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FCVA > SEC Filings for FCVA > Form 10-K on 27-Mar-2014All Recent SEC Filings

Show all filings for FIRST CAPITAL BANCORP, INC.

Form 10-K for FIRST CAPITAL BANCORP, INC.


27-Mar-2014

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 included elsewhere in this report on Form 10-K.

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 Richmond metro area continues to stabilize and show signs of recovery. With the implementation of the Company's Asset Resolution Plan in 2012, the Company has successfully accelerated the resolution of nearly all of the identified assets without incurring additional losses. Net income was $3.9 million for the year ended December 31, 2013, compared to a net loss of $6.0 million for the year ended December 31, 2012, representing the culmination of the groundwork laid in 2012 with the implementation of the Asset Resolution Plan, the restructuring of the FHLB advance portfolio, and the continued focus on maintaining a well positioned balance sheet. The net income available to common shareholders, which is net income reduced by the dividends and discount accretion on preferred stock, for the year ended December 31, 2013, was $3.5 million, as compared to a loss of $6.6 million for the year ended December 31, 2012. Asset quality trends continue to improve, allowing for a recovery of the provision for loan losses of $186 thousand for the year ended December 31, 2013. Return on average equity for the year ended December 31, 2013, was 8.05%, while return on average assets was 0.73%, compared to -13.01% and -1.13%, respectively, for the year ended December 31, 2012.

For the year ended December 31, 2013, assets increased $4.9 million to $547.9 million or 0.91% from $542.9 million at December 31, 2012. Total net loans, excluding loans held for sale, at December 31, 2013 were $423.2 million, an increase of $54.2 million, or 14.70%, from the December 31, 2012 amount of $368.9 million. Deposits at December 31, 2013, decreased $3.1 million to $456.0 million, or 0.69% from the December 31, 2012 amount of $459.1 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 application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.

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) Accounting Standards Codification ("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 Generally Accepted Accounting Principles ("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, 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.

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,
                                       2013                                 2012
                         Average      Income/     Yield/      Average      Income/     Yield/
                         Balance      Expense      Rate       Balance      Expense      Rate

                                                (Dollars in thousands)
Assets:
 Loans, net of unearned
income (1)              $ 409,209    $ 20,915      5.11  %   $ 377,246    $ 20,438      5.42  %
 Bank owned life
insurance (2)               9,422         499      5.30  %       9,087         507      5.58  %
 Investment securities:
  U.S. Agencies                  -           -     0.00  %       1,335          50      3.79  %
  Mortgage backed
securities                 16,687         323      1.94  %      13,589         278      2.05  %
  Corporate bonds           8,836         205      2.33  %      16,585         397      2.39  %
  Municipal securities
(2)                         5,184         337      6.49  %       6,256         403      6.44  %
  Taxable municipal
securities                 16,399         523      3.19  %      11,213         428      3.82  %
  CMO                      32,603         747      2.29  %      41,705         945      2.27  %
  SBA                         157          (2)    (1.49) %       1,433          28      1.96  %
  Other investments         3,384         138      4.07  %       4,075         136      3.33  %
   Total investment
securities                 83,250       2,271      2.73  %      96,191       2,665      2.77  %
  Interest bearing
deposits                    7,628          21      0.27  %      18,843          44      0.23  %
  Total earning assets  $ 509,509    $ 23,706      4.65  %   $ 501,367    $ 23,654      4.72  %
Cash and cash
equivalents                 8,425                                8,077
Allowance for loan
losses                     (8,199)                              (7,800)
Other assets               24,590                               29,549
  Total assets          $ 534,325                            $ 531,193

Liabilities &
Stockholders' Equity:
 Interest checking      $  13,695    $     46      0.34  %   $  10,985    $     34      0.31  %
 Money market deposit
accounts                  149,191         620      0.42  %     142,940         700      0.49  %
 Statement savings          1,665           5      0.32  %       1,278           5      0.41  %
 Certificates of
deposit                   222,713       3,999      1.80  %     233,164       4,816      2.07  %
   Total
interest-bearing
deposits                  387,264       4,670      1.21  %     388,367       5,555      1.43  %
 Fed funds purchased          207           1      0.61  %           5            -         - %
 Repurchase agreements      1,123           4      0.40  %       1,365           5      0.40  %
 Subordinated debt          7,155         137      1.91  %       7,155         154      2.15  %
 FHLB advances             26,876         332      1.23  %      36,831         960      2.61  %
  Total
interest-bearing
liabilities               422,625       5,144      1.22  %     433,723       6,674      1.54  %

Noninterest-bearing
liabilities:
 Noninterest-bearing
deposits                   61,647                               49,592
 Other liabilities          1,927                                1,707
  Total liabilities        63,574                               51,299
 Shareholders' equity      48,126                               46,171
  Total liabilities and
shareholders' equity    $ 534,325                            $ 531,193

Net interest income                  $ 18,562                             $ 16,980
Interest rate spread                               3.44  %                              3.18  %

Net interest margin                                3.64  %                              3.39  %
Ratio of average
interest earning assets
to
 average
interest-bearing
liabilities                                      120.56  %                            115.60  %

(1) Includes nonaccrual
loans


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


Year ended December 31, 2013 compared to year ended December 31, 2012

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 and certificates of deposit to lower yields, and continued benefit from the restructured FHLB advances. The Company also expects continued pressure on net interest margin from low rates over the next several quarters.

