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

Table of Contents

 

 

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 June 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)

 

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.

 

 

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

 

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

 

 

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

 

13,862,864 shares of common stock, par value $0.01 per share, outstanding as of August 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 June 30, 2019 (unaudited) and December 31, 2018		3
Consolidated Statements of Income For the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)		4
Consolidated Statements of Comprehensive Income For the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)		5
Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2019 and 2018 (unaudited)		6
Consolidated Statements of Changes in Stockholders’ Equity For the Three and Six Months Ended June 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		42
Item 3. Quantitative and Qualitative Disclosures About Market Risk		64
Item 4. Controls and Procedures		66
PART II — OTHER INFORMATION		67
Item 1. Legal Proceedings		67
Item 1A. Risk Factors		67
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		67
Item 3. Defaults Upon Senior Securities		67
Item 4. Mine Safety Disclosures		67
Item 5. Other Information		67
Item 6. Exhibits		67
SIGNATURES		69

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FVCBankcorp, Inc. and Subsidiary

 

Consolidated Balance Sheets

June 30, 2019 and December 31, 2018

(In thousands, except share data)

 

		June 30,			December 31,
		2019			2018 *
		(Unaudited)
Assets
Cash and due from banks		$	15,201		$	9,435
Interest-bearing deposits at other financial institutions		29,149			34,060
Securities held-to-maturity (fair value of $1.8 million and $1.7 million at June 30, 2019 and December 31, 2018, respectively)		1,761			1,761
Securities available-for-sale, at fair value		134,471			123,537
Restricted stock, at cost		5,379			5,299
Loans, net of allowance for loan losses of $10.0 million and $9.2 million at June 30, 2019 and December 31, 2018, respectively		1,224,376			1,127,584
Premises and equipment, net		2,049			2,271
Accrued interest receivable		4,653			4,050
Prepaid expenses		1,548			892
Deferred tax assets, net		7,857			8,591
Goodwill and intangibles, net		8,223			8,443
Bank owned life insurance (BOLI)		26,621			16,406
Other real estate owned (OREO)		3,866			4,224
Operating lease right-of-use assets		11,843			—
Other assets		7,603			5,023
Total assets		$	1,484,600		$	1,351,576
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing		$	270,711		$	233,318
Interest-bearing checking, savings and money market		606,716			583,736
Time deposits		391,947			345,386
Total deposits		$	1,269,374		$	1,162,440
Subordinated notes, net of issuance costs		$	24,447		$	24,407
Accrued interest payable		809			811
Operating lease liabilities		12,177			—
Accrued expenses and other liabilities		7,630			5,582
Total liabilities		$	1,314,437		$	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		13,839,772		13,712,615		138			137
Additional paid-in capital						$	125,021		$	123,882
Retained earnings						44,653			36,728
Accumulated other comprehensive income (loss), net						351			(2,411		)
Total stockholders’ equity						$	170,163		$	158,336
Total liabilities and stockholders’ equity						$	1,484,600		$	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 six months ended June 30, 2019 and 2018

(In thousands, except per share data)

(Unaudited)

 

		For the three months ended June 30,						For the six months ended June 30,
		2019			2018			2019			2018
Interest and Dividend Income
Interest and fees on loans		$	15,819		$	11,292		$	30,686		$	21,865
Interest and dividends on securities held-to-maturity		13			13			26			26
Interest and dividends on securities available-for-sale		886			673			1,777			1,330
Dividends on restricted stock		79			60			146			113
Interest on deposits at other financial institutions		193			32			315			77
Total interest and dividend income		$	16,990		$	12,070		$	32,950		$	23,411
Interest Expense
Interest on deposits		$	4,192		$	2,286		$	7,932		$	4,434
Interest on federal funds purchased		32			1			93			1
Interest on short-term debt		—			32			—			67
Interest on subordinated notes		395			395			790			790
Total interest expense		$	4,619		$	2,714		$	8,815		$	5,292
Net Interest Income		$	12,371		$	9,356		$	24,135		$	18,119
Provision for loan losses		505			281			1,020			639
Net interest income after provision for loan losses		$	11,866		$	9,075		$	23,115		$	17,480
Noninterest Income
Service charges on deposit accounts		$	229		$	152		$	411		$	293
BOLI income		110			108			215			219
Other fee income		200			103			651			236
Total noninterest income		$	539		$	363		$	1,277		$	748
Noninterest Expenses
Salaries and employee benefits		$	4,245		$	3,324		$	8,183		$	6,509
Occupancy and equipment expense		873			580			1,700			1,152
Data processing and network administration		343			285			782			565
State franchise taxes		426			296			848			592
Audit, legal and consulting fees		274			132			404			288
Merger and acquisition expense		16			397			83			397
Loan related expenses		99			61			168			118
FDIC insurance		111			117			222			225
Marketing, business development and advertising		131			94			289			180
Director fees		122			122			243			233
Postage, courier and telephone		41			48			94			100
Internet banking		101			75			208			142
Core deposit intangible amortization		97			5			198			10
Other operating expenses		397			286			758			571
Total noninterest expenses		$	7,276		$	5,822		$	14,180		$	11,082
Net income before income tax expense		$	5,129		$	3,616		$	10,212		$	7,146
Income tax expense		1,044			539			2,201			1,072
Net income		$	4,085		$	3,077		$	8,011		$	6,074
Earnings per share, basic		$	0.30		$	0.28		$	0.58		$	0.55
Earnings per share, diluted		$	0.28		$	0.26		$	0.54		$	0.50

