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FCVA > SEC Filings for FCVA > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for FIRST CAPITAL BANCORP, INC.


15-May-2013

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 first quarter of 2013 was $795 thousand, and net income available to common stockholders was $709 thousand, or $0.05 per fully diluted share, compared to a net income of $304 thousand, and a net income available to common stockholders of $134 thousand or $0.05 per fully diluted share, for the first quarter of 2012.


Table of Contents

From a revenue and cost perspective, income after excluding certain items, which is a non-GAAP measurement, increased to $1.3 million for the first quarter of 2013 from $974 thousand for the first quarter of 2012. Contributing to the increase was an increase in net interest income of $307 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
                                                                 March 31,
                                                            2013              2012
                                                          (Dollars in thousands)
  Income Before Excluded Items (non-GAAP measurement)   $       1,300         $ 974
  Gain on Sale of Securities                                      (31 )         (27 )
  Provision for Loan Losses                                       100           565
  Losses and Writedown on OREO                                     98           124

  Net Income Before Taxes                                       1,133           312
  Income Tax Expense                                              338             8

  Net Income                                            $         795         $ 304

The three months ended March 31, 2013, presents the continued positive 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. These activities have provided a reduction in interest expense related to the FHLB advance portfolio and allowed for immediate and continued improvement in our credit quality statistics which have ultimately led to a better return for our shareholders.

Financial Condition

Total assets at March 31, 2013, were $526.3 million, down $16.7 million from $542.9 million at December 31, 2012. Cash and cash equivalents decreased $21.2 million to $14.1 at March 31, 2013. This decrease was used to fund the increase in net loans outstanding, which were $380.8 million at March 31, 2013, an increase of $11.9 million compared to the 2012 year-end balance. Additionally, the decrease in cash and cash equivalents was used fund the decrease in deposits of $15.9 million to $443.2 million, down 3.46% from December 31, 2012. 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 $57.9 million at March 31, 2013, down slightly from $60.1 million at December 31, 2012 as expected due to seasonal fluctuations in these accounts. Interest bearing accounts were managed downward by $13.6 million to $385.4 million at March 31, 2013.

At March 31, 2013, the Company's investment portfolio totaled $86.2 million, a decrease of $3.5 million from $89.7 million at December 31, 2012. 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.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income represents the principal source of earnings for the Company. Net interest income during the first quarter of 2013 compared to net interest income for the comparable period of 2012 improved to $4.2 million from $3.9 million, resulting from the effective restructuring of the FHLB advance portfolio and the decline in rate and balance of interest bearing deposit liabilities.


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Net interest margin increased 31 basis points to 3.58% for the three months ended March 31, 2013 from 3.27% for the first quarter of 2012, reflecting a decrease in average rate paid on interest-bearing liabilities of 39 basis points to 1.32% for the first quarter of 2013 from 1.71% for the first quarter of 2012. This was slightly offset by a 7 basis point decrease in the average yield on earning assets. The yield on loans, net of unamortized fees and costs, was 5.26% and 5.51% for the first quarters of 2013 and 2012, respectively, with the decrease due primarily to lower rates during the period. The average yield on investments decreased to 2.74% for the first quarter of 2013 from 2.84% for the first quarter of 2012 while average balances in investments decreased to $89.1 million for the first quarter of 2013 from $98.9 million for the first quarter of 2012. Average interest bearing deposits at the Federal Reserve, which were earning 0.25% and 0.24% for the first quarters of 2013 and 2012, respectively, decreased to $10.6 million at the end of the first quarter of 2013 from $20.2 million at the end of the first quarter 2012. The average balance of interest bearing deposits increased to $387.5 million for the first quarter of 2013 from $387.0 million for the first quarter of 2012.

For the three months ended March 31, 2013, net interest income was up $307 thousand to $4.2 million from $3.9 million for the first quarter of 2012. This increase was due primarily to the effective restructuring of the FHLB advance portfolio in the second quarter of 2012.

Total interest and fees on loans, the largest component of net interest income, decreased $115 thousand or 2.23% to $5.0 million during the first quarter of 2013 compared to $5.1 million for the same period in 2012 primarily due to decreases in the interest rate environment.

Interest expense on deposits decreased $189 thousand to $1.3 million, or 13.10% for the first quarter of 2013 compared to $1.4 million for the same period of 2012. 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 19 basis points to 1.31% for the first quarter of 2013 from 1.50% for the first quarter of 2012.

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.


