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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 September 30, 2018

 

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 o   No x

 

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

 

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

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Smaller reporting company x

 

Emerging growth company x

 

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

 

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

 

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

 

13,687,569 shares of common stock, par value $0.01 per share, outstanding as of November 1, 2018

 

 

 


Table of Contents

 

FVCBankcorp, Inc.

 

INDEX TO FORM 10-Q

 

PART I — FINANCIAL INFORMATION

3

 

 

Item 1. Financial Statements:

3

 

 

Consolidated Statements of Condition At September 30, 2018 and December 31, 2017 (unaudited)

3

 

 

Consolidated Statements of Income For the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)

4

 

 

Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)

5

 

 

Consolidated Statements of Changes in Shareholders’ Equity For the Nine Months Ended September 30, 2018 and 2017 (unaudited)

6

 

 

Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2018 and 2017 (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

69

 

 

Item 4. Controls and Procedures

71

 

 

PART II — OTHER INFORMATION

72

 

 

Item 1. Legal Proceedings

72

 

 

Item 1A. Risk Factors

72

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

72

 

 

Item 3. Defaults Upon Senior Securities

72

 

 

Item 4. Mine Safety Disclosures

72

 

 

Item 5. Other Information

72

 

 

Item 6. Exhibits

72

 

 

SIGNATURES

74

 

2


Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FVCBankcorp, Inc. and Subsidiary

 

Consolidated Balance Sheets

September 30, 2018 and December 31, 2017

(In thousands, except share data)

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

 

 

2018

 

2017

 

 

 

 

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

 

 

 

$

8,939

 

$

7,428

 

Interest-bearing deposits at other financial institutions

 

 

 

 

 

46,396

 

15,139

 

Securities held-to-maturity (fair value of $1.7 million and $1.8 million at September 30, 2018 and December 31, 2017, respectively)

 

 

 

 

 

1,761

 

1,760

 

Securities available-for-sale, at fair value

 

 

 

 

 

111,370

 

115,952

 

Restricted stock, at cost

 

 

 

 

 

3,800

 

3,438

 

Loans, net of allowance for loan losses of $8.6 million and $7.7 million at September 30, 2018 and December 31, 2017, repectively

 

 

 

 

 

969,728

 

880,952

 

Premises and equipment, net

 

 

 

 

 

1,420

 

1,236

 

Accrued interest receivable

 

 

 

 

 

3,652

 

2,964

 

Prepaid expenses

 

 

 

 

 

928

 

698

 

Deferred tax assets, net

 

 

 

 

 

3,664

 

3,155

 

Core deposit intangible, net

 

 

 

 

 

83

 

99

 

Bank owned life insurance (BOLI)

 

 

 

 

 

16,297

 

15,969

 

Other real estate owned (OREO)

 

 

 

 

 

3,866

 

3,866

 

Other assets

 

 

 

 

 

3,533

 

568

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

$

1,175,437

 

$

1,053,224

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

 

 

 

 

$

211,808

 

$

175,446

 

Interest-bearing checking, savings and money market

 

 

 

 

 

498,325

 

379,101

 

Time deposits

 

 

 

 

 

283,853

 

373,616

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

 

 

 

 

$

993,986

 

$

928,163

 

 

 

 

 

 

 

 

 

 

 

Federal funds purchased

 

 

 

 

 

$

15,000

 

$

 

Subordinated notes, net of issuance costs

 

 

 

 

 

24,387

 

$

24,327

 

Accrued interest payable

 

 

 

 

 

881

 

417

 

Accrued expenses and other liabilities

 

 

 

 

 

2,407

 

2,034

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

 

 

$

1,036,661

 

$

954,941

 

 

 

 

 

 

 

 

 

 

 

Commitments and Contingent Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

2017

 

 

 

 

 

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

 

12,831,040

 

10,868,984

 

129

 

109

 

Additional paid-in capital

 

 

 

 

 

107,358

 

74,008

 

Retained earnings

 

 

 

 

 

35,318

 

25,859

 

Accumulated other comprehensive (loss), net

 

 

 

 

 

(4,029

)

(1,693

)

Total stockholders’ equity

 

 

 

 

 

$

138,776

 

$

98,283

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

 

 

 

 

$

1,175,437

 

$

1,053,224

 

 

See Notes to Consolidated Financial Statements.

