FVCBankcorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. FVCBankcorp is a Virginia bank holding company operating through FVCbank in the Washington, D.C. and Baltimore metropolitan areas.
Financial performance and condition
| Metric | Q3 2021 | Prior comparable period | Nine months 2021 | Prior comparable period |
|---|---|---|---|---|
| Net interest income | $14.5 | $13.6 | $42.7 | $38.5 |
| Provision for loan losses | $0 | $1.7 | $0 | $4.5 |
| Noninterest income | $1.1 | $0.8 | $2.5 | $2.2 |
| Noninterest expense | $9.4 | $7.7 | $25.5 | $23.0 |
| Net income | $4.7 | $3.9 | $15.4 | $10.5 |
| Diluted EPS | $0.32 | $0.28 | $1.06 | $0.74 |
| Net interest margin, tax-equivalent | 2.97% | 3.30% | 3.08% | 3.27% |
- Management-reported annualized return on average assets was 0.91% for Q3 and 1.05% year to date; return on average equity was 9.18% and 10.35%, respectively. Excluding identified items, non-GAAP operating earnings were $5.8 million for Q3 and $16.6 million year to date.
- At September 30, total assets were $2.00 billion, up 9.7% from year-end 2020. Deposits were $1.71 billion, up 11.6%. Gross loans were $1.47 billion, broadly flat overall; excluding PPP loans, loans increased $97.7 million, or 7.4%.
- Cash and due from banks was $30.4 million; interest-bearing deposits at other institutions were $122.5 million. Management reported liquid assets of $422.8 million, or 21.2% of assets, plus available borrowing capacity of approximately $325.4 million at the FHLB, $85.6 million at the Federal Reserve, and $269.0 million in unsecured federal funds lines.
- Shareholders’ equity was $204.2 million, or 10.2% of assets; tangible book value was $14.33 per share. The Bank’s Community Bank Leverage Ratio was 10.67%, versus 11.65% at year-end 2020; the filing states the Bank remained well capitalized.
- Other borrowed funds totaled $44.6 million, including $25.0 million in FHLB advances and $19.6 million in subordinated notes, net. The company redeemed $10.5 million of its 2016 subordinated notes and had another $14.5 million awaiting redemption from holders.
- For the first nine months, operating cash flow was negative $0.1 million, investing cash flow was negative $157.9 million, and financing cash flow was positive $167.5 million. Cash and cash equivalents increased $9.5 million to $30.4 million.
Material changes versus comparable periods
- Year-to-date net income rose 47% from 2020, supported by higher net interest income and no loan-loss provision, compared with a $4.5 million provision in 2020. Lower deposit funding costs helped net interest income, while lower asset yields and a narrower net interest margin remained headwinds.
- Q3 and year-to-date 2021 results included $1.1 million of merger and acquisition expense and $380,000 of accelerated debt issuance costs. The Q3 effective tax rate was 23.4%, partly reflecting nondeductible merger expenses.
- Available-for-sale securities increased to $269.9 million from $126.2 million at year-end, principally reflecting purchases to invest excess liquidity. Accumulated other comprehensive income moved from $1.8 million to a loss of $0.7 million, mainly due to lower market values of securities.
- Asset quality improved: nonperforming assets declined to $7.5 million from $9.5 million, and the NPA-to-assets ratio fell to 0.38% from 0.52%. The allowance for loan losses was $14.4 million, or 0.98% of loans net of deferred fees, versus $15.0 million, or 1.02%, at year-end.
- The $58.2 million PPP loan balance, net of deferred fees and costs, continued to run off as loans were forgiven; $162.3 million of PPP loans were forgiven year to date.
Outlook, management commentary, risks, and unusual items
- Merger: FVCBankcorp agreed in July 2021 to an all-stock merger of equals with Blue Ridge Bankshares, subject to approvals and other conditions. On November 4, after quarter-end, the companies disclosed that the OCC had identified regulatory concerns at Blue Ridge Bank that could affect the merger application process and timing. The merger agreement includes a potential $12.3 million termination fee in certain circumstances and a June 30, 2022 outside date. Completion and expected benefits are uncertain.
- ACM investment: The Bank invested $20.4 million in Atlantic Coast Mortgage, LLC, acquiring a 28.7% interest, subject to an earnback option of up to 3.7% over three years. The Bank reported a $41.8 million warehouse facility, $9.8 million in portfolio loans, and $364,000 of related income at September 30.
- Credit and concentration: Commercial real estate, including construction lending, represented 73.1% of total loans. Two loans totaling $10.6 million remained on payment deferral. Management warned that a prolonged pandemic or economic downturn could increase credit losses and required reserves. PPP loans were described as fully government-guaranteed, subject to that guarantee remaining in effect.
- Interest-rate and securities risk: The company’s model showed net interest income sensitivity to higher rates, but its economic-value-of-equity measure indicated potential capital-value declines in some rising-rate scenarios. The filing attributes securities’ unrealized losses primarily to interest-rate changes, not credit deterioration. The company also identified uncertainty in the transition from LIBOR to replacement benchmarks.
- Other risks and guidance: Management described liquidity and capital as sufficient, but noted potential risks from deposit outflows, higher funding costs, COVID-19 effects, commercial real estate conditions, and merger execution. No specific forward earnings guidance is provided in the filing. The company reported no material legal proceedings and stated disclosure controls were effective.
Important facts for investors to verify
- Whether OCC concerns delay, change, or prevent the Blue Ridge merger, and the resulting costs or termination-fee exposure.
- Whether loan quality, the allowance, deferred loans, and commercial real estate concentrations remain stable as pandemic-related effects evolve.
- How deposit growth, excess liquidity, securities portfolio valuation, and net interest margin respond to interest-rate changes.
- Whether the ACM investment and related lending facilities deliver sustainable earnings and how the earnback option affects ownership.
- The pace of PPP forgiveness and the company’s expected transition to CECL, scheduled for 2023.