 

See Notes to Consolidated Financial Statements.

 

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FVCBankcorp, Inc. and Subsidiary

 

Consolidated Statements of Comprehensive Income

For the three and six months ended June 30, 2019 and 2018

(In thousands)

(Unaudited)

 

		For the three months ended June 30,						For the six months ended June 30,
		2019			2018			2019			2018
Net income		$	4,085		$	3,077		$	8,011		$	6,074
Other comprehensive income (loss):
Unrealized gain (loss) on securities available for sale, net of tax expense of $367 and $734 for the three and six months June 30, 2019, respectively, net of tax benefit of $105 and $477 for the three and six months ended June 30, 2018, respectively.		1,382			(397		)	2,762			(1,796		)
Total other comprehensive income (loss)		$	1,382		$	(397	)	$	2,762		$	(1,796	)
Total comprehensive income		$	5,467		$	2,680		$	10,773		$	4,278

 

See Notes to Consolidated Financial Statements.

 

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FVCBankcorp, Inc. and Subsidiary

 

Consolidated Statements of Cash Flows

For the six months ended June 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		$	8,011		$	6,074
Depreciation		321			224
Provision for loan losses		1,020			639
Net amortization of premium of securities		178			281
Net amortization of deferred loan costs and purchase premiums		293			657
Net accretion of acquisition accounting adjustments		310			—
Amortization of subordinated debt issuance costs		40			40
Stock-based compensation expense		272			350
BOLI income		(215		)	(219		)
Core deposits intangible amortization		198			10
Changes in assets and liabilities:
Increase in accrued interest receivable, prepaid expenses and other assets		(3,415		)	(3,014		)
Increase (decrease) in accrued interest payable, accrued expenses and other liabilities		1,892			(230		)
Net cash provided by operating activities		$	8,905		$	4,812
Cash Flows From Investing Activities
Decrease (increase) in interest-bearing deposits at other financial institutions		$	4,911		$	(15,595	)
Purchases of securities available-for-sale		(16,535		)	(11,815		)
Proceeds from redemptions of securities available-for-sale		8,919			8,130
Net purchase of restricted stock		(80		)	(362		)
Net increase in loans		(98,573		)	(67,687		)
Proceeds from sale of OREO		358			—
Purchases of BOLI		(10,000		)	—
Purchases of premises and equipment, net		(99		)	(389		)
Net cash used in investing activities		$	(111,099	)	$	(87,718	)
Cash Flows From Financing Activities
Net increase in noninterest-bearing, interest-bearing checking, savings, and money market deposits		$	50,358		$	126,572
Net increase (decrease) in time deposits		56,734			(45,839		)
Common stock issuance		868			1,055
Net cash provided by financing activities		$	107,960		$	81,788
Net increase (decrease) in cash and cash equivalents		$	5,766		$	(1,118	)
Cash and cash equivalents, beginning of year		9,435			7,428
Cash and cash equivalents, end of year		$	15,201		$	6,310

 