 

3


Table of Contents

 

FVCBankcorp, Inc. and Subsidiary

 

Consolidated Statements of Income

For the three and nine months ended September 30, 2018 and 2017

(In thousands, except per share data)

(Unaudited)

 

 

 

For the three months ended September 30,

 

For the nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Interest and Dividend Income

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

11,977

 

$

9,610

 

$

33,841

 

$

27,443

 

Interest and dividends on securities held-to-maturity

 

13

 

13

 

39

 

39

 

Interest and dividends on securities available-for-sale

 

661

 

613

 

1,992

 

1,800

 

Dividends on restricted stock

 

57

 

52

 

170

 

169

 

Interest on deposits at other financial institutions

 

165

 

23

 

242

 

50

 

Total interest and dividend income

 

$

12,873

 

$

10,311

 

$

36,284

 

$

29,501

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

Interest on deposits

 

$

2,584

 

$

1,717

 

$

7,018

 

$

4,499

 

Interest on federal funds purchased

 

16

 

1

 

17

 

3

 

Interest on short-term debt

 

 

28

 

67

 

157

 

Interest on long-term debt

 

 

 

 

1

 

Interest on subordinated notes

 

395

 

395

 

1,185

 

1,185

 

Total interest expense

 

$

2,995

 

$

2,141

 

$

8,287

 

$

5,845

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

$

9,878

 

$

8,170

 

$

27,997

 

$

23,656

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

351

 

250

 

990

 

765

 

Net interest income after provision for loan losses

 

$

9,527

 

$

7,920

 

$

27,007

 

$

22,891

 

 

 

 

 

 

 

 

 

 

 

Noninterest Income

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

158

 

$

146

 

$

452

 

$

402

 

Gains on sale of securities available-for-sale

 

 

15

 

 

134

 

BOLI income

 

110

 

115

 

329

 

740

 

Other fee income

 

480

 

77

 

714

 

228

 

Total noninterest income

 

$

748

 

$

353

 

$

1,495

 

$

1,504

 

 

 

 

 

 

 

 

 

 

 

Noninterest Expenses

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

3,491

 

$

2,950

 

$

10,000

 

$

8,798

 

Occupancy and equipment expense

 

591

 

559

 

1,743

 

1,672

 

Data processing and network administration

 

321

 

275

 

886

 

772

 

State franchise taxes

 

296

 

252

 

888

 

789

 

Audit, legal and consulting fees

 

147

 

123

 

434

 

352

 

Merger and acquisition expense

 

274

 

 

671

 

 

Loan related expenses

 

61

 

67

 

179

 

218

 

FDIC insurance

 

133

 

92

 

358

 

304

 

Marketing, business development and advertising

 

89

 

41

 

269

 

238

 

Director fees

 

121

 

105

 

353

 

296

 

Postage, courier and telephone

 

50

 

52

 

150

 

140

 

Internet banking

 

83

 

63

 

225

 

178

 

Dues, memberships & publications

 

36

 

32

 

118

 

92

 

Bank insurance

 

47

 

35

 

127

 

100

 

Printing and supplies

 

38

 

28

 

100

 

84

 

Bank charges

 

33

 

17

 

102

 

54

 

State assessments

 

34

 

38

 

106

 

97

 

Core deposit intangible amortization

 

5

 

5

 

16

 

15

 

Other operating expenses

 

98

 

127

 

305

 

225

 

Total noninterest expenses

 

$

5,948

 

$

4,861

 

$

17,030

 

$

14,424

 

 

 

 

 

 

 

 

 

 

 

Net income before income tax expense

 

$

4,327

 

$

3,412

 

$

11,472

 

$

9,971

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

942

 

1,177

 

2,013

 

3,287

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,385

 

$

2,235

 

$

9,459

 

$

6,684

 

 

 

 

 

 

 

 

 

 

 

Earnings per share, basic

 

$

0.30

 

$

0.21

 

$

0.85

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

Earnings per share, diluted

 

$

0.27

 

$

0.19

 

$

0.78

 

$

0.60

 

 

See Notes to Consolidated Financial Statements.

