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FCVA > SEC Filings for FCVA > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for FIRST CAPITAL BANCORP, INC.

Form 10-Q for FIRST CAPITAL BANCORP, INC.


14-Aug-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 second quarter of 2013 was $1.0 million, and net income available to common stockholders was $915 thousand, or $0.07 per fully diluted share, compared to a net loss of $7.8 million, and a net loss allocable to common stockholders of $7.9 million or $0.99 per fully diluted share, for the second quarter of 2012.

From a revenue and cost perspective, income after excluding certain items, which is a non-GAAP measurement, increased to $1.2 million for the second quarter of 2013 from $1.0 million for the second quarter of 2012. Contributing to the increase was an increase in net interest income of $432 thousand due to a reduction in interest expense resulting mostly from the restructuring of the FHLB advance portfolio with additional benefit provided by a the shift in the deposit liabilities base from interest bearing to non-interest bearing deposits. The following chart reconciles income before excluded items to net income (loss) for the periods presented.


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                                                   Three Months Ended                 Six Months Ended
                                                        June 30,                          June 30,
                                                  2013             2012             2013             2012
                                                 (Dollars in thousands)            (Dollars in thousands)
Income Before Excluded Items (non-GAAP
measurement)                                  $      1,247       $   1,049       $    2,546        $   2,023
Gain on Sale of Securities                             145              -               176               27
Provision for Loan Losses                               -           (8,310 )           (100 )         (8,875 )
FHLB Prepayment Penalty                                 -           (2,755 )             -            (2,755 )
(Gains) Losses on Sale and Writedown of
OREO                                                    55          (1,519 )            (44 )         (1,643 )
Additional Accrual                                      -             (300 )             -              (300 )

Net Income (Loss) Before Income Taxes                1,447         (11,835 )          2,578          (11,523 )
Income Tax Expense (Benefit)                           446          (4,056 )            783           (4,048 )

Net Income (Loss)                             $      1,001       $  (7,779 )     $    1,795        $  (7,475 )

The three months ended June 30, 2013, presents the continued positive results of the successful activities undertaken in the second quarter of 2012. The three month period 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 $5.0 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 June 30, 2013, were $538.9 million, down $4.0 million from $542.9 million at December 31, 2012. Cash and cash equivalents decreased $14.6 million to $20.7 at June 30, 2013. This decrease was used to fund the increase in net loans outstanding, which were $404.0 million at June 30, 2013, an increase of $35.1 million compared to the 2012 year-end balance. The remaining funds used to provide for the growth in the loan portfolio were obtained from available for sale securities, which decreased $14.8 million from the December 31, 2012 balance and the decrease in loans held for sale, which decreased $5.9 million from the December 31, 2012 balance. Total deposit liabilities decreased $4.2 million to $454.9 million at June 30, 2013 from $459.1 million at December 31, 2013. A favorable shift in the composition of our deposits, with an increase in non-interest bearing deposits of $13.0 million from the December 31, 2012 balance and a decrease in interest bearing deposits of $17.2 million from the December 31, 2013, has bolstered additional improvement to net interest income. Our deposit strategy during the second quarter was focused on decreasing noncore funding sources and single service CD relationships and increasing noninterest-bearing deposit accounts.

At June 30, 2013, the Company's investment portfolio totaled $74.9 million, a decrease of $14.8 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.


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RESULTS OF OPERATIONS

Net Interest Income

Net interest income represents the principal source of earnings for the Company. Net interest income during 2013 to date compared to net interest income for the comparable period of 2012 improved to $8.7 million from $7.9 million, resulting primarily from the effective restructuring of the FHLB advance portfolio and the decline in rate and balance of interest bearing deposit liabilities.

