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Section 1: 10-Q (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)

 

Virginia

 

47-5020283

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

11325 Random Hills Road
Suite 240

 

 

Fairfax, Virginia

 

22030

(Address of principal executive offices)

 

(Zip Code)

 

(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.

 

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

 

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

 

Title of Each Class:

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered:

Common Stock, $0.01 par value

 

FVCB

 

The Nasdaq Stock Market, LLC

 

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

 

2


Table of Contents

 

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.

 

3


Table of Contents

 

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.

 

4


Table of Contents

 

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.

 

5


Table of Contents

 

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.

 

6


Table of Contents

 

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.

 

7


Table of Contents

 

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.

 

8


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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:

 

10


Table of Contents

 

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

 

 

11


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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

 

12


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Notes to Unaudited Consolidated Financial Statements

(Continued)

 

past twelve-month period. Available-for-sale and held-to-maturity securities that have been in a continuous unrealized loss position are as follows:

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

(In thousands)

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

At June 30, 2019

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Securities of U.S. government and federal agencies

 

$

 

$

 

$

994

 

$

(6

)

$

994

 

$

(6

)

Securities of state and local municipalities taxable

 

 

 

1,531

 

(28

)

1,531

 

(28

)

Corporate bonds

 

 

 

911

 

(89

)

911

 

(89

)

SBA pass-through securities

 

 

 

175

 

(4

)

175

 

(4

)

Mortgage-backed securities

 

 

 

52,081

 

(501

)

52,081

 

(501

)

Collateralized mortgage obligations

 

 

 

14,155

 

(266

)

14,155

 

(266

)

Total

 

$

 

$

 

$

69,847

 

$

(894

)

$

69,847

 

$

(894

)

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

At December 31, 2018

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Securities of U.S. government and federal agencies

 

$

 

$

 

$

2,433

 

$

(64

)

$

2,433

 

$

(64

)

Securities of state and local municipalities tax exempt

 

263

 

(1

)

3,634

 

(44

)

3,897

 

(45

)

Securities of state and local municipalities taxable

 

757

 

(1

)

1,551

 

(69

)

2,308

 

(70

)

Corporate bonds

 

988

 

(12

)

933

 

(67

)

1,921

 

(79

)

Certificates of deposit

 

 

 

244

 

(1

)

244

 

(1

)

SBA pass-through securities

 

 

 

195

 

(5

)

195

 

(5

)

Mortgage-backed securities

 

12,743

 

(59

)

60,656

 

(2,232

)

73,399

 

(2,291

)

Collateralized mortgage obligations

 

 

 

16,790

 

(810

)

16,790

 

(810

)

Total

 

$

14,751

 

$

(73

)

$

86,436

 

$

(3,292

)

$

101,187

 

$

(3,365

)

 

13


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Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Securities of U.S. government and federal agencies: The unrealized loss on one available-for-sale security was caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.

 

Securities of state and local municipalities: The unrealized losses on the Company’s investment in securities of state and local municipalities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Five of the nine investments carry an S&P investment grade rating of AA+ or above, one has a rating of AA-, one has an AA rating, while the remaining two do not carry a rating.

 

Corporate bonds: The unrealized losses on the investments in corporate bonds were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. One of these investments carries an S&P investment grade rating of A-. The remaining four investments do not carry a rating.

 

SBA pass-through securities: The unrealized loss on the Company’s single investment in SBA pass-through securities was caused by interest rate increases. Repayment of the principal on those investments is guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider that investments to be other-than-temporarily impaired at June 30, 2019.

 

Mortgage-backed securities: The unrealized losses on the Company’s investment in forty-two mortgage-backed securities were caused by interest rate increases. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2019.

 

Collateralized mortgage obligations (CMOs): The unrealized loss associated with twenty-four CMOs was caused by interest rate increases. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2019.

