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FCVA > SEC Filings for FCVA > Form 10-K on 29-Mar-2013All Recent SEC Filings

Show all filings for FIRST CAPITAL BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for FIRST CAPITAL BANCORP, INC.


29-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information about the results of operations and financial condition, liquidity and capital resources. This discussion should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements.

Overview

The Company is a bank holding company which owns 100% of the stock of the Bank. We are headquartered in Glen Allen, Virginia and conduct our primary operations through our wholly owned subsidiary. Through its seven full service branch offices and courier service, the Bank serves the greater Richmond metropolitan area which includes the counties of Henrico, Chesterfield and Hanover, the Town of Ashland and the City of Richmond, Virginia. We target small to medium-sized businesses and consumers in our market area and emerging suburbs outside of the greater Richmond metropolitan area. In addition, we strive to develop personal, knowledgeable relationships with our customers, while at the same time offering products comparable to statewide regional banks located in its market area. We believe that the marketing of customized banking services has enabled it to establish a niche in the financial services marketplace in the Richmond metropolitan area.

The continuing difficult economic environment during 2012 and 2011, as well as the implementation of the Company's Asset Resolution Plan in the second quarter of 2012, resulted in continuing elevated loan loss provisions, which negatively impacted our financial performance as we realized a net loss of $6.0 million for the year ended December 31, 2012, compared to a $3.1 million loss for the year ended December 31, 2011. Net loss allocable to common shareholders, which adds to the net loss the dividends and discount accretion on preferred stock, was a loss of $6.6 million for the year ended December 31, 2012 compared to a loss of $3.8 million for 2011. A key factor affecting the 2012 results was a $9.2 million provision for loan losses due largely to the chargeoffs associated with the Asset Resolution Plan. Return on average equity for the year ended December 31, 2012 was -13.01%, while return on average assets was -1.13%, compared to -7.11% and -0.58%, respectively, for 2011.

For the year ended December 31, 2012, assets increased $1.3 million to $542.9 million or 0.23% from $541.7 million at December 31, 2011. Total net loans, excluding loans held for sale, at December 31, 2012 were $368.9 million, an increase of $8.0 million, or 2.20%, from the December 31, 2011 amount of $361.0 million. Deposits increased $18.9 million to $459.1 million, or 4.30% from the December 31, 2011 amount of $440.2 million.

The Company remains well capitalized with capital ratios above the regulatory minimums.

The Company has been keenly focused on five primary objectives for the last three years. In order of importance, those areas are asset quality, capital preservation, liquidity, reducing exposure to real estate acquisition and development loans and improving core earnings. Each of these objectives will be discussed elsewhere in this report.

Critical Accounting Policies

The financial condition and results of operations presented in the consolidated financial statements, the accompanying notes to the consolidated financial statements and this section are, to a large degree, dependent upon our accounting policies. The selection and applications of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.


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First Capital Bank's critical accounting policies relate to the evaluation of the allowance for loan losses and estimation of fair value of financial instruments and other assets.

The evaluation of the allowance for loan losses is based on management's opinion of an amount that is adequate to absorb probable losses inherent in the Bank's existing portfolio. The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450 Contingencies, which requires that losses be accrued when occurrence is probable and can be reasonably estimated, and
(ii) ASC 310 Receivables, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

The Company's allowance for loan losses is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to applicable GAAP. Management's estimate of each homogenous pool component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; geographic, borrower and industry concentrations; seasoning of the loan portfolio; the findings of internal credit quality assessments and results from external bank regulatory examinations. These factors, as well as historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations.

Applicable GAAP requires that the impairment of loans that have been separately identified for evaluation are measured based on the present value of expected future cash flows or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral) and for which management has determined foreclosure is probable, the measure of impairment is to be based on the net realizable value of the collateral. This statement also requires certain disclosures about investments in impaired loans and the allowance for loan losses and interest income recognized on impaired loans.

Reserves for commercial loans are determined by applying estimated loss factors to the portfolio based on historical loss experience and management's evaluation and "risk grading" of the commercial loan portfolio. Reserves are provided for noncommercial loan categories using historical loss factors applied to the total outstanding loan balance of each loan category. Additionally, environmental factors based on national and local economic conditions, as well as portfolio-specific attributes, are considered in estimating the allowance for loan losses.

Although management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if future economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

Securities available for sale and certain mortgage loans held for sale, are recorded at fair value on a recurring basis. From time to time, certain assets, consisting primarily of other real estate owned and impaired loans, may be recorded at fair value on a non-recurring basis. These non-recurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring during the period. For example, if the fair value of an asset in these categories falls below its cost basis, it is considered to be at fair value at the end of the period of the adjustment. In periods where there is no adjustment,


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the asset is generally not considered to be at fair value. Management believes this is a critical accounting policy because the estimation of fair value involves a high degree of complexity and requires us to make subjective judgments that often require assumptions or estimates about various matters.