 

4


Table of Contents

 

FVCBankcorp, Inc. and Subsidiary

 

Consolidated Statements of Comprehensive Income

For the three and nine months ended September 30, 2018 and 2017

(In thousands)

(Unaudited)

 

 

 

For the three months ended September 30,

 

For the nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,385

 

$

2,235

 

$

9,459

 

$

6,684

 

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on securities available for sale, net of tax benefit of $144 and $621 for the three and nine months ended September 30, 2018, repectively, net of tax expense $56 and $242 for the three and nine months ended September 30, 2017, respectively.

 

(540

)

108

 

(2,336

)

468

 

Reclassification adjustment for gains realized in income, net of tax of $0 for the three and nine months ended September 30, 2018, and net of tax $5 and $46 for the three and nine months ended September 30, 2017, respectively.

 

 

(10

)

 

(88

)

Total other comprehensive income (loss)

 

$

(540

)

$

98

 

$

(2,336

)

$

380

 

Total comprehensive income

 

$

2,845

 

$

2,333

 

$

7,123

 

$

7,064

 

 

See Notes to Consolidated Financial Statements.

 

5


Table of Contents

 

FVCBankcorp, Inc. and Subsidiary

 

Consolidated Statements of Changes in Stockholders’ Equity

For the nine months ended September 30, 2018 and 2017

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares 

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

8,143

 

$

82

 

$

63,145

 

$

17,884

 

$

(1,299

)

$

79,812

 

Net income

 

 

 

 

6,684

 

 

6,684

 

Other comprehensive income

 

 

 

 

 

380

 

380

 

Common stock issuance at $20 per share

 

500

 

5

 

9,995

 

 

 

10,000

 

5-for-4 stock split

 

2,171

 

22

 

(22

)

(4

)

 

(4

)

Common stock issuance for options exercised

 

43

 

 

193

 

 

 

193

 

Stock-based compensation expense

 

 

 

480

 

 

 

480

 

Balance at September 30, 2017

 

10,857

 

$

109

 

$

73,791

 

$

24,564

 

$

(919

)

$

97,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

10,869

 

$

109

 

$

74,008

 

$

25,859

 

$

(1,693

)

$

98,283

 

Net income

 

 

 

 

9,459

 

 

9,459

 

Other comprehensive loss

 

 

 

 

 

(2,336

)

(2,336

)

Common stock issuance at $20 per share

 

1,750

 

18

 

31,737

 

 

 

31,755

 

Common stock issuance for options exercised

 

212

 

2

 

1,082

 

 

 

1,084

 

Stock-based compensation expense

 

 

 

531

 

 

 

531

 

Balance at September 30, 2018

 

12,831

 

$

129

 

$

107,358

 

$

35,318

 

$

(4,029

)

$

138,776

 

 

See Notes to Consolidated Financial Statements.

 

6


Table of Contents

 

FVCBankcorp, Inc. and Subsidiary

 

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2018 and 2017

(In thousands)

(Unaudited)

 

 

 

2018

 

2017

 

Cash Flows From Operating Activities

 

 

 

 

 

Reconciliation of net income to net cash provided by operating activities:

 

 

 

 

 

Net income

 

$

9,459

 

$

6,684

 

Depreciation

 

340

 

408

 

Provision for loan losses

 

990

 

765

 

Net amortization of premium of securities

 

419

 

430

 

Net amortization of deferred loan costs and purchase premiums

 

491

 

965

 

Amortization of subordinated debt issuance costs

 

60

 

60

 

Stock-based compensation expense

 

531

 

480

 

BOLI income

 

(329

)

(740

)

Realized gains on securities sales

 

 

(134

)

Core deposits intangible amortization

 

16

 

15

 

Changes in assets and liabilities:

 

 

 

 

 

Increase in accrued interest receivable, prepaid expenses and other assets

 

(3,771

)

