FVCBankcorp, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 27, 2020. FVCBankcorp is a Virginia bank holding company operating through FVCbank, serving commercial and retail customers primarily in the Washington, D.C. and Baltimore regions. The 2018 Colombo Bank acquisition added five locations and affects year-over-year comparisons.
Financial performance and condition
- Profitability: Net income was $15.8 million, or $1.07 per diluted share, versus $10.9 million, or $0.85, in 2018. Return on average assets was 1.09% (0.94% in 2018); return on average equity was 9.32% (9.29%). Excluding merger costs, reported non-GAAP net income was $15.9 million in 2019 and $13.4 million in 2018.
- Revenue and margins: Net interest income was $48.1 million, up 20.7%; noninterest income was $2.5 million, up $0.9 million. Net interest margin declined to 3.48% from 3.51%. The efficiency ratio improved to 57.06% from 63.07%.
- Expenses and credit provision: Noninterest expense increased to $28.9 million from $26.4 million, mainly reflecting Colombo-related operating costs and staffing for growth. Provision for loan losses was $1.7 million versus $1.9 million. The allowance was $10.2 million, or 0.81% of loans, unchanged as a percentage from 2018.
- Growth and funding: Total assets rose 13.7% to $1.54 billion; gross loans rose 11.8% to $1.27 billion; deposits rose 10.6% to $1.29 billion. Shareholders’ equity was $179.1 million, and tangible book value per share increased to $12.26 from $10.93.
- Cash flow: Operating activities provided $20.4 million; investing activities used $164.6 million, including $147.2 million of net loan growth and a $20.0 million BOLI purchase; financing activities provided $149.7 million. Cash and cash equivalents increased $5.5 million to $14.9 million.
- Debt and liquidity: Borrowings totaled $49.5 million, including $24.5 million of subordinated notes, $15.0 million of FHLB advances and $10.0 million of federal funds purchased. Liquid assets were $174.5 million, or 11.4% of assets. Reported additional borrowing capacity included approximately $113.3 million at the FHLB, $51.9 million at the Federal Reserve and $189.0 million of unsecured federal funds lines.
- Capital: The Bank’s total risk-based capital ratio was 13.43%, Tier 1 and CET1 ratios were 12.72%, and leverage ratio was 12.15%. The Bank was classified as well capitalized.
Material changes and unusual items
- Net interest income growth was driven primarily by higher average earning assets, including loan growth and Colombo assets. Interest-earning asset yield rose to 4.83%, while the cost of interest-bearing deposits increased to 1.77% from 1.32%, limiting margin expansion.
- 2019 merger and acquisition expense was $133,000, compared with $3.3 million in 2018. Noninterest income included a $145,000 loss on loans held for sale; 2018 included a $462,000 loss on securities sales.
- The company reclassified part of its purchased unsecured consumer loan portfolio as held for sale: $11.2 million at year-end, following $647,000 of net charge-offs and a $145,000 fair-value loss. It anticipated selling the loans in 2020.
- Nonperforming loans increased to $10.7 million, or 0.84% of loans, from $3.2 million, or 0.34%. Nonperforming assets were $14.6 million, or 0.95% of assets, versus $7.4 million, or 0.57%. A $3.9 million troubled debt restructuring and two special-mention loans totaling $11.1 million were reported as paid off in full in the first quarter of 2020.
- The company adopted lease accounting in 2019, recognizing $13.3 million of operating lease right-of-use assets and $13.7 million of lease liabilities at year-end. It also purchased $20.0 million of BOLI policies.
Outlook, risks and contingencies
- No specific earnings, growth, margin or other financial guidance is provided. Management describes plans for continued organic growth, selective branching, and potentially opportunistic acquisitions, while emphasizing profitability, asset quality and customer service.
- Credit concentration is a central risk: commercial real estate, including construction, represented 81.5% of loans. Regulatory-defined CRE loans equaled 396.4% of risk-based capital; construction, development and land loans equaled 111.7%. Management cites underwriting and heightened monitoring, but regulators may expect added capital or controls.
- Approximately 79.9% of the loan portfolio had been originated in the prior three years, leaving limited seasoning. The filing also notes geographic concentration in the Washington-area economy and exposure to government contractors and possible federal payment interruptions.
- The filing identifies the emerging coronavirus outbreak and related disruptions as a potential risk to borrowers, collateral values, loan demand, deposits and operations; the filing does not quantify its financial impact.
- Interest-rate and funding risks include rising deposit costs, a potentially flattening yield curve, reliance on deposits and wholesale funding, and LIBOR transition exposure. Management reported a slightly asset-sensitive position, but modeled one-year net interest income declined 0.69% in a +400 basis-point scenario.
- The company had no material legal proceedings reported. It did not pay cash dividends and stated it had no current plans to do so. A repurchase authorization for up to 1,112,165 shares was announced in February 2020; the filing reports no repurchases in the fourth quarter of 2019.
Most important facts for investors to verify
- Whether the rise in nonperforming loans and special-mention/substandard credits is sustained or offset by the reported first-quarter 2020 payoffs.
- How the unsecured consumer loans held for sale were ultimately disposed of and whether additional losses occurred.
- CRE and construction concentration, loan seasoning, allowance adequacy and any subsequent regulatory capital expectations.
- Deposit mix, funding costs, wholesale funding use and actual liquidity capacity under stress.
- Subsequent effects of the coronavirus disruption on customers, credit quality, earnings and funding; the filing provides no quantified forecast.
- Execution and cost of the share repurchase authorization, and whether repurchases affect capital available for growth.