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EX-99.3 - CERTIFICATION OF JOHN M. PRESLEY PURSUANT TO THE EMERGENCY ECONOMIC - FIRST CAPITAL BANCORP, INC.dex993.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - FIRST CAPITAL BANCORP, INC.dex311.htm
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - FIRST CAPITAL BANCORP, INC.dex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - FIRST CAPITAL BANCORP, INC.dex312.htm
EX-99.4 - CERTIFICATION OF WILLIAM W. RANSON PURSUANT TO THE EMERGENCY ECONOMIC - FIRST CAPITAL BANCORP, INC.dex994.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

ANNUAL REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

Commission file number 001-33543

 

 

FIRST CAPITAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Virginia   11-3782033

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4222 Cox Road, Suite 200

Glen Allen, Virginia

  23060
(Address of principal executive offices)  

(Zip Code)

Registrant’s telephone number, including area code (804)-273-1160

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Act:

 

Common Stock, $4.00 par value

  

NASDAQ Capital Market

(Title of Class)    (Name of each Exchange on which registered)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act    Yes  ¨    No  x

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days    x  Yes    ¨  No

Indicate by check mark whether registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days. The aggregate market value of the voting stock held by non-affiliates computed based on a sale price of $6.00 for the Bank’s common stock on March 23, 2010 is approximately $17,186,000.

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.    Yes  ¨    No  ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 2,971,171 Shares of Common Stock, $4.00 par value

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the Proxy Statement for the Annual Meeting of Stockholders (Part III)

Transitional Small Business Disclosure Format (Check One):    Yes  ¨    No  x

 

 

 


Table of Contents

FIRST CAPITAL BANCORP, INC.

FORM 10-K

Fiscal Year Ended December 31, 2009

TABLE OF CONTENTS

 

PART I

       
 

Item 1.

   Business    4
 

Item 2.

   Properties    20
 

Item 3.

   Legal Proceedings    21
 

Item 4.

   Removed and Reserved    21

PART II

       
 

Item 5.

   Market for Registrant’s Common Equity and Related Stockholder Matters    21
 

Item 6.

   Selected Financial Data    23
 

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    24
 

Item 8.

   Financial Statements    41
 

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    41
 

Item 9A.

   Controls and Procedures    41
 

Item 9B

   Other Information    42

PART III

       
 

Item 10.

   Directors and Executive Officers of the Registrant    42
 

Item 11.

   Executive Compensation    42
 

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    42
 

Item 13.

   Certain Relationships and Related Transactions, and Director Independence    43
 

Item 14.

   Principal Accountant Fees and Services    43

PART IV

       
 

Item 15.

   Exhibits    43
SIGNATURES    46
EXHIBITS   

 

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PART I

Company

First Capital Bancorp, Inc. is a bank holding company headquartered in Glen Allen, Virginia. We conduct our primary operations through our wholly-owned subsidiary, First Capital Bank, which opened for business in 1998.

We emphasize personalized service, access to decision makers and a quick turn around time on lending decisions. Our slogan is “Where People Matter.” We have a management team, officers and other employees with extensive experience in our primary market which is the Richmond, Virginia metropolitan area. We strive to develop personal, knowledgeable relationships with our customers, while at the same time offering products comparable to those offered by larger banks in our market area.

First Capital Bank operates seven full service branch offices (alternatively referred to herein as “branches” and “offices”), throughout the greater Richmond metropolitan area. Our bank engages in a general commercial banking business, with a particular focus on the needs of small and medium-sized businesses and their owners and key employees and the professional community.

We continued to experience growth in assets during 2009. As of December 31, 2009, we had assets of $530.4 million, a $98.8 million, or 22.9%, increase from December 31, 2008. The severe economic conditions in the real estate market in 2009 significantly affected our profitability as we made significant additions to our allowance for loan losses during the year. For 2009, our net income was $308 thousand compared to net income for 2008 of $170 thousand. Our earnings per diluted share for 2009 were a loss of $0.07 (after payment of TARP dividends and accretion of discount) compared to a profit of $0.06 for 2008. The continued deterioration of the real estate market, unemployment and the difficulties of the financial sector will continue to adversely affect our profitability.

CAUTION ABOUT FORWARD-LOOKING STATEMENTS

Certain information contained in this Report on Form 10-K may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “we expect,” “we believe” or words of similar import.

Such forward-looking statements involve known and unknown risks including, but not limited to, the following factors:

 

   

the ability to successfully manage our growth or implement our growth strategies if we are unable to identify attractive markets, locations or opportunities to expand in the future;

 

   

our ability to continue to attract low cost core deposits to fund asset growth;

 

   

changes in interest rates and interest rate policies and the successful management of interest rate risk;

 

   

maintaining cost controls and asset quality as we open or acquire new locations;

 

   

maintaining capital levels adequate to support our growth and operations;

 

   

changes in general economic and business conditions in our market area;

 

   

reliance on our management team, including our ability to attract and retain key personnel;

 

   

risks inherent in making loans such as repayment risks and fluctuating collateral values;

 

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competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

 

   

demand, development and acceptance of new products and services;

 

   

problems with technology utilized by us;

 

   

changing trends in customer profiles and behavior;

 

   

changes in banking and other laws and regulations applicable to us; and

 

   

other factors described in “Risk Factors” above.

Although we believe that our expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that our actual results, performance or achievements will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

 

ITEM 1. BUSINESS

General

First Capital Bancorp, Inc. is a bank holding company that was incorporated under Virginia law in 2006. Pursuant to a statutory share exchange that was effective on September 8, 2006, we became a bank holding company. We conduct our primary operations through our wholly owned subsidiary, First Capital Bank, which is chartered under Virginia law. We have one other wholly owned subsidiary, FCRV Statutory Trust 1, which is a Delaware Business Trust that we formed in connection with the issuance of trust preferred debt in September, 2006.

Our principal executive offices are located at 4222 Cox Road, Suite 200, Glen Allen, Virginia 23060, and our telephone number is (804) 273-1160. We maintain a website at www.1capitalbank.com.

First Capital Bank, a Virginia banking corporation headquartered in Glen Allen, Virginia, was incorporated under the laws of the Commonwealth of Virginia as a state-chartered bank in 1997. The bank is a member of the Federal Reserve System and began banking operations in late 1998. The bank is a community oriented financial institution that offers a full range of banking and related financial services to small and medium-sized businesses, professionals and individuals located in its market area. This market area consists of the Richmond, Virginia metropolitan area, with a current emphasis on western Henrico County, Chesterfield County, the City of Richmond, the Town of Ashland, and the surrounding vicinity. The bank’s goal is to provide its customers with high quality, responsive and technologically advanced banking services. In addition, the bank strives to develop personal, knowledgeable relationships with its customers, while at the same time it offers products comparable to those offered by larger banks in its market area. We believe that the marketing of customized banking services has enabled the bank to establish a niche in the financial services marketplace in the Richmond metropolitan area.

The bank currently conducts business from its executive offices and seven branch locations. See “Item 2 – Description of Property”.

Products and Services

We offer a full range of deposit services that are typically available in most banks including checking accounts, NOW accounts, savings accounts and other time deposits of various types, ranging

 

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from daily money market accounts to longer-term certificates of deposit. The transaction accounts and time certificates are tailored to our market area at rates competitive to those offered in the area. In addition, we offer certain retirement account services, such as Individual Retirement Accounts (IRAs).

We also offer a full range of short-to-medium term commercial and consumer loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements) and purchase of equipment and machinery. Consumer loans include secured (and unsecured loans) for financing automobiles, home improvements, education and personal investments. Additionally, we originate fixed and floating-rate mortgage and real estate construction and acquisition loans.

Other services we offer include safe deposit boxes, certain cash management services, traveler’s checks, direct deposit of payroll and social security checks and automatic drafts for various accounts, selected on-line banking services and a small and medium-sized businesses courier service. We also have become associated with a shared network of automated teller machines (ATMs) that may be used by our customers throughout Virginia and other states located in the Mid-Atlantic region.

Our Market Area

Our primary market is the Richmond, Virginia metropolitan area, which includes Chesterfield County, Henrico County, Hanover County, the Town of Ashland and the City of Richmond. Richmond is the capital of Virginia. All of our branches are located in the Richmond metropolitan area. The Richmond metropolitan area is the third-largest metropolitan area in Virginia and is one of the state’s top growth markets based on population and median household income.

Our market area has been subject to large scale consolidation of local banks, primarily by larger, out-of-state financial institutions. We believe that there is a large customer base in our market area that prefers doing business with a local institution. We seek to fill this banking need by offering timely personalized service, while making it more convenient by continuing to build our branch network throughout the Richmond metropolitan area where our customers live and work. To that end, in 2002, we initiated a branching strategy to better ensure that our branch network covers more of the markets in which our customers live and conduct business. We have made significant investments in our infrastructure and believe our current operating platform is sufficient to support a substantially larger banking institution without incurring meaningful additional expenses.

Employees

As of March 22, 2010, we had a total of 78 full time equivalent employees. We consider relations with our employees to be excellent. Our employees are not represented by a collective bargaining unit.

Economy

The current economic recession, which economists suggest began in late 2007, became a major recognizable force in the late summer or early fall of 2008 in the United States and locally. Since then, the stock markets have dropped sharply, foreclosures have increased dramatically, unemployment has risen significantly, the capital and liquidity of financial institutions have been severely challenged and credit markets have been greatly reduced. In the U.S., the government has provided support for financial institutions in order to strengthen capital, increase liquidity and ease the credit markets.

 

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Competition

We compete as a financial intermediary with other commercial banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in the Richmond metropolitan area and elsewhere. Many of our non-bank competitors are not subject to the same extensive federal regulations that govern federally-insured banks and state regulations governing state chartered banks. As a result, such non-bank competitors may have certain advantages over us in providing certain services.

Our primary market area is a highly competitive, highly branched banking market. Competition in the market area for loans to small and medium-sized businesses and professionals is intense, and pricing is important. Many of our competitors have substantially greater resources and lending limits than us and offer certain services, such as extensive and established branch networks, that we are not currently providing. Moreover, larger institutions operating in the Richmond metropolitan area have access to borrowed funds at lower cost than the funds that are presently available to us. Deposit competition among institutions in the market area also is strong. Competition for depositors’ funds comes from U.S. Government securities, private issuers of debt obligations and suppliers of other investment alternatives for depositors, among other sources.

Governmental Monetary Policies

Our earnings and growth are affected not only by general economic conditions, but also by the monetary policies of various governmental regulatory authorities, particularly the Federal Reserve Bank (“FRB”). The FRB implements national monetary policy by its open market operations in United States Government securities, control of the discount rate and establishment of reserve requirements against both member and nonmember financial institutions’ deposits. These actions have a significant effect on the overall growth and distribution of loans, investments and deposits, as well as the rates earned on loans, or paid on deposits.

Our management is unable to predict the effect of possible changes in monetary policies upon our future operating results.

Lending Activities

Credit Policies

The principal risk associated with each of the categories of loans in our portfolio is the creditworthiness of our borrowers. Within each category, such risk is increased or decreased, depending on various factors. The risks associated with real estate mortgage loans, commercial loans and consumer loans vary based on employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay indebtedness. The risk associated with real estate construction loans varies based on the supply and demand for the type of real estate under construction. In an effort to manage these risks, we have loan amount approval limits for individual loan officers based on their position and level of experience.

We have written policies and procedures to help manage credit risk. We use a loan review process that includes a portfolio management strategy, guidelines for underwriting standards and risk assessment, procedures for ongoing identification and management of credit deterioration, and annual independent third party portfolio reviews to establish loss exposure and to monitor compliance with policies. Our loan approval process includes our Management Loan Committee, the Loan Committee of the Board of Directors and, for larger loans, the Board of Directors. Our Senior Credit Officer is

 

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responsible for reporting to the Directors monthly on the activities of the Management Loan Committee and on the status of various delinquent and non-performing loans. The Loan Committee of the Board of Directors also reviews lending policies proposed by management. Our Board of Directors establishes our total lending limit and approves proposed lending policies approved by the Loan Committee of the Board.

Loan Originations

Real estate loan originations come primarily through direct solicitations by our loan officers, continued business from current customers, and through referrals. Construction loans are obtained by solicitations of our construction loan officers and continued business from current customers. Commercial real estate loan originations are obtained through broker referrals, direct solicitation by our loan officers and continued business from current customers. We may also purchase loan participations from other community banks in Virginia.

Our loan officers, as part of the application process, review all loan applications. Information is obtained concerning the income, financial condition, employment and credit history of the applicant. If commercial real estate is involved, information is also obtained concerning cash flow available for debt service. Loan quality is analyzed based on our experience and credit underwriting guidelines. Real estate collateral for loans in excess of $250 thousand are appraised by independent appraisers who have been pre-approved by meeting the requirement of providing a current and valid license certification and based on the lender’s experience with these appraisers. Evaluations for real estate collateral for loans less than $250 thousand are made by the loan officer.

In the normal course of business, we make various commitments and incur certain contingent liabilities that are disclosed but not reflected in our annual financial statements including commitments to extend credit. At December 31, 2009, commitments to extend credit totaled $75.2 million.

Construction Lending

We make local construction and land acquisition and development loans. Residential houses and commercial real estate under construction and the underlying land secure construction loans. At December 31, 2009, construction, land acquisition and land development loans outstanding were $81.1 million, or 20.1% of total loans. These loans are concentrated in our local markets. Lending activity in this area has been significantly curtailed in the last 18 months due to the overall economy. Because the interest rate charged on these loans usually floats with the market, these loans assist us in managing our interest rate risk. Construction lending entails significant additional risks, compared to residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the value of the building under construction is only estimable when the loan funds are disbursed. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and related loan-to-value ratios. To mitigate the risks associated with construction lending, we generally limit loan amounts to 80% of appraised value in addition to analyzing the creditworthiness of the borrowers. We also obtain a first lien on the property as security for construction loans and typically require personal guarantees from the borrower’s principal owners.

Commercial Business Loans

Commercial business loans generally have a higher degree of risk than loans secured by real property but have higher yields. To manage these risks, we generally obtain appropriate collateral and personal guarantees from the borrower’s principal owners and monitor the financial condition of its business borrowers. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, commercial business loans typically are made on the basis of the

 

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borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate. We have a loan review and monitoring process to regularly assess the repayment ability of commercial borrowers. At December 31, 2009, commercial loans totaled $54.6 million, or 13.5% of the total loan portfolio.

Commercial Real Estate Lending

Commercial real estate loans are secured by various types of commercial real estate in our market area including commercial buildings and offices, recreational facilities, small shopping centers, churches and hotels. At December 31, 2009, commercial real estate loans totaled $125.4 million, or 31.1% of our total loans. We may lend up to 80% of the secured property’s appraised value. Commercial real estate lending entails significant additional risk, compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or in the economic environment. Our commercial real estate loan underwriting criteria requires an examination of debt service coverage ratios, the borrower’s creditworthiness and prior credit history and reputation, and we typically require personal guarantees or endorsements of the borrowers’ principal owners. In addition, we carefully evaluate the location of the security property.