The net interest margin increased 32 basis points to 3.61% for the three months ended June 30, 2013 from 3.29% for the second quarter of 2012, due largely to a decrease in average rate paid on interest-bearing liabilities of 45 basis points to 1.22% for the second quarter of 2013 from 1.67% for the second quarter of 2012. This was slightly offset by a 10 basis point decrease in the average yield on earning assets. The yield on loans, net of unamortized fees and costs, was 5.06% and 5.44% for the second quarters of 2013 and 2012, respectively, with the decrease due primarily to lower rates during the period. The average yield on investments increased to 2.81% for the second quarter of 2013 from 2.76% for the second quarter of 2012 while average balances in investments decreased to $83.2 million for the second quarter of 2013 from $99.6 million for the second quarter of 2012. Average interest bearing deposits at the Federal Reserve, which were earning 0.25% and 0.23% for the second quarters of 2013 and 2012, respectively, decreased to $8.5 million at the end of the second quarter of 2013 from $19.0 million at the end of the second quarter 2012. The average balance of interest bearing deposits increased to $386.5 million for the second quarter of 2013 from $378.5 million for the second quarter of 2012.

For the three months ended June 30, 2013, net interest income was up $432 thousand to $4.4 million from $4.0 million for the second quarter of 2012. This increase was due primarily to the effective restructuring of the FHLB advance portfolio in the second quarter of 2012 and the reduction of interest expense resulting from the change in composition of deposit liabilities.

Total interest and fees on loans, the largest component of net interest income, remained stable at $5.1 million during the second quarters of both 2013 and 2012 despite the increased pressure of the rate environment.

Interest expense on deposits decreased $212 thousand to $1.2 million, or 15.38% for the second quarter of 2013 compared to $1.4 million for the same period of 2012. This decrease was due to the restructuring of the deposit mix and a decrease in overall rates paid on time deposits as interest rates paid on interest bearing deposits decreased 25 basis points to 1.21% for the second quarter of 2013 from 1.46% for the second quarter of 2012.

For the six months ended June 30, 2013, the net interest margin increased to 3.59% from 3.28% for the six months ended June 30, 2012. The improvement in year to date margin is primarily the result of the successful restructuring of the FHLB advance portfolio which offset the decline in the yield in the loan portfolio.

Net interest income increased $742 thousand for the first six months of 2013 compared to the first six months 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.


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

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.


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                                                                Three Months Ended June 30,
                                                       2013                                      2012
                                        Average       Income/       Yield/        Average       Income/       Yield/
                                        Balance       Expense        Rate         Balance       Expense        Rate
                                                                   (Dollars in thousands)
Assets:
Loans, net of unearned income (1)      $ 407,105      $  5,136         5.06 %    $ 378,860      $  5,121         5.44 %
Bank owned life insurance (2)              9,382           128         5.47 %        9,044           128         5.68 %
Investment securities:
U.S. Agencies                                 -             -          0.00 %        1,955            17         3.63 %
Mortgage backed securities                14,342            73         2.04 %       14,252            73         2.06 %
Corporate bonds                            8,544            52         2.45 %       16,454           101         2.47 %
Municipal securities (2)                   5,424            87         6.47 %        6,272           100         6.39 %
Taxable municipal securities              18,177           147         3.23 %       10,954           107         3.92 %
CMO                                       33,314           188         2.26 %       43,759           248         2.28 %
SBA                                           -             -          0.00 %        1,464             4         1.09 %
Other investments                          3,361            36         4.29 %        4,459            34         3.07 %

Total investment securities               83,162           583         2.81 %       99,569           684         2.76 %
Interest bearing deposits                  8,488             5         0.25 %       19,015            11         0.23 %

Total earning assets                   $ 508,137      $  5,852         4.62 %    $ 506,488      $  5,944         4.72 %

Cash and cash equivalents                  8,223                                     8,366
Allowance for loan losses                 (7,810 )                                  (7,498 )
Other assets                              26,230                                    29,032

Total assets                           $ 534,780                                 $ 536,388


Liabilities & Stockholders' Equity:
Interest checking                      $  13,413      $     11         0.33 %    $  11,157      $      8         0.28 %
Money market deposit accounts            146,522           150         0.41 %      138,507           172         0.50 %
Statement savings                          1,455             1         0.32 %        1,280             1         0.42 %
Certificates of deposit                  225,135         1,004         1.79 %      227,542         1,196         2.11 %

