FVCBankcorp, Inc. filed 10-Q

FVCBankcorp, Inc. files 10-Q in a filing on Wed, August 14 accessible here.

On June 20, 2016, the Company issued $25 million in private placement of fixed-to-floating subordinated notes due June 30, 2026.  Interest is payable at 6.00% per annum, from and including June 20, 2016 to, but excluding June 30, 2021, payable semi-annually in arrears.  From and including June 30, 2021 to the maturity date or early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 487 basis points, payable quarterly in arrears.

The Company may, at its option, beginning with the interest payment date of June 30, 2021 and on any scheduled interest payment date thereafter redeem the subordinated notes, in whole or in part, upon not fewer than 30 nor greater than 60 days’ notice to holders, at a redemption price equal to 100% of the principal amount of the subordinated notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption. Any partial redemption will be made pro rata among all of the holders.

·                  Total assets increased to $1.48 billion compared to $1.35 billion at June 30, 2019 and December 31, 2018, respectively, an increase of $133.0 million, or 9.8%.

·                  Total loans, net of deferred fees, increased $278.7 million, or 29.2%, from June 30, 2018 to June 30, 2019. Nonperforming loans and loans past due 90 days or more as a percentage of total assets being 0.67% at June 30, 2019, compared to 0.08% at June 30, 2018.

·                  Total deposits increased $260.5 million, or 25.8%, from June 30, 2018 to June 30, 2019.

The annualized return on average assets for the each of the three months ended June 30, 2019 and 2018 was 1.13%. The annualized return on average equity for the three months ended June 30, 2019 and 2018 was 9.78% and 12.00%, respectively. Excluding merger-related expenses, the annualized return on average assets and annualized return on average equity for the three months ended June 30, 2019 was 1.13% and 9.81%, respectively. For a reconciliation of these performance metrics as adjusted for the merger-related expenses, please refer to “Reconciliation of Net Income (GAAP) to Operating Earnings (Non-GAAP)” below.

The annualized return on average assets for the six months ended June 30, 2019 and 2018 was 1.14% and 1.13%, respectively. The annualized return on average equity for the six months ended June 30, 2019 and 2018 was 9.76% and 12.02%, respectively. Excluding merger-related expenses, the annualized return on average assets and annualized return on average equity for the six months ended June 30, 2019 was 1.15% and 9.84%, respectively. For a reconciliation of these performance metrics as adjusted for the merger-related expenses, please refer to “Reconciliation of Net Income (GAAP) to Operating Earnings (Non-GAAP)” below.

(2)         The average yields for investment securities are reported on a fully taxable equivalent basis at a rate of 22.5% for 2019 and 21% for 2018.

Net interest income for the three months ended June 30, 2019 was $12.4 million, compared to $9.4 million for the three months ended June 30, 2018, an increase of $3.0 million, or 32.2%. The increase in net interest income was primarily a result of an increase in the volume of interest-earning assets related to organic growth during 2019 compared to 2018 in addition to the earning assets acquired from Colombo. The yield on interest-earning assets increased 39 basis points to 4.91% for the three months ended June 30, 2019, compared to 4.52% for the same period of 2018. Offsetting this increase in yield was a 44 basis point increase in the cost of interest-bearing liabilities, primarily reflecting increasing rates of interest-bearing deposits.

Average interest-earning assets increased by 29.5% to $1.38 billion for the three months ended June 30, 2019 compared to $1.07 billion for the three months ended June 30, 2018, which resulted in an increase in total interest income on a tax equivalent basis of $4.9 million, to $17.0 million for the three months ended June 30, 2019, compared to $12.1 million for the three months ended June 30, 2018. The increase in our earning assets was primarily driven by an increase in the average volume of loans receivable of $277.8 million, which contributed to an additional $3.4 million in interest income. This increase in interest income was enhanced by an increase in yields earned on the loan portfolio which increased interest income $1.1 million. Average balances of nonperforming loans, which consist of nonaccrual loans, are included in the net interest margin calculation and did not have a material impact on our net interest margin in 2019 and 2018.