(434

)

Increase (decrease) in accrued interest payable, accrued expenses and other liabilities

 

837

 

(805

)

Net cash provided by operating activities

 

$

9,043

 

$

7,694

 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

Maturities of certificates of deposits purchased for investment

 

$

245

 

$

250

 

Increase in interest-bearing deposits at other financial institutions

 

(31,257

)

(18,617

)

Purchases of securities available-for-sale

 

(11,815

)

(16,815

)

Proceeds from sales of securities available-for-sale

 

 

1,586

 

Proceeds from redemptions of securities available-for-sale

 

12,776

 

10,982

 

Net purchase of restricted stock

 

(362

)

(175

)

Net increase in loans

 

(90,257

)

(59,910

)

Proceeds of BOLI, net

 

 

(4,285

)

Purchases of premises and equipment, net

 

(524

)

(392

)

Net cash used in investing activities

 

$

(121,194

)

$

(87,376

)

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

Net increase (decrease) in noninterest-bearing, interest-bearing checking, savings, and money market deposits

 

$

155,586

 

$

(6,150

)

Net (decrease) increase in time deposits

 

(89,763

)

77,013

 

Increase in federal funds purchased

 

15,000

 

100

 

Net increase in FHLB advances

 

 

500

 

Cash paid in lieu of fractional shares

 

 

(4

)

Common stock issuance

 

32,839

 

10,193

 

Net cash provided by financing activities

 

$

113,662

 

$

81,652

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

$

1,511

 

$

1,970

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

7,428

 

5,174

 

 

 

 

 

 

 

Cash and cash equivalents, end of year

 

$

8,939

 

$

7,144

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

Cash payments for interest

 

$

7,823

 

$

5,310

 

Cash payments for income taxes

 

$

4,892

 

$

4,834

 

 

 

 

 

 

 

Supplemental Disclosures of Noncash Investing Activity

 

 

 

 

 

Unrealized (losses) gains on securities available for sale

 

$

(2,957

)

$

580

 

 

See Notes to Consolidated Financial Statements.

 

7


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except share and per share data)

 

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.

 

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, 2017, included in its Prospectus filed with the Securities and Exchange Commission on September 17, 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.

 

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. There have been no changes to these policies during the nine months ended September 30, 2018.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured

 

8


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except share and per share data)

 

on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The FASB made subsequent amendments to Topic 842 in July 2018 through ASU 2018-10 (“Codification Improvements to Topic 842, Leases.”) and ASU 2018-11 (“Leases (Topic 842): Targeted Improvements”). Among these amendments is the provision in ASU 2018-11 that provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). The Company has six leases and is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.

 

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. The Company is currently identifying third party vendors to assist in the measurement of expected credit losses under this standard and has identified an implementation committee to assess the impact that ASU 2016-13 will have on its consolidated financial statements.

 

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

 

9


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except share and per share data)

 

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 March 2017, the FASB issued ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date.  Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU 2017-08 will have on its consolidated financial statements.

 

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.”  The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes.  Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update.   The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018.  Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact that ASU 2017-12 will have on its consolidated financial statements. The Company does not expect the adoption of ASU 2017-12 to have a material impact on its consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, “Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.”  The amendments expand the scope of Topic 718 to include share-based payments issued to non-employees for goods or services, which were previously excluded. The amendments will align the accounting for share-based payments to nonemployees and employees more similarly. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted. The Company does not expect the adoption of ASU 2018-07 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 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.

 

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Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except share and per share data)

 

Note 2.                                 Stock Offering

 

During September 2018, the Company completed its initial public offering (the “IPO”), which resulted in $35.0 million in gross proceeds and $31.8 million, net of issuance costs, for which the Company issued 1.75 million shares of common stock at $20 per share.

