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FCVA > SEC Filings for FCVA > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for FIRST CAPITAL BANCORP, INC.

Form 10-Q for FIRST CAPITAL BANCORP, INC.


15-May-2014

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 2014 was $977 thousand, and net income available to common shareholders was $953 thousand, or $0.06 per fully diluted share, compared to net income of $795 thousand, and net income available to common stockholders of $709 thousand or $0.05 per fully diluted share, for the first quarter of 2013.

Financial Condition

Total assets at March 31, 2014, were $564.3 million, up $16.4 million from $547.9 million at December 31, 2013. Cash and cash equivalents increased $9.8 million to $24.0 million at March 31, 2014. This increase resulted from the growth in interest bearing deposit liabilities and borrowings, as well as cash generated from the paydown of securities in the investment portfolio which were offset by growth in the loan portfolio. Net loans outstanding, which were $437.0 million at March 31, 2014, up $13.9 million from $423.2 million at December 31, 2013, increased due to continued improvement in the local economy and the Company's further penetration into the market. To effectively manage interest rate risk, advances from the Federal Home Loan Bank of Atlanta (FHLB) grew $10.0 million to $40.0 million at March 31, 2014, from $30.0 million at December 31, 2013. The Company executed a subordinated note totaling $6.5 million in the first quarter of 2014, the proceeds of which were used to redeem the remaining preferred stock for $5.5 million.

At March 31, 2014, the Company's investment portfolio totaled $68.2 million, a decrease of $5.7 million from $73.9 million at December 31, 2013. 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 for the first quarter of 2014 compared to net interest income for the comparable period of 2013 improved to $4.6 million from $4.2 million, resulting primarily from the effective utilization of the investment portfolio to fund continued loan growth as well as the decline in rate on interest bearing deposit liabilities.

The net interest margin increased 6 basis points to 3.64% for the three months ended March 31, 2014, from 3.58% for the first quarter of 2013, due largely to an increase in loan volume and a decrease in the average rate paid on interest-bearing liabilities of 14 basis points to 1.18% for the first quarter of 2014 from 1.32% for the first quarter of 2013. 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 5.05% and 5.26% for the first quarters of 2014 and 2013, respectively, with the decrease due primarily to lower rates during the current period. The average yield on investments decreased to 2.65% for the first quarter of 2014 from 2.74% for the first quarter of 2013 while average balances in investments decreased to $76.3 million for the first quarter of 2014 from $89.1 million for the first quarter of 2013. Average interest bearing deposits at the Federal Reserve, which were earning 0.26% and 0.25% for the first quarters of 2014 and 2013, respectively, decreased to $9.0 million at the end of the first quarter of 2014 from $10.6 million at the end of the first quarter 2013. The average balance of interest bearing deposits increased to $389.9 million for the first quarter of 2014 from $387.5 million for the first quarter of 2013.

Total interest and fees on loans, the largest component of net interest income, increased to $5.4 million during the first quarter of 2014 compared to $5.0 million for the first quarter of 2013 despite the increased pressure of the rate environment.

Interest expense on deposits decreased $172 thousand to $1.1 million, or 13.72% for the first quarter of 2014 compared to $1.3 million for the same period of 2013. This decrease was due to the change in the deposit mix and a decrease in overall rates paid on time deposits as interest rates paid on interest bearing deposits decreased 19 basis points to 1.13% for the first quarter of 2014 from 1.31% for the first quarter of 2013.

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.

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,
                                         2014                                2013
                            Average     Income/     Yield/      Average     Income/     Yield/
                            Balance     Expense      Rate       Balance     Expense      Rate

                                                 (Dollars in thousands)
Assets:
 Loans, net of unearned
income (1)                 $ 435,851    $ 5,436      5.05  %   $ 388,614    $ 5,033      5.26  %
 Bank owned life insurance
(2)                            9,624        122      5.14  %       9,297        125      5.46  %
 Investment securities:
  U.S. Agencies                     -          -     0.00  %            -          -         - %
  Mortgage backed
securities                    23,911        101      1.71  %      12,036         58      1.97  %
  Corporate bonds              4,413         21      1.88  %      14,936         90      2.44  %
  Municipal securities (2)     3,805         65      6.89  %       5,526         89      6.53  %
  Taxable municipal
securities                    15,459        117      3.07  %      16,704        139      3.37  %
  CMO                         25,031        148      2.41  %      35,879        197      2.23  %
  SBA                               -          -     0.00  %         637         (2)    (1.49) %
  Other investments            3,651         47      5.25  %       3,404         31      3.66  %
   Total investment
securities                    76,270        499      2.65  %      89,122        602      2.74  %
  Interest bearing
deposits                       8,980          6      0.26  %      10,566          6      0.25  %
  Total earning assets     $ 530,725    $ 6,063      4.63  %   $ 497,599    $ 5,766      4.70  %
Cash and cash equivalents      8,866                               7,719
Allowance for loan losses     (8,181)                             (7,923)
Other assets                  21,939                              27,311
  Total assets             $ 553,349                           $ 524,706

