Classified in: Business, Covid-19 virus
Subject: EARNINGS

FVCBankcorp, Inc. Announces Third Quarter 2020 Earnings

FVCBankcorp, Inc. (NASDAQ:FVCB) (the "Company") today reported third quarter 2020 net income of $3.9 million, or $0.28 diluted earnings per share, compared to $4.1 million, or $0.28 diluted earnings per share, for the quarter ended September 30, 2019. Net revenues, which includes net interest income plus noninterest income, for the three months ended September 30, 2020 were $14.4 million, an increase of $1.6 million, from $12.8 million for the year ago quarter ended September 30, 2019. For the nine months ended September 30, 2020, the Company reported net income of $10.5 million, or $0.74 diluted earnings per share, compared to $12.1 million or $0.82 diluted earnings per share, for the same period of 2019. The decrease in net income was primarily attributable to an increase in loan loss provisioning of $3.3 million year-over-year. Net revenues for the nine months ended September 30, 2020 were $40.7 million, an increase of $2.5 million, from $38.2 million for the nine months ended September 30, 2019.

The Company believes the reporting of earnings to exclude branch closing impairment charges, gains on sales of securities, and merger and acquisition expenses are more reflective of the Company's operating performance ("Operating Earnings"). Operating Earnings is not a measurement that is in accordance with generally accepted accounting principles in the United States ("GAAP"). Operating Earnings for the three months ended September 30, 2020 were $3.8 million, or $0.28 diluted earnings per share, compared to $4.1 million, or $0.28 diluted earnings per share for the three months ended September 30, 2019. Operating Earnings for the nine months ended September 30, 2020 were $10.9 million, or $0.77 diluted earnings per share, compared to $12.2 million, or $0.82 diluted earnings per share for the nine months ended September 30, 2019. A reconciliation of Operating Earnings can be found in the tables below.

Both the three and nine month periods ended September 30, 2020 have been impacted by elevated provision for loan losses expense. In addition, during the second quarter of 2020, the Company announced the closure of two branch locations which resulted in one-time branch closure costs of $676 thousand ($534 thousand after tax). The Company anticipates realizing the benefits of annualized cost savings of approximately $350 thousand related to occupancy expense beginning with the fourth quarter of 2020. Other annual savings of approximately $250 thousand include salaries and benefits expense as the employees for each of these locations have filled current vacant positions within the Company, reducing the need to hire additional personnel.

Third Quarter Selected Highlights

• Increased Pre-Tax Pre-Provision Income. For the three months ended September 30, 2020 and 2019, pre-tax pre-provision income (which also excludes branch closure costs and gains on sales of securities) was $6.6 million and $5.4 million, respectively, an increase of $1.2 million or 21.6%. On a linked quarter basis, pre-tax pre-provision income was $6.1 million for the three months ended June 30, 2020. Pre-tax pre-provision return on average assets for the three months ended September 30, 2020 and 2019 was 1.50% and 1.46%, respectively. For the nine months ended September 30, 2020 and 2019, pre-tax pre-provision income was $18.2 million and $16.6 million, respectively, an increase of $1.6 million. A reconciliation of pre-tax pre-provision, a non-GAAP financial measure, can be found in the tables below.
• Strong Core Deposit Growth. Core deposits, which excludes wholesale deposits, increased $233.6 million to $1.42 billion at September 30, 2020, an increase of 19.7%, from December 31, 2019. Noninterest-bearing deposits represent 30.4% of core deposits at September 30, 2020.
• Improved Net Interest Margin. Net interest margin increased 14 basis points to 3.30% for the quarter ended September 30, 2020 compared to 3.16% for the quarter ended June 30, 2020. Excluding the impact of Paycheck Protection Program ("PPP") loans, credit mark accretion, and excess liquidity during the third quarter of 2020, net interest margin for the three months ended September 30, 2020 would have been 3.36%. Cost of deposits, which include noninterest-bearing deposits, for the third quarter of 2020 was 0.73%, compared to 1.42% for the third quarter of 2019, a decrease of 69 basis points, or 48.6%.
• Significant Decrease in Payment Deferred Loans. At October 20, 2020, approximately 2.6% of the total loan portfolio, or $39.5 million, continue under COVID-19 deferrals. Approximately $20.4 million of current deferrals are in their second 90-day payment deferral period, of which approximately 76.7% are making interest-only payments. This compares to modified loans of $360.2 million, or 24.4% of the total loan portfolio, reported at June 30, 2020.
• Reduced Levels of Past Due and Nonperforming loans. Loans past due 90 days or more and still accruing totaled $311 thousand at September 30, 2020, compared to $1.4 million at June 30, 2020. Nonperforming loans and loans past due 90 days or more and still accruing were $8.0 million, or 0.45% of total assets, at September 30, 2020, compared to $10.7 million, or 0.70% of total assets at December 31, 2019, and $8.5 million, or 0.48% of total assets, at June 30, 2020.
• Improved Efficiency Ratio. Efficiency ratio for the three months ended September 30, 2020 was 53.9%, an improvement from 57.7% for the year ago quarter ended September 30, 2020.