Residential Real Estate Lending

Residential real estate loans at December 31, 2009, accounted for $138.0 million, or 34.1% of our total loan portfolio. Residential first mortgage loans represent $75.0 million or 54.3% of total residential real estate loans. Land loans represent $27.5 million or 20.0% of total residential real estate loans. Multifamily and home equity loans represent $9.2 million and $17.9 million, respectively, and junior liens account for $8.4 million of total residential real estate loans.

All residential mortgage loans originated by us contain a “due-on-sale” clause providing that we may declare the unpaid principal balance due and payable upon sale or transfer of the mortgaged premises. In connection with residential real estate loans, we require title insurance, hazard insurance and if appropriate, flood insurance. We do not require escrows for real estate taxes and insurance.

Consumer Lending

We offer various secured and unsecured consumer loans, including unsecured personal loans and lines of credit, automobile loans, boat loans, deposit account loans, installment and demand loans and credit cards. At December 31, 2009, we had consumer loans of $4.5 million or 1.1% of total loans. Such loans are generally made to customers with whom we have a pre-existing relationship. We currently originate all of our consumer loans in our market area.

Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured, such as loans secured by rapidly depreciable assets such as automobiles. Any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment as a result of the greater likelihood of damage, loss or depreciation. Due to the relatively small amounts involved, any remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

 

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The underwriting standards we employ to mitigate the risk for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment and from any verifiable secondary income. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount.

SUPERVISION AND REGULATION

General

As a bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as amended, and the examination and reporting requirements of the Board of Governors of the FRB. As a state-chartered commercial bank, First Capital Bank is subject to regulation, supervision and examination by the Virginia State Corporation Commission’s Bureau of Financial Institutions (the “BFI”). It is also subject to regulation, supervision and examination by the FRB. Other federal and state laws, including various consumer and compliance laws, govern the activities of the bank, the investments that it makes and the aggregate amount of loans that it may grant to one borrower.

The following description summarizes the significant federal and state laws applicable to us and our subsidiary. To the extent that statutory or regulatory provisions are described, the description is qualified in its entirety by reference to that particular statutory or regulatory provision.

First Capital Bancorp, Inc.

Bank Holding Company Act. As a bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and we are registered as such with, and are subject to examination by, the FRB. Pursuant to the BHC Act, we are subject to limitations on the kinds of business in which we can engage directly or through subsidiaries. We are permitted to manage or control banks. Generally, however, we are prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than five percent of any class of voting shares of an entity engaged in non-banking activities, unless the FRB finds such activities to be “so closely related to banking” as to be deemed “a proper incident thereto” within the meaning of the BHC Act. Activities at the bank holding company level are limited to:

 

   

banking, managing or controlling banks;

 

   

furnishing services to or performing services for its subsidiaries; and

 

   

engaging in other activities that the FRB has determined by regulation or order to be so closely related to banking as to be a proper incident to these activities.

Bank acquisitions by bank holding companies are also regulated. A bank holding company may not acquire more than five percent of the voting shares of another bank without prior approval of the FRB. The BHC Act subjects bank holding companies to minimum capital requirements. Regulations and policies of the FRB also require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. The FRB’s policy is that a bank holding company should stand ready to use available resources for assisting a subsidiary bank. Under certain conditions, the FRB may conclude that certain actions of a bank holding company, such as a payment of a cash dividend, would constitute an

 

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unsafe and unsound banking practice. Some of the activities that the FRB has determined by regulation to be proper incidents to the business of a bank holding company include making or servicing loans and specific types of leases, performing specific data processing services and acting in some circumstances as a fiduciary or investment or financial adviser. The only activity in which we are engaged is the operation of First Capital Bank. We have no present intention to engage in any other permitted activities. However, we may determine to engage in additional activities if it is deemed to be in our best interests.

With some limited exceptions, the BHC Act requires every bank holding company to obtain the prior approval of the FRB before:

 

   

acquiring substantially all the assets of any bank;

 

   

acquiring direct or indirect ownership or control of any voting shares of any bank if after such acquisition it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares); or

 

   

merging or consolidating with another bank holding company.

In addition, and subject to some exceptions, the BHC Act and the Change in Bank Control Act, together with their regulations, require FRB approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities and either has registered securities under Section 12 of the Securities Exchange Act of 1934 or no other person owns a greater percentage of that class of voting securities immediately after the transaction. The regulations provide a procedure for challenging this rebuttable control presumption.

Financial Holding Companies and Financial Activities. The Gramm-Leach-Bliley Act established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit a holding company system to engage in a full range of financial activities through qualification as a new entity known as a financial holding company. We have not determined whether to become a financial holding company, but we may consider such a conversion in the future if it appears to be in our best interest.

Dividends. No Virginia corporation may make any distribution to stockholders if, after giving it effect, (i) the corporation would not be able to pay its existing and reasonably foreseeable debts, liabilities and obligations, whether or not liquidated, matured, asserted or contingent, as they become due in the usual course of business; or (ii) the corporation’s total assets would be less than the sum of its total liabilities plus, the amount that would be needed if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution.

In a policy statement, the FRB has advised bank holding companies that it believes that payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. As a result of this policy, banks and their holding companies may find it difficult to pay dividends out of retained earnings from historical periods prior to the most recent fiscal year or to take advantage of earnings generated by extraordinary items such as sales of buildings or other large assets in order to generate profits to enable payment of future dividends.

The primary source of funds for payment of dividends by us to our stockholders will be the receipt of dividends and interest from First Capital Bank. Our ability to receive dividends from First Capital Bank will be limited by applicable law. The power of the board of directors of an insured

 

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depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution, depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. Federal law prohibits insured depository institutions from making capital distributions, including dividends, if after such transaction, the institution would be undercapitalized. A bank is undercapitalized for this purpose if its leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio are not at least 5%, 6% and 10%, respectively. See “Regulatory Capital Requirements” below.

The FRB has authority to prohibit a bank holding company from engaging in practices which are considered to be unsafe and unsound. Depending upon the financial condition of First Capital Bank and upon other factors, the FRB could determine that the payment of dividends or other payments by us or First Capital Bank might constitute an unsafe or unsound practice. Finally, any dividend that would cause a bank to fall below required capital levels could also be prohibited.

Regulatory Capital Requirements. State banks and bank holding companies are required to maintain a minimum risk capital ratio of 10% (at least 5% in the form of Tier 1 capital) of risk-weighted assets and off-balance sheets items. Tier 1 capital consists of common equity, noncumulative perpetual preferred stock and minority interest in the equity accounts of consolidated subsidiaries and excludes goodwill. Tier 2 capital consists of cumulative perpetual preferred stock, limited-life preferred stock, mandatory convertible securities, subordinated debt and (subject to a limit of 1.25% of risk-weighted assets) general loan loss reserves. In calculating the relevant ratio, a bank’s assets and off-balance sheet commitments are risk-weighted: thus, for example, most commercial loans are included at 100% of their book value while assets considered less risky are included at a percentage of their book value (e.g., 20% for interbank obligations and 0% for vault cash and U.S. treasury securities).

We are subject to leverage ratio guidelines as well. The leverage ratio guidelines require maintenance of a minimum ratio of 3% Tier 1 capital to total assets for the most highly rated organizations. Institutions that are less highly rated, anticipating significant growth or subject to other significant risks will be required to maintain capital levels ranging from 1% to 2% above the 3% minimum.

Recent federal regulation established five tiers of capital measurement ranging from “well capitalized” to “critically undercapitalized.” Federal bank regulatory authorities are required to take prompt corrective action with respect to inadequately capitalized banks. If a bank does not meet the minimum capital requirement set by its regulators, the regulators are compelled to take certain actions, which may include prohibition on payment of dividends to its holding company or requiring the adoption of a capital restoration plan which must be guaranteed by the bank’s holding company.

Cross-Institution Assessments. Any insured depository institution owned by us can be assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other depository institution owned by us.

First Capital Bank

First Capital Bank is subject to various state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory oversight with respect to virtually all aspects of its operations. The following is a brief summary of the material provisions of certain statutes, rules and regulations that affect First Capital Bank. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below.

 

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General. First Capital Bank is under the supervision of, and subject to regulation and examination by, the BFI and FRB. As such, First Capital Bank is subject to various statutes and regulations administered by these agencies that govern, among other things, required reserves, investments, loans, lending limits, acquisitions of fixed assets, interest rates payable on deposits, transactions among affiliates and First Capital Bank, the payment of dividends, mergers and consolidations, and establishment of branch offices. As noted previously, First Capital Bank is a member of the Federal Reserve System. As such, the FRB, as the primary federal regulator of First Capital Bank, has the authority to impose penalties, initiate civil and administrative actions, and take other steps to prevent First Capital Bank from engaging in unsafe and unsound practices.

Mergers and Acquisitions. Under federal law, previously existing restrictions on interstate bank acquisitions were abolished effective September 29, 1995, and since such date bank holding companies from any state have been able to acquire banks and bank holding companies located in any other state. Effective June 1, 1997, the law allows banks to merge across state lines, subject to earlier “opt-in” or “opt-out” action by individual states. The law also allows interstate branch acquisitions and de novo branching if permitted by the “host state.” Effective July 1, 1995, Virginia adopted early “opt-in” legislation which permits interstate bank mergers. Virginia law also permits interstate branch acquisitions and de novo branching if reciprocal treatment is accorded Virginia banks in the state of the acquirer.

Although the above laws had the potential to have a significant impact on the banking industry, it is not possible for our management to determine, with any degree of certainty, the impact such laws have had on First Capital Bank.

Financial Services Legislation. On November 1, 1999, then President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”). The GLB Act implemented fundamental changes in the regulation of the financial services industry in the United States, further transforming the already converging banking, insurance and securities industries by permitting further mergers and affiliations which will combine commercial banks, insurers and securities firms under one holding company. Many of these changes are discussed above.

The provisions of the GLB Act have had a significant impact on the banking industry in general. However, it is not possible for us to determine, with any degree of certainty at this time, the impact that such provisions have had on First Capital Bank and its operations.

Dividends. The amount of dividends payable by First Capital Bank depends upon its earnings and capital position, and is limited by federal and state law, regulations and policy. In addition, Virginia law imposes restrictions on the ability of all banks chartered under Virginia law to pay dividends. Under such law, no dividend may be declared or paid that would impair a bank’s paid-in capital. Each of the BFI and the FDIC have the general authority to limit dividends paid by First Capital Bank if such payments are deemed to constitute an unsafe and unsound practice. In particular, Section 38 of the Federal Deposit Insurance Act (“FDIA”) would prohibit First Capital Bank from making a dividend if it were “undercapitalized” or if such dividend would result in the institution becoming “undercapitalized.”

Under current supervisory practice, prior approval of the FRB is required if cash dividends declared in any given year exceed the total of First Capital Bank’s net profits for such year, plus its retained profits for the preceding two years. In addition, First Capital Bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting current losses and bad debts. Federal law further provides that no insured depository institution may make any capital distribution (which would include a cash dividend) if, after making the distribution, the institution would not satisfy one or more of its minimum capital requirements.

 

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Insurance of Accounts, Assessments and Regulation by the FDIC

The deposits of the bank are insured by the FDIC up to the limits set forth under applicable law. The deposits of First Capital Bank are subject to the deposit insurance assessments of the Deposit Insurance Fund of the FDIC.

The FDIC recently amended its risk-based deposit assessment system for 2007 to implement authority granted by the Federal Deposit Insurance Reform Act of 2005. Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned. Assessment rates are determined by the FDIC and currently range from five to seven basis points for the healthiest institutions (Risk Category I) to 43 basis points of assessable deposits for the riskiest (Risk Category IV). The FDIC may adjust rates uniformly from one quarter to the next, except that no single adjustment can exceed three basis points.

The FDIC is authorized to prohibit any insured institution from engaging in any activity that the FDIC determines by regulation or order to pose a serious threat to the Deposit Insurance Fund. Also, the FDIC may initiate enforcement actions against a bank, after first giving the institution’s primary regulatory authority an opportunity to take such action. The FDIC may terminate the deposit insurance of any depository institution if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed in writing by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. We are not aware of any existing circumstances that could result in termination of any of First Capital Bank’s deposit insurance.

Capital Requirements. The various federal bank regulatory agencies, including the FRB, have adopted risk-based capital requirements for assessing the capital adequacy of banks and bank holding companies. Virginia chartered banks must also satisfy the capital requirements adopted by the BFI. The federal capital standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, as adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profile among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

The minimum requirement for the ratio of total capital to risk-weighted assets (including certain off-balance sheet obligations, such as stand-by letters of credit) is 8%. At least half of the risk-based capital must consist of common equity, retained earnings and qualifying perpetual preferred stock, less deductions for goodwill and various other tangibles (“Tier 1 capital”). Tier 2 capital includes the hybrid capital instruments and other debt securities, preferred stock and a limited amount of the general valuation allowance for loan losses. The sum of Tier 1 capital and Tier 2 capital is “total risk-based capital.”

The FRB also has adopted regulations which supplement the risk-based guidelines to include a minimum leverage ratio of Tier 1 capital to quarterly average assets (“Leverage Ratio”) of 3%. The FRB has emphasized that the foregoing standards are supervisory minimums and that a banking organization will be permitted to maintain such minimum levels of capital only if it receives the highest rating under the regulatory rating system and the banking organization is not experiencing or anticipating significant growth. All other banking organizations are required to maintain a Leverage Ratio of at least 4% to 5%

 

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of Tier 1 capital. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets. The FRB continues to consider tangible Tier 1 Leverage Ratio as the ratio of a banking organization’s Tier 1 capital, less deductions for intangibles otherwise includable in Tier 1 capital, to total tangible assets.

The Federal Financial Institutions Examination Council establishes the guidelines which banks follow in preparing their quarterly Reports of Condition and Income (“Call Report”) which are filed with their supervisory agency. The guidelines in most respects follow accounting principles generally accepted in the United States (“GAAP”) in presenting the financial condition of each institution. An exception exists in the manner that recognition of deferred tax asset balances are treated for the purpose of calculating capital adequacy. In preparing the Call Report schedules dealing with regulatory capital, an institution can recognize only that portion of its deferred tax asset balance which equates to projected earnings for the ensuing 12 month period. Any amount in excess of that is disallowed when calculating the institution’s capital ratios. All capital ratios reported by First Capital Bank following recognition of its deferred tax asset balance at June 30, 2003, will be in accordance with the Regulatory Accounting Principles (“RAP”) noted above. All other financial statements presented by the Bank, including all other Call Report presentations, will be in accordance with GAAP.

Section 38 of the FDIA, as amended by the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), requires that the federal banking agencies establish five capital levels for insured depository institutions – “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized” – and requires or permits such agencies to take certain supervisory actions as an insured institution’s capital level falls.

As of December 31, 2009, we and First Capital Bank both exceeded all capital requirements under all applicable regulations.

Safety and Soundness. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” all such terms are defined under uniform regulations defining such capital levels issued by each of the federal banking agencies.