Table of Contents

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 March 31,
                                                       2013                                        2012
                                        Average       Income/        Yield/         Average       Income/       Yield/
                                        Balance       Expense         Rate          Balance       Expense        Rate
                                                                    (Dollars in thousands)
Assets:
Loans, net of unearned income (1)      $ 388,614      $  5,033          5.26 %     $ 376,051      $  5,147         5.51 %
Bank owned life insurance (2)              9,297           125          5.46 %         8,962           125         5.63 %
Investment securities:
U.S. Agencies                                 -             -           0.00 %         1,999            18         3.58 %
Mortgage backed securities                12,036            58          1.97 %        14,796            81         2.20 %
Corporate bonds                           14,936            90          2.44 %        16,317            99         2.44 %
Municipal securities (2)                   5,526            89          6.53 %         6,964           112         6.50 %
Taxable municipal securities              16,704           139          3.37 %         9,531            94         3.96 %
CMO                                       35,879           197          2.23 %        43,181           253         2.35 %
SBA                                          637            (2 )       (1.49 )%        1,579             9         2.25 %
Other investments                          3,404            30          3.66 %         4,509            33         2.90 %

Total investment securities               89,122           601          2.74 %        98,876           699         2.84 %
Interest bearing deposits                 10,566             6          0.25 %        20,186            12         0.24 %

Total earning assets                   $ 497,599      $  5,765          4.70 %     $ 504,075      $  5,983         4.77 %

Cash and cash equivalents                  7,719                                       8,079
Allowance for loan losses                 (7,923 )                                    (9,146 )
Other assets                              27,311                                      29,243

Total assets                           $ 524,706                                   $ 532,251


Liabilities & Stockholders' Equity:
Interest checking                      $  12,613      $     10          0.33 %     $  11,412      $      8         0.29 %
Money market deposit accounts            142,910           144          0.41 %       152,442           190         0.50 %
Statement savings                          1,406             1          0.32 %         1,147             1         0.42 %
Certificates of deposit                  230,593         1,098          1.93 %       222,019         1,244         2.25 %

Total interest-bearing deposits          387,522         1,253          1.31 %       387,020         1,443         1.50 %

Fed funds purchased                           72            -           0.61 %            -             -            -  %
Repurchase agreements                      1,105             1          0.40 %         1,021             1         0.40 %
Subordinated debt                          7,155            34          1.94 %         7,155            42         2.35 %
FHLB advances                             25,000            81          1.31 %        50,000           402         3.24 %

Total interest-bearing liabilities       420,854         1,369          1.15 %       445,196         1,888         1.71 %


Noninterest-bearing liabilities:
Noninterest-bearing deposits              54,862                                      44,327
Other liabilities                          1,849                                       1,725

Total liabilities                         56,711                                      46,052
Shareholders' equity                      47,141                                      41,003

Total liabilities and shareholders'
equity                                 $ 524,706                                   $ 532,251


Net interest income                                   $  4,396                                    $  4,095

Interest rate spread                                                    3.38 %                                     3.07 %


Net interest margin                                                     3.58 %                                     3.27 %

Ratio of average interest earning
assets to average interest-bearing
liabilities                                                           118.24 %                                   113.23 %

(1) Includes nonaccrual loans

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


Table of Contents

Noninterest Income

Total noninterest income was $602 thousand for the first quarter of 2013, compared to $340 thousand for the same period of 2012. The mortgage division added $284 thousand to noninterest income from gains on sales of loans in the first quarter 2013 compared to $37 thousand for the first quarter 2012 as the division was newly operational in the first quarter of 2012. Other noninterest income increased $10 thousand for the first quarter of 2013 to $199 thousand compared to $189 thousand for the same period of 2012. This increase was primarily generated by the investment group.

Noninterest Expense

This category includes all expenses other than interest paid on deposits and borrowings. Total noninterest expenses for the first quarter of 2013 increased to $3.6 million, an increase of $213 thousand or 6.27%, compared to $3.4 million for the same period in 2012. Salaries and employee benefits increased $290 thousand to $2.0 million for the first quarter of 2013 compared to $1.7 million for the first quarter of 2012 representing the continued growth in the lending area including our mortgage operation. The assessment for FDIC insurance decreased $100 thousand to $82 thousand for the first quarter of 2013 from $182 for the first quarter of 2012 as the calculation of the assessment changed.

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 March 31, 2013 and 2012 was 29.83% and 2.56%, respectively.

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 portfolio, specific impaired loans, the overall level of nonperforming loans, the value and adequacy of collateral and guarantors, experience and depth of lending staff, effects of credit concentrations and economic conditions. Because the risk of loan loss includes general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses can only be an estimate.

Total nonperforming assets, which consist of nonaccrual loans, loans past due 90 days and still accruing interest, and OREO, were $10.2 million at March 31, 2013, down from $22.8 million at March 31, 2012. This decrease reflects the implementation of the Asset Resolution Plan in accordance with the Standby Purchase Agreement of the rights offering that closed May 19, 2012. At December 31, 2012, nonperforming assets totaled $13.1 million. Nonperforming assets are composed largely of loans secured by real estate and repossessed properties in our OREO portfolio. At the end of the first quarter of 2013, OREO was $3.8 million, down from $6.4 million at March 31, 2012. At March 31, 2013, there were $2.2 million of troubled debt restructurings that were performing loans.