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 six months ended June 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		—		—			—			6,074			—			6,074
Other comprehensive loss		—		—			—			—			(1,796		)	(1,796		)
Common stock issuance for options exercised		207		2			1,053			—			—			1,055
Stock-based compensation expense		—		—			350			—			—			350
Balance at June 30, 2018		11,076		$	111		$	75,411		$	31,933		$	(3,489	)	$	103,966
Balance at April 1, 2018		10,981		$	110		$	74,778		$	28,856		$	(3,092	)	$	100,652
Net income		—		—			—			3,077			—			3,077
Other comprehensive loss		—		—			—			—			(397		)	(397		)
Common stock issuance for options exercised		95		1			455			—			—			456
Stock-based compensation expense		—		—			178			—			—			178
Balance at June 30, 2018		11,076		$	111		$	75,411		$	31,933		$	(3,489	)	$	103,966
Balance at December 31, 2018		13,713		$	137		$	123,882		$	36,728		$	(2,411	)	$	158,336
Net income		—		—			—			8,011			—			8,011
Adoption of lease accounting standard		—		—			—			(86		)	—			(86		)
Other comprehensive income		—		—			—			—			2,762			2,762
Common stock issuance for options exercised		127		1			867			—			—			868
Stock-based compensation expense		—		—			272			—			—			272
Balance at June 30, 2019		13,840		$	138		$	125,021		$	44,653		$	351		$	170,163
Balance at April 1, 2019		13,755		$	138		$	124,318		$	40,568		$	(1,031	)	$	163,993
Net income		—		—			—			4,085			—			4,085
Other comprehensive income		—		—			—			—			1,382			1,382
Common stock issuance for options exercised		85		—			596			—			—			596
Stock-based compensation expense		—		—			107			—			—			107
Balance at June 30, 2019		13,840		$	138		$	125,021		$	44,653		$	351		$	170,163

 

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. The amendments in this ASU are effective for U.S. Securities and Exchange Commission (SEC) filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Based on FASB’s July 17, 2019 meeting, an exposure draft is expected that, once finalized, could change implementation dates for many companies. 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 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

 

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Notes to Unaudited Consolidated Financial Statements

(Continued)

 

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 June 30, 2019 and December 31, 2018, are as follows:

 

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Notes to Unaudited Consolidated Financial Statements

(Continued)

 

		June 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		$	5		$	—		$	269
Securities of U.S. government and federal agencies		1,497			3			—			1,500
Total Held-to-maturity Securities		$	1,761		$	8		$	—		$	1,769
Available-for-sale
Securities of U.S. government and federal agencies		$	1,000		$	—		$	(6	)	$	994
Securities of state and local municipalities tax exempt		3,671			62			—			3,733
Securities of state and local municipalities taxable		2,309			1			(28		)	2,282
Corporate bonds		5,000			60			(89		)	4,971
Certificates of deposit		245			—			—			245
SBA pass-through securities		179			—			(4		)	175
Mortgage-backed securities		94,362			851			(501		)	94,712
Collateralized mortgage obligations		27,354			271			(266		)	27,359
Total Available-for-sale Securities		$	134,120		$	1,245		$	(894	)	$	134,471

 

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Notes to Unaudited Consolidated Financial Statements

(Continued)

 

		December 31, 2018
					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	)	$	258
Securities of U.S. government and federal agencies		1,497			—			(20		)	1,477
Total Held-to-maturity Securities		$	1,761		$	—		$	(26	)	$	1,735
Available-for-sale
Securities of U.S. government and federal agencies		$	1,000		$	—		$	(44	)	$	956
Securities of state and local municipalities tax exempt		3,678			—			(39		)	3,639
Securities of state and local municipalities taxable		2,378			—			(70		)	2,308
Corporate bonds		5,000			92			(79		)	5,013
Certificates of deposit		245			—			(1		)	244
SBA pass-through securities		200			—			(5		)	195
Mortgage-backed securities		90,234			94			(2,291		)	88,037
Collateralized mortgage obligations		23,945			10			(810		)	23,145
Total Available-for-sale Securities		$	126,680		$	196		$	(3,339	)	$	123,537

 

The Company had no securities pledged with the Federal Reserve Bank at June 30, 2019 and December 31, 2018, respectively.  Securities of $4.5 million were pledged with the Treasury Board of Virginia at the Community Bankers’ Bank at June 30, 2019.  There was $8.1 million in such securities pledged as of December 31, 2018.

 

The following table shows fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2019 and December 31, 2018, respectively. The reference point for determining when securities are in an unrealized loss position is month-end. Therefore, it is possible that a security’s market value exceeded its amortized cost on other days during the

 

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