Total interest-bearing deposits          386,525         1,166         1.21 %      378,486         1,377         1.46 %

Fed funds purchased                          171            -          0.61 %           -             -            -  %
Repurchase agreements                        965             1         0.40 %          962             1         0.40 %
Subordinated debt                          7,155            35         1.93 %        7,155            38         2.13 %
FHLB advances                             26,759            82         1.23 %       48,737           388         3.20 %

Total interest-bearing liabilities       421,575         1,284         1.22 %      435,340         1,804         1.67 %


Noninterest-bearing liabilities:
Noninterest-bearing deposits              63,330                                    48,818
Other liabilities                          1,788                                     1,763

Total liabilities                         65,118                                    50,581
Shareholders' equity                      48,087                                    50,467

Total liabilities and shareholders'
equity                                 $ 534,780                                 $ 536,388


Net interest income                                   $  4,568                                  $  4,140

Interest rate spread                                                   3.40 %                                    3.05 %


Net interest margin                                                    3.61 %                                    3.29 %

Ratio of average interest earning
assets to average interest-bearing
liabilities                                                          120.53 %                                  116.34 %

(1) Includes nonaccrual loans

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


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                                                                 Six Months Ended June 30,
                                                      2013                                        2012
                                       Average       Income/        Yield/         Average       Income/       Yield/
                                       Balance       Expense         Rate          Balance       Expense        Rate
                                                                   (Dollars in thousands)
Assets:
Loans, net of unearned income (1)     $ 397,911      $ 10,170          5.15 %     $ 377,455      $ 10,269         5.48 %
Bank owned life insurance (2)             9,339           253          5.46 %         9,003           253         5.66 %
Investment securities:
U.S. Agencies                                -             -           0.00 %         1,977            35         3.61 %
Mortgage backed securities               13,195           131          2.01 %        14,524           154         2.13 %
Corporate bonds                          11,722           142          2.44 %        16,386           200         2.45 %
Municipal securities (2)                  5,475           176          6.50 %         6,618           212         6.45 %
Taxable municipal securities             17,445           285          3.30 %        10,242           201         3.94 %
CMO                                      34,590           385          2.24 %        43,470           501         2.32 %
SBA                                         317            (2 )       (1.49 )%        1,521            13         1.69 %
Other investments                         3,382            67          3.97 %         4,484            67         2.99 %

Total investment securities              86,126         1,184          2.77 %        99,222         1,383         2.80 %
Interest bearing deposits                 9,521            12          0.25 %        19,600            23         0.24 %

Total earning assets                  $ 502,897      $ 11,619          4.66 %     $ 505,280      $ 11,928         4.75 %

Cash and cash equivalents                 7,972                                       8,223
Allowance for loan losses                (7,866 )                                    (8,322 )
Other assets                             26,768                                      29,138

Total assets                          $ 529,771                                   $ 534,319


Liabilities & Stockholders' Equity:
Interest checking                     $  13,015      $     21          0.33 %     $  11,285      $     16         0.29 %
Money market deposit accounts           144,726           295          0.41 %       145,474           361         0.50 %
Statement savings                         1,431             2          0.32 %         1,214             3         0.42 %
Certificates of deposit                 227,849         2,102          1.86 %       224,781         2,440         2.18 %

Total interest-bearing deposits         387,021         2,420          1.26 %       382,754         2,820         1.48 %

Fed funds purchased                         122            -           0.61 %            -             -            -  %
Repurchase agreements                     1,035             2          0.40 %           991             2         0.40 %
Subordinated debt                         7,155            69          1.93 %         7,155            80         2.24 %
FHLB advances                            25,884           163          1.27 %        49,368           790         3.22 %

Total interest-bearing liabilities      421,217         2,654          1.27 %       440,268         3,692         1.69 %


Noninterest-bearing liabilities:
Noninterest-bearing deposits             59,119                                      46,572
Other liabilities                         1,818                                       1,744

Total liabilities                        60,937                                      48,316
Shareholders' equity                     47,617                                      45,735

