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FCVA > SEC Filings for FCVA > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for FIRST CAPITAL BANCORP, INC.

Form 10-Q for FIRST CAPITAL BANCORP, INC.


14-Nov-2012

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The purpose of this discussion is to focus on important factors affecting the Company's financial condition and results of operations. The discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements included elsewhere in this report.

This report contains forward-looking statements with respect to the financial condition, results of operations and business of the Company. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on information available at the time these statements and disclosures were prepared. Factors that may cause actual results to differ materially from those expected included the following:

General economic conditions may deteriorate and negatively impact the ability of borrowers to repay loans and depositors to maintain balances.

Changes in interest rates could reduce income.

Competitive pressures among financial institutions may increase.

The businesses that the Company is engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards.

New products developed or new methods of delivering products could result in a reduction in business and income for the Company.

Adverse changes may occur in the securities market.

OVERVIEW

Net income for the third quarter of 2012 was $828 thousand, and net income available to common shareholders was $743 thousand, or $0.06 per fully diluted share, compared to a net loss of $2.6 million, and a net loss allocable to common shareholders of $2.8 million or $0.93 per fully diluted share, in the third quarter of 2011.


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From a revenue and cost perspective, income before excluded items, which is a non-GAAP measurement, increased to $1.3 million for the third quarter of 2012 from $718 thousand for the third quarter of 2011. Contributing to the increase was an increase in net interest income of $198 thousand due to a reduction in interest expense resulting mostly from the restructuring of the FHLB advance portfolio. The following chart reconciles income before excluded items to net income for the periods presented.

                                                   Three Months Ended             Nine Months Ended
                                                     September 30,                  September 30,
                                                  2012            2011           2012            2011
                                                                (Dollars in thousands)
Income Before Excluded Items (non-GAAP
measurement)                                    $   1,276       $    718       $   3,302       $  2,774
Gain on Sale of Securities                            (53 )           -              (79 )         (644 )
Provision                                             156          4,726           9,031          8,572
FHLB Prepayment Penalty                                12             -            2,767             -
(Gains) Losses and Writedown on OREO                  (47 )           -            1,597            321
Additional Accrual                                     -              -              300             -

Income Before Taxes                                 1,208         (4,008 )       (10,314 )       (5,475 )
Taxes                                                 380         (1,416 )        (3,668 )       (1,993 )

Net Income                                      $     828       $ (2,592 )     $  (6,646 )     $ (3,482 )

The three months ended September 30, 2012 presents the results of the successful activities undertaken in the second quarter of 2012. The three months ended June 30, 2012 was one of the most active and exciting quarters in the Company's history. The Company successfully closed its $17.8 million rights offering, participated in the United States Treasury's auction of its TARP securities, was the successful bidder for $5 million of the those securities, implemented the Asset Resolution Plan required in our Standby Purchase Agreement with our standby purchaser and now majority shareholder, Kenneth R. Lehman, and retired $40 million of the Company's long term debt with the Federal Home Bank of Atlanta, with an additional $5 million in FHLB advances retired in the third quarter of 2012.

On May 11, 2012, the Company completed its rights offering and its offering of shares to a standby investor. Stockholders exercised subscription rights to purchase 4.0 million shares offered at a subscription price of $2.00 per share, and Kenneth R. Lehman, a private investor from Arlington, Virginia, purchased 4.9 million shares at the subscription price of $2.00 per share. In total, the Company raised gross proceeds of $17.8 million before expenses. The proceeds from the rights offering and the standby purchase were used to invest in the Company's subsidiary, First Capital Bank, to bolster its regulatory capital ratios and for general corporate purposes.