On December 19, 1991, FDICIA was enacted into law. FDICIA requires each federal banking regulatory agency to prescribe, by regulation or guideline, standards for all insured depository institutions and depository institution holding companies relating to: (i) internal controls, information systems and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) compensation, fees and benefits; and (vii) such other operational and managerial standards as the agency determines to be appropriate. On July 10, 1995, the federal banking agencies, including the FRB, adopted final rules and proposed guidelines concerning standards for safety and soundness required to be prescribed by regulation pursuant to Section 39 of the FDIA. In general, the standards relate to (1) operational and managerial matters; (2) asset quality and earnings; and (3) compensation. The operational and managerial standards cover (a) internal controls and information systems; (b) internal audit systems; (c) loan documentation; (d) credit underwriting; (e) interest rate exposure; (f) asset growth; and (g) compensation, fees and benefits.

Activities and Investments of Insured State-Chartered Banks. The activities and equity investments of FDIC-insured, state-chartered banks are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may

 

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not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary; (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets; (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions; and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met. In addition, an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory capital requirements. Any insured state-chartered bank directly or indirectly engaged in any activity that is not permitted for a national bank must cease the impermissible activity. The scope of permissible activities available to FDIC-insured, state chartered banks may be expanded by the recently enacted financial services legislation. See “Supervision and Regulation – First Capital Bank – Financial Services Legislation.”

Regulatory Enforcement Authority. Applicable banking laws include substantial enforcement powers available to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil monetary penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

Monetary Policy

The commercial banking business is affected not only by general economic conditions but also by the monetary policies of the FRB. The instruments of monetary policy employed by the FRB include open market operations in United States government securities, changes in the discount rate on member bank borrowing and changes in reserve requirements against deposits held by all federally insured banks. The FRB’s monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national and international economy and in the money markets, as well as the effect of actions by monetary fiscal authorities, including the FRB, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the bank.

Federal Reserve System

In 1980, Congress enacted legislation that imposed reserve requirements on all depository institutions that maintain transaction accounts or non-personal time deposits. NOW accounts, money market deposit accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to these reserve requirements which are subject to adjustment by the FRB. Because required reserves must be maintained in the form of vault cash or in a non-interest-bearing account at, or on behalf of, a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets.

 

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Transactions with Affiliates

Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any bank or entity that controls, is controlled by or is under common control with such bank. Generally, Sections 23A and 23B:

 

   

limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and maintain an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital stock and surplus; and

 

   

require that all such transactions be on terms substantially the same, or at least as favorable, to the association or subsidiary as those provided to a nonaffiliate.

The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions.

Loans to Insiders

The Federal Reserve Act and related regulations impose specific restrictions on loans to directors, executive officers and principal shareholders of banks. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer and to a principal shareholder of a bank, and some affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the bank’s loan-to-one borrower limit. Loans in the aggregate to insiders and their related interests as a class may not exceed two times the bank’s unimpaired capital and unimpaired surplus until the bank’s total assets equal or exceed $100,000,000, at which time the aggregate is limited to the bank’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans, above amounts prescribed by the appropriate federal banking agency, to directors, executive officers and principal shareholders of a bank or bank holding company, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the bank with any “interested” director not participating in the voting. The FDIC has prescribed the loan amount, which includes all other outstanding loans to such person, as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Section 22(h) requires that loans to directors, executive officers and principal shareholders be made on terms and underwriting standards substantially the same as offered in comparable transactions to other persons.

Community Reinvestment Act

Under the Community Reinvestment Act and related regulations, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practice. The Community Reinvestment Act requires the adoption by each institution of a Community Reinvestment Act statement for each of its market areas describing the depository institution’s efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance with the Community Reinvestment Act and are assigned ratings in this regard. Banking regulators consider a depository institution’s Community Reinvestment Act rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries.

 

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The GLB Act and federal bank regulators have made various changes to the Community Reinvestment Act. Among other changes, Community Reinvestment Act agreements with private parties must be disclosed and annual reports must be made to a bank’s primary federal regulatory. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the GLB Act may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a “satisfactory” rating in its latest Community Reinvestment Act examination. First Capital Bank received a “satisfactory” rating during its latest examination.

Fair Lending; Consumer Laws

In addition to the Community Reinvestment Act, other federal and state laws regulate various lending and consumer aspects of the banking business. Governmental agencies, including the Department of Housing and Urban Development, the Federal Trade Commission and the Department of Justice, have become concerned that prospective borrowers experience discrimination in their efforts to obtain loans from depository and other lending institutions. These agencies have brought litigation against depository institutions alleging discrimination against borrowers. Many of these suits have been settled, in some cases for material sums, short of a full trial.

Recently, these governmental agencies have clarified what they consider to be lending discrimination and have specified various factors that they will use to determine the existence of lending discrimination under the Equal Credit Opportunity Act and the Fair Housing Act, including evidence that a lender discriminated on a prohibited basis, evidence that a lender treated applicants differently based on prohibited factors in the absence of evidence that the treatment was the result of prejudice or a conscious intention to discriminate, and evidence that a lender applied an otherwise neutral non-discriminatory policy uniformly to all applicants, but the practice had a discriminatory effect, unless the practice could be justified as a business necessity.

Banks and other depository institutions also are subject to numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, and the Fair Housing Act, require compliance by depository institutions with various disclosure requirements and requirements regulating the availability of funds after deposit or the making of some loans to customers.

USA Patriot Act of 2001

In October 2001, the USA Patriot Act of 2001 (“Patriot Act”) was enacted in response to the September 11, 2001 terrorist attacks in New York, Pennsylvania and Northern Virginia. The Patriot Act is intended to strengthen U. S. law enforcement and the intelligence communities’ abilities to work cohesively to combat terrorism. The continuing impact on financial institutions of the Patriot Act and related regulations and policies is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws, and imposes various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities to identify persons who may be involved in terrorism or money laundering.

 

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Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act (“SOX”) was signed into law in 2002 and addresses accounting, corporate governance and disclosure issues. The impact of SOX is wide-ranging as it applies to all public companies and imposes significant requirements for public company governance and disclosure requirements. In general, SOX established new corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and created a new regulatory body to oversee auditors of public companies. It backed these requirements with new SEC enforcement tools, increased criminal penalties for federal mail, wire and securities fraud, and created new criminal penalties for document and record destruction in connection with federal investigations. It also increased the opportunity for more private litigation by strengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection. The economic and operational effects of SOX on public companies, including the Company, have been and will continue to be significant in terms of the time, resources and costs associated with compliance with its requirements.

Legislation

Under current regulations, FDIC-insured depository institutions that are members of the FDIC pay insurance premiums at rates based on their assessment risk classification, which is determined, in part, based on the institution’s capital ratios and on factors that the FDIC deems relevant to determine the risk of loss to the FDIC. As part of the new assessments that began April 1, 2009, the FDIC introduced three new adjustments that may impact the assessment base. These adjustments are for 1) a potential decrease for long-term unsecured debt, 2) a potential increase for secured liabilities above a threshold amount and 3) for non-risk category 1 institutions, a potential increase for brokered deposits above a threshold amount. The base assessment rates for Risk Categories II — IV range from 17-78 basis points. A change in our risk category would negatively impact our assessment rates.

The amount an institution is assessed is based upon statutory factors that include the balance of insured deposits as well as the degree of risk the institution poses to the insurance fund and may be reviewed semi-annually. Additionally, all institutions insured by the FDIC Bank Insurance Fund are assessed fees to cover the debt of the Financing Corporation, the successor of the insolvent Federal Savings and Loan Insurance Corporation. The assessment rate is adjusted quarterly.

On May 22, 2009, the FDIC voted to levy a special assessment on insured institutions as part of the FDIC’s efforts to rebuild the reserve and help maintain public confidence in the banking system. The special assessment was 5 basis points on each FDIC-insured depository institution’s assets, minus its Tier 1 capital, as of June 30, 2009. On September 30, 2009, the Company paid a special assessment of $225 thousand.

On November 12, 2009, the FDIC voted to require insured institutions to prepay slightly over three years of estimated insurance assessments. The pre-payment allows the FDIC to strengthen the cash position of the DIF immediately without immediately impacting earnings of the industry. On December 31, 2009, the Company pre-paid estimated assessments of $3.4 million for the years 2010-2012. For risk-based capital purposes, the pre-payment was assigned a zero percent risk weighting.

On October 3, 2008, the FDIC’s deposit insurance temporarily increased from $100 thousand to $250 thousand per depositor. Checking, savings, certificates of deposit, money market accounts, and other interest-bearing deposit accounts, when combined, are now FDIC insured up to $250 thousand per

 

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depositor. Joint accounts may be insured up to $250 thousand per owner in addition to the $250 thousand of insurance available on those same owner’s individual accounts. On May 19, 2009, Congress extended the temporary $250 thousand coverage through December 31, 2013. On January 1, 2014, the standard coverage limit is scheduled to return to $100 thousand for all deposit categories except IRAs and certain retirement accounts mentioned above, which will continue to be insured up to $250 thousand per owner because that is permanent coverage set by Congress in 2006.

On October 14, 2008, the FDIC announced the enactment of the Temporary Liquidity Guarantee Program (“TLGP”) to strengthen confidence and encourage liquidity in the banking system. Pursuant to the program, the FDIC will guarantee certain senior unsecured debt issued by participating financial institutions issued on or after October 14, 2008 and before June 30, 2009; and provide full FDIC deposit insurance coverage for non-interest bearing transaction accounts at participating institutions through December 31, 2009 (Transaction Account Guarantee Program). All insured institutions were covered under the program until December 5, 2008, at no cost. After December 5, 2008, the cost for institutions electing to participate was a 10-basis-point surcharge applied to balances covered by the noninterest-bearing deposit transaction account guarantee and 75 basis points of the eligible senior unsecured debt guaranteed under the program. The Company elected to participate in the unlimited coverage for noninterest-bearing transaction accounts.

On June 3, 2009, the FDIC amended the TLGP to provide a limited extension of the debt guarantee program. Effective October 1, 2009, the FDIC also extended the full FDIC deposit insurance coverage for noninterest-bearing transaction accounts at participating institutions through June 30, 2010.

New regulations and statutes are regularly proposed that contain wide-ranging proposals that may or will alter the structures, regulations, and competitive relationships of the nation’s financial institutions. The Company cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which the Company’s business may be affected by any new regulation or statute.

Recent Legislative and Regulatory Initiatives to Address Financial and Economic Crises

Congress, Treasury, and the federal banking regulators, including the FDIC, have taken broad measures since early September 2008 to address the turmoil in the U. S. banking system.

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted. EESA authorizes the Treasury to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in the TARP.

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”), establishing more limits on executive compensation for all current and future TARP recipients. The ARRA limits do not repeal or replace the rules discussed above but supplement the guidance issued by the Treasury. Under the ARRA, any TARP participant may not pay any bonus, retention award or incentive compensation to its five most highly paid executives, except for payments of long term restricted stock, the awards of which do not vest while the Preferred Stock is outstanding and do not have a value greater than one-third of the officer’s total annual compensation, unless the payments are required pursuant to a written agreement executed prior to February 11, 2009. In addition, the ARRA requires the Treasury to review bonuses, retention awards and other compensation paid to a TARP participant’s five most highly-compensated officers and the next 20 most highly compensated employees to determine if the payments were excessive or inconsistent with the purpose of the ARRA or TARP or were otherwise contrary to the public interest. If so, the Treasury is directed to negotiate the return of any such amounts to the government.

 

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The purpose of TARP is to restore confidence and stability to the U. S. banking system and to encourage financial institutions to increase their lending to customers and to each other. The Treasury has allocated $250 billion to the TARP Capital Purchase Program (“CCP”). TARP also includes direct purchases or guarantees of troubled assets of financial institutions. Participants in the CPP are subject to certain executive compensation limits and are encouraged to expand their lending and mortgage loan modifications. Under CPP, the Treasury will purchase debt or equity securities from participating institutions.

On April 3, 2009, the Company issued 10,958 shares of preferred stock to the U.S. Treasury in return for $10.958 million in cash in connection with the TARP Capital Purchase Program. The agreement requires us to pay a 5% dividend on the preferred stock for the first five years. The dividend increases to 9% for all periods after the first five years if we have not redeemed the preferred stock. In addition, we issued a warrant to the U.S. Treasury giving them the right to purchaser 250,947 shares of our common stock at $6.55 per share for up to 10 years.

Future Regulatory Uncertainty

Because federal regulation of financial institutions changes regularly and is the subject of constant legislative debate, we cannot forecast how federal regulation of financial institutions may change in the future and impact our operations. Although Congress in recent years has sought to reduce the regulatory burden on financial institutions with respect to the approval of specific transactions, we fully expect that the financial institution industry will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices.

 

ITEM 2. PROPERTIES

Our banking offices are listed below. We conduct our business from the properties listed below. Except for our Ashland and WestMark office, which we own, we lease our other offices under long term lease arrangements. All of such leases are at market rental rates and they are all with unrelated parties having no relationship or affiliation with us.

 

Office Location

   Date
Opened

WestMark Office (1)

11001 West Broad Street

Glen Allen, Virginia 23060

   1998

Ashland Office

409 South Washington Highway

Ashland, Virginia 23005

   2000

Chesterfield Towne Center Office

1580 Koger Center Boulevard

Richmond, Virginia 23235

   2003

 

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Staples Mill Road Office

1776 Staples Mill Road

Richmond, Virginia 23230

   2003

Bon Air Office

2810 Buford Road

Richmond, Virginia 23235

   2008

Three Chopt Office (2)

7100 Three Chopt Road

Richmond, Virginia 23229

   2006

James Center Office

One James Center

901 East Cary Street

Richmond, Virginia 23219

   2007

 

(1) Relocation of our Innsbrook leased office to an owned free standing site across the street in September 2008.
(2) Relocated from 1504 Santa Rosa Road, Richmond, Virginia in February 2009 to an owned free standing site.

Our corporate office, which we opened in 2003, is located at 4222 Cox Road, Suite 200, Glen Allen, Virginia 23060.

All of our properties are in good operating condition and are adequate for our present and anticipated future needs.

 

ITEM 3. LEGAL PROCEEDINGS

We are not involved in any pending legal proceedings other than legal proceedings occurring in the ordinary course of business. Our management does not believe that such legal proceedings, individually or in the aggregate, are likely to have a material adverse effect on our results of operations or financial condition.

 

ITEM 4. REMOVED AND RESERVED

PART II

 

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock was approved for listing on the Nasdaq Capital Markets as of June 7, 2007 under the symbol “FCVA”. Trading under that symbol began June 14, 2007.

 

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The following table shows high and low sale prices for our common stock, as reported to us, for the periods indicated.

 

     High    Low

2009

     

1st Quarter

   $ 8.66    $ 4.50

2nd Quarter

     8.71      5.70

3rd Quarter

     8.61      6.55

4th Quarter

     7.55      4.17

2008

     

1st Quarter

   $ 14.25    $ 11.05

2nd Quarter

     13.50      10.50

3rd Quarter

     11.25      9.01

4th Quarter

     10.50      5.75

The foregoing transactions may not be representative of all transactions during the indicated periods or of the actual fair market value of our common stock at the time of such transaction due to the infrequency of trades and the limited market for our common stock.

