FVCBankcorp, Inc. - Quarter Report: 2019 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2019

 

or

 

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                          to

 

Commission File Number:  001-38647

 

FVCBankcorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

(703) 436-3800

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company x
	Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes  o   No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

13,875,833 shares of common stock, par value $0.01 per share, outstanding as of November 7, 2019

 

 

Table of Contents

 

FVCBankcorp, Inc.

 

INDEX TO FORM 10-Q

 

PART I — FINANCIAL INFORMATION	3
Item 1. Financial Statements:	3
Consolidated Balance Sheets At September 30, 2019 (unaudited) and December 31, 2018	3
Consolidated Statements of Income For the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	4
Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	5
Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2019 and 2018 (unaudited)	6
Consolidated Statements of Changes in Stockholders’ Equity For the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3. Quantitative and Qualitative Disclosures About Market Risk	69
Item 4. Controls and Procedures	71
PART II — OTHER INFORMATION	72
Item 1. Legal Proceedings	72
Item 1A. Risk Factors	72
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3. Defaults Upon Senior Securities	72
Item 4. Mine Safety Disclosures	72
Item 5. Other Information	72
Item 6. Exhibits	72
SIGNATURES	74

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FVCBankcorp, Inc. and Subsidiary

 

Consolidated Balance Sheets

September 30, 2019 and December 31, 2018

(In thousands, except share data)

 

						September 30,			December 31,
						2019			2018 *
						(Unaudited)
Assets
Cash and due from banks						$	19,424		$	9,435
Interest-bearing deposits at other financial institutions						92,986			34,060
Securities held-to-maturity (fair value of $0.3 million and $1.7 million at September 30, 2019 and December 31, 2018, respectively)						264			1,761
Securities available-for-sale, at fair value						136,268			123,537
Restricted stock, at cost						6,017			5,299
Loans, net of allowance for loan losses of $10.1 million and $9.2 million at September 30, 2019 and December 31, 2018, respectively						1,233,337			1,127,584
Premises and equipment, net						2,029			2,271
Accrued interest receivable						4,279			4,050
Prepaid expenses						1,165			892
Deferred tax assets, net						7,673			8,591
Goodwill and intangibles, net						8,119			8,443
Bank owned life insurance (BOLI)						26,820			16,406
Other real estate owned (OREO)						3,866			4,224
Operating lease right-of-use assets						13,597			—
Other assets						9,352			5,023
Total assets						$	1,565,196		$	1,351,576
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing						$	294,825		$	233,318
Interest-bearing checking, savings and money market						622,820			583,736
Time deposits						400,075			345,386
Total deposits						$	1,317,720		$	1,162,440
FHLB advances						$	15,000		$	—
Subordinated notes, net of issuance costs						24,467			24,407
Accrued interest payable						924			811
Operating lease liabilities						13,971			—
Accrued expenses and other liabilities						18,045			5,582
Total liabilities						$	1,390,127		$	1,193,240
Commitments and Contingent Liabilities
Stockholders’ Equity

 

		2019		2018
Preferred stock, $0.01 par value
Shares authorized		1,000,000		1,000,000
Shares issued and outstanding		—		—		—			—
Common stock, $0.01 par value
Shares authorized		20,000,000		20,000,000
Shares issued and outstanding		13,874,776		13,712,615		139			137
Additional paid-in capital						$	125,483		$	123,882
Retained earnings						48,746			36,728
Accumulated other comprehensive income (loss), net						701			(2,411		)
Total stockholders’ equity						$	175,069		$	158,336
Total liabilities and stockholders’ equity						$	1,565,196		$	1,351,576

 

See Notes to Consolidated Financial Statements.

 

* Derived from audited consolidated financial statements.