Under the Standby Purchase Agreement with Lehman, the Company was required to use all or a portion of the capital raised in the rights offering to significantly change our strategy with respect to up to $50 million of our assets, consisting primarily of other real estate owned, nonperforming loans and performing loans graded substandard or lower. During the second quarter, the Company and Lehman identified $33.5 million of nonperforming and performing loans and $5.9 million of other real estate owned as targets under the agreement. We changed our strategy to accelerate the resolution of these assets prior to December 31, 2013 in accordance with the Standby Purchase Agreement and the Asset Resolution Plan. As a result of this change in strategy, during the second quarter of 2012 nonperforming and performing loans were written down by $7.4 million and other real estate owned was written down $1.2 million. Company management feels that with the actions taken in the second quarter to accelerate the resolution of the identified assets, further significant losses in these portfolios are not expected and the Company is better positioned to be profitable in the future.

The forgoing actions had significant positive effects on the Company's credit statistics in the second quarter which continued into the third quarter of 2012. The Bank's nonperforming assets continued to drop, and were $13.8 or 3.8% of total loans at September 30, 2012, down from $14.6 million or 4.0% of total loans at the end of the second quarter of 2012 and compared to $25.3 million or 6.8% at the end of the prior year and $27.0 million or 7.2% of total loans at the end of the third quarter of 2011.


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On June 13, 2012, the United States Department of the Treasury announced that it priced the secondary public offering of 10,958 shares of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the "Preferred Stock") it held in First Capital Bancorp, Inc. at $920.11 per share. The Company was notified that it was the successful bidder for the purchase of 5,434 shares of the Preferred Stock for a total purchase price of $5.0 million, plus accrued and unpaid dividends on the Preferred Stock. The closing of the offering occurred on June 19, 2012. As a result of its successful bid in the offering, the Company retired 5,434 of its original 10,958 of shares of Preferred Stock. The remaining preferred shares of the Preferred Stock were purchased by one or more third parties.

Company retired $40 million of Federal Home Loan Bank of Atlanta advances in the second quarter of 2012 and $5 million of FHLB advances in the following quarter. The advances had an average interest rate of 3.08% representing an annual cost of approximately $1.2 million. The Company incurred prepayment penalties of approximately $2.8 million to retire this debt; however, the Company's earnings and net interest margin have already seen positive impacts of this action and expect to see significant improvement in future periods due to the repayment of this debt. Interest on FHLB advances for the third quarter of 2012 decreased $327 thousand to $87 thousand from $414 thousand for the third quarter of 2011.

Financial Condition

Total assets at September 30, 2012 were $529.5 million, down $12.2 million from $541.7 million at December 31, 2011. Net loans outstanding were $359.5 million at September 30, 2012, a decrease of $1.4 million compared to the 2011 year-end balance. Deposits increased by $7.1 million to $447.3 million, up 1.6% from December 31, 2011. Our deposit strategy was focused on decreasing noncore funding sources and single service CD relationships and increasing noninterest-bearing deposit accounts. Noninterest-bearing accounts were $51.5 million at September 30, 2012, up from $46.4 million at December 31, 2011.

At September 30, 2012, the Company's investment portfolio totaled $89.6 million, an increase of $2.7 million from $86.9 million at December 31, 2011. Most of the funds that are invested in the Company's investment portfolio are part of management's effort to balance interest rate risk, and to provide liquidity and income to the Company. Bank owned life insurance of $8.2 million was purchased during the second quarter of 2011 as an additional investment for the Company and to provide life insurance benefits for senior executives. The value of this investment increased to $9.2 million at September 30, 2012.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income represents a principal source of earnings for the Company. Net interest income during 2012 to date compared to net interest income for the comparable period of 2011 remained steady at approximately $12 million resulting from the reduction of the loan portfolio being offset by the effective restructuring of the FHLB advance portfolio and decline in interest bearing deposit liabilities.