Results of Operations

Net Interest Income

We generate a significant amount of our income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest-earning assets outstanding during the period and the interest rates earned thereon. Interest expense is a function of the average amount of deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on non-accrual loans and the amount of additions to the allowance for loan losses.

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.


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The following table reflects an analysis of our net interest income using the daily average balance of our assets and liabilities as of the periods indicated.

                                                                  Year Ended December 31,
                                                      2012                                      2011
                                       Average       Income/       Yield/        Average       Income/        Yield/
                                       Balance       Expense        Rate         Balance       Expense         Rate
                                                                  (Dollars in thousands)
Assets:
Loans, net of unearned income (1)     $ 377,246      $ 20,438         5.42 %    $ 384,131      $ 21,511          5.60 %
Bank owned life insurance (2)             9,087           507         5.58 %        5,877           333          5.66 %
Investment securities:
U.S. Agencies                             1,335            50         3.79 %        1,814            60          3.28 %
Mortgage backed securities               13,589           278         2.05 %       14,919           389          2.60 %
CMO                                      41,705           945         2.27 %       35,093           907          2.59 %
Municipal securities (2)                  6,256           403         6.44 %       13,423           840          6.26 %
Corporate bonds                          16,585           397         2.39 %        9,679           271          2.80 %
Taxable municipal securities             11,213           428         3.82 %       10,601           471          4.44 %
SBA                                       1,433            28         1.96 %        2,407            (8 )       (0.33 )%
Other investments                         4,075           136         3.33 %        4,581           110          2.40 %

Total investment securities              96,191         2,665         2.77 %       92,517         3,040          3.29 %
Interest bearing deposits                18,843            44         0.23 %       25,689            59          0.23 %

Total earning assets                  $ 501,367      $ 23,654         4.72 %    $ 508,214      $ 24,943          4.91 %

Cash and cash equivalents                 8,077                                     7,666
Allowance for loan losses                (7,800 )                                 (10,202 )
Other assets                             29,549                                    26,407

Total assets                          $ 531,193                                 $ 532,085

Liabilities & Stockholders' Equity:
Interest checking                     $  10,985      $     34         0.31 %    $  10,279      $     37          0.36 %
Money market deposit accounts           142,940           700         0.49 %      148,240         1,077          0.73 %
Statement savings                         1,278             5         0.41 %          929             4          0.42 %
Certificates of deposit                 233,164         4,816         2.07 %      221,826         5,475          2.47 %

Total interest-bearing deposits         388,367         5,555         1.43 %      381,274         6,593          1.73 %

Fed funds purchased                           5            -          0.00 %           -             -             -  %
Repurchase agreements                     1,365             5         0.40 %        1,331             7          0.49 %
Subordinated debt                         7,155           154         2.15 %        7,155           139          1.95 %
FHLB advances                            36,831           960         2.61 %       53,329         1,641          3.08 %

Total interest-bearing liabilities      433,723         6,674         1.54 %      443,089         8,380          1.89 %


Noninterest-bearing liabilities:
Noninterest-bearing deposits             49,592                                    43,973
Other liabilities                         1,707                                     1,752

Total liabilities                        51,299                                    45,725
Shareholders' equity                     46,171                                    43,271

Total liabilities and shareholders'
equity                                $ 531,193                                 $ 532,085


Net interest income                                  $ 16,980                                  $ 16,563

Interest rate spread                                                  3.18 %                                     3.02 %


Net interest margin                                                   3.39 %                                     3.26 %

Ratio of average interest earning
assets to average interest-bearing
liabilities                                                         115.60 %                                   114.70 %

(1) Includes nonaccrual loans

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


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Year ended December 31, 2012 compared to year ended December 31, 2011

The low interest rates during the last year have placed downward pressure on the Company's yield on earning assets and related interest income. The decline in earning asset yields, however, has been offset principally by repricing of money market accounts, certificates of deposit to lower yields, and FHLB advances. The Company also expects net interest margin to be negatively impacted by continued low rates over the next several quarters.

Net interest income for the year ended December 31, 2012 increased 2.45% to $16.3 million from $15.9 million for the year ended December 31, 2011. Net interest income increased due to a 13 basis point increase in the net interest margin from 3.26% for the year ended December 31, 2011 to 3.39% for the comparable period of 2012.