 

Note 3.                                 Securities

 

Amortized cost and fair values of securities held-to-maturity and securities available-for-sale as of September 30, 2018 and December 31, 2017, are as follows:

 

11


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except share and per share data)

 

 

 

September 30, 2018

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

(Losses)

 

Value

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

Securities of state and local municipalities tax exempt

 

$

264

 

$

 

$

(10

)

$

254

 

Securities of U.S. government and federal agencies

 

1,497

 

 

(45

)

1,452

 

Total Held-to-maturity Securities

 

$

1,761

 

$

 

$

(55

)

$

1,706

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

Securities of U.S. government and federal agencies

 

$

1,000

 

$

 

$

(66

)

$

934

 

Securities of state and local municipalities tax exempt

 

3,682

 

 

(105

)

3,577

 

Securities of state and local municipalities taxable

 

2,432

 

 

(93

)

2,339

 

Corporate bonds

 

5,000

 

12

 

(81

)

4,931

 

Certificates of deposit

 

245

 

 

(1

)

244

 

SBA pass-through securities

 

200

 

 

(10

)

190

 

Mortgage-backed securities

 

85,777

 

 

(3,692

)

82,085

 

Collateralized mortgage obligations

 

18,134

 

 

(1,064

)

17,070

 

Total Available-for-sale Securities

 

$

116,470

 

$

12

 

$

(5,112

)

$

111,370

 

 

12


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except share and per share data)

 

 

 

December 31, 2017

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

(Losses)

 

Value

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

Securities of state and local municipalities tax exempt

 

$

263

 

$

3

 

$

 

$

266

 

Securities of U.S. government and federal agencies

 

1,497

 

 

(1

)

1,496

 

Total Held-to-maturity Securities

 

$

1,760

 

$

3

 

$

(1

)

$

1,762

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

Securities of U.S. government and federal agencies

 

$

1,000

 

$

 

$

(32

)

$

968

 

Securities of state and local municipalities tax exempt

 

3,694

 

23

 

(1

)

3,716

 

Securities of state and local municipalities taxable

 

2,591

 

3

 

(41

)

2,553

 

Corporate bonds

 

5,000

 

57

 

(61

)

4,996

 

Certificates of deposit

 

490

 

 

 

490

 

SBA pass-through securities

 

254

 

 

(8

)

246

 

Mortgage-backed securities

 

84,614

 

 

(1,401

)

83,213

 

Collateralized mortgage obligations

 

20,453

 

 

(683

)

19,770

 

Total Available-for-sale Securities

 

$

118,096

 

$

83

 

$

(2,227

)

$

115,952

 

 

13


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except share and per share data)

 

At September 30, 2018 securities in the amount of $545 thousand were pledged with the Federal Reserve Bank and $8.8 million with Treasury Board of Virginia at the Community Bankers’ Bank.  There were no such securities pledged as of December 31, 2017.

 

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 September 30, 2018 and December 31, 2017, 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 past twelve-month period. Available-for-sale securities that have been in a continuous unrealized loss position are as follows:

 

14


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except share and per share data)

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

At September 30, 2018

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Securities of U.S. government and federal agencies

 

$

 

$

 

$

934

 

$

(66

)

$

934

 

$

(66

)

Securities of state and local municipalities tax exempt

 

3,577

 

(105

)

 

 

3,577

 

(105

)

Securities of state and local municipalities taxable

 

758

 

(3

)

1,581

 

(90

)

2,339

 

(93

)

Corporate bonds

 

987

 

(13

)

933

 

(68

)

1,920

 

(81

)

Certificates of deposit

 

244

 

(1

)

 

 

244

 

(1

)

SBA pass-through securities

 

 

 

190

 

(10

)

190

 

(10

)

Mortgage-backed securities

 

12,883

 

(249

)

69,202

 

(3,443

)

82,085

 

(3,692

)

Collateralized mortgage obligations

 

1,028

 

(35

)

16,042

 

(1,029

)

17,070

 

(1,064

)

Total

 

$

19,477

 

$

(406

)

$

88,882

 

$

(4,706

)

$

108,359

 

$

(5,112

)

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

At December 31, 2017

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Securities of U.S. government and federal agencies

 

$

 

$

 

$

968

 

$

(32

)

$

968

 

$

(32

)

Securities of state and local municipalities tax exempt

 

272

 

(1

)

 

 

272

 

(1

)

Securities of state and local municipalities taxable

 

497

 