Net interest margin increased 25 basis points to 3.54% for the three months ended September 30, 2012 from 3.29% for the third quarter of 2011, reflecting a decrease in average rate paid on interest-bearing liabilities of 42 basis points to 1.43% for the third quarter of 2012 from 1.85% for the third quarter of 2011. This was offset by a 14 basis point decrease in the average yield on earning assets. The yield on loans, net of discount, was 5.41% and 5.62% for the third quarters of 2012 and 2011, respectively, with the decrease due primarily to decreases in loans outstanding and lower rates during the period. The average yield on investments decreased to 2.72% for the third quarter of 2012 from 3.02% for the third quarter of 2011 while average balances in


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investments increased to $96.8 million for the third quarter of 2012 from $96.0 million for the third quarter of 2011. Average fed funds sold, which were earning 0.23% for the third quarters of 2012 and 2011, decreased to $10.6 million at the end of the third quarter of 2012 from $21.0 million at the end of the third quarter 2011. The average balance of interest bearing deposits increased to $388.3 million at the end of the third quarter of 2012 from $381.1 million at the end of the third quarter of 2011.

For the three months ended September 30, 2012, net interest income was up $198 thousand to $4.2 million for the third quarter of 2012 from $4.0 million for the third quarter of 2011. This increase was due to the disproportionate reduction in rates on interest bearing liabilities compared to the rate on earning assets.

Total interest and fees on loans, the largest component of net interest income, decreased $312 thousand or 5.8 % to $5.1 million during the third quarter of 2012 compared to $5.4 million for the same period in 2011 primarily due to decreases in loans outstanding since September 30, 2011.

Interest expense on deposits decreased $232 thousand to $1.4 million, or 14.3% for the third quarter of 2012 compared to the same period of 2011. The decrease in deposit expense was due to the restructuring of the deposit mix and a decrease in overall rates paid on deposits as interest rates paid on interest bearing deposits decreased 25 basis points to 1.43% for the third quarter of 2012 from 1.68% for the third quarter of 2011.

For the nine months ended September 30, 2012, the net interest margin increased to 3.36% from 3.28% for the nine months ended September 30, 2011. The improvement in the year to date margin is primarily a result of the successful restructuring of the FHLB advance portfolio which offset the decline in yield in the loan and investment portfolios.

Net interest income increased $63 thousand for the first nine months of 2012 compared to the first nine months of 2011.

Average Balances, Income and Expenses, Yields and Rates

Net interest income represents our principal source of earnings. Net interest income is the amount by which interest generated from earning assets exceeds the expense of funding those assets. Changes in volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income.

Earning assets consist primarily of loans, investment securities and other investments. Interest-bearing liabilities consist principally of deposits, FHLB advances and other borrowings.


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The following table illustrates average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders' equity and related income, expense and corresponding weighted-average yields and rates. The average balances used in these tables were calculated using daily average balances.

                                                              Three Months Ended September 30,
                                                       2012                                      2011
                                        Average       Income/       Yield/        Average       Income/        Yield/
                                        Balance       Expense        Rate         Balance       Expense         Rate
                                                                   (Dollars in thousands)
Assets:
Loans, net of unearned income (1)      $ 372,004      $  5,064         5.41 %    $ 379,535      $  5,376          5.62 %
Bank owned life insurance (2)              9,126           127         5.53 %        8,792           138          6.24 %
Investment securities:
U.S. Agencies                                999            10         3.99 %          707             4          2.38 %
Mortgage backed securities                13,691            66         1.92 %       15,259            92          2.39 %
CMO                                       41,607           232         2.21 %       39,009           245          2.49 %
Municipal securities (2)                   6,025            98         6.45 %       12,691           194          6.08 %
Corporate bonds                           16,815            99         2.35 %       13,045            77          2.35 %
Taxable municipal securities              12,300           118         3.82 %        8,978            97          4.28 %
SBA                                        1,376             9         2.57 %        1,747            (1 )       (0.36 )%
Other investments                          3,952            29         2.96 %        4,591            24          2.09 %

Total investment securities               96,765           661         2.72 %       96,027           732          3.02 %
Interest bearing deposits                 10,623             6         0.23 %       21,027            12          0.23 %

Total earning assets                   $ 488,518      $  5,858         4.77 %    $ 505,381      $  6,258          4.91 %