Table of Contents

Nonaccrual loans were $6.4 million at March 31, 2013, continuing to decrease from $16.4 million at March 31, 2012 and $8.0 million at December 31, 2012. The decrease reflects the continued efforts by the Company to decrease nonaccruals in a challenging economic environment.

Loan charge-offs, net of recoveries, amounted to a net recovery of $98 thousand for the first quarter of 2013 compared to a net charge-off of $1.8 million for the first quarter of 2012. For the first quarter of 2013, the provision for loan losses was $100 thousand compared to $565 thousand for the first quarter of 2012, and compared to $165 thousand for the fourth quarter of 2012. With the level of loans secured by real estate and the decreased nonperforming assets, management is confident that we can successfully manage through the continuing difficult economic environment.

Loans past due 30 to 89 days stayed consistent at $2.1 million at the end of the first quarter of 2013 and year ended 2012, and decreased $800 thousand from $3.0 million at March 31, 2012.

Although the Company believes it has a sufficient allowance for its existing portfolio, there can be no assurances that an additional allowance for losses on existing loans may not be necessary in the future. The allowance for loan losses totaled $7.5 million at March 31, 2013, compared to $8.0 million at March 31, 2012 and $7.3 million at December 31, 2012. The ratio of the allowance for loan losses to total loans outstanding at March 31, 2013 was 1.92% compared to 1.93% at December 31, 2012 and 2.13% at March 31, 2012. The movement in this ratio results from, and is directionally consistent with, the improvement in the Company's credit quality statistics.

The following table summarizes the Company's nonperforming assets at the dates indicated.

                                                     2013                          2012
                                                   March 31,          December 31,          March 31,
                                                                 (Dollars in thousands)
Nonaccrual loans                                  $     6,366        $        8,014        $    16,410
Loans past due 90 days and accruing interest               -                  1,338                 -

Total nonperforming loans                               6,366                 9,352             16,410
Other real estate owned                                 3,841                 3,771              6,369

Total nonperforming assets                        $    10,207        $       13,123        $    22,779


Allowance for loan losses to period end loans            1.92 %                1.93 %             2.13 %
Nonperforming assets to total assets                     1.94 %                2.42 %             4.30 %
Allowance for loan losses to nonaccrual loans          117.30 %               90.70 %            48.76 %

LIQUIDITY

Management monitors and plans the Company's liquidity position for future periods. Liquidity is provided from cash, interest-bearing deposits in other banks, repayments of loans, increases in deposits, federal funds facility from three correspondent banks, term loans from a federal agency bank and maturing investments. Management is committed to maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements.


Table of Contents

At March 31, 2013, cash and cash equivalents totaled $14.1 million. Unrestricted investment securities not pledged totaled $85.2 million, for a total of 16.20% of total assets, which management believes is adequate to meet short-term liquidity needs. Management also has alternative sources of funding available, including unused unsecured federal funds facilities with three banks totaling $23.5 million and unused available term loans through the FHLB totaling $49.8 million.

Total liquidity and other alternative sources of liquidity totaled $172.6 million at March 31, 2013 if fully utilized, which represents 38.94% of total deposits.

Off-Balance Sheet Arrangements

In the normal course of business there are outstanding commitments for the extension of credit which are not reflected in the financial statements. At March 31, 2013, pre-approved but unused lines of credit for loans totaled approximately $72.8 million. In addition, we had approximately $4.4 million in financial and performance standby letters of credit at March 31, 2013. These commitments represent no more than the normal lending risk that we commit to borrowers. If these commitments are drawn, we will obtain collateral if it is deemed necessary based on our credit evaluation of the counterparty.

CAPITAL RESOURCES

The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Management reviews the adequacy of the Company's capital on an ongoing basis with reference to the size, composition, and quality of the Company's resources and compliance with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses.

Federal regulatory risk-based capital ratio guidelines require percentages to be applied to various assets including off-balance sheet assets in relation to their perceived risk. Tier 1 capital consists of stockholders' equity and minority interests in consolidated subsidiaries, less net unrealized gains on available-for-sale securities. Tier 2 capital, a component of total capital, consists of a portion of the allowance for loan losses, certain components of nonpermanent preferred stock and subordinated debt. The $5 million in trust preferred securities issued by the Company in September 2006 qualifies as Tier 1 capital. First Capital Bank's ratios exceed regulatory requirements. As of March 31, 2013, the Company had a Tier 1 risk-based capital ratio of 12.36% and a Total risk-based capital ratio of 13.81%. At December 31, 2012 these ratios were 12.29% and 13.75%, respectively.

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