Net interest income for the year ended December 31, 2013 increased 12.17% to $18.0 million from $16.3 million for the year ended December 31, 2012. Net interest income increased due to a 25 basis point increase in the net interest margin from 3.39% for the year ended December 31, 2012 to 3.64% for the comparable period of 2013.

Average earning assets increased $8.1 million, or 1.62%, to $509.5 million for 2013 from $501.4 million for 2012. Average loans, net of unearned income increased $32.0 million for 2013 to $409.2 million. The average rate earned on net loans, decreased 31 basis points to 5.11% from 5.42% for the year ended December 31, 2012. The average balance in our securities portfolio decreased $12.9 million in 2013 to $83.3 million from $96.2 million in 2012. The Company experienced a shift in the composition of the balance sheet during 2013. Investments, which yielded 2.77% at December 31, 2012, totaling $12.9 million were reinvested in loan growth yielding 5.11% for the year ended December 31, 2013. Additionally, interest bearing deposits of $11.2 million, yielding 0.23% at December 31, 2012, funded the majority of the remaining loan growth. During 2013, the Company sold securities to restructure the investment portfolio to reduce its duration and volatility and to provide more cash flow to the Company. Investment income, on a tax equivalent basis, decreased to $2.3 million for 2013 from $2.7 million for 2012. Interest on interest bearing deposits decreased from $44 thousand for 2012 to $21 thousand for 2013 as the average balance decreased from $18.8 million in 2012 to $7.6 million in 2013. The yield on interest bearing deposits increased slightly from 23 basis points in 2012 to 27 basis points in 2013. As a result of these changes, the yield on earning assets decreased 7 basis points to 4.65% for 2013 from 4.72% for 2012.

Average interest bearing deposit liabilities decreased $1.1 million or 0.28% to $387.3 million for 2013 from $388.4 million for 2012. Interest expense on deposits decreased $885 thousand for 2013 compared to 2012. The average cost of interest-bearing deposits decreased 22 basis points from 1.43% for 2012 to 1.21% for 2013. 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 27 basis points from 2.07% for 2012 to 1.80% for 2013. Money market accounts increased on average $6.3 million for 2013 compared to 2012 and the cost decreased from 0.49% to 0.42% for 2013. We expect deposit costs to continue to decrease in 2014 as certificates of deposit reprice and the rate on money market accounts decreases, but to a lesser extent than such costs decreased in 2012 and 2013.

The average rate on advances from the Federal Home Loan Bank of Atlanta decreased 1.38 from 2.61% to 1.23% for 2013 due to the restructuring of the FHLB advance portfolio in 2012. In addition, subordinated debt pricing decreased 24 basis points as the cost was tied to LIBOR for 2013.


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.

                                                2013 vs. 2012
                                             Increase (Decrease)
                                              Due to Changes in:
                                       Volume        Rate        Total
                                            (Dollars in thousands)

Earning Assets:
Loans, net of unearned income        $   1,741    $  (1,264)    $    477
BOLI                                        18          (26)          (8)
Investment securities                     (359)         (35)        (394)
Interest bearing deposits                  (26)           3          (23)
  Total earning assets                   1,374       (1,322)          52

Interest-Bearing Liabilities:
 Interest checking                           8            5           13
 Money market deposit accounts              31         (111)         (80)
 Statement savings                           1           (1)            -
 Certificates of deposit                  (216)        (601)        (817)
 Fed funds purchased                          -           1            1
 Repurchase agreements                      (1)            -          (1)
 Subordinated debt                            -         (17)         (17)
 FHLB advances                            (260)        (369)        (629)
  Total interest-bearing liabilities      (437)      (1,093)      (1,530)

 Change in net interest income       $   1,811    $    (229)   $   1,582

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, 2013, resulted in a recovery of $186 thousand compared to a provision of $9.2 million for the year ended December 31, 2012. 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, 2013 compared to year ended December 31, 2012

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 increased $420 thousand to $2.4 million for the year ended December 31, 2013 compared to $2.0 million for the same period in 2012.


The primary cause of the increase in non-interest income was the gain on sale of securities, which provided gains of $329 thousand in 2013 compared to $79 thousand in 2012, as securities were redeployed to assist in funding loan growth. Gain on sale of loans resulted in a gain of $798 thousand for 2013 compared to $669 thousand for 2012.

Non-Interest Expense

Year ended December 31, 2013 compared to year ended December 31, 2012

This category includes all expenses other than interest paid on deposits and borrowings. Total noninterest expense decreased 11.05% or $3.5 million to $14.9 million for 2013 as compared to $18.4 million for the year 2012. Noninterest expense was 2.79% of average assets for the year ended December 31, 2013.