First Capital Bancorp, Inc. does not pay a cash dividend and does not have the intention to pay a cash dividend in the foreseeable future.

There were 2,971,171 shares of the Company’s common stock outstanding at the close of business on December 31, 2009. As of March 22, 2010, there were approximately 656 shareholders of record of our common stock.

 

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ITEM 6. SELECTED FINANCIAL INFORMATION

The following consolidated summary sets forth our selected financial data for the periods and at the dates indicated. The selected financial data for fiscal years have been derived from our audited financial statements for each of the five years that ended December 31, 2009, 2008, 2007, 2006, and 2005. You also should read the detailed information and the financial statements for all of such periods included elsewhere in this Report on Form 10-K.

 

     At or for the Fiscal Years Ended December 31,  
     2009     2008     2007     2006     2005  
     (In thousands, except ratios and per share amounts)  

Income Statement Data:

          

Interest income

   $ 25,401      $ 24,044      $ 20,356      $ 15,263      $ 10,533   

Interest expense

     12,810        12,996        10,563        7,691        4,134   
                                        

Net interest income

     12,591        11,048        9,793        7,572        6,399   

Provision for loan losses

     2,285        2,924        676        404        408   
                                        

Net interest income after provision for loan losses

     10,306        8,124        9,117        7,168        5,991   

Noninterest income

     747        744        809        465        272   

Noninterest expense

     10,628        8,560        7,259        5,261        4,293   
                                        

Income before income taxes

     425        308        2,667        2,372        1,970   

Income tax expense (benefit)

     117        138        925        801        664   
                                        

Net income

   $ 308      $ 170      $ 1,742      $ 1,571      $ 1,306   
                                        

Effective dividend on preferred stock

   $ 503      $ 0      $ 0      $ 0      $ 0   
                                        

Net income (loss) available to common shareholders

   $ (195   $ 170      $ 1,742      $ 1,571      $ 1,306   
                                        

Per Share Data: (1)

          

Basic earnings per share

   $ (0.07   $ 0.06      $ 0.72      $ 0.87      $ 0.73   

Diluted earnings per share

   $ (0.07   $ 0.06      $ 0.71      $ 0.83      $ 0.70   

Book value per share

   $ 12.14      $ 11.92      $ 11.73      $ 8.72      $ 7.78   

Balance Sheet Data:

          

Assets

   $ 530,396      $ 431,553      $ 351,867      $ 257,241      $ 209,529   

Gross loans, net of unearned income

   $ 403,720      $ 372,500      $ 296,723      $ 201,585      $ 156,062   

Deposits

   $ 422,134      $ 334,300      $ 255,108      $ 194,302      $ 162,388   

Shareholders’ equity

   $ 46,458      $ 35,420      $ 34,859      $ 15,659      $ 13,970   

Average shares outstanding, basic

     2,971        2,971        2,414        1,796        1,796   

Average shares outstanding, diluted

     2,971        2,984        2,469        1,889        1,860   

Selected Performance Ratios

          

Return on average assets

     0.06     0.04     0.61     0.69     0.72

Return on average equity

     0.71     0.49     6.80     10.74     9.69

Efficiency ratio

     79.68     72.60     68.47     65.46     64.35

Net interest margin

     2.69     2.89     3.54     3.41     3.68

Equity to assets

     8.76     8.21     9.91     6.09     6.67

Tier 1 risk-based capital ratio

     12.36     10.62     12.98     10.39     9.13

Total risk-based capital ratio

     14.09     12.41     14.44     12.28     11.36

Leverage ratio

     10.01     9.62     12.50     8.80     6.98

Asset Quality Ratios:

          

Non-performing loans to period-end loans

     2.57     1.18     0.02     0.06     0.00

Non-performing assets to total assets

     1.96     1.52     0.01     0.05     0.00

Net loan charge-offs (recoveries) to average loans

     0.19     0.10     0.01     0.02     0.02

Allowance for loan losses to loans outstanding at end of period

     1.64     1.36     0.84     0.91     0.94

 

(1) Amounts have been adjusted to reflect a three for two stock split effective December 20, 2005.

 

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

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

Overview

The Company is a bank holding company which owns 100% of the stock of First Capital Bank (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 difficult economic environment during 2009 negatively impacted our financial performance as we realized a net income of $308 thousand for the year ended December 31, 2009 compared to $170 thousand for the year ended December 31, 2008. Net loss available to common shareholders, which deducts from net income the dividends and discount accretion on preferred stock, was a loss of $195 thousand for the year ended December 31, 2009 compared to $170 thousand a year ago. Key factors affecting the full year 2009 results included significant higher FDIC premiums, $2.3 million provision to loans due to increasing charge-offs and transaction costs in connection with a planned merger which was subsequently terminated.

For the year ended December 31, 2009, assets grew $98.8 million to $530.4 million or 22.9% from $431.5 million at December 31, 2008. Total net loans at December 31, 2009 were $397.1 million, an increase of $29.7 million, or 8.1%, from the December 31, 2008 amount of $367.4 million. Deposits increased $87.8 million to $422.1 million, or 26.3% from the December 31, 2008 amount of $334.3 million.

Net interest margin decreased in 2009 from 2.89% for the year ended December 31, 2008 to 2.68% for the year ended December 31, 2009. The net interest margin was 3.54% for the same period in 2007. During 2009, the Federal Open Market Committee of the Federal Reserve (“FOMC”) maintained the target range for the Federal funds rate at 0% to 0.25% and reiterated its intent to hold the Federal funds rate exceptionally low for an extended period. The decline in the target Federal funds rate throughout the last two years had placed downward pressure on the Company’s earning asset yields and related net interest income. During the third and fourth quarters of 2009, however, repricing of money market accounts and certificates of deposit provided significant relief from this trend. The Company also expects net interest margin to be relatively stable over the next several quarters based on the current yield curve.

We remain well capitalized with capital ratios above the regulatory minimums. As we enter 2010 however, the financial sector remains in turmoil. Pressure continues on the net interest margin and asset quality continues to deteriorate.

 

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Critical Accounting Policies

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

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

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

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

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

While management uses the best information available to establish the allowance for loan and lease 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.

Results of Operations

Net Income

Net income for the year ended December 31, 2009 increased to $308 thousand from $170 thousand for the year ended December 31, 2008. Returns on equity and assets for the year ended December 31, 2009 were 0.71% and 0.06%, respectively, compared to 0.49% and 0.04% for the year ended December 31, 2008. Loan growth resulted in an increase in interest income as interest on loans increased $764 thousand to $22.9 million from $22.1 million in 2008 after increasing $3.8 million in 2008 compared to 2007. Investments increased $46.6 million during 2009 resulting in an increase in interest on investments of

 

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$847 thousand to $2.4 million as compared to $1.5 million in 2008. Total interest expense was $12.8 million for the year ended December 31, 2009, compared to $13.0 million for the year ended December 31, 2008.

For 2009, earnings per diluted share were a loss of $0.07 compared to income of $0.06 for 2008.

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,  
     2009     2008  
     Average
Balance
    Income/
Expense
   Yield/
Rate
    Average
Balance
    Income/
Expense
   Yield/
Rate
 
     (Dollars in thousands)  

Assets:

              

Loans, net of unearned income (1)

   $ 389,364      $ 22,925    5.89   $ 337,168      $ 22,161    6.57

Investment securities:

              

U.S. Agencies

     18,172        807    4.44     19,067        944    4.95

Mortgage backed securities

     11,520        409    3.55     7,342        322    4.39

CMO

     13,898        478    3.44     —          —      0.00

Municipal securities (2)

     6,741        437    6.48     1,695        96    5.68

Corporate bonds

     3,398        194    5.71     3,198        183    5.72

Taxable municipal securities

     3,310        184    5.57     —          —      0.00

Other investments

     4,017        68    1.68     3,648        156    4.28
                                          

Total investment securities

     61,056        2,577    4.22     34,950        1,701    4.87

Federal funds sold

     24,425        48    0.20     10,444        214    2.05
                                          

Total earning assets

   $ 474,845      $ 25,550    5.38   $ 382,562      $ 24,076    6.29
                                          

Cash and cash equivalents

     5,992             10,954        

Allowance for loan losses

     (5,695          (3,393     

Other assets

     14,394             7,831        
                          

Total assets

   $ 489,536           $ 397,954        
                          

Interest bearing liabilities:

              

Interest checking

   $ 7,973      $ 30    0.37   $ 9,213      $ 45    0.49

Money market deposit accounts

     93,177        1,742    1.87     38,586        711    1.84

Statement savings

     699        3    0.47     792        5    0.57

Certificates of deposit

     246,291        8,885    3.61     219,480        9,910    4.52
                                          

Total interest-bearing deposits

     348,140        10,660    3.06     268,071        10,671    3.98
                                          

Fed funds purchased

     —          —      0.00     952        35    3.66

Repurchase agreements

     1,365        6    0.44     2,482        32    1.31

Subordinated debt

     7,155        266    3.72     7,155        386    5.38

FHLB advances

     50,000        1,879    3.76     49,385        1,872    3.79
                                          

Total interest-bearing liabilities

     406,660        12,811    3.15     328,045        12,996    3.96
                      

 

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Noninterest-bearing liabilities:

                

Noninterest-bearing deposits

     37,583           32,672      

Other liabilities

     2,025           2,180      
                        

Total liabilities

     39,608           34,852      

Shareholders’ equity

     43,268           35,057      
                        

Total liabilities and shareholders’ equity

   $ 489,536         $ 397,954      
                        

Net interest income

      $ 12,739         $ 11,080   
                        

Interest rate spread

         2.23         2.32
                        

Net interest margin

         2.68         2.89
                        

Ratio of average interest earning assets to average interest-bearing liabilities

         116.77         116.62
                        

 

(1) Includes nonaccrual loans
(2) Income and yields are reported on a taxable equivlent basis using a 34% tax rate.

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.

Year ended December 31, 2009 compared to year ended December 31, 2008

Net interest income for the year ended December 31, 2009 increased 14.0% to $12.6 million from $11.0 million for the year ended December 31, 2008. Net interest income increased despite a 21 basis point decrease in the net interest margin from 2.89% for the year ended December 31, 2008 to 2.68% for the comparable period of 2009.

Average earning assets increased $92.3 million, or 24.1%, to $474.8 million for 2009 from $382.6 million for 2008. Average loans, net of unearned income increased $52.2 million, or 15.5% for 2009 to $389.4 million. Actual loan balances increased $33.2 million in 2009 compared to $78.3 million in 2008. The average rate earned on net loans, decreased 68 basis points to 5.89% from 6.57% for the year ended December 31, 2008. The decrease in the average rate earned on net loans was the result of the decrease of 400 basis points in the prime rate during 2008. The prime rate remained unchanged at 3.25% for the entire year of 2009. The average balance in our securities portfolio increased $26.1 million in 2009 to $61.1 million from $35.0 million in 2008. We used liquidity generated by deposits and TARP funds to mitigate interest rate risk and pick up spreads over the Federal funds rate. Other investments yield, which include FHLB Stock and Federal Reserve Stock, decreased 260 basis points as the FHLB eliminated the dividend on its stock in 2009. Due to continued low interest rates, the yield on the investment portfolio decreased from 4.87% for 2008 to 4.22% for 2009. Interest on Federal funds sold decreased from $214 thousand for 2008 to $48 thousand for 2009 as the average balance sold increased from $10.4 million in 2008 to $24.4 million in 2009. During most of 2009 the FOMC was pricing Federal funds between 0% and 0.25%. As a result of these changes, the yield on earning assets decreased 91 basis points to 5.38% for 2009 from 6.29% for 2008.

 

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Average deposits increased $80.1 million or 29.9% to $348.1 million for 2009 from $268.1 million for 2008. Interest expense on deposits decreased $11 thousand for 2009 compared to 2008. The average cost of interest-bearing deposits decreased 92 basis points from 3.98% for 2008 to 3.06% for 2009. The decrease in cost of interest-bearing deposits is the result of declining interest rates and change in the mix of deposits. We made a concerted effort to reduce the dependency for funding away from certificates of deposit to other products which more closely matched our assets repricing. As of December 31, 2009, certificates of deposit comprise 57.1% of our deposit base as compared to 75.4% at December 31, 2009. The cost of certificates of deposit decreased 91 basis points from 4.52% for 2008 to 3.61% for 2009. Money market accounts increased on average $54.6 million for 2009 compared to 2008 as the cost increased from 1.84% to 1.87% for 2009. We expect deposit costs continue to decrease in early 2010 as certificates of deposit reprice and the rate on money market accounts decreased.

Other borrowed money decreased 20 basis points from 3.88% to 3.68% for 2009 primarily due to the $5.3 million in Trust Preferred Capital Notes which are 1.70% over the three month LIBOR. At December 31, 2009, the rate on the Trust Preferred Capital Notes was down 175 basis points to 1.95% from 3.70% at December 31, 2008.

Year ended December 31, 2008 compared to year ended December 31, 2007

Net interest income for the year ended December 31, 2008 increased 12.8 % to $11.0 million from $9.8 million for the year ended December 31, 2007. Net interest income increased despite a 65 basis point decrease in the net interest margin from 3.54% for the year ended December 31, 2007 to 2.89% for the comparable period of 2008.

Average earning assets increased 38.5% to $382.6 million for 2008 from $276.3 million for 2007. Average loans, net of unearned income increased $103.4 million, or 44.2% for 2008 to $337.2 million. The average rate earned on net loans, decreased 128 basis points to 6.57% from 7.85% for the year ended December 31, 2007. The decrease in the average rate earned on net loans was the result of a 400 basis point decrease in the prime rate and other rates that track prime in 2008, to which approximately 40% of our loans are tied. The average balance in our securities portfolio decreased by $3.7 million primarily due to maturities and calls of securities of $24.0 million and repayments on mortgage backed securities of $2.1 million, offset by purchases of $24.9 million. The yield on the investment portfolio increased 31 basis points from 4.52% for the year ended December 31, 2007 to 4.83% for the year ended December 31, 2008. Other investments, which include FHLB Stock and Federal Reserve Stock increased on average $1.3 million while the yield decreased from 6.08% to 4.28% for the year ended December 31, 2008. As the result of these changes, total interest income increased $3.7 million, or 18.1% to $24.0 million for the year ended December 31, 2008 as compared to $20.4 million for the comparable period of 2007.

Total interest expense on deposits increased $2.4 million to $13.0 million for the year ended December 31, 2008 from $10.6 million for the same period of 2007. The average balance of interest-bearing deposits increased $81.5 million as the cost of deposits decreased 68 basis points. Average balance of certificates of deposit increased $87.6 million as the cost of certificates decreased 63 basis points to 4.52% for the year ended December 31, 2008. The FOMC cut the federal funds targeted rate and the associated prime rate on interest 400 basis points in 2008. A total of 175 basis points occurred in the fourth quarter of 2008 with a 75 basis point decreased occurring December 16, 2008. Although the vast majority of our time deposits are set to reprice in the next six to twelve months and will lower funding costs, this rapid reduction in rates put pressure on our net interest margin. The average money market deposit accounts decreased $6.1 million during 2008 to $38.6 million as the average rate decreased 218

 

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basis points to 1.84% from 4.02% for the year 2007. The popularity of the Capital Reserve Account with a variable rate tied to fed funds, resulted in the decrease in deposits and interest rates decreased and customers looked to more attractive rates. Targeted fed funds rates decreased from an average of 5.24% in 2007 to 2.05% for 2008 as the FOMC cut rates in 2008. The percentage of certificates of deposits to total deposits increased during 2008 to 75.4% at December 31, 2008 from 62.3% at December 31, 2007.

