FVCBankcorp(FVCB) - 2020 Q4 - Annual Report

PART I Business FVCBankcorp operates as a community commercial bank in the DC/Baltimore area, focusing on business clients and navigating extensive banking regulations Overview and Market Area The company serves the economically robust Washington D.C. and Baltimore markets, growing both organically and through key acquisitions - The company operates as a community-oriented commercial bank in the Washington, D.C. and Baltimore metropolitan areas, serving commercial businesses, nonprofits, and professional service entities[18] - Growth has been achieved through a combination of organic expansion and two whole-bank acquisitions: 1st Commonwealth Bank of Virginia (2012) and Colombo Bank (2018)[19][20] - The primary market is economically robust, with the Washington MSA having the sixth-highest median household income nationally ($105,659 as of Dec 31, 2019) and a large deposit base ($269.4 billion as of June 30, 2020)[22][24] Products and Services The bank provides a full suite of commercial and retail banking products, with a core focus on real estate and commercial lending - The bank offers a full range of commercial and retail banking services, including online banking, mobile banking, remote deposit, and a sophisticated suite of treasury management products[31] - In 2020, the bank participated in the SBA's Paycheck Protection Program (PPP), with PPP loans totaling $155.8 million, or 10.6% of total loans, at year-end[34] Loan Portfolio Composition (as of Dec 31, 2020) | Loan Category | % of Total Loan Portfolio | | :--- | :--- | | Non-owner Occupied Commercial Real Estate | 41.3% | | Commercial Construction | 15.1% | | Owner Occupied Commercial Real Estate | 12.4% | | Paycheck Protection Program (PPP) | 10.6% | | Commercial Loans (ex-PPP) | 8.1% | | Multi-family Residential Real Estate | 5.0% | | Residential 1-4 Family Trust Investment | 5.0% | | Home Equity Lines of Credit (HELOCs) | 4.2% | | 1-4 Family Residential Mortgage | 2.2% | - The bank has developed special expertise in government contract financing, with total commitments to government contractors reaching $178.0 million at year-end 2020[38] Competition and Risk Management The company competes in a crowded market by emphasizing personalized service and maintains a comprehensive risk management framework - The company competes in a highly competitive market with approximately $269.4 billion in total deposits (Washington MSA as of June 30, 2020), holding a market share of about 0.55%[50] - Key competitors include large national banks like PNC Bank, Capital One, and Bank of America, but FVCB aims to provide superior customer service, flexibility, and responsiveness to small and middle-market businesses[50][52] - The company emphasizes a strong risk management culture, with the board of directors establishing the overall risk appetite and overseeing comprehensive policies for credit, interest rate, and liquidity risk[53][54][55] Supervision and Regulation The company and its bank subsidiary are subject to extensive federal and state regulation, including Basel III and CBLR capital frameworks - The Company is a registered bank holding company supervised by the Federal Reserve, while the Bank is a Virginia-chartered commercial bank regulated by the VBFI and the Federal Reserve[66][74] - The Bank is subject to Basel III capital rules, which require minimum ratios for Common Equity Tier 1 (CET1), Tier 1, and Total capital, plus a capital conservation buffer[87][88] - On January 1, 2020, the company adopted the simplified Community Bank Leverage Ratio (CBLR) framework, with the CARES Act temporarily lowering the threshold from 9% to 8% for most of 2020[94][124] - The CARES and Appropriations Acts created the Paycheck Protection Program (PPP) and provided temporary relief allowing banks to suspend TDR accounting for certain loan modifications related to the pandemic[130] Risk Factors The company faces significant risks from the COVID-19 pandemic, credit concentration in real estate, and extensive industry regulation Risks Related to the COVID-19 Pandemic The COVID-19 pandemic poses significant risks to loan quality, operational stability, and financial performance - The pandemic has negatively impacted economic activity, leading to increased allowance for loan losses and changes in consumer and business spending that affect demand for the company's products[128][131] - The company granted payment accommodations on loans with a total value of approximately $360.2 million, with $10.1 million in loans remaining under a payment accommodation as of March 1, 2021[134] - Participation in the Paycheck Protection Program (PPP) exposes the company to potential losses if loans are not forgiven and the SBA does not honor its guarantee, as well as reputational and litigation risks[137] Credit and Market Risks The company is exposed to interest rate fluctuations and credit risk from a loan portfolio heavily concentrated in Washington, D.C. real estate - Profitability is subject to interest rate risk, as net interest income is sensitive to changes in rates, which are beyond the company's control[140][141] - A significant portion of the loan portfolio is concentrated in real estate in the Washington, D.C. and Baltimore metropolitan areas, creating exposure to local economic and real estate market downturns[149] - As of December 31, 2020, 80.2% of total loans were secured by real estate, with commercial real estate loans comprising 53.7% of the portfolio[151] - The loan portfolio has a significant portion of recently originated loans ($701.8 million, or 