Total average interest-bearing deposits increased $233.7 million to $963.9 million for the three months ended June 30, 2019 compared to $730.1 million for the three months ended June 30, 2018. Average noninterest-bearing deposits increased $36.5 million to $264.7 million for the three months ended June 30, 2019 compared to $228.2 million for the same period in 2018. The largest increase in average interest-bearing deposit balances was in our interest checking, which increased $106.0 million compared to 2018. Average wholesale deposits decreased $2.9 million to $88.1 million for the second quarter of 2019 compared to $91.0 million for the second quarter of 2018. This change in the mix of our interest-bearing liabilities, in addition to the increases in the targeted fed funds rate over the past 12 months, have contributed to the increase in our cost of interest-bearing deposits to 1.74% for the three months ended June 30, 2019, from 1.26% for the same period in 2018. The cost of other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, increased 32 basis points to 5.86% for the three months ended June 30, 2019, from 5.54% for the same period in 2018.

(2)           The average yields for investment securities are reported on a fully taxable equivalent basis at a rate of 22.5% for 2019 and 21% for 2018.

Net interest income for the six months ended June 30, 2019 was $24.1 million, compared to $18.1 million for the six months ended June 30, 2018, an increase of $6.0 million, or 33.2%. The increase in net interest income was primarily a result of an increase in the volume of interest-earning assets related to organic growth during 2019 compared to 2018 in addition to the earnings assets acquired from Colombo. The yield on interest-earning assets increased 44 basis points to 4.90% for the six months ended June 30, 2019, compared to 4.46% for the same period of 2018. Offsetting this increase in yield was a 44 basis point increase in the cost of interest-bearing liabilities, primarily reflecting increasing rates of interest-bearing deposits.

Total average interest-bearing deposits increased $200.7 million to $939.3 million for the six months ended June 30, 2019 compared to $738.6 million for the six months ended June 30, 2018. Average noninterest-bearing deposits increased $48.0 million to $249.5 million for the six months ended June 30, 2019 compared to $201.5 million for the same period in 2018. The largest increase in average interest-bearing deposit balances was in our interest checking, which increased $107.4 million compared to 2018. Average wholesale deposits decreased $17.6 million to $81.5 million for the six months ended June 30, 2019 compared to $99.1 million for the six months ended June 30, 2018. This change in the mix of our interest-bearing liabilities, in addition to the increases in the targeted fed funds rate over the past 12 months, have contributed to the increase in our cost of interest-bearing deposits to 1.70% for the six months ended June 30, 2019, from 1.21% for the same period in 2018. The cost of other borrowed funds, which include federal funds purchased, FHLB advances, and our subordinated notes, increased 22 basis points to 5.66% for the six months ended June 30, 2019, from 5.44% for the same period in 2018.

We recorded a provision for loan losses of $505 thousand for the three months ended June 30, 2019 compared to a provision for loan losses of $281 thousand for the same period of 2018, which primarily reflects our increase in loan origination volume while maintaining a low level of problem loans. For the six months ended June 30, 2019 and 2018, provisions for loan losses was $1.0 million and $639 thousand, respectively.  Specific reserves increased $33 thousand during the three months ended June 30, 2019 compared to the prior quarter end, a result of the liquidation analysis completed for newly impaired loans for the second quarter of 2019.  See “Asset Quality” below for additional information on the credit quality of the loan portfolio.  The allowance for loan losses at June 30, 2019 was $10.0 million compared to $9.2 million at December 31, 2018. Our allowance for loan loss ratio as a percent of total loans, net of deferred fees and costs, for each of June 30, 2019 and December 31, 2018 was 0.81%, reflecting our continued sound credit quality and stable economic environment.

Noninterest income includes service charges on deposits and loans, loan swap fee income, and income from our BOLI policies, and continues to supplement our operating results. Noninterest income for the three months ended June 30, 2019 and 2018 was $539 thousand and $363 thousand, respectively. Fee income from fees on loans, service charges on deposits, and other fee income was $429 thousand for the three months ended June 30, 2019, an increase of 68.2%, as compared to the same quarter of 2018, a result of an increase in customer relationships over the past year.

For the six months ended June 30, 2019 and 2018, noninterest income was $1.3 million and $748 thousand, respectively. Included in noninterest income for the six months ended June 30, 2019 is fee income from loan swap activity totaling $347 thousand compared to $35 thousand for the six months ended June 30, 2018.  We anticipate that loan swap fee income will decrease from prior levels as a result of the current yield curve environment.  Fee income from fees on loans, service charges on deposits, and other fee income was $1.1 million for the six months ended June 30, 2019, an increase of 100.8%, as compared to the same period of 2018, a result of fee income on loan swaps recorded during 2019 in addition to an increase in customer relationships over the past year.