Total liabilities and shareholders'
equity                                $ 529,771                                   $ 534,319

Net interest income                                  $  8,965                                    $  8,236

Interest rate spread                                                   3.39 %                                     3.06 %


Net interest margin                                                    3.59 %                                     3.28 %

Ratio of average interest earning
assets to average interest-bearing
liabilities                                                          119.39 %                                   114.77 %

(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 $744 thousand for the second quarter of 2013, compared to $388 thousand for the same period of 2012. The mortgage division added $303 thousand to noninterest income from gains on sales of loans in the second quarter of 2013 compared to $55 thousand for the second quarter of 2012 as the division was newly operational in the first quarter of 2012 and was continuing to become established in the market in the second quarter of 2012. Other noninterest income decreased $26 thousand for the second quarter of 2013 to $208 thousand compared to $234 thousand for the same period of 2012. This decrease was primarily driven by reduced income from the investment group.

For the six months ended June 30, 2013, noninterest income increased $618 thousand to $1.3 million from $727 thousand for the first six months of 2012, attributable to $493 thousand in additional gains on sale of loans and $149 thousand additional gains on sale of securities.

Noninterest Expense

This category includes all expenses other than interest paid on deposits and borrowings. Total noninterest expenses for the second quarter of 2013 decreased to $3.7 million, a decrease of $4.2 million or 53.00%, compared to $7.9 million for the same period in 2012. The elevated expenses incurred in 2012 were primarily driven by the Asset Resolution Plan and restructuring of the FHLB advance portfolio. Other expense details are fairly consistent from one period compared to the other.

For the six months ended June 30, 2013, total noninterest expense decreased $4.0 million or 35.14% to $7.3 million from $11.3 million for the comparable period in 2012 driven by the actions taken in the second quarter of 2012.

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 June 30, 2013 and 2012 was 30.82% and 34.27%, respectively. The effective tax rate for the six month periods ended June 30, 2013 and 2012 was 30.37% and 35.13%, 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 $7.3 million at June 30, 2013, down from $14.6 million at June 30, 2012. This


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decrease reflects the results of the Asset Resolution Plan. 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 second quarter of 2013, OREO was $2.2 million, down from $4.8 million at June 30, 2012. At June 30, 2013, there were $2.0 million of troubled debt restructurings that were performing loans.

Nonaccrual loans were $5.1 million at June 30, 2013, continuing to decrease from $9.8 million at June 30, 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 $1.1 million for the second quarter of 2013 compared to a net charge-off of $9.1 million for the second quarter of 2012. For the second quarter of 2013, there was no provision for loan losses compared to $8.3 million for the second quarter of 2012 as a result of the implementation of the Asset Resolution Plan.

Loans past due 30 to 89 days decreased $1.0 million to $1.1 million at the end of the second quarter of 2013 compared to $2.1 million at the end of the year 2012, and decreased $86 thousand from $1.2 million at June 30, 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 $8.6 million at June 30, 2013, compared to $7.3 million at December 31, 2012 and June 30, 2012. The ratio of the allowance for loan losses to total loans outstanding at June 30, 2013 was 2.08% compared to 1.93% at December 31, 2012 and 1.97% at June 30, 2012. The movement in this ratio results from, and is directionally consistent with, the loan portfolio's growth and the loan portfolio's risk factors.

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

                                                    2013                        2012
                                                  June 30,          December 31,         June 30,
                                                               (Dollars in thousands)
Nonaccrual loans                                  $   5,108        $        8,014        $   9,778
Loans past due 90 days and accruing interest             -                  1,338               -

Total nonperforming loans                             5,108                 9,352            9,778
Other real estate owned                               2,158                 3,771            4,787

Total nonperforming assets                        $   7,266        $       13,123        $  14,565


Allowance for loan losses to period end loans          2.08 %                1.93 %           1.97 %
Nonperforming assets to total assets                   1.35 %                2.42 %           2.80 %
Allowance for loan losses to nonaccrual loans        168.01 %               90.70 %          74.18 %
. . .
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