Average advances from the Federal Home Loan Bank of Atlanta (“FHLB”) increased $21.0 million during 2008. Average cost of those advances decreased 49 basis points. Advances from the FHLB were used to augment deposits in supporting the loan growth of the Bank at attractive rates in comparison to deposit rates available during the same time frame. Interest expense of FHLB advances increased $659 thousand or 54.3% over 2007 to $1.9 million for the year ended December 31, 2008.

Average subordinated debt and other borrowed money decreased $121 thousand during 2008. The average cost decreased 188 basis points from 6.16% for the year ended December 31, 2007 to 4.27% for the year ended December 31, 2008. The primary reason for the decrease in cost was the reduction of the cost of Trust Preferred Capital Notes issued a LIBOR-indexed floating rate of interest (three-Month LIBOR plus 1.70%) which adjusts quarterly. The rate was 3.70% at December 31, 2008, down from 6.69% at December 31, 2007. Subordinated debt of $2.0 million was outstanding all of 2008 and 2007 at a fixed rate of 6.33%.

The following table analysis 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.

 

     2009 vs. 2008
Increase (Decrease)
Due to Changes in:
    2008 vs. 2007
Increase (Decrease)
Due to Changes in:
 
     Volume     Rate     Total     Volume     Rate     Total  
     (Dollars in thousands)  

Earning Assets:

            

Loans, net of unearned income

   $ 3,431      ($ 2,659   $ 772      $ 8,117      ($ 4,328   $ 3,789   

Investment securities:

     453        422        874        (59     0        (59

Federal funds sold

     281        (452     (172     281        (333     (52
                                                

Total earning assets

     4,165        (2,689     1,474        8,339        (4,661     3,678   
                                                

Interest-Bearing Liabilities:

            

Interest checking

     (5     (10     (15     2        (52     (50

Money market deposit accounts

     1,006        25        1,031        (246     (841     (1,087

Statement savings

     (1     (1     (2     (1     (8     (9

Certilficates of deposit

     1,211        (2,236     (1,025     4,503        (1,375     3,128   

Fed funds purchased

     (35     —          (35     (33     (11     (44

Repurchase agreements

     (15     (11     (26     23        (72     (49

Subordinated debt

     —          (120     (120     —          (115     (115

FHLB advances

     23        (16     7        900        (241     659   
                                                

Total interest-bearing liabilities

     2,184        (2,369     (185     5,148        (2,715     2,433   
                                                

Change in net interest income

   $ 1,981      ($ 320   $ 1,659      $ 3,191      ($ 1,946   $ 1,245   
                                                

 

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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, 2009 was $2.3 million compared to $2.9 million for the year ended December 31, 2008. 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, 2009 compared to year ended December 31, 2008

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 $3 thousand to $747 thousand for the year ended December 31, 2009 compared to $744 thousand for the same period in 2008.

Fees on deposits increased $9 thousand to $257 thousand for the 2009 year compared to $248 for the 2008 year. Other non-interest income decreased $6 thousand for the year 2009 compared to 2008. Components of the decrease are: document prep fees of $19 thousand as a result of decreased loan volume and decrease in gains and fees on sale of mortgages of $28 thousand due to decreases in mortgage loan originated. These reductions were offset by a $31 thousand increase in investment services offered to our customers and $22 thousand increase in fees on letters of credit.

Year ended December 31, 2008 compared to year ended December 31, 2007

Non-interest income decreased 8.0% to $744 thousand for the year ended December 31, 2008 compared to $809 thousand for the same period in 2007.

Fees on deposits increased $27 thousand or 12.3% to $248 thousand for the year ended December 31, 2008. Returned Check fees decreased $4 thousand and Service Charges on Checking increased $31 thousand. Other noninterest income decreased $92 thousand from $588 thousand in 2007 to $496 thousand in 2008. Income associated with our Mortgage operation decreased 35.5% from $159 thousand in 2007 to $102 thousand in 2008 as the mortgage industry froze during the turmoil of the financial markets in 2008. In addition gain on sale of securities and assets total $59 thousand in 2007 which was not repeated in 2008.

Non-Interest Expense

Year ended December 31, 2009 compared to year ended December 31, 2008

Total noninterest expense increased 24.2% or $2.1 million to $10.6 million for 2009 as compared to $8.6 million for the year 2008. Noninterest expense was 2.2% of average assets for the year ended December 31, 2009.

Salaries and employee benefits increased 11.8% to $4.8 million for the year 2009 as compared to $4.3 million for 2008. A full year’s salary related to the staffing for the opening of the Bon Air Branch in 2008, the hiring of the Managing Director and CEO of the Company in late 2008, and hiring a senior loan officer and a loan analyst in 2009 contributed to the increase.

 

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Merger costs totaled $285 thousand for the year ended December 31, 2009. These costs were legal, accounting and investment advisors cost associated with a transaction that was subsequently terminated.

Occupancy costs decreased $53 thousand as the result of relocating the rented Innsbrook office to an owned location in WestMark, saving $123 thousand in rent. This was offset by a $47 thousand increase in renting the James Center office and the Bon Air office for all of 2009 as compared to a partial year in 2008.

Professional fees increased 43.6% to $386 thousand for the year 2009 from $269 thousand in 2008. This was primarily the result of increasing legal fees associated with a higher volume of customer work out agreements, foreclosures and settlements in 2009.

Advertising and marketing costs decreased $153 thousand or 61.2% to $97 thousand in 2009 from $250 thousand in 2008. The branding campaign started in 2008 was suspended due to poor economic conditions.

FDIC assessments increased considerably during 2009 to $1.1 million compared to $215 thousand in 2009 due to increases in the fee assessment rates during 2009 and a special assessment applied to all insured institutions as of June 30, 2009.

Virginia capital stock tax increased $144 thousand, or 37.8%, to $525 thousand during 2009 from $381 thousand for 2008. Infusion of an additional $8.8 million of capital in the subsidiary bank in 2009 resulted in the increase in the capital stock tax. The Company received $10.9 million from the U.S. Treasury Department under the TARP Capital Purchase Program, of which $8.8 million was infused in the subsidiary Bank.

Depreciation expense increased $43 thousand or 11.4% to $419 thousand in 2009 from $376 thousand in 2008. The primary cause of this increase is the construction of the free standing branch in WestMark in 2008 and relocation of the Forest Office Park Branch to an owned, free standing location at 7100 Three Chopt Road.

Other expenses increased 21.4% or $271 thousand to $1.5 million in 2009 from $1.3 million in 2008. OREO expenses totaled $115 thousand in 2009 as compared to $0 in 2008 and an additional $84 thousand in losses on the disposition of OREO during 2009.

Year ended December 31, 2008 compared to year ended December 31, 2007

Total noninterest expense increased 17.9% to $8.6 million for the year 2008 as compared to $7.3 million for 2007. Noninterest expense was 2.2% of average assets for the year ended December 31, 2008 compared to 2.6% for 2007.

Salaries and employee benefits increased 12.0% to $4.3 million compared to $3.8 million for 2007. The opening and staffing of the Company’s seventh branch at Bon Air Chesterfield County to staff to support business development contributed to the increase. In addition, a key addition to management team in the hiring of John Presley in October 2008 contributed to the increase.

Occupancy expense increased $113 thousand, or 15.2%, to $852 thousand during 2008 as compared to 2007. The opening of the Bon Air Branch in 2008 added $53 thousand in rent during 2008. Additional space leased at corporate headquarters added an additional $46 thousand in rent expense in 2008. Associated utilities, real estate taxes and maintenance also increased during 2008.

 

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Professional services increased $97 thousand, or 56.6%, to $269 thousand due to increased legal representation in dealing with impaired loans and other real estate owned during 2008.

Advertising and marketing increased $55 thousand as a branding campaign was initiated in 2008 to generate name recognition.

FDIC assessments increased $56 thousand to $215 for 2008 from $160 for 2007 due to a change in the calculation of the premium due for FDIC insurance and deposit growth.

Virginia capital stock tax increased $85 thousand to $381 thousand during 2008 from $296 thousand for 2007. Infusion of an additional $6.8 million of capital in the subsidiary bank in 2008 resulted in the increase in the capital stock tax.

Other expenses increased $254 thousand due to expansion of the Bank.

Income Taxes

Our reported income tax expense was $117 thousand for 2009 and $138 thousand for 2008. Note 10 of our consolidated financial statements provides a reconciliation between the amount of income tax expense computed using the federal statutory rate and our actual income tax 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, 2009 and 2008.

Financial Condition

Assets

Total assets increased to $530.4 million at December 31, 2009, compared to $431.6 million at December 31, 2008 representing an increase of $98.8 million or 22.9%. Average assets increased 23.0% from $398.0 million for the year ended December 31, 2008 to $489.5 million for the year ended December 31, 2009. Average stockholders’ equity increased 23.4% to $43.2 million for the year ended December 31, 2009 as compared to $35.1 million for the same period in 2008.

Loans

Our loan portfolio is the largest component of our earning assets. Total loans, which exclude the allowance for loan losses and deferred loan fees and costs, at December 31, 2009, were $403.7 million, an increase of $31.1 million from $372.6 million at December 31, 2008. Residential real estate increased 12.6% to $137.9 million and represented 34.2% of the portfolio at December 31, 2009. Commercial real estate increased $18.6 million or 17.5% to $125.4 million and represented 31.1% of the portfolio. Real estate construction decreased 6.3% or $5.4 million and represented 20.1% of the portfolio, down from 23.2% in 2008. Concerted effort continued to be made to lessen our percentage of real estate construction as a percentage of the total portfolio. The allowance for loan losses was $6.6 million or 1.64% of total loans outstanding at December 31, 2009 up from 1.36% at December 31, 2008.

 

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Major classifications of loans are as follows:

 

     2009     2008    2007    2006    2005  
           (Dollars in thousands)  

Commercial

   $ 54,590      $ 51,138    $ 44,367    $ 22,619    $ 15,312   

Real estate - residential

     137,981        122,552      83,035      62,166      57,708   

Real estate - commercial

     125,445        106,796      86,301      63,062      49,775   

Real estate - construction

     81,106        86,515      79,096      51,450      31,442   

Consumer

     4,542        5,584      4,106      2,387      1,799   
                                     

Total loans

     403,664        372,585      296,905      201,684      156,036   
                                     

Less:

             

Allowance for loan losses

     6,600        5,060      2,489      1,834      1,460   

Net deferred fees (costs)

     (56     85      182      99      (26
                                     

Loans, net

   $ 397,120      $ 367,440    $ 294,234    $ 199,751    $ 154,602   
                                     

Our average net loan portfolio totaled 82.0% of average earning assets in 2009, up from 81.5% in 2008. Because of the nature of our market, loan collateral is predominantly real estate. At December 31, 2009, we had no concentration of loans in any one industry exceeding 10%.

The following table reflects the amount of loans for Commercial loans and Real estate construction as to fixed and variable and repricing or maturity:

 

     December 31, 2008
     One Year or
Less
   After One Year
Through
Five Years
   After
Five Years
   Total
     (Dollars in thousands)

Commercial

   $ 20,577    $ 23,289    $ 7,272    $ 51,138

Real estate construction

     54,702      23,112      8,701      86,515
                           

Total

   $ 75,279    $ 46,401    $ 15,973    $ 137,653
                           

Loans with:

           

Fixed Rates

   $ 9,625    $ 22,676    $ 8,826    $ 41,127

Variable Rates

     65,654      23,725      7,147      96,526
                           
   $ 75,279    $ 46,401    $ 15,973    $ 137,653
                           

Asset Quality

Total non-performing assets, consisting of nonaccrual loans and other real estate owned, increased $426 thousand to $7.0 million at December 31, 2009. The ratio of nonperforming assets to total loans was 0.89% compared to 1.18% at year end 2008. Non-performing assets to total assets decreased from 1.52% for 2008 to 1.32% for 2009. Non-performing assets consists of nonaccrual loans totaling $3.6 million and OREO of $3.4 million which are represented by twenty-three building lots, one house under construction and one rental home.

 

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Table of Contents

Non-performing Assets

We place loans on a non-accrual when the collection of principal and interest is doubtful, generally when a loan becomes 90 days past due. There are three negative implications for earnings when we place a loan on non-accrual status. First, all interest accrued but unpaid at the date that the loan is placed on non-accrual status is either deducted from interest income or written off as a loss. Second, accruals on interest are discontinued until it becomes certain that both principal and interest can be repaid. Finally, there may be actual losses that require additional provisions for loan losses to be charged against earnings.

 

     December 31,  
     2009     2008     2007     2006     2005  
     (Dollars in thousands)  

Non-performing loans

   $ 3,607      $ 4,411      $ 50      $ 120      $ 2   

Non-performing assets

   $ 3,388      $ 2,158         

Accruing loans greater than 90 days past due

     —          —          —          —          —     

Non-performing loans to period end loans

     0.89     1.18     0.02     0.06     0.00

Non-performing assets to total assets

     1.32     1.52     0.02     0.06     0.00

Allowance for Loan Losses

For a discussion of our accounting policies with respect to the allowance for loan losses, see “Critical Accounting Policies – Allowance for Loan Losses” above.

The following table depicts the transactions, in summary form, that occurred to the allowance for loan losses in each year presented:

 

     December 31,  
     2009     2008     2007     2006     2005  
     (Dollars in thousands)  

Balance, beginning of year

   $ 5,060      $ 2,489      $ 1,834      $ 1,460      $ 1,084   

Loans charge-offs

          

Commercial

     340        24        20        21        31   

Real estate - residential

     8        58        —          —          —     

Real estate - commercial

     —          —          —          —          —     

Real estate - construction

     402        273        —          10        —     

Consumer

     5        4        4        —          1   
                                        

Total loans charged off

   $ 755      $ 359      $ 24      $ 31      $ 32   
                                        

Recoveries

          

Commercial

     2        5        —          1        —     

Real estate - residential

     7        —          —          —          —     

Real estate - commercial

     —          —          —          —          —     

Real estate - construction

     1        —          —          —          —     

Consumer

     —          1        3        —          —     
                                        

Total recoveries

   $ 10      $ 6      $ 3      $ 1      $ 0   
                                        

Net charge-offs

     745        353        21        30        32   

Additions charge to operations

     2,285        2,924        676        404        408   
                                        

Balance, end of year

   $ 6,600      $ 5,060      $ 2,489      $ 1,834      $ 1,460   
                                        

Ratio of allowance for loan losses to loansoutstanding at end of period

     1.64     1.36     0.84     0.91     0.94

Ratio of new charge-offs (recoveries) to average loans outstanding during the period

     0.19     0.10     0.01     0.02     0.02

 

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The allowance for loan losses at December 31, 2009 was $6.6 million compared to $5.1 million at December 31, 2008. The allowance for loan losses was 1.64% of total loans outstanding at December 31, 2009 compared to 1.36% at December 31, 2008. The provision for loan losses was $2.3 million for 2009 compared to $2.9 million for 2008. Net charge-offs were $745 thousand for the year ended December 31, 2009 compared to $353 thousand for the year ended December 31, 2008. The portfolio continues to show stress as the economic environment and the real estate market continue to deteriorate and additional provision for loan losses may be required if the downward trend in conditions persists. We have no exposure to sub-prime loans in the portfolio.