"We are extremely pleased with our third quarter results, particularly the improvement in our net interest margin, which was a result of our efforts to reduce deposit costs by almost 40% year-over-year. We are cautiously optimistic with the results of our loan payment deferral program as we see just over 5% of loans request a second 90-day deferral period; and 77% of those loans are making interest-only payments. We will continue to work with our customers to assist them through this pandemic and help them navigate the economic impact that they are experiencing," stated David W. Pijor, Chairman and CEO.

COVID-19 Pandemic Impact to Loan Portfolio

As a result of the COVID-19 pandemic, the Company implemented loan payment deferral programs to allow customers who were required to close or reduce business operations to defer loan principal and interest payments primarily for 90 days. During the second quarter of 2020, the Company modified 277 loans for a total outstanding principal balance of $360.2 million, or 24.4% of the total loan portfolio. At October 20, 2020, remaining payment deferred loans totaled $39.5 million, or 2.6% of the total loan portfolio, comprising 26 loans. For those commercial real estate loans with approved payment deferrals, these loans are collateralized and well secured. The table below shows the number of loans still deferring payments and their respective outstanding loan balances by asset class.

Previously modified hotel loans totaling $45.9 million have all resumed contractual loan payments with the exception of one loan totaling $9.7 million, which has moved to the watchlist. The Company is working with the borrower to determine the best course of action. Loans expected to resume payments above are based on conversations with the borrowers and analysis of their financial condition. Loans under further analysis and review are being closely monitored by the Company to determine if further modifications are warranted and to review all options available to the Company.

The Company is closely and proactively monitoring the effects of the pandemic on its loan and deposit customers and is focused on assessing risks within the loan portfolio and working with customers to minimize losses. The Company considers pandemic impacted loans to include commercial real estate loans to hotels, churches, and certain retail and special purpose asset classes. During its assessment of the allowance for loan losses, the Company addressed the credit risks associated with these pandemic impacted segments and those loan customers that have requested payment deferrals.

The Company believes that as a result of its conservative underwriting discipline at loan origination coupled with the active dialogue the Company has had with its borrowers, the Company has the ability and necessary flexibility to assist its customers through this pandemic.

Balance Sheet

Total assets increased to $1.79 billion at September 30, 2020 compared to $1.54 billion at December 31, 2019, an increase of $256.9 million, or 16.7%. Year-over-year, total assets increased $229.0 million, or 14.6% from $1.57 billion at September 30, 2019.

Loans receivable, net of deferred fees, totaled $1.50 billion at September 30, 2020, compared to $1.27 billion at December 31, 2019, an increase of $227.1 million, or 17.9%, and compared to $1.24 billion at September 30, 2019, a year-over-year increase of $254.2 million, or 20.5%. PPP loans originated and funded, net of fees, totaled $170.3 million during the quarter assisting both existing and new clients. During the third quarter of 2020, loan originations, excluding PPP loans, totaled approximately $64.0 million, of which $32.0 million funded during the quarter. For the year-to-date 2020, net loan growth, excluding PPP loans, is $45.6 million, or 3.6%.