53.3% of non-PPP loans, originated in the last three years), which lack seasoning and may pose a higher risk of future credit defaults[160] Strategic, Liquidity, and Operational Risks The company faces strategic risks from intense competition, reliance on deposits for liquidity, and dependence on third-party technology - The company operates in a highly competitive banking market, which could require increasing deposit rates or lowering loan rates, thereby reducing profitability[161][162] - Reliance on customer deposits as the primary funding source creates liquidity risk, as deposit outflows could constrain lending activities[163][164] - The business depends on third-party information technology systems, and any system failures or security breaches could disrupt operations, damage reputation, and result in financial loss[177][178] - Concentrations in commercial real estate lending may require the company to hold higher levels of capital, potentially limiting growth; as of December 31, 2020, commercial real estate loans represented 372% of total risk-based capital[171] Industry and Regulatory Risks The highly regulated banking industry poses risks from changing laws and accounting standards, such as the upcoming CECL model - The banking industry is subject to extensive and costly federal and state regulation, which governs nearly all aspects of operations and may place the company at a competitive disadvantage to non-bank competitors[190] - The upcoming implementation of the CECL accounting model, effective in 2023, is expected to materially affect how the allowance for loan losses is determined and could require a significant increase in the allowance[195][196] - As a bank holding company, the company is required by federal law to act as a source of financial and managerial strength for its subsidiary, FVCbank, which may require committing resources in times of stress[194] Properties The company operates its executive office, an operations center, and 10 branches across Virginia, Maryland, and D.C., leasing most properties - The main office is in Fairfax, Virginia, with 9 additional branches in Virginia, Maryland, and Washington, D.C[203] - The company leases all of its properties except for its owned branch in Baltimore, Maryland[203] Legal Proceedings The company is not currently involved in any material legal proceedings - The company is not party to any material legal proceedings[205] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq (FVCB), with earnings retained for growth and an active share repurchase program in place - The company's common stock is listed on the Nasdaq Capital Market under the symbol "FVCB"[209] - The company has not paid cash dividends and does not currently plan to, intending to retain earnings to finance growth[210] - A share repurchase program, extended through December 31, 2021, authorizes the repurchase of up to 1,080,860 shares (approx. 8% of shares outstanding at Dec 31, 2020)[214] - Since the program's inception, 487,531 shares have been repurchased at a total cost of $7.3 million[215] Selected Financial Data Financial data shows consistent balance sheet growth, with stable 2020 net income impacted by higher loan loss provisions Selected Financial Highlights (2019 vs. 2020) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Income Statement Data: | | | | Net Interest Income | $52,620 | $48,063 | | Provision for Loan Losses | $5,016 | $1,720 | | Net Income | $15,501 | $15,828 | | Balance Sheet Data (End of Period): | | | | Total Assets | $1,821,481 | $1,537,295 | | Loans Receivable, net | $1,466,083 | $1,270,526 | | Total Deposits | $1,532,493 | $1,285,722 | | Total Shareholders' Equity | $189,500 | $179,078 | | Per Share Data: | | | | Diluted Net Income per Share | $1.10 | $1.07 | | Tangible Book Value per Share | $13.41 | $12.26 | | Performance Ratios: | | | | Return on Average Assets | 0.91% | 1.09% | | Return on Average Equity | 8.48% | 9.32% | | Net Interest Margin | 3.28% | 3.48% | | Asset Quality Ratios: | | | | Nonperforming Assets to Total Assets | 0.52% | 0.95% | Management's Discussion and Analysis of Financial Condition and Results of Operations Asset growth in 2020 was strong, though net income slightly declined due to increased loan loss provisions related to the COVID-19 pandemic COVID-19 Pandemic Impact The company actively managed the pandemic's impact by participating in the PPP and providing significant loan payment deferrals to customers - The company originated 755 PPP loans totaling approximately $170.3 million as of December 31, 2020[244] - Loan payment deferrals were granted on 277 loans with a total principal balance of $360.2 million; as of March 1, 2021, remaining deferred loans totaled $10.1 million[245] - The company identified specific loan segments impacted by the pandemic, including retail, hotels, and churches, and adjusted qualitative factors in its allowance for loan losses to account for increased risk[246] - The share repurchase program was temporarily suspended on March 20, 2020, due to market uncertainty but was reinstated and expanded in January 2021[252] Results of Operations (2020 vs. 2019) Net income slightly decreased in 2020 due to a higher provision for loan losses, despite growth in net interest income Key Operating Results (in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Interest Income | $52,620 | $48,063 | | Provision for Loan Losses | $5,016 | $1,720 | | Noninterest Income | $2,891 | $2,546 | | Noninterest Expense | $30,838 | $28,877 | | Net Income | $15,501 | $15,828 | | Diluted EPS | $1.10 | $1.07 | - Net interest margin decreased