 

The amortized cost and fair value of securities as of June 30, 2019, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

 

14


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Notes to Unaudited Consolidated Financial Statements

(Continued)

 

 

 

June 30, 2019

 

 

 

Held-to-maturity

 

Available-for-sale

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

(In thousands)

 

Cost

 

Value

 

Cost

 

Value

 

Less than 1 year

 

$

 

$

 

$

745

 

$

745

 

After 5 years through 10 years

 

1,761

 

1,769

 

21,035

 

21,054

 

After 10 years

 

 

 

112,340

 

112,672

 

Total

 

$

1,761

 

$

1,769

 

$

134,120

 

$

134,471

 

 

For the six months ended June 30, 2019 and June 30, 2018, proceeds from maturities, calls and principal repayments of securities were $8.9 million and $8.1 million, respectively. During the six months ended June 30, 2019 and June 30, 2018, there were no proceeds from sales of securities available-for-sale, no gross realized gains, and no realized losses.

 

Note 3.                                 Loans and Allowance for Loan Losses

 

A summary of loan balances by type follows:

 

 

 

June 30, 2019

 

December 31, 2018

 

(In thousands)

 

Originated

 

Acquired

 

Total

 

Originated

 

Acquired

 

Total

 

Commercial real estate

 

$

679,017

 

$

56,004

 

$

735,021

 

$

616,614

 

$

66,988

 

$

683,602

 

Commercial and industrial

 

126,766

 

7,952

 

134,718

 

128,909

 

8,419

 

137,328

 

Commercial construction

 

210,538

 

7,644

 

218,182

 

141,694

 

11,645

 

153,339

 

Consumer residential

 

85,922

 

38,206

 

124,128

 

87,609

 

43,822

 

131,431

 

Consumer nonresidential

 

24,139

 

110

 

24,249

 

32,184

 

124

 

32,308

 

 

 

$

1,126,382

 

$

109,916

 

$

1,236,298

 

$

1,007,010

 

$

130,998

 

$

1,138,008

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

9,996

 

 

9,996

 

9,159

 

 

9,159

 

Unearned income and (unamortized premiums), net

 

1,926

 

 

1,926

 

1,265

 

 

1,265

 

Loans, net

 

$

1,114,460

 

$

109,916

 

$

1,224,376

 

$

996,586

 

$

130,998

 

$

1,127,584

 

 

During 2018, as a result of the Company’s acquisition of Colombo, the loan portfolio was segregated between loans initially accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans).

 

The loans segregated to the acquired loan portfolio were initially measured at fair value and subsequently accounted for under either ASC Topic 310-30 or ASC 310-20.  The outstanding principal balance and related carrying amount of acquired loans included in the consolidated balance sheets as of June 30, 2019 and December 31, 2018 are as follows:

 

15


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Notes to Unaudited Consolidated Financial Statements

(Continued)

 

(In thousands)

 

June 30, 2019

 

Purchased credit impaired acquired loans evaluated individually for future credit losses

 

 

 

Outstanding principal balance

 

$

2,579

 

Carrying amount

 

1,846

 

 

 

 

 

Other acquired loans

 

 

 

Outstanding principal balance

 

109,511

 

Carrying amount

 

108,070

 

 

 

 

 

Total acquired loans

 

 

 

Outstanding principal balance

 

112,090

 

Carrying amount

 

109,916

 

 

(In thousands)

 

December 31, 2018

 

Purchased credit impaired acquired loans evaluated individually for future credit losses

 

 

 

Outstanding principal balance

 

$

2,533

 

Carrying amount

 

1,401

 

 

 

 

 

Other acquired loans

 

 

 

Outstanding principal balance

 

131,286

 

Carrying amount

 

129,597

 

 

 

 

 

Total acquired loans

 

 

 

Outstanding principal balance

 

133,819

 

Carrying amount

 

130,998

 

 

The following table presents changes during the six months ended June 30, 2019 and the year ended December 31, 2018, respectively, in the accretable yield on purchased credit impaired loans for which the Company applies ASC 310-30.