Cash and cash equivalents                  8,104                                     7,935
Allowance for loan losses                 (7,305 )                                  (9,603 )
Other assets                              30,620                                    28,885

Total assets                           $ 519,937                                 $ 532,598


Liabilities & Stockholders' Equity:
Interest checking                      $  10,437      $      8         0.31 %    $  10,751      $     10          0.35 %
Money market deposit accounts            137,626           174         0.50 %      151,396           258          0.68 %
Statement savings                          1,303             1         0.42 %          911             1          0.42 %
Certificates of deposit                  238,900         1,202         2.00 %      218,012         1,349          2.46 %

Total interest-bearing deposits          388,266         1,385         1.43 %      381,070         1,618          1.68 %

Fed funds purchased                           18            -          0.00 %           -             -             -  %
Repurchase agreements                      2,148             2         0.40 %        1,181             1          0.50 %
Subordinated debt                          7,155            38         2.09 %        7,155            34          1.90 %
FHLB advances                             23,859            88         1.46 %       53,370           414          3.07 %

Total interest-bearing liabilities       421,446         1,513         1.43 %      442,776         2,067          1.85 %


Noninterest-bearing liabilities:
Noninterest-bearing deposits              50,471                                    44,685
Other liabilities                          1,791                                     1,712

Total liabilities                         52,262                                    46,397
Shareholders' equity                      46,229                                    43,425

Total liabilities and shareholders'
equity                                 $ 519,937                                 $ 532,598


Net interest income                                   $  4,345                                  $  4,191

Interest rate spread                                                   3.34 %                                     3.06 %


Net interest margin                                                    3.54 %                                     3.29 %

Ratio of average interest earning
assets to average interest-bearing
liabilities                                                          115.92 %                                   114.14 %

(1) Includes nonaccrual loans

(2) Income and yields are reported on a taxable equivalent basis using a 34% tax rate.


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                                                              Nine Months Ended September 30,
                                                      2012                                      2011
                                       Average       Income/       Yield/        Average       Income/        Yield/
                                       Balance       Expense        Rate         Balance       Expense         Rate
                                                                  (Dollars in thousands)
Assets:
Loans, net of unearned income (1)     $ 375,625      $ 15,333         5.46 %    $ 388,019      $ 16,269          5.61 %
Bank owned life insurance (2)             9,044           380         5.61 %        4,866           209          5.73 %
Investment securities:
U.S. Agencies                             1,648            45         3.68 %        2,207            53          3.22 %
Mortgage backed securities               14,244           220         2.07 %       14,586           308          2.82 %
CMO                                      42,844           732         2.28 %       33,877           677          2.67 %
Municipal securities (2)                  6,419           310         6.45 %       13,824           651          6.30 %
Corporate bonds                          16,530           299         2.42 %        7,903           187          3.17 %
Taxable municipal securities             10,933           319         3.90 %       10,913           369          4.52 %
SBA                                       1,473            22         1.97 %        2,662           (13 )       (0.64 )%
Other investments                         4,306            96         2.98 %        4,587            81          2.35 %

Total investment securities              98,397         2,043         2.77 %       90,559         2,313          3.42 %
Interest bearing deposits                16,586            29         0.23 %       24,143            42          0.23 %

Total earning assets                  $ 499,652      $ 17,785         4.75 %    $ 507,587      $ 18,833          4.96 %

Cash and cash equivalents                 8,183                                     7,459
Allowance for loan losses                (7,981 )                                 (10,528 )
Other assets                             29,636                                    24,977

Total assets                          $ 529,490                                 $ 529,495


Liabilities & Stockholders' Equity:
Interest checking                     $  11,000      $     24         0.30 %    $  10,078      $     27          0.37 %
Money market deposit accounts           142,839           535         0.50 %      145,837           848          0.78 %
Statement savings                         1,244             4         0.42 %          916             3          0.42 %
Certificates of deposit                 229,521         3,642         2.12 %      221,218         4,150          2.51 %