The following table shows the balance and percentage of our allowance for loan losses allocated to each major category of loan:

 

     Commercial & Industrial     Real Estate Mortgage     Real Estate Construction     Consumer     Total
     Allowance
for

Loan
Loss
   Percent of
Loan in
Category to
Total Loans
    Allowance
for

Loan
Loss
   Percent of
Loan in
Category to
Total Loans
    Allowance
for

Loan
Loss
   Percent of
Loan in
Category to
Total Loans
    Allowance
for

Loan
Loss
   Percent of
Loan in
Category to
Total Loans
    Allowance
for

Loan
Loss
     (Dollars in thousands)

2009

   $ 365    13.52   $ 3,488    65.26   $ 2,738    20.09   $ 9    1.13   $ 6,600

2008

     1,075    13.73     3,026    61.56     942    23.22     17    1.50     5,060

2007

     960    14.94     937    57.03     591    26.64     1    1.38     2,489

2006

     762    11.22     633    62.09     437    25.51     2    1.18     1,834

2005

     556    9.82     627    68.88     275    20.15     2    1.15     1,460

 

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Table of Contents

Securities

We have designated most securities in the investment portfolio as “available for sale” as further defined in Note 3 to our consolidated financial statements. In 2008, we designated certain security purchases as “held-to-maturity” as defined in Note 3 to our consolidated financial statements. Available for sale securities are required to be carried on the financial statements at fair value. The unrealized gains or losses, net of deferred income taxes, are reflected in stockholders’ equity. Held-to-maturity securities are carried on our books at amortized cost.

The market value of the available for sale securities at December 31, 2009 and 2008 was $77.1 million and $30.5 million, respectively. The net unrealized gain after tax on the available for sale securities was $370 thousand at December 31, 2009 as compared to $297 thousand December 31, 2008.

The carrying values of securities available for sale at the dates indicated were as follows:

 

     December 31,
     2009    2008    2007
     (Dollars in thousands)

Available for Sale

        

U.S. Government securities

   $ 23,467    $ 17,122    $ 21,501

Mortgage-backed and CMO securities

     12,062      6,377      8,418

CMO securities

     22,940      2,027      —  

State and political subdivision obligations - tax exempt

     9,364      1,729      1,010

State and political subdivision obligations - taxable

     5,797      —        —  

Corporate bonds

     3,488      3,269      1,895
                    
   $ 77,118    $ 30,524    $ 32,824
                    

Held to Maturity

        

State and political subdivision obligations - tax exempt

   $ 1,453    $ 1,471      —  
                    
   $ 1,453    $ 1,471    $ 0
                    

Restricted equity securities consist primarily of Federal Reserve Bank stock, Federal Home Loan Bank of Atlanta stock and Community Bankers Bank Stock.

 

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Table of Contents

Deposits

The following table is a summary of average deposits and average rates paid on those deposits for the periods presented:

 

     2009     2008     2007  
     Amount    Average
Rate
    Amount    Average
Rate
    Amount    Average
Rate
 
     (Dollars in thousands)  

Noninterest-bearing deposits

               

Demand deposits

   $ 37,583    0.00   $ 32,672    0.00   $ 32,119    0.00

Interest-bearing deposits

               

Interest checking

     7,973    0.37     9,213    0.49     9,063    1.06

Savings

     699    0.47     792    0.57     883    1.53

Money market accounts

     93,177    1.87     38,586    1.84     44,698    4.02

Certificates of deposit

     246,291    3.61     219,480    4.52     131,912    5.12
                           
   $ 385,723      $ 300,743      $ 218,675   
                           

As of December 31, 2009, deposits were $422.1 million, an $87.8 million increase over December 31, 2008 deposits of $334.3 million. Average deposits increased 29.9% or $80.1 million compared to average deposits for the year ended December 31, 2008. Average money market accounts increased 141.5% or $54.6 million to $93.2 million from $38.6 million for the comparable period in 2008. Average certificates of deposit grew $26.8 million for the year to $246.3 million. Included in the certificates of deposit are $34.8 million (8.2% of total deposits) in brokered deposits at an average cost of 2.09%. We used brokered deposits to extend the maturity of our certificates of deposit to assist in our interest rate risk management.

As of December 31, 2008, deposits were $334.3 million, a $79.2 million increase over December 31, 2007 deposits of $255.1 million. Average deposits increased 43.7% or $81.5 million compared to average deposits for the year ended December 31, 2007. Average money market accounts decreased 13.7% or $6.1 million to $38.6 million from $44.7 million for the comparable period of 2007. Average Certificates of deposit grew $87.6 million for the year to $219.5 million.

The following table is a summary of the maturity distribution of certificates of deposit equal to or greater than $100,000 as of December 31, 2009:

 

     Maturities of Certificates of Deposit of $100,000 and Greater  
     Within
Three
Months
   Three to
Twelve
Months
   Over
One
Year
   Total    Percent
of Total
Deposits
 
     (Dollars in thousands)  

At December 31, 2009

   $ 24,410    $ 26,242    $ 82,306    $ 132,958    31.5

 

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Borrowings

At December 31, 2009 and 2008, our borrowings and the related weighted average interest rate were as follows:

 

     2009     2008     2007  
     Amount    Weighted-
Average
Rate
    Amount    Weighted-
Average
Rate
    Amount    Weighted-
Average
Rate
 
     (Dollars in thousands)  

Federal funds purchased

   $ 0    0.00   $ 952    3.66   $ 9,261    1.88

Repurchase agreements

     1,365    0.44     2,482    1.31     2,103    3.11

Federal Home Loan Bank advances

     50,000    3.76     49,385    3.79     40,000    4.01

Subordinated debt

     7,155    3.72     7,155    5.38     7,155    6.59
                           
   $ 58,520      $ 59,974      $ 58,519   
                           

We have various lines of credit available from certain of our correspondent banks in the aggregate amount of $29.5 million. These lines of credit, which bear interest at prevailing market rates, permit us to borrow funds in the overnight market, and are renewable annually. Advances from the FHLB constitute convertible advances with contractual maturities of five to ten years. All convertible advances have a call option remaining of various terms.

Interest Rate Sensitivity

The most important element of asset/liability management is the monitoring of the Company’s sensitivity to interest rate movements. The income stream of the Company is subject to risk resulting from interest rate fluctuations to the extent there is a difference between the amount of the Company’s interest earning assets and the amount of interest bearing liabilities that are prepaid, mature or repriced in specific periods. Our goal is to maximize net interest income within acceptable levels of risk to changes in interest rates. We seek to meet this goal by influencing the maturity and re-pricing characteristics of the various lending and deposit taking lines of business and by managing discretionary balance sheet asset and liability portfolios.

We monitor interest rate levels on a daily basis at meetings of the Asset/Liability Sub-Committee. The following reports and/or tools are used to assess the current interest rate environment and its impact on our earnings and liquidity: monthly and year to date net interest margin and spread calculations, monthly and year to date balance sheet and income statements versus budget, quarterly net portfolio value analysis, a weekly survey of rates offered by other local competitive institutions and GAP analysis (matching maturities or repricing dates of interest sensitive assets to those of interest sensitive liabilities by periods) and a Risk Manager model used to measure earnings at risk and economic value of equity at risk.

The data in the following table reflects repricing or expected maturities of various assets and liabilities. The gap analysis represents the difference between interest-sensitive assets and liabilities in a specific time interval. Interest sensitivity gap analysis presents a position that existed at one particular point in time, and assumes that assets and liabilities with similar repricing characteristics will reprice at the same time and to the same degree.

 

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Table of Contents
     December 31, 2009
     1 to 90
Days
    90 Days to
1 Year
    Total
1 Year
    1 to 3
Years
    3 to 5
Years
    Over 5
Years
    Total
     (Dollars in thousands)

Earning Assets:

              

Total Loans

   $ 116,839      $ 66,053      $ 182,892      $ 69,663      $ 97,695      $ 53,197      $ 403,447

Investment securities

     1,950        638        2,588        18,837        4,102        52,978        79,208

Interest bearing deposits and fed funds

     23,747        —          23,747        —          —          —          23,747
                                                      

Total rate sensitive assets

   $ 142,536      $ 66,691      $ 209,227      $ 88,500      $ 101,797      $ 106,175      $ 506,402
                                                      

Cumulative totals

     142,536        209,227        209,227        297,727        399,524        505,699     
                                                  

Interest-Bearing Liabilities:

              

Interest checking

   $ 8,774      $ —        $ 8,774      $ —        $ —        $ —        $ 8,774

Money market accounts

     134,162        —          134,162        —          —          —          134,162

Savings deposits

     613        —          613        —          —          —          613

Certificates of deposit:

              

Less than $100

     24,034        40,670        64,704        31,213        12,155        —          108,072

Greater than $100

     24,410        26,242        50,652        52,580        29,726          132,958
                                                      

Total

   $ 48,444      $ 66,912      $ 115,356      $ 83,793      $ 41,881      $ 0      $ 241,030
                                                      

Federal funds purchased

     —          —          —          —          —          —          —  

FHLB borrowing

     5,000        5,000        10,000        15,000        10,000        15,000        50,000

Sub Debt

           2,000            2,000

Trust preferred

     5,155        —          5,155          —          —          5,155

Other liabilities

     1,168        —          1,168        —          —          —          1,168
                                                      

Total rate sensitive liabilities

   $ 203,316      $ 71,912      $ 275,228      $ 100,793      $ 51,881      $ 15,000      $ 440,902
                                                      

Cumulative totals

   $ 203,316      $ 275,228      $ 275,228      $ 376,021      $ 427,902      $ 442,902     
                                                  

Interest sensitivity gap

   $ (60,780   $ (5,221   $ (66,001   $ (12,293   $ 49,916      $ 91,175     
                                                  

Cumulative interest sensitivity gap

   $ (60,780   $ (66,001   $ (66,001   $ (78,294   $ (28,378   $ 62,797     
                                                  

Cumulative interest sensitive gap as a percentage of earning assets

     -12.0     -13.0     -13.0     -15.5     -5.6     12.4  
                                                  

Ratio of cumulative rate sensitive assets to cummulative rate sensitive liabilities

     70.1     76.0     76.0     79.2     93.4     114.2  
                                                  

Capital Resources and Dividends

We have an ongoing strategic objective of maintaining a capital base that supports the pursuit of profitable business opportunities, provides resources to absorb risk inherent in our activities and meets or exceeds all regulatory requirements.

The Federal Reserve Board has established minimum regulatory capital standards for bank holding companies and state member banks. The regulatory capital standards categorize assets and off-balance sheet items into four categories that weight balance sheet assets according to risk, requiring more capital for holding higher risk assets. At December 31, 2009 and 2008, our Tier 1 leverage ratio (Tier 1 capital to average total assets) was 10.01% and 9.62% respectively with the minimum regulatory ratio to be well capitalized at 5.00%. Tier 1 risk based capital ratios at December 31, 2009 and 2008 were 12.36% and 10.62% respectively with the minimum regulatory ratio to be well

 

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capitalized at 6.00%. Total risk based capital to risk weighted assets at December 31, 2009 and 2008 were 14.09% and 12.41% respectively with the minimum regulatory ratio to be well capitalized at 10.00%. Our capital structure exceeds regulatory guidelines established for well capitalized institutions, which affords us the opportunity to take advantage of business opportunities while ensuring that we have the resources to protect against risk inherent in our business.

 

     December 31,  
     2009     2008     2007  
     (Dollars in thousands)  

Tier 1 capital:

      

Common stock

   $ 11,885      $ 11,885      $ 11,885   

Retained earnings

     23,275        23,339        23,011   
                        

Total equity

     35,160        35,224        34,896   

Trust preferred stock

     10,394        —          —     

Warrants

     661        —          —     

Trust preferred debt

     5,155        5,155        5,155   
                        

Total Tier 1 capital

     51,370        40,379        40,051   
                        

Tier 2 capital:

      

Allowance for loan losses

     5,192        4,797        2,489   

Subordinated debt

     2,000        2,000        2,000   
                        

Total Tier 2 capital

     7,192        6,797        4,489   
                        

Total risk-based capital

   $ 58,562      $ 47,176      $ 44,540   
                        

Risk-weighted assets

   $ 415,747      $ 380,070      $ 308,511   
                        

Capital ratios:

      

Tier 1 leverage ratio

     10.01     9.62     12.50

Tier 1 risk based capital

     12.36        10.62        12.98   

Total risk based capital

     14.09        12.41        14.44   

Tangible equity to assets

     6.80        8.16        9.92   

Liquidity

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, short-term investments, securities classified as available for sale as well as loans and securities maturing within one year. As a result of our management of liquid assets and the ability to generate liquidity through liability funding, management believes we maintain overall liquidity sufficient to satisfy our depositors’ requirements and meet our clients’ credit needs.

We also maintain additional sources of liquidity through a variety of borrowing arrangements. The Bank maintains federal funds lines with a large regional money-center banking institution and a local community bankers bank. These available lines currently total approximately $29.5 million, of which there were no outstanding draws at December 31, 2009.

 

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We have a credit line at the Federal Home Loan Bank of Atlanta in the amount of approximately $61.5 million which may be utilized for short and/or long-term borrowing. Advances from the Federal Home Loan Bank totaled $50.0 million at December 31, 2009.

At December 31, 2009, cash, federal funds sold, short-term investments, securities available for pledge or sale and available lines were 34.6% of total deposits.

 

ITEM 8. FINANCIAL STATEMENTS

The following 2009 Financial Statements of First Capital Bancorp, Inc. are included after the signature pages to this Report on Form 10-K:

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Financial Condition December 31, 2009 and 2008

Consolidated Statements of Income for the Years Ended December 31, 2009 and 2008

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

for the Years Ended December 31, 2009 and 2008

Consolidated Statements of Cash Flows for the Years ended December 31, 2009 and 2008

Notes to Consolidated Financial Statements

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There were no changes in or disagreements with accountants on accounting and financial disclosure during the last fiscal year.

 

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2009 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Internal Control over Financial Reporting

Management is also responsible for establishing and maintaining adequate internal control over the Company’s financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended). Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, management has conducted an assessment of the design and effectiveness of its internal controls over financial reporting based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). There were no changes in the Company’s internal control over financial reporting during the Company’s quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

ITEM 9B. OTHER INFORMATION

None

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

Audit Committee Financial Expert. The applicable information contained in the section captioned “Proposal No. 1 – Election of Directors – Audit Committee” in the definitive proxy statement for the Annual Meeting of Stockholders to be held on May 19, 2010 (the “Proxy Statement”) is incorporated herein by reference.