 

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FVCBankcorp, Inc. and Subsidiary

 

Consolidated Statements of Income

For the three and nine months ended September 30, 2019 and 2018

(In thousands, except per share data)

(Unaudited)

 

		For the three months ended September 30,						For the nine months ended September 30,
		2019			2018			2019			2018
Interest and Dividend Income
Interest and fees on loans		$	15,915		$	11,977		$	46,601		$	33,841
Interest and dividends on securities held-to-maturity		2			13			28			39
Interest and dividends on securities available-for-sale		832			661			2,609			1,992
Dividends on restricted stock		88			57			234			170
Interest on deposits at other financial institutions		169			165			485			242
Total interest and dividend income		$	17,006		$	12,873		$	49,957		$	36,284
Interest Expense
Interest on deposits		$	4,423		$	2,584		$	12,355		$	7,018
Interest on federal funds purchased		48			16			141			17
Interest on short-term debt		48			—			48			67
Interest on subordinated notes		395			395			1,185			1,185
Total interest expense		$	4,914		$	2,995		$	13,729		$	8,287
Net Interest Income		$	12,092		$	9,878		$	36,228		$	27,997
Provision for loan losses		235			351			1,255			990
Net interest income after provision for loan losses		$	11,857		$	9,527		$	34,973		$	27,007
Noninterest Income
Service charges on deposit accounts		$	240		$	158		$	651		$	452
Gains on calls of securities held-to-maturity		3			—			3			—
BOLI income		198			110			414			329
Other fee income		239			480			888			714
Total noninterest income		$	680		$	748		$	1,956		$	1,495
Noninterest Expenses
Salaries and employee benefits		$	4,349		$	3,491		$	12,533		$	10,000
Occupancy and equipment expense		882			591			2,582			1,743
Data processing and network administration		414			321			1,196			886
State franchise taxes		424			296			1,272			888
Audit, legal and consulting fees		230			147			634			434
Merger and acquisition expense		51			274			133			671
Loan related expenses		125			61			293			179
FDIC insurance		—			133			222			358
Marketing, business development and advertising		121			89			410			269
Director fees		126			121			369			353
Postage, courier and telephone		57			50			151			150
Internet banking		112			83			320			225
Core deposit intangible amortization		95			5			293			16
Other operating expenses		377			286			1,135			858
Total noninterest expenses		$	7,363		$	5,948		$	21,543		$	17,030
Net income before income tax expense		$	5,174		$	4,327		$	15,386		$	11,472
Income tax expense		1,081			942			3,282			2,013
Net income		$	4,093		$	3,385		$	12,104		$	9,459
Earnings per share, basic		$	0.30		$	0.30		$	0.88		$	0.85
Earnings per share, diluted		$	0.28		$	0.27		$	0.82		$	0.78

 

See Notes to Consolidated Financial Statements.

 

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FVCBankcorp, Inc. and Subsidiary

 

Consolidated Statements of Comprehensive Income

For the three and nine months ended September 30, 2019 and 2018

(In thousands)

(Unaudited)

 

		For the three months ended September 30,						For the nine months ended September 30,
		2019			2018			2019			2018
Net income		$	4,093		$	3,385		$	12,104		$	9,459
Other comprehensive income (loss):
Unrealized gain (loss) on securities available for sale, net of tax expense of $214 and $946 for the three and nine months September 30, 2019, respectively, net of tax benefit of $144 and $621 for the three and nine months ended September 30, 2018, respectively.		456			(540		)	3,218			(2,336		)
Unrealized loss on interest rate swaps, net of tax benefit of $28 and $28 for the three and nine months ended September 30, 2019.		(106		)	—			(106		)
Total other comprehensive income (loss)		$	350		$	(540	)	$	3,112		$	(2,336	)
Total comprehensive income		$	4,443		$	2,845		$	15,216		$	7,123

 

See Notes to Consolidated Financial Statements.

 

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FVCBankcorp, Inc. and Subsidiary

 

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2019 and 2018

(In thousands)

(Unaudited)

 