We recorded a provision for income tax expense of $1.0 million for the three months ended June 30, 2019, compared to $539 thousand for the three months ended June 30, 2018. Our effective tax rate for the three months ended June 30, 2019 was 20.4%, compared to 14.9% for the same period of 2018. Our effective tax rate for the each of the three months ended June 30, 2019 and 2018 was less than the statutory rate because of discrete tax benefits recorded as a result of exercises of nonqualified stock options during 2019 and 2018.  For the six months ended June 2019 and 2018, provision for tax expense was $2.2 million and $1.1 million respectively. Our effective tax rate for the six months ended June 30, 2019 and 2018 was 21.6% and 15.0%, respectively.  For 2019, our effective tax rate is expected to be greater than the statutory federal rate as a result of our operating in additional states following the Colombo acquisition and minimal tax-exempt income.  Our effective tax rate for the six months ended June 30, 2018 is less than the statutory rate because of discrete tax benefits recorded as a result of exercises of nonqualified stock options during 2018.

At June 30, 2019, total assets were $1.48 billion, an increase of 9.8%, or $133.0 million, from $1.35 billion at December 31, 2018. Total loans receivable, net of deferred fees and costs, increased 8.6%, or $97.6 million, to $1.23 billion at June 30, 2019, from $1.14 billion at December 31, 2018. Total investment securities increased $10.9 million, or 8.7%, to $136.2 million at June 30, 2019, from $125.3 million at December 31, 2018. Total deposits increased 9.2%, or $106.9 million, to $1.27 billion at June 30, 2019, from $1.16 billion at December 31, 2018. From time to time, we may utilize other borrowed funds such as federal funds purchased and FHLB advances as an additional funding source for the Bank. At June 30, 2019 and December 31, 2018, we had no federal funds sold or FHLB advances outstanding.

Total loans receivable, net of deferred fees and costs, were $1.23 billion at June 30, 2019, an increase of $97.6 million, or 8.6%, compared to $1.14 billion at December 31, 2018. The increase in the loans receivable portfolio was a result of organic loan growth primarily in our commercial real estate and commercial construction portfolios.

Commercial real estate loans totaled $735.0 million at June 30, 2019, compared to $683.6 million at December 31, 2018, an increase of $51.4 million, or 7.5%.  Owner-occupied commercial real estate loans were $172.6 million at June 30, 2019 compared to $160.6 million at December 31, 2018.  Nonowner-occupied commercial real estate loans were $500.0 million at June 30, 2019 compared to $452.2 million at December 31, 2018.  Construction loans totaled $218.2 million at June 30, 2019, or 17.7% of total loans receivable.  Of the $218.2 million in construction loans, $53.0 million are collateralized by land and only $2.0 million are lot acquisition and development loans (which have a higher degree of credit risk than the remaining portion of the construction portfolio).  Our commercial real estate portfolio including construction loans is diversified by asset type and geographic concentration.  We plan to manage this portion of our portfolio in a disciplined manner.  We have comprehensive policies to monitor, measure, and mitigate our loan concentrations within this portfolio segment, including rigorous credit approval, monitoring and administrative practices.

Nonperforming assets, defined as nonaccrual loans, loans past due 90 days or more and still accruing, and OREO at June 30, 2019 were $13.9 million compared to $7.4 million at December 31, 2018. Nonperforming loans of $2.7 million are from our acquired loan portfolio.  Our ratio of nonperforming assets to total assets was 0.93% at June 30, 2019 compared to 0.55% at December 31, 2018. Nonperforming loans increased $6.8 million and are primarily commercial real estate loans, one of which is an acquired loan that has a specific reserve of $26 thousand at June 30, 2019.

We recorded annualized net charge-offs to average loans receivable of 0.03% for the six months ended June 30, 2019, all of which were related to loans we purchased for our consumer unsecured loan portfolio, and therefore were not originally underwritten by the Bank.   We recorded annualized net charge-offs to average loans receivable of 0.01% for the six months ended June 30, 2018. The following tables provide additional information on our asset quality for the periods presented.