Average earning assets decreased $6.8 million, or 1.35%, to $501.4 million for 2012 from $508.2 million for 2011. Average loans, net of unearned income decreased $6.9 million for 2012 to $377.2 million. The average rate earned on net loans, decreased 18 basis points to 5.42% from 5.60% for the year ended December 31, 2011. The average balance in our securities portfolio increased $3.7 million in 2012 to $96.2 million from $92.5 million in 2011. We used liquidity generated by deposits and TARP funds to mitigate interest rate risk and pick up spreads over the Federal funds rate. During 2012, the Company sold securities to restructure the investment portfolio to reduce the duration, volatility and provide more cash flow to the Company. Reinvestment of the proceeds resulted in a reduction in the average yield on the investment portfolio from 3.29% for 2011 to 2.77% for 2012. Investment income, on a tax equivalent basis, decreased to $2.7 million for 2012 from $3.0 million for 2011. Interest on interest bearing deposits decreased from $59 thousand for 2011 to $44 thousand for 2012 as the average balance sold decreased from $25.7 million in 2011 to $18.8 million in 2012 and the yield remained unchanged at 23 basis points. As a result of these changes, the yield on earning assets decreased 19 basis points to 4.72% for 2012 from 4.91% for 2011.

Average interest bearing deposit liabilities increased $7.1 million or 1.86% to $388.4 million for 2012 from $381.3 million for 2011. Interest expense on deposits decreased $1.0 million for 2012 compared to 2011. The average cost of interest-bearing deposits decreased 30 basis points from 1.73% for 2011 to 1.43% for 2012. The decrease in cost of interest-bearing deposits is the result of declining interest rates and change in the mix of deposits. The cost of certificates of deposit decreased 40 basis points from 2.47% for 2011 to 2.07% for 2012 despite the average outstanding balances increasing $11.3 million. Money market accounts decreased on average $5.3 million for 2012 compared to 2011 as the cost decreased from 0.73% to 0.49% for 2012. We expect deposit costs to continue to decrease in early 2013 as certificates of deposit reprice and the rate on money market accounts decreases, but to a lesser extent than such costs decreased in 2012.

The average rate on advances from the Federal Home Loan Bank of Atlanta decreased 47 basis points from 3.08% to 2.61% for 2012 due to the restructuring of the FHLB advance portfolio in 2012. In addition, subordinated debt pricing increased 20 basis points as the cost was tied to LIBOR for 2012.


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The following table analyzes changes in net interest income attributable to changes in the volume of interest-earning assets and interest bearing liabilities compared to changes in interest rates.

                                                  2012 vs. 2011                            2011 vs. 2010
                                               Increase (Decrease)                      Increase (Decrease)
                                               Due to Changes in:                        Due to Changes in:
                                       Volume         Rate         Total         Volume         Rate         Total
                                             (Dollars in thousands)                    (Dollars in thousands)

Earning Assets:
Loans, net of unearned income          $  (386 )    $   (687 )    $ (1,073 )    $ (1,458 )    $   (339 )    $ (1,797 )
BOLI                                       182            (8 )         174           287            25           312
Investment securities:                     121          (495 )        (374 )         206          (517 )        (311 )
Interest bearing deposits                  (16 )           1           (15 )          14            -             14

Total earning assets                       (99 )      (1,189 )      (1,288 )        (951 )        (831 )      (1,782 )


Interest-Bearing Liabilities:
Interest checking                            3            (6 )          (3 )           4            -              4
Money market deposit accounts              (39 )        (338 )        (377 )          17          (723 )        (706 )
Statement savings                            1            -              1             1            -              1
Certificates of deposit                    280          (938 )        (658 )        (211 )        (636 )        (847 )
Repurchase agreements                       -             (1 )          (1 )          -             -             -
Subordinated debt                           -             14            14            -            (90 )         (90 )
FHLB advances                             (508 )        (173 )        (681 )         (30 )        (170 )        (200 )

Total interest-bearing liabilities        (263 )      (1,442 )      (1,705 )        (219 )      (1,619 )      (1,838 )


Change in net interest income          $   164      $    253      $    417      $   (732 )    $    788      $     56

Provision for Loan Losses

The provision for loan losses is based upon management's estimate of the amount required to maintain an adequate allowance for loan losses as discussed within the Critical Accounting Policies section above. The provision for loan losses for the year ended December 31, 2012 was $9.2 million compared to $9.4 million for the year ended December 31, 2011. Changes in the amount of provision for loan losses during each period reflect the results of the Bank's analysis used to determine the adequacy of the allowance for loan losses. We are committed to making loan loss provisions that maintain an allowance that adequately reflects the risk inherent in our loan portfolio. This commitment is more fully discussed in the "Asset Quality" section below.

Non-Interest Income

Year ended December 31, 2012 compared to year ended December 31, 2011

Non-interest income has been and will continue to be an important factor for increasing profitability. Management continues to consider areas where non-interest income can be increased.

Non-interest income decreased $98 thousand to $2.0 million for the year ended December 31, 2012 compared to $2.1 million for the same period in 2011.