to 3.28% in 2020 from 3.48% in 2019, primarily due to the lower interest rate environment and the origination of low-yielding PPP loans[289] - The provision for loan losses increased significantly to $5.0 million in 2020 from $1.7 million in 2019, mainly due to qualitative factor adjustments related to the COVID-19 pandemic[296] - Noninterest expense in 2020 included a one-time impairment charge of $676 thousand related to the closure of two branch offices[305] Financial Condition Analysis The company's financial condition strengthened in 2020 with significant growth in assets and deposits, alongside improved asset quality Balance Sheet Highlights (in millions) | Metric | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $1,821.5 | $1,537.3 | | Total Loans, net | $1,466.1 | $1,270.5 | | Total Deposits | $1,532.5 | $1,285.7 | | Shareholders' Equity | $189.5 | $179.1 | - Nonperforming assets decreased to $9.5 million at year-end 2020 from $14.6 million at year-end 2019, with the ratio of nonperforming assets to total assets improving to 0.52% from 0.95%[318] - The allowance for loan losses increased to $15.0 million (1.02% of total loans) at year-end 2020, up from $10.2 million (0.81% of total loans) at year-end 2019[296] - The Bank's Community Bank Leverage Ratio (CBLR) was 11.65% at December 31, 2020, exceeding the temporary regulatory minimum of 8.0% and positioning the bank as "well capitalized"[371][623] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, which is actively managed by the ALCO to protect net interest income and equity value - The company's primary market risk is interest rate risk, which it manages through an Asset and Liability Committee (ALCO) using a net interest income simulation model[394][396] Interest Rate Risk to Net Interest Income (1-Year Horizon) | Rate Shock (Basis Points) | % Change in NII (Dec 31, 2020) | % Change in NII (Dec 31, 2019) | | :--- | :--- | :--- | | +400 | -0.62% | -0.69% | | +200 | -0.63% | +0.11% | | +100 | -0.54% | +0.11% | | -100 | -0.07% | +0.56% | Interest Rate Risk to Economic Value of Equity (EVE) | Rate Shock (Basis Points) | % Change in EVE (Dec 31, 2020) | % Change in EVE (Dec 31, 2019) | | :--- | :--- | :--- | | +400 | +6.64% | -13.72% | | +200 | +4.84% | -5.21% | | +100 | +2.68% | -1.99% | | -100 | -4.15% | +1.68% | Financial Statements and Supplementary Data The audited financial statements detail the company's financial condition and results of operations for 2020 and 2019 Consolidated Statements of Condition The balance sheet reflects significant growth in assets, loans, and deposits from 2019 to 2020 Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and equivalents | $141,063 | $33,142 | | Loans, net | $1,451,125 | $1,260,295 | | Total Assets | $1,821,481 | $1,537,295 | | Liabilities & Equity | | | | Total Deposits | $1,532,493 | $1,285,722 | | Total Liabilities | $1,631,981 | $1,358,217 | | Total Stockholders' Equity | $189,500 | $179,078 | | Total Liabilities & Equity | $1,821,481 | $1,537,295 | Consolidated Statements of Income The income statement shows a slight decrease in net income for 2020, driven by a higher provision for loan losses Consolidated Income Statement Summary (in thousands) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Net Interest Income | $52,620 | $48,063 | | Provision for loan losses | $5,016 | $1,720 | | Net interest income after provision | $47,604 | $46,343 | | Total noninterest income | $2,891 | $2,546 | | Total noninterest expenses | $30,838 | $28,877 | | Net income before income tax | $19,657 | $20,012 | | Net income | $15,501 | $15,828 | | Earnings per share, diluted | $1.10 | $1.07 | Notes to Consolidated Financial Statements The notes detail key accounting policies, including the incurred loss model for loan losses and the adoption of the CBLR framework - The company accounts for the allowance for loan losses under the incurred loss model and is not required to adopt the CECL model until January 1, 2023[451][497] - Short-term loan modifications made in good faith in response to COVID-19 for borrowers who were current are not considered Troubled Debt Restructurings (TDRs) per interagency guidance[505] - As of December 31, 2020, the company had $7.2 million in goodwill and $1.2 million in net core deposit intangibles, primarily from the 2018 acquisition of Colombo Bank[579][583] - The company adopted the Community Bank Leverage Ratio (CBLR) framework on January 1, 2020, simplifying its capital adequacy reporting[620] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2020 - Management concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[684] - Based on an assessment using the 2013 COSO framework, management believes the company's internal control over financial reporting was effective as of December 31, 2020[686] PART III Directors, Executive Compensation, and Corporate Governance Information on directors, compensation, and governance is incorporated by reference from the 2021 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's definitive Proxy Statement for the 2021 Annual Meeting of Shareholders[692][693][694][698][699] - As of December 31, 2020, there were 1,727,945 securities to be issued upon exercise of outstanding options under equity compensation plans approved by stockholders, with 148,602 securities remaining available for future issuance[696] PART IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including governance documents, material contracts, and required certifications - This section provides a list of all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and required certifications[700]