Salaries and employee benefits increased 18.18% to $9.0 million for the year 2013 as compared to $7.6 million for 2012. Salaries and benefits increased primarily due to increased benefit costs and incentive compensation in 2013.

FDIC premiums decreased $365 thousand from $705 thousand in 2012 to $340 thousand in 2013, the result of a change in the calculation of the premium.

OREO write-downs and losses related to revaluation of existing properties and losses on sale of OREO totaled a gain of $105 thousand in 2013 compared to a loss of $1.7 million in 2012.

In the second quarter of 2012, the FHLB advance portfolio was restructured incurring one-time prepayment penalties totaling $2.8 million. No such expenses occurred in 2013.

Income Taxes

Our reported income tax expense was $1.8 million for 2013 and the income tax benefit was $3.3 million for 2012. Note 11 of our consolidated financial statements included elsewhere in this report on Form 10-K 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, 2013 and 2012.

Financial Condition

Assets

Total assets increased to $547.9 million at December 31, 2013, compared to $542.9 million at December 31, 2012 representing an increase of $4.9 million or 0.91%. Average assets decreased 0.59% from $531.2 million for the year ended December 31, 2012 to $534.3 million for the year ended December 31, 2013. Stockholders' equity increased 5.51% to $49.7 million for the year ended December 31, 2013 as compared to $47.1 million for the same period in 2012.

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 were $431.3 million at December 31, 2013, an increase of $55.2 million from $376.1 million at December 31, 2012. Commercial real estate loans increased $21.2 million or 14.71% to $165.2 million and represented 38.30% of the portfolio. Other construction, land development and other land loans decreased $1.8 million, or 3.99%, to $43.3 million from $45.1 million and represented 10.03% of the portfolio, down from 11.98% at December 31, 2012. The allowance for loan losses was $8.2 million, up 12.33% from the prior year and represented 1.89% of total loans outstanding at December 31, 2013 down from 1.93% at December 31, 2012.

Major classifications of loans are as follows:


                               2013         2012         2011         2010         2009

                                                      (Dollars in thousands)

Real estate
Residential                 $ 142,702    $ 131,144    $ 127,541    $ 118,209    $ 110,437
Commercial                    165,216      144,034      142,989      145,399      125,445
Residential Construction       22,603       13,202        9,712       15,852       23,531
Other Construction, Land
Development & Other Land       43,257       45,053       48,637       66,041       85,119
Commercial                     55,947       40,423       37,922       48,004       54,590
Consumer                        1,615        2,215        3,250        3,693        4,542
Total loans                   431,340      376,071      370,051      397,198      403,664
Less:
Allowance for loan losses       8,165        7,269        9,271       11,036        6,600
Net deferred (income) costs       (15)         118          189           47           56
Loans, net                  $ 423,160    $ 368,920    $ 360,969    $ 386,209    $ 397,120

Our average net loan portfolio totaled 80.31% of average earning assets in 2013, up from 73.69% in 2012. Because of the nature of our market, loan collateral is predominantly real estate. At December 31, 2013, the Company had approximately $379.4 million in loans secured by real estate which represents 87.96% of our total loans outstanding as of that date.

Asset Quality

With the successful implementation of the Asset Resolution Plan in the second quarter of 2012, the Company continues to see significant improvement in asset quality. Nonperforming loans to period end loans improved to 1.04% at December 31, 2013 as compared to 2.49% at December 31, 2012. Nonperforming assets to total assets improved to 1.30% at December 31, 2013 as compared to 2.42% at December 31, 2012. Other real estate owned declined $1.1 million or 29.51% from $3.8 million at December 31, 2012 to $2.7 million at December 31, 2013.

Resources continue to be devoted specifically to the ongoing review of the loan portfolio and the workouts of problem assets to minimize any losses to the Company. The Company has in place a special assets loan committee, which includes the Company's Chief Executive Officer, Chief Credit Officer, and other senior lenders and credit officers. This committee formulates strategies, develops action plans, and approves all credit actions taken on significant problem loans. Management continues to monitor delinquencies, risk rating changes, charge-offs, market trends and other indicators of risk in the Company's portfolio, particularly those tied to residential and commercial real estate, and adjusts the allowance for loan losses accordingly. The Company seeks to work with its customers on loan collection matters while taking appropriate actions to improve the Company's position and minimize any losses. These loans are closely managed and evaluated for collection with appropriate loss reserves established whenever necessary.

Recoveries, net of charge-offs for 2013 were $1.1 million, or 0.26%, of average loans outstanding. Recoveries, net of charge-offs included commercial real estate loans of $665 thousand and residential construction loans of $807 thousand. At December 31, 2013, total past due loans, 30 - 89 days past due and 90+ days past due and accruing, were $987 thousand, or 0.24%, of total loans, down from $3.4 million at December 31, 2012. Loans classified as Substandard decreased $3.8 million, or 18.97% to $16.4 million at December 31, . . .

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