Liabilities &
Stockholders' Equity:
 Interest checking         $  16,176    $    14      0.34  %   $  12,613    $    10      0.33  %
 Money market deposit
accounts                     154,627        161      0.42  %     142,910        145      0.41  %
 Statement savings             2,463          2      0.31  %       1,406          1      0.32  %
 Certificates of deposit     216,621        905      1.70  %     230,593      1,098      1.93  %
   Total interest-bearing
deposits                     389,887      1,082      1.13  %     387,522      1,254      1.31  %
 Fed funds purchased             246           -     0.61  %          72           -     0.61  %
 Repurchase agreements         8,233          8      0.38  %       1,105          1      0.40  %
 Subordinated debt            12,997        113      3.50  %       7,155         34      1.94  %
 FHLB advances                33,000         91      1.12  %      25,000         81      1.31  %
  Total interest-bearing
liabilities                  444,363      1,294      1.18  %     420,854      1,370      1.32  %

Noninterest-bearing
liabilities:
 Noninterest-bearing
deposits                      61,460                              54,862
 Other liabilities             1,979                               1,849
  Total liabilities           63,439                              56,711
 Shareholders' equity         45,547                              47,141
  Total liabilities and
shareholders' equity       $ 553,349                           $ 524,706

Net interest income                     $ 4,769                             $ 4,396
Interest rate spread                                 3.45  %                             3.38  %

Net interest margin                                  3.64  %                             3.58  %
Ratio of average interest
earning assets to
 average interest-bearing
liabilities                                        119.43  %                           118.24  %

(1) Includes nonaccrual
loans


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


Noninterest Income

Total noninterest income was $466 thousand for the first quarter of 2014, compared to $602 thousand for the same period of 2013. The mortgage division added $55 thousand to noninterest income from gains on sales of loans in the first quarter of 2014 compared to $284 thousand for the first quarter of 2013 as the demand for mortgages decreased over the previous periods and this division was closed in the first quarter of 2014. Other noninterest income increased $36 thousand for the first quarter of 2014 to $235 thousand compared to $199 thousand for the same period of 2013. This increase was primarily driven by increased income from account fees and services charges.

Noninterest Expense

This category includes all expenses other than interest paid on deposits and borrowings. Total noninterest expenses for the first quarter of 2014 increased to $4.0 million, an increase of $356 thousand or 9.86%, compared to $3.6 million for the same period in 2013, primarily resulting from an increase in salaries and employment benefits related to annual performance based salary increases, year end bonuses and increased health care costs which were partially offset by gains on sales of other real estate owned.

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, 2014 and 2013 was 31.15% and 29.83%, 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 $6.1 million at March, 31 2014, down from $10.2 million at March 31, 2013. This decrease reflects the results of the Asset Resolution Plan. At December 31, 2013, nonperforming assets totaled $7.1 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 2014, OREO was $2.5 million, down from $3.8 million at March 31, 2013. At March 31, 2014, there were $5.0 million of troubled debt restructurings that were performing loans.

Nonaccrual loans were $3.7 million at March 31, 2014, continuing to decrease from $6.4 million at March 31, 2013, and $4.5 million at December 31, 2013. 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 $146 thousand for the first quarter of 2014 compared to a net recovery of $98 thousand for the first quarter of 2013. For the first quarter of 2014, the provision for loan losses was recovered in the amount of $292 thousand compared to a provision expense of $100 thousand for the first quarter of 2013.

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 $8.0 million at March 31, 2014, compared to $7.5 million at March 31, 2013, and $8.2 million at December 31, 2013. The ratio of the allowance for loan losses to total loans outstanding at March 31, 2014, was 1.80% compared to 1.92% at March 31, 2013. The movement in this ratio results from the loan portfolio's growth since December 31, 2012, and the loan portfolio's risk factors.

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

                                        2014                   2013
                                      March 31,     December 31,      March 31,

                                               (Dollars in thousands)
Nonaccrual loans                     $  3,676      $      4,467      $  6,366
Loans past due 90 days
and accruing interest                        -                 -             -
Total nonperforming loans               3,676             4,467         6,366
Other real estate owned                 2,478             2,658         3,841
Total nonperforming assets           $  6,154      $      7,125      $ 10,207

Allowance for loan losses
to period end loans                      1.80  %           1.89  %       1.92  %
Nonperforming assets to total assets     1.09  %           1.30  %       1.94  %
Allowance for loan losses
to nonaccrual loans                    218.12  %         182.80  %     117.29  %

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.

At March 31, 2014, cash and cash equivalents totaled $24.0 million and unrestricted investment securities not pledged totaled $66.4 million, for a total of 11.76% 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 $24.5 million and unused available term loans through the FHLB totaling $36.6 million.

Total liquidity and other alternative sources of liquidity totaled $151.4 million at March 31, 2014, if fully utilized, which represents 32.89% 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, 2014, pre-approved but unused lines of credit for loans totaled approximately $107.7 million. In addition, we had approximately $7.7 million in financial and performance standby letters of credit at March 31, 2014. 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 qualified as Tier 1 capital as of December 31, 2013. The $6.5 million of subordinated debt issued in the first quarter of 2014 qualifies as Tier 2 capital. First Capital Bank's ratios exceed regulatory requirements. As of March 31, 2014, the Company had a Tier 1 risk-based capital ratio of 11.0% and a Total risk-based capital ratio of 13.86%. At December 31, 2013, these ratios were 12.34% and 13.78%, respectively.

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