Total interest-bearing deposits         384,604         4,205         1.46 %      378,049         5,028          1.78 %

Fed funds purchased                           6            -          0.00 %           -             -             -  %
Repurchase agreements                     1,380             4         0.40 %        1,041             4          0.50 %
Subordinated debt                         7,155           117         2.19 %        7,155           102          1.92 %
FHLB advances                            40,803           878         2.87 %       54,451         1,234          3.03 %

Total interest-bearing liabilities      433,948         5,204         1.60 %      440,696         6,368          1.93 %


Noninterest-bearing liabilities:
Noninterest-bearing deposits             47,881                                    43,096
Other liabilities                         1,760                                     1,767

Total liabilities                        49,641                                    44,863
Shareholders' equity                     45,901                                    43,936

Total liabilities and shareholders'
equity                                $ 529,490                                 $ 529,495


Net interest income                                  $ 12,581                                  $ 12,465

Interest rate spread                                                  3.15 %                                     3.03 %


Net interest margin                                                   3.36 %                                     3.28 %

Ratio of average interest earning
assets to average interest-bearing
liabilities                                                         115.14 %                                   115.18 %

(1) Includes nonaccrual loans

(2) Income and yields are reported on a taxable equivalent basis using a 34% tax rate.


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Noninterest Income

Total noninterest income was $621 thousand for the third quarter of 2012, compared to $313 thousand for the same period of 2011. Fees on deposits increased 19.8% to $97 thousand for the third quarter of 2012 compared to $81 thousand for the comparable period in 2011. Gain on sale of securities were $53 thousand for the three months ended September 30, 2012 compared to no gain on sale of securities as no security sales were transacted during the third quarter of 2011. The mortgage division added $253 thousand to noninterest income as gains on sales of loans were recognized in the third quarter 2012 compared to zero for the third quarter 2011 as the division was not yet operational in the third quarter of 2011. Other noninterest income decreased $14 thousand for the second quarter of 2012 to $218 thousand compared to $232 thousand for the same period of 2011. This decrease was due primarily to a decline in the cash surrender value of life insurance.

For the nine months ended September 30, 2012, noninterest income decreased $27 thousand to $1.3 million for the first nine months of 2012 from $1.4 thousand for the comparable period in 2011, attributable to fewer security sales in the first nine months of 2012 compared to 2011 being offset partially by the gain on sale of loans and overall increase in the cash surrender value of life insurance.

Noninterest Expense

This category includes all expenses other than interest paid on deposits and borrowings. Total noninterest expenses for the third quarter of 2012 remained relatively stable and totaled $3.4 million, a decrease of $140 thousand, compared to $3.6 million for the same period in 2011.

For the nine months ended September 30, 2012, total noninterest expense increased $4.4 million, or 42.8% to $14.7 million from $10.3 million for the comparable period in 2011. The primary cause of the increase was the implementations of the Asset Resolution Plan in accordance with the Standby Purchase Agreement as part of the rights offering that closed May 19, 2012 and the restructuring of the Federal Home Loan Bank of Atlanta (FHLB) advances. Write-downs and losses on OREO expense increased $1.3 million to $1.6 million for the nine months ended September 30, 2012, from $321 thousand for the nine months ended September 30, 2011. A prepayment penalty of $2.8 million was incurred in the second quarter of 2012 as part of the FHLB restructuring that was designed to reduce interest expense and better match the maturity of the Company's current asset portfolio.

Income Taxes

The provision for income taxes is based upon the results of operations, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.

The effective tax rate for the three month periods ended September 30, 2012 and 2011 was 31.5% and 35.3%, respectively. The effective tax rate for the nine months ended September 30, 2012 and 2011 was 35.6% and 36.4%, respectively.


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ASSET QUALITY

The Company's allowance for loan losses is an estimate of the amount needed to provide for probable losses inherent in the loan portfolio. In determining adequacy of the allowance, management considers a number of factors, including, the Company's historical loss experience, the size and composition of the loan . . .

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