Investment securities decreased $30.4 million to $111.2 million at September 30, 2020, compared to $141.6 million at December 31, 2019. The Company sold $3.0 million in mortgage-backed securities available-for-sale, recording gains of $44 thousand during the third quarter of 2020. These securities were sold as they had larger premiums susceptible to prepayment risk, decreasing future interest income. Year-over-year, investment securities decreased $25.3 million, or 18.6%, from $136.5 million at September 30, 2019.

Total deposits increased to $1.51 billion at September 30, 2020 compared to $1.29 billion at December 31, 2019, an increase of $228.6 million, or 17.8%. Year-over-year, total deposits increased $196.6 million, or 14.9%, from $1.32 billion at September 30, 2019. Core deposits, which represent total deposits less wholesale deposits, increased $233.6 million, or 19.7%, to $1.42 billion at September 30, 2020 compared to $1.19 billion at December 31, 2019, and increased $174.6 million, or 14.0% from $1.24 billion at September 30, 2019. The increase in core deposits reflects new customer relationships as well as growth in existing customer accounts and, to a lesser extent, deposits remaining from PPP funds. Wholesale deposits totaled $95.0 million, or 6.3% of total deposits at September 30, 2020, a decrease of $5.0 million from December 31, 2019. Noninterest-bearing deposits increased $125.1 million, or 40.9%, to $431.3 million at September 30, 2020 from $306.2 million at December 31, 2019, and represented 28.5% of total deposits, or 30.4% of core deposits, at September 30, 2020.

The capital ratios at the Company's bank subsidiary, FVCbank, remain well-capitalized at September 30, 2020 with a leverage ratio of 11.02%.

Income Statement

Net income for the three months ended September 30, 2020 was $3.9 million, compared to $4.1 million for the same period of 2019, and $2.9 million for the quarter ended June 30, 2020. For the nine months ended September 30, 2020, net income was $10.5 million, compared to $12.1 million for the same period of 2019. Both the three and nine months' periods of 2020 were impacted by increased provision for loan losses.

Net interest income totaled $13.6 million, an increase of $1.5 million, or 12.4%, for the quarter ended September 30, 2020, compared to the year ago quarter, and increased by $900 thousand, or 7.1%, compared to the second quarter of 2020, a result of significant decreases in the cost of deposits. Interest expense on deposits decreased $1.7 million for the three months ended September 30, 2020 compared to the same period of 2019, and decreased $470 thousand compared to the three months ended June 30, 2020. The impact to interest income from the accretion of loan marks on acquired loans was $469 thousand and $43 thousand for the three months ended September 30, 2020 and 2019, respectively. The increase in income related to loan mark accretion was a result of improved cash flows for an acquired loan during the three months ended September 30, 2020. In addition, net interest income for the three months ended September 30, 2020 benefited from PPP loan origination, which contributed $981 thousand to interest income. Remaining net deferred fees related to PPP originations total $3.6 million and are being recognized in interest income over the remaining lives of the PPP loans, or sooner upon PPP loan forgiveness or payment. For the nine months ended September 30, 2020 and 2019, net interest income was $38.5 million and $36.2 million, respectively, an increase of $2.3 million, year-over-year.

The Company's net interest margin for the three months ended September 30, 2020 was 3.30%, compared to 3.41% for the year ago quarter ended September 30, 2019, a decrease of 11 basis points, impacted by the decreases in the targeted fed funds rate of 225 basis points since August 2019. On a linked quarter basis, net interest margin increased 14 basis points from 3.16% for the three months ended June 30, 2020. Excluding the impact of PPP loans (a decrease of 11 basis points), credit mark accretion (an increase of 9 basis points), and excess liquidity (a decrease of 6 basis points) during the third quarter of 2020, net interest margin for the three months ended September 30, 2020 would have been 3.36%. The average yield for the loan portfolio for the third quarter of 2020 was 4.56% (excluding PPP loans) compared to 5.13% for the year ago quarter, and 4.77% for the quarter ended June 30, 2020. Cost of interest-bearing deposits for the third quarter of 2020 was 1.01%, compared to 1.82% for the third quarter of 2019, a decrease of 81 basis points, or 44.5%, primarily as a result of the Company having aggressively decreased its deposit rates during the second and third quarters in order to offset the repricing of the variable rate loan portfolio.