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The primary cause of the decrease in non-interest income was the sale of securities resulting in a gain of $1.1 million in 2011 as compared to a gain of $79 thousand in 2012. Fees on deposits increased $54 thousand to $377 thousand for the 2012 year compared to $323 for the 2011 year. Other noninterest income increased $208 thousand to $857 thousand for the 2012 year compared to $649 thousand for the 2011 year. Included in other noninterest income was the income on bank owned life insurance, resulting in an increase in income of $115 thousand for the year 2012. Also included in other noninterest income was the gain on sale of mortgage loans, which increased substantially as the mortgage group was in place the full year for 2012, resulting in an increase in income of $640 thousand from $29 thousand in 2011 to $669 thousand in 2012.

Non-Interest Expense

Year ended December 31, 2012 compared to year ended December 31, 2011

This category includes all expenses other than interest paid on deposits and borrowings. Total noninterest expense increased 35.96% or $4.9 million to $18.4 million for 2012 as compared to $13.5 million for the year 2011. Noninterest expense was 3.47% of average assets for the year ended December 31, 2011.

Salaries and employee benefits increased 18.55% to $7.6 million for the year 2012 as compared to $6.4 million for 2011. Salaries and benefits increased primarily due to adding additional lending team members in 2012. In addition, our mortgage operation was started during the third quarter of 2011 in which 10 individuals were employed for that function for the full year of 2012.

Occupancy costs decreased $24 thousand as the result of the expiration of a lease for a branch that had moved prior to the expiration of the lease. Depreciation expense increased $21 thousand due an investment in technology.

Professional fees decreased $32 thousand for the year 2012 to $644 thousand from $676 thousand in 2011. This was primarily the result of a consistent volume of customer work-out agreements, foreclosures and settlements in 2012.

Advertising and marketing costs increased $12 thousand to $285 thousand in 2012 from $273 thousand in 2011, as additional marketing and name branding was implemented in 2012.

FDIC premiums decreased $53 thousand from $758 thousand in 2011 to $705 thousand in 2012, the result of a change in the calculation of the premium from deposits outstanding to average liabilities outstanding effective June 30, 2011.

Virginia capital stock tax decreased $234 thousand, or 49.37%, to $240 thousand during 2012 from $474 thousand for 2011. This decrease was due to the decrease in the equity of the Bank during the year.

OREO write-down and losses related to revaluation of existing values and losses on sale of OREO totaled $1.7 million in 2012 as compared to $747 thousand in 2011 as values in the real estate market continued to deteriorate resulting in write downs in the value of the properties in connection with the Asset Resolution Plan implemented following the completion of the Rights Offering.

In the second quarter of 2012, the FHLB advance portfolio was restructured incurring one-time prepayment penalties totaling $2.8 million.

Other expenses increased $247 thousand to $2.3 million in 2012 from $2.0 million in 2011 due to the compliance function transitioning to an outsourced function from an employee function and expenses related to the mortgage operation increasing in volume during 2012.


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Income Taxes

Our reported income tax benefit was $3.3 million for 2012 and income tax benefit was $1.9 million for 2011. Note 11 of our consolidated financial statements provides a reconciliation between the amount of income tax benefit/expense computed using the federal statutory rate and our actual income tax benefit/expense. Also included in Note 11 to the consolidated financial statements is information regarding the principal items giving rise to deferred taxes for the two years ended December 31, 2012 and 2011.

Financial Condition

Assets

Total assets increased to $542.9 million at December 31, 2012, compared to $541.7 million at December 31, 2011 representing an increase of $1.3 million or 0.23%. Average assets decreased 0.17% from $532.1 million for the year ended December 31, 2011 to $531.2 million for the year ended December 31, 2012. Stockholders' equity increased 15.74% to $47.0 million for the year ended December 31, 2012 as compared to $40.7 million for the same period in 2011.

Loans

Our loan portfolio is the largest component of our earning assets. Total loans, which exclude the allowance for loan losses and deferred loan fees and costs, at December 31, 2012, were $376.1 million, an increase of $6.0 million from $370.1 million at December 31, 2011. Commercial real estate increased $1.0 million or 0.73% to $144.0 million and represented 38.30% of the portfolio. Other construction, land development and other land loans decreased $3.6 million, or 7.37%, to $45.1 million from $48.6 million and represented 11.98% of the portfolio, down from 13.14% at December 31, 2011. The allowance for loan losses was $7.3 million, down 21.61% and represented 1.93% of total loans outstanding at December 31, 2012 down from 2.51% at December 31, 2011.


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Major classifications of loans are as follows:

                                 2012          2011          2010          2009          2008
                                                    (Dollars in thousands)
 Real estate
 Residential                   $ 131,144     $ 127,541     $ 118,209     $ 110,437     $  97,314
 Commercial                      144,034       142,989       145,399       125,445       106,796
. . .
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