(3

)

1,278

 

(38

)

1,775

 

(41

)

Corporate bonds

 

1,492

 

(7

)

946

 

(54

)

2,438

 

(61

)

Certificates of deposit

 

245

 

 

 

 

245

 

 

SBA pass-through securities

 

 

 

246

 

(8

)

246

 

(8

)

Mortgage-backed securities

 

38,039

 

(404

)

44,663

 

(997

)

82,702

 

(1,401

)

Collateralized mortgage obligations

 

2,731

 

(28

)

17,040

 

(655

)

19,771

 

(683

)

Total

 

$

43,276

 

$

(443

)

$

65,141

 

$

(1,784

)

$

108,417

 

$

(2,227

)

 

15


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except share and per share data)

 

At September 30, 2018, the Company had two held-to-maturity securities in an unrealized loss position of less than twelve months. The fair value of the securities were $1.7 million and the unrealized loss was $55 thousand. At December 31, 2017, the Company had one held-to-maturity security in an unrealized loss position of less than twelve months. The fair value was $1.5 million and the unrealized loss was $1 thousand.

 

Securities of U.S. government and federal agencies: The unrealized losses on one available-for-sale and one held-to-maturity securities were 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 investments 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 two investments carries an S&P investment grade rating of A-. The remaining investment does not carry a rating.

 

Certificates of Deposit: The unrealized loss on the certificate of deposit was caused by interest rate increases. Certificates of deposit are cash deposits with a stated maturity at a correspondent bank of the Company. Because the Company does not intend to redeem the certificate prior to maturity, the Company does not consider that investment to be other-than-temporarily impaired at September 30, 2018.

 

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

 

16


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except share and per share data)

 

Company does not consider that investments to be other-than-temporarily impaired at September 30, 2018.

 

Mortgage-backed securities: The unrealized losses on the Company’s investment in sixty-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 September 30, 2018.

 

Collateralized mortgage obligations (CMOs): The unrealized loss associated with thirty-one 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 September 30, 2018.

 

In general, while the Company may, from time to time, sell portions of its investment securities portfolio as part of an investment strategy, the unrealized losses within the investment securities portfolio as of September 30, 2018 does not cause the Company to consider these investments to be other-than-temporarily impaired.

 

The amortized cost and fair value of securities as of September 30, 2018, 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.

 

 

 

September 30, 2018

 

 

 

Held-to-maturity

 

Available-for-sale

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

 

 

 

 

 

 

 

 

 

 

Less than 1 year

 

$

 

$

 

$

245

 

$

244

 

After 1 year through 5 years

 

 

 

3,654

 

3,588

 

After 5 years through 10 years

 

1,761

 

1,706

 

26,783

 

25,818

 

After 10 years

 

 

 

85,788

 

81,720

 

Total

 

$

1,761

 

$

1,706

 

$

116,470

 

$

111,370

 

 

For the nine months ended September 30, 2018 and September 30, 2017, proceeds from maturities, calls and principal repayments of securities were $12.8 million and $11.0 million, respectively.  During the nine months ended September 30, 2018 and September 30, 2017, proceeds from sales of securities available-for-sale amounted to $0 and $1.6 million, gross

 

17


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except share and per share data)

 

realized gains were $0 and $134 thousand, respectively. There were no realized losses as of September 30, 2018 or September 30, 2017.

 

Note 4.                                 Loans and Allowance for Loan Losses

 

A summary of loan balances by type follows:

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

 

 

Commercial real estate

 

$

593,541

 

$

526,657

 

Commercial and industrial

 

108,522

 

98,150

 

Commercial construction

 

144,830

 

123,444

 

Consumer residential

 

106,329

 

108,926

 

Consumer nonresidential

 

26,327

 

32,232

 

 

 

$

979,549

 

$

889,409

 

Less:

 

 

 

 

 

Allowance for loan losses

 

8,576

 

7,725

 

Unearned income and (unamortized premiums), net

 

1,245

 

732

 

Loans, net

 

$

969,728

 

$

880,952

 

 

18


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except share and per share data)

 