While our loan growth has continued to be strong, unexpected changes in economic growth could adversely affect our loan portfolio, including causing increases in delinquencies and default rates, which would adversely impact our charge-offs and provision for loan losses. Deterioration in real estate values, employment data and household incomes may also result in higher credit losses for us. Also, in the ordinary course of business, we may also be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer. At June 30, 2019, our commercial real estate portfolio (including construction lending) was 77.1% of our total loan portfolio. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our business, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities and industries, may not function as we have anticipated.

Our investment securities portfolio is used as a source of income and liquidity. The investment portfolio consists of investment securities available-for-sale, investment securities held-to-maturity and certificates of deposit. Investment securities available-for-sale are those securities that we intend to hold for an indefinite period of time, but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability strategy, liquidity management or regulatory capital management. Investment securities held-to-maturity at each of June 30, 2019 and December 31, 2018 totaled $1.8 million, and are those securities that we have the intent and ability to hold to maturity and are carried at amortized cost. The fair value of our investment securities available-for-sale was $134.5 million at June 30, 2019, an increase of $10.9 million or 8.9%, from $123.5 million at December 31, 2018. We purchased $16.5 million in available-for-sale investment securities during the six months ended June 30, 2019 to help enhance our net interest margin by investing in higher yielding earning assets and reinvesting $8.9 million in cash flows provided by mortgage-backed securities redemptions.

Total deposits were $1.27 billion at June 30, 2019, an increase of $106.9 million, or 9.2%, from $1.16 billion at December 31, 2018. Noninterest-bearing deposits totaled $270.7 million at June 30, 2019, comprising 21.3% of total deposits and increased $37.4 million, or 16.0%, compared to December 31, 2018. At June 30, 2019, deposits from municipalities which are secured by a letter of credit issued by the FHLB, represented 10.6% of our total deposits. Deposits of any individual municipality are generally limited to 5% of total assets and in the aggregate, municipalities are limited to 18% of total assets. Some of these customers utilize our treasury management services, and all maintain deposits of varying types and maturities. As such, we believe that these customers are unlikely to abruptly terminate their relationship with us. However, in the event that we were to lose all or a significant portion of the deposits of one or more of these customers, we believe that we have adequate alternative sources of liquidity to enable us to replace these funds, although the cost of such replacement sources of liquidity could be higher.

Total shareholders’ equity to total assets for June 30, 2019 and December 31, 2018 was 11.5% and 11.7%, respectively. Tangible book value per share at June 30, 2019 and December 31, 2018 was $11.70 and $10.93, respectively. Total risk-based capital to risk-weighted assets for the Bank was 13.21% at June 30, 2019 compared to 14.02% at December 31, 2018. Accordingly, we were considered “well capitalized” for regulatory purposes at June 30, 2019 and December 31, 2018.

Liquid assets, which include cash and due from banks, federal funds sold and investment securities available for sale, totaled $178.8 million at June 30, 2019, or 12.0% of total assets. We held investments that are classified as held-to-maturity in the amount of $1.8 million at June 30, 2019. To maintain ready access to the Bank’s secured lines of credit, the Bank has pledged a portion of its commercial real estate and residential real estate loan portfolios to the FHLB and FRB. Additional borrowing capacity at the FHLB at June 30, 2019 was approximately $165.8 million. Borrowing capacity with the FRB was approximately $59.1 million at June 30, 2019. These facilities are subject to the FHLB and the Federal Reserve approving disbursement to us. In addition, we have investment securities of $134.5 million which are available to pledge at FHLB to provide additional borrowing capacity if needed. We also have unsecured federal funds purchased lines of $199.0 million available to us. We anticipate maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth and fully comply with all regulatory requirements.

At June 30, 2019, our asset/liability position was asset sensitive based on our interest rate sensitivity model. Our net interest income would increase by 1.1% in an up 100 basis point scenario and would increase by 3.0% in an up 400 basis point scenario over a one-year time frame. In the two-year time horizon, our net interest income would increase by 2.8% in an up 100 basis point scenario and would increase by 7.5% in an up 400 basis point scenario. At June 30, 2019 and December 31, 2018, all interest rate risk stress tests measures were within our board policy established limits in each of the increased rate scenarios.

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