Code of Ethics. The Bank has adopted (i) A Banker’s Professional Code of Ethics, and (ii) a Code of Conduct and Conflict of Interest, both of which are applicable to its principal executive officer, principal financial officer and principal accounting officer or controller. The codes are filed as exhibits to this Report on Form 10-K.

The information contained under the section captioned “Proposal No. 1– Election of Directors” in the Proxy Statement is incorporated herein by reference.

Additional information concerning executive officers is included in the Proxy Statement in the section captioned “Proposal No. 1 – Election of Directors - Section 16(a) Beneficial Ownership Reporting Compliance.”

 

ITEM 11. EXECUTIVE COMPENSATION.

The information contained in the section captioned “Proposal No. 1 – Election of Directors – Executive Compensation” in the Proxy Statement is incorporated herein by reference.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

 

  (a) Security Ownership of Certain Beneficial Owners

Information required by this item is incorporated herein by reference to the section captioned “Voting Securities and Principal Stockholders” in the Proxy Statement.

 

  (b) Security Ownership of Management

Information required by this item is incorporated herein by reference to the chart in the section captioned “Voting Securities and Principal Stockholders” in the Proxy Statement.

 

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  (c) Management of First Capital Bancorp, Inc. knows of no arrangements, including any pledge by any person of securities of the First Capital Bancorp, Inc., the operation of which may at a subsequent date result in a change in control of First Capital Bancorp, Inc.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is incorporated herein by reference to the section captioned “Proposal No. 1 - Election of Directors – Certain Relationships and Related Transactions” in the Proxy Statement.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information contained in the sections captioned “2009 Audit Committee Report” and “Proposal No. 3 – Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement is incorporated herein by reference.

PART IV

 

ITEM 15. EXHIBITS.

The following exhibits are filed as part of this Form 10-K

 

No.    Description

 

  2.1 Agreement and Plan of Reorganization dated as of September 5, 2006, by and between First Capital Bancorp, Inc. and First Capital Bank (incorporated by reference to Exhibit 2.1 of Form 8-K 12 g-3 filed on September 12, 2006).

 

  3.1 Articles of Incorporation of First Capital Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of Form 10-QSB filed on November 13, 2006).

 

  3.2 Amended and Restated bylaws of First Capital Bancorp, Inc. (incorporated by reference to Exhibit 3.2 of Form 8-K filed on May 22, 2007).

 

  3.3 Articles of Amendment to the Company’s Articles of Incorporation, designating the terms of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 3.1 of Form 8-K filed on April 6, 2009).

 

  4.1 Specimen Common Stock Certificate of First Capital Bancorp, Inc. (incorporated by reference to Exhibit 4.1 of Form SB-2 filed on March 16, 2007.

 

  4.2 Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 4.1 of Form 8-K filed on April 6, 2009).

 

  4.3 Warrant to Purchase Shares of Common Stock (incorporated by reference to Exhibit 4.2 of Form 8-K filed on April 6, 2009).

 

10.1 2000 Stock Option Plan (formerly First Capital Bank 2000 Stock Option Plan) (incorporated by reference to Exhibit 10.1 to Amendment No.1 to Form SB-2 filed on April 26, 2007). *

 

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10.2 Amended and Restated Employment Agreement dated December 31, 2008, between First Capital Bank and Robert G. Watts, Jr. (incorporated by reference to Exhibit 10.2 of Form 10-K filed on March 31, 2009).*

 

10.3 Amended and Restated Change in Control Agreement dated September 15, 2006, between First Capital Bank and William W. Ranson (incorporated by reference to Exhibit 10.3 of Amendment No.1 to Form SB-2 filed on April 26, 2007).*

 

10.4 Employment Agreement dated December 31, 2008, between First Capital Bancorp. Inc. and John M. Presley (incorporated by reference to Exhibit 10.4 of Form 10-K filed on March 31, 2009).*

 

10.5 Change in Control Agreement dated April 14, 2009, between First Capital Bank and K. Bradley Hildebrandt (incorporated by reference to Exhibit 10.4 of Form 8-K filed on April 16, 2009).*

 

10.6 Form of Change in Control Agreement dated April 1, 2009, between First Capital Bank and each of William D. Bein, Katherine K. Wagner, Richard McNeil, Ralph Ward, Jr., James E. Sedlar and Barry P. Almond (incorporated by reference to Exhibit 10.6 of Form 10-Q filed on August 14, 2009). *

 

10.7 Letter Agreement, dated as of April 3, 2009, by and between First Capital Bancorp, Inc., and the U.S. Department of Treasury (incorporated by reference to Exhibit 10.1 in Form 8-K filed on April 6, 2009).

 

10.8 Side Letter Agreement dated April 3, 2009, by and between First Capital Bancorp, Inc. and the U.S. Department of Treasury (incorporated by reference to Exhibit 10.2 of Form 8-K filed on April 6, 2009).

 

10.9 Form of Waiver (incorporated by reference to Exhibit 10.3 of Form 8-K filed on April 6, 2009).

 

10.10 Form of Waiver (incorporated by reference to Exhibit 10.4 of Form 8-K filed on April 6, 2009).

 

21.1 List of Subsidiaries (incorporated by reference to Exhibit 21.1 of Form SB-2 filed on March 16, 2007).

 

24 Power of Attorney (included on signature page).

 

31.1 Certification of John M. Presley, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated March 31, 2010.

 

31.2 Certification of William W. Ranson, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated March 31, 2010.

 

32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

99.1 A Banker’s Professional Code of Ethics as adopted by First Capital Bank (incorporated by reference to Exhibit 99.1 of Form 10-KSB/A filed on June 13, 2007).

 

99.2 Code of Conduct and Conflict of Interest as adopted by First Capital Bank (incorporated by reference to Exhibit 99.2 of Form 10-KSB/A filed on June 13, 2007).

 

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99.3 Certification of John M. Presley Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009.

 

99.4 Certification of William W. Ranson Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009.

 

* Management contract or compensation plan or arrangement.

Exhibits to Form 10-K; Financial Information

A copy of any of the exhibits to this Report on Form 10-K and copies of any published annual or quarterly reports will be furnished without charge to the stockholders as of the record date, upon written request to William W. Ranson, Senior Vice President & Chief Financial Officer, 4222 Cox Road, Suite 200, Glen Allen, Virginia 23060.

Annual Stockholders’ Meeting

The Annual Meeting of stockholders will be held at 4:30 p.m. on Wednesday, May 19, 2010 at Hilton Richmond Hotel & SPA/Short Pump, 12042 West Broad Street, Richmond, Virginia.

 

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SIGNATURE

The undersigned hereby appoint John M. Presley and William W. Ranson and each of them, as attorneys and agents for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign and file with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, any and all exhibits and amendments to this 10-K, and any and all instruments and other documents to be filed with the Securities and Exchange Commission pertaining to this 10-K, with full power and authority to do and perform any and all acts and things whatsoever requisite or desirable.

 

  FIRST CAPITAL BANCORP, INC.
Date: March 31, 2010     By:  

/s/ John M. Presley

      John M. Presley
      Managing Director and Chief Executive Officer

 

Pursuant to the requirements of Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant, in the capacities and on the dates indicated.

 

Date: March 31, 2010      

/s/ John M. Presley

      John M. Presley
     

Managing Director and Chief Executive

Officer and Director

Date: March 31, 2010      

/s/ Robert G. Watts, Jr.

      Robert G. Watts, Jr.
      President and Director
Date: March 31, 2010      

/s/ William W. Ranson

      William W. Ranson
      Senior Vice President and CFO
      (Principal Accounting and Financial Officer)
Date: March 31, 2010      

/s/ P. C. Amin

      P. C. Amin, Director
Date: March 31, 2010      

/s/ Gerald Blake

      Gerald Blake, Director

 

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Date: March 31, 2008      

/s/ Grant S. Grayson

      Grant S. Grayson, Director
Date: March 31, 2010      

/s/ Yancey S. Jones

      Yancey S. Jones, Director
Date: March 31, 2008      

/s/ Jay M. Weinberg

      Jay M. Weinberg, Director
Date: March 31, 2010      

/s/ Joseph C. Stiles, Jr.

      Joseph C. Stiles, Jr., Director
Date: March 31, 2010      

/s/ Richard W. Wright

      Richard W. Wright, Director
Date: March 31, 2010      

/s/ Gerald H. Yospin

      Gerald H. Yospin, Director
Date: March 31, 2010      

/s/ Debra L. Richardson

      Debra L. Richardson, Director
Date: March 31, 2009      

/s/ Kamlesh N. Dave, Director

      Kamlesh N. Dave, Director

 

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FIRST CAPITAL BANCORP, INC. AND SUBSIDIARY

Consolidated Financial Statements

For the Years Ended

December 31, 2009 and 2008


Table of Contents

FIRST CAPITAL BANCORP, INC. AND SUBSIDIARY

Contents

 

    Page

Report of Independent Registered Public Accounting Firm

  F-2
Consolidated Financial Statements  
Consolidated Statements of Financial Condition
December 31, 2009 and 2008
  F-3
Consolidated Statements of Income
For the Years Ended December 31, 2009 and 2008
  F-4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
For the Years Ended December 31, 2009 and 2008
  F-5
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2009 and 2008
  F-6
Notes to Consolidated Financial Statements   F-7


Table of Contents

LOGO

Report of Independent Registered Public Accounting Firm

The Board of Directors

   And Stockholders

First Capital Bancorp, Inc.

Richmond, Virginia

We have audited the accompanying consolidated statements of financial condition of First Capital Bancorp, Inc. and Subsidiary (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial condition of First Capital Bancorp, Inc. and Subsidiary, as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Cherry, Bekaert & Holland, L.L.P.

Richmond, Virginia

March 29, 2010

 

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PART 1 - FINANCIAL INFORMATION

Item 1 - Financial Statements

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

 

     2009     2008

ASSETS

    

Cash and due from banks

   $ 7,919,612      $ 5,439,863

Interest-bearing deposits in other banks

     22,747,000        274,471

Federal funds sold

     1,000,000        9,640,000

Investment securities:

    

Available for sale, at fair value

     77,118,370        30,523,357

Held to maturity, at cost

     1,452,947        1,453,541

Restricted, at cost

     4,158,289        3,804,039

Loans, net of allowance for losses

     397,120,098        367,440,018

Other real estate owned

     3,387,712        2,158,179

Premises and equipment, net

     7,118,591        7,214,660

Accrued interest receivable

     2,292,742        1,804,805

Deferred tax asset

     1,435,267        952,554

Prepaid FDIC premiums

     3,135,649        —  

Other assets

     1,509,486        847,709
              

Total assets

   $ 530,395,763      $ 431,553,196
              

LIABILITIES

    

Deposits

    

Noninterest-bearing

   $ 37,554,667      $ 34,517,982

Interest-bearing

     384,579,427        299,782,058
              

Total deposits

     422,134,094        334,300,040
              

Accrued expenses and other liabilities

     3,413,338        2,525,956

Securities sold under repurchase agreements

     1,234,901        2,152,628

Subordinated debt

     7,155,000        7,155,000

Federal Home Loan Bank advances

     50,000,000        50,000,000
              

Total liabilities

     483,937,333        396,133,624
              

STOCKHOLDERS’ EQUITY

    

Preferred stock, $4.00 par value (authorized 2,000,000 shares; issued and outstanding 2009: Series A: $1,000 Stated Value 10,958 shares Fixed Rate Cumulative Perpetual Preferred, and $0 at December 31, 2008

     43,832        —  

Common stock, $4.00 par value (authorized 5,000,000 shares; issued and outstanding, 2,971,171 at December 31, 2009 and December 31, 2008 respectively)

     11,884,684        11,884,684

Additional paid-in capital

     29,696,114        18,650,379

Retained earnings

     4,493,471        4,688,639

Warrants

     660,769        —  

Discount on preferred stock

     (564,395     —  

Accumulated other comprehensive income, net of tax

     243,955        195,870
              

Total stockholders’ equity

     46,458,430        35,419,572
              

Total liabilities and stockholders’ equity

   $ 530,395,763      $ 431,553,196
              

See notes to consolidated financial statements.

 

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Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Income

Year Ended December 31, 2009 and 2008

 

     December 31,
     2009     2008

Interest income

    

Loans

   $ 22,925,135      $ 22,161,395

Investments:

    

Taxable interest income

     2,072,139        1,449,766

Tax exempt interest income

     288,446        63,525

Dividends

     67,420        156,020

Federal funds sold and interest bearing deposits

     48,354        214,058
              

Total interest income

     25,401,494        24,044,764
              

Interest expense

    

Deposits

     10,665,696        10,671,026

FHLB advances

     1,878,559        1,872,417

Federal funds purchased

     110        34,907

Subordinated debt and other borrowed money

     266,331        417,782
              

Total interest expense

     12,810,696        12,996,132
              

Net interest income

     12,590,798        11,048,632

Provision for loan loss

     2,285,000        2,924,442
              

Net interest income after provision for loan loss

     10,305,798        8,124,190
              

Noninterest income

    

Fees on deposits

     257,311        248,012

Other

     489,648        495,974
              

Total noninterest income

     746,959        743,986
              

Noninterest expenses

    

Salaries and employee benefits

     4,773,711        4,269,961

Merger costs

     284,542        —  

Occupancy expense

     799,043        852,070

Data processing

     703,060        676,850

Professional services

     386,815        269,422

Advertising and marketing

     97,054        249,953

FDIC assessment

     1,099,092        215,232

Virginia franchise tax

     525,000        381,000

Depreciation

     418,511        375,550

Other expenses

     1,541,164        1,269,977
              

Total noninterest expense

     10,627,992        8,560,015
              

Net income before provision for income taxes

     424,765        308,161

Income tax expense

     117,200        137,800
              

Net income

   $ 307,565      $ 170,361
              

Effective dividend on preferred stock

     502,733        —  

Net income (loss) available to common shareholders

   $ (195,168   $ 170,361
              

Basic income (loss) per share

   $ (0.07   $ 0.06
              

Diluted income (loss) per share

   $ (0.07   $ 0.06
              

See notes to consolidated financial statements.