 

(In thousands)

 

 

 

Balance at January 1, 2019

 

$

357

 

Accretion

 

(51

)

Balance at June 30, 2019

 

$

306

 

 

(In thousands)

 

 

 

Balance at January 1, 2018

 

$

 

Accretable yield at acquisition date

 

379

 

Accretion

 

(22

)

Balance at December 31, 2018

 

$

357

 

 

16


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Notes to Unaudited Consolidated Financial Statements

(Continued)

 

An analysis of the allowance for loan losses for the three and six months ended June 30, 2019 and 2018, and for the year ended December 31, 2018, follows:

 

Allowance for Loan Losses

For the three months ended June 30, 2019

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance, April 1

 

$

5,812

 

$

1,480

 

$

1,491

 

$

495

 

$

234

 

$

9,512

 

Charge-offs

 

 

 

 

 

(21

)

(21

)

Recoveries

 

 

 

 

 

 

 

Provision

 

177

 

(69

)

397

 

(1

)

1

 

505

 

Ending Balance

 

$

5,989

 

$

1,411

 

$

1,888

 

$

494

 

$

214

 

$

9,996

 

 

Allowance for Loan Losses

For the six months ended June 30, 2019

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance, January 1

 

$

5,548

 

$

1,474

 

$

1,285

 

$

518

 

$

334

 

$

9,159

 

Charge-offs

 

 

 

 

 

(183

)

(183

)

Recoveries

 

 

 

 

 

 

 

Provision

 

441

 

(63

)

603

 

(24

)

63

 

1,020

 

Ending Balance

 

$

5,989

 

$

1,411

 

$

1,888

 

$

494

 

$

214

 

$

9,996

 

 

17


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Allowance for Loan Losses

For the three months ended June 30, 2018

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance, April 1

 

$

5,140

 

$

821

 

$

1,249

 

$

630

 

$

230

 

$

32

 

$

8,102

 

Charge-offs

 

 

(86

)

 

 

(11

)

 

(97

)

Recoveries

 

 

12

 

 

 

 

 

12

 

Provision

 

135

 

122

 

57

 

(26

)

(11

)

4

 

281

 

Ending Balance

 

$

5,275

 

$

869

 

$

1,306

 

$

604

 

$

208

 

$

36

 

$

8,298

 

 

Allowance for Loan Losses

For the six months ended June 30, 2018

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

4,832

 

$

768

 

$

1,191

 

$

626

 

$

268

 

$

40

 

$

7,725

 

Charge-offs

 

 

(86

)

 

 

(11

)

 

(97

)

Recoveries

 

 

31

 

 

 

 

 

31

 

Provision

 

443

 

156

 

115

 

(22

)

(49

)

(4

)

639

 

Ending Balance

 

$

5,275

 

$

869

 

$

1,306

 

$

604

 

$

208

 

$

36

 

$

8,298

 

 

Allowance for Loan Losses

For the year ended December 31, 2018

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

4,832

 

$

768

 

$

1,191

 

$

626

 

$

268

 

$

40

 

$

7,725

 

Charge-offs

 

 

(86

)

 

(187

)

(292

)

 

(565

)

Recoveries

 

 

26

 

 

1

 

52

 

 

79

 

Provision

 

716

 

766

 

94

 

78

 

306

 

(40

)

1,920

 

Beginning Balance

 

$

5,548

 

$

1,474

 

$

1,285

 

$

518

 

$

334

 

$

 

$

9,159

 

 

18


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

The following tables present the recorded investment in loans and impairment method as of June 30, 2019 and 2018, and at December 31, 2018, by portfolio segment:

 

Allowance for Loan Losses

At June 30, 2019

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial
and Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

26

 

$

343

 

$

 

$

29

 

$

 

$

398

 

Purchase credit impaired

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

5,963

 

1,068

 

1,888

 

465

 

214

 

9,598

 

 

 

$

5,989

 

$

1,411

 

$

1,888

 

$

494

 

$

214

 

$

9,996

 

 

Loans Receivable

At June 30, 2019

(In thousands)

 

 

 

Commercial
Real Estate

 

Commercial
and Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Total

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

5,493

 

$

2,905

 

$

 

$

169

 

$