An analysis of the allowance for loan losses for the three and nine months ended September 30, 2018 and 2017, and for the year ended December 31, 2017, follows:

 

Allowance for Loan Losses

For the three months ended September 30, 2018

 

 

 

Commercial
Real Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

5,275

 

$

869

 

$

1,306

 

$

604

 

$

208

 

$

36

 

$

8,298

 

Charge-offs

 

 

 

 

 

(118

)

 

(118

)

Recoveries

 

 

10

 

 

 

35

 

 

45

 

Provision

 

209

 

18

 

31

 

10

 

69

 

14

 

351

 

Ending Balance

 

$

5,484

 

$

897

 

$

1,337

 

$

614

 

$

194

 

$

50

 

$

8,576

 

 

Allowance for Loan Losses

For the nine months ended September 30, 2018

 

 

 

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

)

 

 

(128

)

 

(214

)

Recoveries

 

 

40

 

 

 

35

 

 

75

 

Provision

 

652

 

175

 

146

 

(12

)

19

 

10

 

990

 

Ending Balance

 

$

5,484

 

$

897

 

$

1,337

 

$

614

 

$

194

 

$

50

 

$

8,576

 

 

Allowance for Loan Losses

For the three months ended September 30, 2017

 

 

 

Commercial
Real Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

4,583

 

$

817

 

$

907

 

$

571

 

$

106

 

$

28

 

$

7,012

 

Charge-offs

 

 

 

 

 

(33

)

 

(33

)

Recoveries

 

 

42

 

 

 

 

 

42

 

Provision

 

149

 

(118

)

68

 

19

 

30

 

102

 

250

 

Ending Balance

 

$

4,732

 

$

741

 

$

975

 

$

590

 

$

103

 

$

130

 

$

7,271

 

 

19


Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except share and per share data)

 

Allowance for Loan Losses

For the nine months ended September 30, 2017

 

 

 

Commercial
Real Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

4,266

 

$

1,032

 

$

375

 

$

500

 

$

121

 

$

158

 

$

6,452

 

Charge-offs

 

 

(44

)

 

 

(33

)

 

(77

)

Recoveries

 

 

98

 

 

 

33

 

 

131

 

Provision

 

466

 

(345

)

600

 

90

 

(18

)

(28

)

765

 

Ending Balance

 

$

4,732

 

$

741

 

$

975

 

$

590

 

$

103

 

$

130

 

$

7,271

 

 

Allowance for Loan Losses

At December 31, 2017

 

 

 

Commercial
Real Estate

 

Commercial and
Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

4,266

 

$

1,032

 

$

375

 

$

500

 

$

121

 

$

158

 

$

6,452

 

Charge-offs

 

 

(44

)

 

 

(33

)

 

(77

)

Recoveries

 

 

117

 

 

 

33

 

 

150

 

Provision

 

566

 

(337

)

816

 

126

 

147

 

(118

)

1,200

 

Beginning Balance

 

$

4,832

 

$

768

 

$

1,191

 

$

626

 

$

268

 

$

40

 

$

7,725

 

 

20


 

Table of Contents

 

Notes to Unaudited Consolidated Financial Statements

(Dollars in thousands, except share and per share data)

 

The following tables present the recorded investment in loans and impairment at September 30, 2018 and December 31, 2017, by portfolio segment:

 

Allowance for Loan Losses

At September 30, 2018

 

 

 

Commercial
Real Estate

 

Commercial
and Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Collectively evaluated for impairment

 

5,484

 

897

 

1,337

 

614

 

194

 

50

 

8,576

 

 

 

$

5,484

 

$

897

 

$

1,337

 

$

614

 

$

194

 

$

50

 

$

8,576

 

 

Loans Receivable

At September 30, 2018

 

 

 

Commercial
Real Estate

 

Commercial
and Industrial

 

Commercial
Construction

 

Consumer
Residential

 

Consumer
Nonresidential

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

724

 

$

128

 

$

 

$

587

 

$

 

$

 

$

1,439

 

Collectively evaluated for impairment

 

592,817

 

108,394

 

144,830

 

105,742

 

26,327

 

 

978,110