		2019			2018
Cash Flows From Operating Activities
Reconciliation of net income to net cash provided by operating activities:
Net income		$	12,104		$	9,459
Depreciation		479			340
Provision for loan losses		1,255			990
Net amortization of premium of securities		277			419
Net amortization of deferred loan costs and purchase premiums		494			491
Net accretion of acquisition accounting adjustments		339			—
Gain on calls of held-to-maturity securities		(3		)	—
Amortization of subordinated debt issuance costs		60			60
Stock-based compensation expense		470			531
BOLI income		(414		)	(329		)
Core deposits intangible amortization		293			16
Changes in assets and liabilities:
Increase in accrued interest receivable, prepaid expenses and other assets		(3,774		)	(3,771		)
Increase in accrued interest payable, accrued expenses and other liabilities		3,541			837
Net cash provided by operating activities		$	15,121		$	9,043
Cash Flows From Investing Activities
Maturities of certificates of deposits purchased for investment		$	245		$	245
Increase in interest-bearing deposits at other financial institutions		(58,926		)	(31,257		)
Purchases of securities available-for-sale		(16,535		)	(11,815		)
Proceeds from maturities and calls of securities held-to-maturity		1,500			—
Proceeds from maturities and calls of securities available-for-sale		750			—
Proceeds from redemptions of securities available-for-sale		14,859			12,776
Net purchase of restricted stock		(718		)	(362		)
Net increase in loans		(108,012		)	(90,257		)
Proceeds from sale of OREO		358			—
Purchases of BOLI		(10,000		)	—
Purchases of premises and equipment, net		(237		)	(524		)
Net cash used in investing activities		$	(176,716	)	$	(121,194	)
Cash Flows From Financing Activities
Net increase in noninterest-bearing, interest-bearing checking, savings, and money market deposits		$	100,591		$	155,586
Net increase (decrease) in time deposits		54,860			(89,763		)
Increase in federal funds purchased		—			15,000
Net increase in FHLB advances		15,000			—
Common stock issuance		1,133			32,839
Net cash provided by financing activities		$	171,584		$	113,662
Net increase in cash and cash equivalents		$	9,989		$	1,511
Cash and cash equivalents, beginning of year		9,435			7,428
Cash and cash equivalents, end of year		$	19,424		$	8,939

 

See Notes to Consolidated Financial Statements.

 

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FVCBankcorp, Inc. and Subsidiary

 

Consolidated Statements of Changes in Stockholders’ Equity

For the three and nine months ended September 30, 2019 and 2018

(In thousands)

(Unaudited)

 

													Accumulated
							Additional						Other
				Common			Paid-in			Retained			Comprehensive
		Shares		Stock			Capital			Earnings			Income (Loss)			Total
Balance at December 31, 2017		10,869		$	109		$	74,008		$	25,859		$	(1,693	)	$	98,283
Net income		—		—			—			9,459			—			9,459
Other comprehensive loss		—		—			—			—			(2,336		)	(2,336		)
Common stock issuance at $20 per share		1,750		18			31,737			—			—			31,755
Common stock issuance for options exercised		212		2			1,082			—			—			1,084
Stock-based compensation expense		—		—			531			—			—			531
Balance at September 30, 2018		12,831		$	129		$	107,358		$	35,318		$	(4,029	)	$	138,776
Balance at July 1, 2018		11,076		$	111		$	75,411		$	31,933		$	(3,489	)	$	103,966
Net income		—		—			—			3,385			—			3,385
Other comprehensive loss		—		—			—			—			(540		)	(540		)
Common stock issuance at $20 per share		1,750		18			31,737			—			—			31,755
Common stock issuance for options exercised		5		—			29			—			—			29
Stock-based compensation expense		—		—			181			—			—			181
Balance at September 30, 2018		12,831		$	129		$	107,358		$	35,318		$	(4,029	)	$	138,776
Balance at December 31, 2018		13,713		$	137		$	123,882		$	36,728		$	(2,411	)	$	158,336
Net income		—		—			—			12,104			—			12,104
Adoption of lease accounting standard		—		—			—			(86		)	—			(86		)
Other comprehensive income		—		—			—			—			3,112			3,112
Common stock issuance for options exercised		162		2			1,131			—			—			1,133
Stock-based compensation expense		—		—			470			—			—			470
Balance at September 30, 2019		13,875		$	139		$	125,483		$	48,746		$	701		$	175,069
Balance at July 1, 2019		13,840		$	138		$	125,021		$	44,653		$	351		$	170,163
Net income		—		—			—			4,093			—			4,093
Other comprehensive income		—		—			—			—			350			350
Common stock issuance for options exercised		35		1			264			—			—			265
Stock-based compensation expense		—		—			198			—			—			198
Balance at September 30, 2019		13,875		$	139		$	125,483		$	48,746		$	701		$	175,069

 

See Notes to Consolidated Financial Statements.