Noninterest income totaled $770 thousand and $680 thousand for the quarters ended September 30, 2020 and 2019, respectively. Fee income from loans was $35 thousand for the quarter ended September 30, 2020, compared to $101 thousand for the same period of 2019. Service charges on deposit accounts and other fee income totaled $411 thousand for the third quarter of 2020, compared to $378 thousand from the year ago quarter. Income from bank-owned life insurance increased $82 thousand to $280 thousand for the three months ended September 30, 2020, compared to $198 thousand for the same period of 2019, primarily as a result of purchasing additional policies during 2019. Noninterest income for the year-to-date period ended September 30, 2020 was $2.2 million, compared to $2.0 million for the 2019 year-to-date period, an increase of $195 thousand, or 10.0%, which was primarily driven by an increase in service charges on deposit accounts and other fee income, and income from bank-owned life insurance, and offset by fair value losses on loans held for sale of $451 thousand recorded during the first quarter of 2020 before these loans were transferred to the held for investment portfolio.

Noninterest expense totaled $7.7 million for the quarter ended September 30, 2020, compared to $7.4 million for the same three-month period of 2019, an increase of $383 thousand, or 5.2%, which is in line with the Company's targeted expense growth for 2020. The increase in noninterest expense compared to the year ago quarter was primarily related to an increase in data processing and network administration expense of $124 thousand, which is related to planned network infrastructure upgrades for 2020, an increase of $154 thousand for loan related expenses, and an increase in professional fees of $73 thousand. The Company has invested in technology in its efforts to reduce certain expenses where possible. Noninterest expense for the third quarter of 2020 increased $424 thousand, or 5.8%, when compared to noninterest expense of $7.3 million (excluding branch closure costs of $676 thousand) recorded during the second quarter of 2020. Increases in noninterest expense during the third quarter of 2020 as compared to the second quarter of 2020 were isolated to salaries and benefits expense with an increase of $362 thousand. During the third quarter of 2020, salaries and benefits expense increased as a result of an increase in incentive accruals by $220 thousand, and a decrease in deferred salaries expense for loan originations of $146 thousand, which were elevated during the second quarter as a result of deferred loan salaries recorded for PPP loan originations. For the nine months ended September 30, 2020 and 2019, noninterest expense, excluding branch closure charges, was $22.3 million and $21.5 million, respectively, an increase of $734 thousand, or 3.4%.

The efficiency ratio for the quarter ended September 30, 2020 was 53.9%, a decrease from 57.7% for the year ago quarter and a decrease from 54.7% for the three months ended June 30, 2020 (excluding branch closure costs). The efficiency ratios for the nine months ended September 30, 2020 and 2019, excluding branch closure costs and merger expense from 2019, were 54.2% and 56.1%, respectively.

The Company recorded a provision for income taxes of $1.0 million for the three months ended September 30, 2020, compared to $1.1 million for the same period of 2019. The effective tax rates for the three months ended September 30, 2020 and 2019 were 21.2% and 20.9%, respectively. The effective tax rates for the 2020 and 2019 periods presented are less than the Company's combined federal and state statutory rate of 21.5% primarily because of discrete tax benefits recorded as a result of exercises of nonqualified stock options.

