Net interest income fell 7% year over year as funding costs rose faster than asset yields: the yield on interest-earning assets increased to 4.64% from 3.55%, while the cost of interest-bearing deposits rose to 2.61% from 0.60%. Average noninterest-bearing deposits declined year over year, while average wholesale deposits increased substantially. Management reported annualized return on assets of 0.11% and return on equity of 1.21%, versus 1.30% and 12.63%, respectively, in Q1 2022.
Operating cash flow was $2.6 million; investing activities used $0.7 million and financing activities provided $4.2 million. Cash and due from banks increased $6.0 million to $13.3 million. The company reported $384.4 million of liquid assets, or 16% of total assets, and estimated liquidity at 123% of uninsured deposits. Estimated uninsured deposits were $621.8 million, or 32.5% of deposits.
Gross loans were $1.828 billion. Commercial real estate represented about 60% of gross loans. The allowance for credit losses on loans was $19.1 million; including the $0.9 million reserve for unfunded commitments, the combined allowance was approximately $20.0 million. Nonperforming loans were $4.4 million, or 0.19% of assets. Special-mention loans increased to $16.7 million from $10.4 million at year-end, and substandard loans increased to $4.8 million.
The Bank reported regulatory capital ratios of 13.53% total risk-based capital, 12.48% Tier 1 and CET1 capital, and 10.38% leverage, and stated that it met applicable capital requirements and was well capitalized. Subordinated notes, net of issuance costs, were $19.6 million.
Material changes and unusual items
- Investment portfolio repositioning: The company sold $40.3 million of available-for-sale securities for a pretax loss of $4.6 million ($3.6 million after tax). Proceeds helped repay high-cost borrowings and fund higher-yielding commercial loans. The loss was substantially reflected in accumulated other comprehensive loss before sale; management said the transaction was neutral to shareholders’ equity and tangible book value at the time of sale.
- ACM investment: The company recorded an $801,000 pretax loss from its minority mortgage-banking investment, compared with $912,000 of income in Q1 2022. The filing says ACM’s Q1 funded volume was $358 million and its operating losses declined from the prior quarter.
- CECL adoption: Adoption on January 1, 2023 increased credit-loss reserves by $3.7 million and reduced retained earnings by $2.8 million, net of tax. The Q1 provision for credit losses was $242,000, compared with $350,000 in Q1 2022.
- Wholesale funding hedges: The company executed $150 million of additional pay-fixed/receive-floating swaps, with five-year maturities and a weighted average rate of 3.50%. Management said the securities repositioning and funding-cost actions each improved Q1 net interest margin by about five basis points.
- Share repurchases and staffing: The company repurchased 90,952 shares in Q1. It reported approximately $100,000 of severance expense and expects staffing changes to produce annualized savings of approximately $1.0 million.
Outlook, risks and contingencies
No formal numerical earnings guidance is provided. Management expects operating earnings to benefit from lower staffing costs, improved margin following balance-sheet repositioning, lower wholesale funding costs, and interest income from newly originated commercial loans. It cautions that Q1 results are not necessarily indicative of full-year results. Management also expects higher interest rates and limited housing inventory to remain headwinds for the mortgage industry during 2023.
Key risks include rising funding costs and deposit competition; liquidity sensitivity to deposit outflows and market disruption; interest-rate-driven securities valuation changes; commercial real estate exposure; potential deterioration in loan collateral values and borrower performance; and transition of LIBOR-linked instruments to alternative rates. The company reported no material legal proceedings and no material changes to the risk factors disclosed in its 2022 Form 10-K. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile net interest income and interest expense: the primary income statement reports net interest income of $14.014 million, while an MD&A supplemental reconciliation presents different interest-expense and net-interest-income figures.
- Confirm tangible book value per share: the MD&A narrative states $11.53 at March 31, while its tangible-book-value table reports $11.09; $11.53 appears to be book value per share in that table.
- Check the share-repurchase disclosure: the narrative authorizes up to 1.3 million shares, but the table’s remaining-share figures appear inconsistent with that authorization.
- Monitor uninsured deposit levels and composition, funding costs, and the company’s access to contingent borrowing facilities.
- Track criticized loans, especially the increase in special-mention and substandard balances, alongside the concentrated commercial real estate portfolio and CECL allowance assumptions.
- Assess whether the repositioning and hedging actions deliver the margin and earnings improvements management expects, and whether ACM’s results continue to improve.