 

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Notes to Unaudited Consolidated Financial Statements

 

Note 1.                                 Organization and Summary of Significant Accounting Policies

 

Organization

 

FVCBankcorp, Inc. (the “Company”), a Virginia corporation, was formed in 2015 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company is headquartered in Fairfax, Virginia. The Company conducts its business activities through the branch offices of its wholly owned subsidiary bank, FVCbank (the “Bank”). The Company exists primarily for the purposes of holding the stock of its subsidiary, the Bank.

 

The Bank was organized under the laws of the Commonwealth of Virginia to engage in a general banking business serving the Washington, D.C. metropolitan area. The Bank commenced regular operations on November 27, 2007 and is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation. It is subject to the regulations of the Federal Reserve System and the State Corporation Commission of Virginia.  Consequently, it undergoes periodic examinations by these regulatory authorities.

 

On October 12, 2018, the Company announced the completion of its acquisition of Colombo Bank (“Colombo”). Colombo, which was headquartered in Rockville, Maryland, merged into FVCbank effective October 12, 2018 adding five banking locations in Washington, D.C., and Montgomery County and the City of Baltimore in Maryland. Pursuant to the terms of the merger agreement, holders of shares of Colombo common stock received 0.002217 shares of the Company’s common stock and $0.053157 in cash for each share of Colombo common stock held immediately prior to the effective date of the Merger, plus cash in lieu of fractional shares at a rate equal to $19.614 per share of FVCB common stock.  Holders of an aggregate of 35,002 shares of Colombo common stock who individually owned fewer than 45,086 shares of Colombo common stock after aggregation of all shares held in the same name, made a timely election to receive only cash in an amount equal to $0.096649 per share of Colombo common stock. As a result of the merger, 763,051 shares of the Company’s common stock were issued in exchange for outstanding shares of Colombo common stock.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements; however, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s audited financial statements for the year ended December 31, 2018. Certain prior period amounts have been reclassified to conform to current period presentation.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company. All material intercompany balances and transactions have been eliminated in consolidation.

 

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Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Significant Accounting Policies

 

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. At the FASB’s October 16, 2019 meeting, the Board affirmed its decision to amend the effective date of this ASU for many companies.   Public business entities that are SEC filers, excluding those meeting the smaller reporting company definition, will retain the initial required implementation date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  All other entities will be required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company has identified a third party vendor to assist in the measurement of expected credit losses under this standard. The implementation committee has completed the data collection process, validated the data inputs, and is in the initial phases of evaluating various allowance methodologies for certain loan segments within the Company’s loan portfolio. The Company is currently evaluating the implementation of ASU 2016-13 due to the change in implementation dates for smaller reporting companies included in the FASB’s Exposure Draft.

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the

 

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Notes to Unaudited Consolidated Financial Statements

(Continued)

 

narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.  Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

 

In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.”  This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various TRG Meetings.  The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.  Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-04 will have on its consolidated financial statements.

 

In May 2019, the FASB issued ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief.”  The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326.  The fair value option election does not apply to held-to-maturity debt securities.  An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings.  The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the balance sheet.  Early adoption is permitted.  The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements.

 

Note 2.           Securities

 

Amortized cost and fair values of securities held-to-maturity and securities available-for-sale as of September 30, 2019 and December 31, 2018, are as follows:

 

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Notes to Unaudited Consolidated Financial Statements

(Continued)

 

		September 30, 2019
					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
(In thousands)		Cost			Gains			(Losses)			Value
Held-to-maturity
Securities of state and local municipalities tax exempt		$	264		$	6		$	—		$	270
Total Held-to-maturity Securities		$	264		$	6		$	—		$	270
Available-for-sale
Securities of U.S. government and federal agencies		$	1,000		$	—		$	(2	)	$	998
Securities of state and local municipalities tax exempt		3,667			70			—			3,737
Securities of state and local municipalities taxable		1,514			—			(20		)	1,494
Corporate bonds		5,000			56			(86		)	4,970
SBA pass-through securities		163			—			(2		)	161
Mortgage-backed securities		97,565			1,054			(274		)	98,345
Collateralized mortgage obligations		26,338			362			(137		)	26,563
Total Available-for-sale Securities		$	135,247		$	1,542		$	(521	)	$	136,268

 

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