Asset Quality

The Company recorded a provision for loan losses of $1.7 million for the three months ended September 30, 2020, compared to $235 thousand for the year ago quarter. The increase in the provision for loan losses for the three months ended September 30, 2020 is primarily related to growth in the loan portfolio and increases in qualitative factors related to the economic uncertainties caused by the COVID-19 pandemic, including an increase in adversely rated credits. The Company is not required to implement the provisions of the current expected credit losses ("CECL") accounting standard until January 1, 2023, and is continuing to account for the allowance for loans losses under the incurred loss model. Provision for loan losses for the nine months ended September 30, 2020 and 2019 were $4.5 million and $1.3 million, respectively.

The allowance for loan losses to total loans, excluding PPP loans, was 1.10% at September 30, 2020, compared to 0.81% at December 31, 2019. The effective reserve coverage, which includes both the allowance for loan losses and the remaining unaccreted fair value discount on acquired loans, to total loans, excluding PPP loans, was 1.26% at September 30, 2020. Net charge-offs of $38 thousand recorded during the third quarter of 2020 were primarily related to purchased consumer unsecured loans.

Nonperforming loans and loans 90 days or more past due at September 30, 2020 totaled $8.0 million, or 0.45% of total assets. This compares to $10.7 million in nonperforming loans and loans 90 days or more past due at December 31, 2019, or 0.70% of total assets. All of the Company's nonperforming loans are secured and have specific reserves totaling $456 thousand, representing the expected losses associated with those loans. The Company has one troubled debt restructuring at September 30, 2020 totaling $98 thousand which is a consumer residential loan. Nonperforming assets (including other real estate owned) to total assets was 0.66% at September 30, 2020 compared to 0.95% for December 31, 2019.

Completion of $20 Million Subordinated Notes Offering

On October 13, 2020, the Company announced the completion of its private placement of $20 million of its 4.875% Fixed to Floating Subordinated Notes due 2030 (the "Notes") to certain qualified institutional buyers and accredited investors. The Notes have a maturity date of October 15, 2030 and carry a fixed rate of interest of 4.875% for the first five years. Thereafter, the Notes will pay interest at 3-month SOFR plus 471 basis points, resetting quarterly. The Notes include a right of prepayment without penalty on or after October 15, 2025. The Notes have been structured to qualify as Tier 2 capital for regulatory purposes. The Company plans to use the proceeds from the placement of the Notes for general corporate purposes, to include supporting capital ratios at the Company's subsidiary, FVCbank, and potential repayment of a portion of the $25.0 million outstanding subordinated debt callable June 30, 2021.

About FVCBankcorp, Inc.

FVCBankcorp, Inc. is the holding company for FVCbank, a wholly-owned subsidiary that commenced operations in November 2007. FVCbank is a $1.79 billion asset-sized Virginia-chartered community bank serving the banking needs of commercial businesses, nonprofit organizations, professional service entities, their owners and employees located in the greater Baltimore and Washington D.C., metropolitan areas. FVCbank is based in Fairfax, Virginia, and has 9 full-service offices in Arlington, Fairfax, Manassas, Reston and Springfield, Virginia, Washington D.C., and Baltimore, Bethesda, and Rockville, Maryland.

For more information on the Company's selected financial information, please visit the Investor Relations page of FVCBankcorp, Inc.'s website, www.fvcbank.com.

Caution about Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited, statements of goals, intentions, and expectations as to future trends, plans, events or results of the Company's operations and policies and regarding general economic conditions. In some cases, forward-looking statements can be identified by use of words such as "may," "will," "anticipates," "believes," "expects," "plans," "estimates," "potential," "continue," "should," and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company's market, interest rates and interest rate policy, competitive factors, and other conditions which by their nature, are not susceptible to accurate forecast and are subject to significant uncertainty. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. These forward-looking statements are based on current beliefs that involve significant risks, uncertainties, and assumptions. Factors that could cause the Company's actual results to differ materially from those indicated in these forward-looking statements, include, but are not limited to, the risk factors and other cautionary language included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 and in other periodic and current reports filed with the Securities and Exchange Commission. Because of these uncertainties and the assumptions on which the forward-looking statements are based, actual operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company's past results are not necessarily indicative of future performance.

 

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