 

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First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Years Ended December 31, 2009 and 2008

 

     Preferred
Stock
   Common
Stock
   Additional
Paid-in
Capital
    Retained
Earnings
    Warrant    Discount
on
Preferred
Stock
    Accumulated
Other

Comprehensive
Income
(Loss)
    Total  

Balance January 1, 2008

   $ —      $ 11,884,684    $ 18,492,528      $ 4,518,278      $ —      $ —        $ (36,432   $ 34,859,058   

Net income

     —        —        —          170,361        —        —          170,361        170,361   

Other comprehensive income

                   

Unrealized holding gain arising during period, (net of tax, $119,671)

     —        —        —          —          —        —          232,302        232,302   
                         

Total comprehensive income

                  $ 402,663     
                         

Stock based compensation expense

     —        —        157,851        —          —        —            157,851   
                                                             

Balance December 31, 2008

   $ —      $ 11,884,684    $ 18,650,379      $ 4,688,639      $ —      $ —        $ 195,870      $ 35,419,572   
                                                             

Balance January 1, 2009

   $ —      $ 11,884,684    $ 18,650,379      $ 4,688,639      $ —      $ —        $ 195,870      $ 35,419,572   

Net income

     —        —        —          307,565        —        —          307,565        307,565   

Other comprehensive income

                   

Unrealized holding gain arising during period, (net of tax, $24,771)

     —        —        —          —          —        —          48,085        48,085   
                         

Total comprehensive income

                  $ 355,650     
                         

Issuance of Preferred Stock

     43,832      —        10,914,168        —          660,769      (660,769       10,958,000   

Cost associated with preferred stock

     —        —        (24,272     —          —        —            (24,272

Dividends on Preferred Stock

     —        —        —          (406,359     —        —            (406,359

Accretion of discount on Preferred Stock

     —        —        —          (96,374     —        96,374          —     

Stock based compensation expense

     —        —        155,839        —          —        —            155,839   
                                                             

Balance December 31, 2009

   $ 43,832    $ 11,884,684    $ 29,696,114      $ 4,493,471      $ 660,769    $ (564,395   $ 243,955      $ 46,458,430   
                                                             

See notes to consolidated financial statements.

 

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Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Year Ended December 31, 2009 and 2008

 

     2009     2008  

Cash flows from operating activities

    

Net income

   $ 307,565      $ 170,361   

Adjustments to reconcile net income to net cash provided by operating activities

    

Provision for loan losses

     2,285,000        2,924,442   

Depreciation of premises and equipment

     418,511        375,550   

Stock based compensation expense

     155,839        157,851   

Deferred income taxes

     (507,485     (753,129

Net (accretion) amortization of bond premiums/discounts

     356,589        (36,135

(Increase) in other assets

     (3,797,424     (207,695

(Increase) decrease in accrued interest receivable

     (487,937     3,134   

Increase (decrease) in accrued expenses and other liabilities

     887,382        (854,692
                

Net cash provided by (used in) operating activities

     (381,960     1,779,687   
                

Cash flows from investing activities

    

Proceeds from maturities and calls of securities

     5,700,000        24,000,000   

Proceeds from paydowns of securities available-for-sale

     7,611,946        2,108,066   

Purchase of securities available-for-sale

     (60,190,099     (23,418,769

Purchase of securities held-to-maturity

     —          (1,453,550

Purchase of FHLB Stock

     (143,800     (620,300

Purchase of Federal Reserve Stock

     (210,450     —     

Purchases of property and equipment

     (322,442     (664,398

Purchase of land and building

     —          (4,847,992

Net increase in loans

     (33,194,613     (78,288,354
                

Net cash used in investing activities

     (80,749,458     (83,185,297
                

Cash flows from financing activities

    

Net increase (decrease) in demand, savings and money market accounts

     98,929,243        (14,009,457

Advances from FHLB

     —          10,000,000   

Issurance of preferred stock to U.S. Treasury, net of related expenses

     10,933,728        —     

Dividends on preferred stock

     (406,359     —     

Net (decrease) increase in certificates of deposit

     (11,095,189     93,201,174   

Increase in Federal funds purchased

     —          (9,261,000

Net (decrease) increase in repurchase agreements

     (917,727     49,689   
                

Net cash provided by financing activities

     97,443,696        79,980,406   
                

Net increase (decrease) in cash and cash equivalents

     16,312,278        (1,425,204

Cash and cash equivalents, beginning of period

     15,354,334        16,779,538   
                

Cash and cash equivalents, end of period

   $ 31,666,612      $ 15,354,334   
                

Supplemental disclosure of cash flow information

    

Interest paid during the period

   $ 12,774,959      $ 12,957,374   
                

Taxes paid during the period

   $ 724,283      $ 1,060,000   
                

Supplemental schedule of noncash investing and financing activities

    

Transfer of loans to other real estate owned, net

   $ 1,416,852      $ —     
                

See notes to consolidated financial statements.

 

F-6


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2009 and 2008

Note 1 - Summary of significant accounting policies

First Capital Bancorp, Inc. (the “Company”) is the holding company of and successor to First Capital Bank (the “Bank”). Effective September 8 , 2006, the Company acquired all of the outstanding stock of the Bank in a statutory share exchange transaction (the “Share Exchange”) pursuant to an Agreement and Plan of Reorganization dated September 5, 2006, between the Company and the Bank (the “Agreement”). The Agreement was approved by the shareholders of the Bank at the annual meeting of shareholders held on May 16, 2006. Under the terms of the Agreement, the shares of the Bank’s common stock were exchanged for shares of the Company’s common stock, par value $4.00 per share, on a one-for-one basis. As a result, the Bank became a wholly owned subsidiary of the Company, the Company became the holding company of the Bank and the shareholders of the Bank became shareholders of the Company. All references to the Company in this annual report for dates or periods prior to September 8, 2006 are references to the Bank.

The Company conducts all of its business activities through the branch offices of its wholly owned subsidiary bank, First Capital Bank. First Capital Bank created RE1, LLC, a wholly owned Virginia limited liability company in December 2008 for the sole purpose of taking title to property acquired in lieu of foreclosure. RE1, LLC has been consolidated with First Capital Bank. The Company exists primarily for the purpose of holding the stock of its subsidiary, the Bank, and such other subsidiaries as it may acquire or establish.

The accounting and reporting policies of the Company and its wholly owned subsidiary conform to accounting principles generally accepted in the United States of America and general practices within the financial services industry. The following is a summary of the more significant of these policies.

Consolidation – The consolidated financial statements include the accounts of First Capital Bancorp, Inc. and its wholly owned subsidiary. All material intercompany balances and transactions have been eliminated.

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. The estimation process may include management obtaining independent appraisals for significant collateral properties, but the ultimate collectibility and recovery of carrying amounts are susceptible to changes in the local real estate market and other local economic conditions.

Management uses available information to recognize losses on loans; future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for losses on loans. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for losses on loans may change in the near term.

Cash equivalents – Cash equivalents include short-term highly liquid investments with maturities of three months or less at the date of purchase, including Federal funds sold.

Investment Securities – Investment in debt securities classified as held-to-maturity are stated at cost, adjusted for amortization or premiums and accretion of discounts using the interest method. Management has a positive intent and ability to hold these securities to maturity and, accordingly, adjustments are not made for temporary declines in their fair value below amortized cost. Investment not classified as held-to-maturity are classified as available-for-sale. Debt securities classified as available-for-sale are stated at fair value with unrealized holding gains and losses excluded from earnings and reported, net of deferred tax, as a component of other comprehensive income until realized.

 

F-7


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2009 and 2008

 

The Company as a matter of policy does not trade securities and therefore does not classify any of its securities as such. Realized gains and losses on the sale of available-for-sale securities are determined using the specific-identification method and recognized on a trade-date basis. Other-than-temporary declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost, if any, are included in earnings as realized losses.

Due to the nature of, and restrictions placed upon the Company’s common stock investment in the Federal Reserve Bank, Federal Home Loan Bank of Atlanta and Community Bankers Bank, these securities have been classified as restricted equity securities and carried at cost. These restricted securities are not subject to the investment security classifications.

Loans and allowances for loan losses – Loans are concentrated to borrowers in the Richmond metropolitan area and are stated at the amount of unpaid principal reduced by an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances on the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. The Company defers loan origination and commitment fees, net of certain direct loan origination costs, and the net deferred fees are amortized into interest income over the lives of the related loans as yield adjustments.

Loans that are 90 days or more past due are individually reviewed for ultimate collectibility. Interest determined to be uncollectible on loans that are contractually past due is charged off, or an allowance is established based on management’s periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management’s judgment, the borrower’s ability to make periodic interest and principal payments is returned to normal, in which case the loan is returned to accrual status.

The allowance for loan losses is maintained at a level considered by management to be adequate to absorb known and expected loan losses currently inherent in the loan portfolio. Management’s assessment of the adequacy of the allowance is based upon type and volume of the loan portfolio, existing and anticipated economic conditions, and other factors which deserve current recognition in estimating loan losses. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Management’s assessment of the adequacy of the allowance is subject to evaluation and adjustment by the Bank’s regulators.

A loan is defined as impaired when, based on current information and events, it is probable that the creditor will be unable to collect all amounts of principal and interest due according to the contractual terms of the loan agreement. Impairment is measured either by discounting the expected future cash flows at the loan’s effective interest rate, based on the net realizable value of the collateral or based upon an observable market price where applicable. Charges on impaired loans are recognized as a component of the allowance for loans losses.

Other real estate owned – Other real estate owned is comprised of real estate properties acquired in partial or total satisfaction of problem loans. The properties are recorded at the lower of cost or fair value less estimated costs to sell at the date acquired. Losses arising at the time of acquisition of such properties are charged against the allowance for loan losses. Subsequent write-downs that may be required to the carrying value of these properties are charged to current operations. Gains and losses realized from the sale of other real estate owned are included in current operations.

Bank premises and equipment – Company premises and equipment are stated at cost, less accumulated depreciation. Depreciation of Company premises and equipment is computed on the straight-line method over estimated useful lives of 10 to 50 years for premises and 5 to 20 years for equipment, furniture and fixtures. Maintenance and repairs are charged to expense as incurred and major improvements are capitalized. Upon sale or retirement of depreciable properties, the cost and related accumulated depreciation are netted against the proceeds and any resulting gain or loss is included in the determination of income.

 

F-8


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2009 and 2008

 

Impairment or Disposal of Long-Lived Assets – The Company’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used, such as bank premises and equipment, is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceed the fair value of the asset. Assets to be disposed of, such as foreclosed properties, are reported at the lower of the carrying amount or fair value less costs to sell.

Income taxes – Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

Advertising costs – Advertising costs are expensed in the period they are incurred and amounted to $97,054 and $249,953 for December 31, 2009 and 2008, respectively.

Stock Based Compensation – Effective January 1, 2006, the Company adopted ASC 718 (formerly SFAS No. 123R) Stock Compensation. This statement requires the costs resulting from all share-based payments to employees, including grants of employee stock options, be recognized as compensation in the financial statements.

Note 2 – Restrictions of cash

To comply with Federal Reserve regulations, the Company is required to maintain certain average cash reserve balances. The daily average cash reserve requirements were approximately $255,000 for the week including December 31, 2009 and $930,000 for the week including December 31, 2008.

Note 3 – Investment Securities

The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities are as follows:

 

     December 31, 2009
     Amortized
Costs
   Gross Unrealized    Fair
Values
        Gains    Losses   

Available-for-sale

           

U.S. Government agencies

   $ 23,610,035    $ 132,274    $ 274,915    $ 23,467,394

Mortgage-backed securities

     11,820,972      276,457      35,382      12,062,047

Corporate bonds

     3,406,512      112,519      31,416      3,487,615

CMO securities

     22,699,676      284,645      44,299      22,940,022

State and political subdivisions - taxable

     5,936,082      50,463      189,465      5,797,080

State and political subdivisions - tax exempt

     9,274,947      147,675      58,410      9,364,212
                           
   $ 76,748,224    $ 1,004,033    $ 633,887    $ 77,118,370
                           

 

F-9


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2009 and 2008

 

     December 31, 2008
     Amortized
Costs
   Gross Unrealized    Fair
Values
        Gains    Losses   

Available-for-sale

           

U.S. Government agencies

   $ 16,685,034    $ 437,483    $ —      $ 17,122,517

Mortgage-backed securities

     6,368,501      63,429      54,910      6,377,020

Corporate bonds

     3,390,363      —        121,643      3,268,720

CMO securities

     2,026,516      —        —        2,026,516

State and political subdivisions - tax exempt

     1,755,654      3,713      30,783      1,728,584
                           
   $ 30,226,068    $ 504,625    $ 207,336    $ 30,523,357
                           

 

     December 31, 2009
     Amortized
Costs
   Gross Unrealized    Fair
Values
        Gains    Losses   

Held-to-maturity

           

Tax-exempt municipal bonds

   $ 1,452,947    $ 84,507    $ —      $ 1,537,454
                           
   $ 1,452,947    $ 84,507    $ —      $ 1,537,454
                           

 

     December 31, 2008
     Amortized
Costs
   Gross Unrealized    Fair
Values
        Gains    Losses   

Held-to-maturity

           

Tax-exempt municipal bonds

   $ 1,453,541    $ 17,530    $ —     
                           
   $ 1,453,541    $ 17,530    $ —      $ 1,537,454
                           

The amortized cost, weighted average yield and estimated fair value of debt securities at December 31, 2009, by contractual maturity, were as follows:

 

     Amortized
Cost
   Weighted
Average Tax
Equivalent
Yield
    Fair Value

Available-for-sale

       

Due in one year or less

   $ 337,946    4.24   $ 343,976

Due after one year through five years

     18,729,497    4.00     19,088,578

Due after five years through ten years

     30,011,752    4.41     30,318,564

Due after ten years

     27,669,029    4.77     27,367,252
                   

Total

   $ 76,748,224    4.44   $ 77,118,370
                   

Held-to-maturity

       

Due after ten years

     1,452,947    7.22     1,537,454
                   

Total

   $ 1,452,947    7.22   $ 1,537,454
                   

 

F-10


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2009 and 2008

 

The following table details unrealized losses and related fair values in the Company’s available-for-sale investment securities portfolios. All unrealized losses on investment securities are a result of volatility in the market during 2009 and 2008. At December 31, 2009 there was 1 out of 38 mortgage-backed securities with fair values less than amortized cost. All unrealized losses are considered by management to be temporary given investment security credit ratings, the short duration of the unrealized losses and the intent to hold debt securities in an unrealized loss position greater than twelve months for the foreseeable future. This information is aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2009 and 2008:

 

     December 31, 2009
     Less than 12 Months    12 Months or More
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses

U.S. Government agencies

   $ 10,419,951    $ 189,472    $ 2,906,250    $ 85,443

Mortgage-backed securities

     1,470,442      35,382      —        —  

Corporate bonds

     968,432      5,592      448,900      25,824

CMO securities

     4,562,551      44,299      —        —  

State and political subdivisions - taxable

     4,229,179      189,465      —        —  

State and political subdivisions - tax exempt

     4,272,085      58,410      —        —  
                           
   $ 25,922,640    $ 522,620    $ 3,355,150    $ 111,267
                           

 

     December 31, 2008
     Less than 12 Months    12 Months or More
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses

U.S. Government agencies

   $ —      $ —      $ —      $ —  

Mortgage-backed securities

     2,543,554      51,513      401,873      3,397

Corporate bonds

     3,268,720      121,643      —        —  

State and political subdivisions - tax exempt

     1,177,665      30,783      —        —  
                           
   $ 6,989,939    $ 203,939    $ 401,873    $ 3,397
                           

Restricted equity securities consist of Federal Reserve Bank stock in the amount of $1,042,050 and $831,600, Federal Home Loan Bank of Atlanta stock in the amount of $3,026,900 and $2,883,100, Community Bankers Bank stock in the amount of $62,750 and $62,750, and an equity investment in Infinex in the amount of $9,500 as of December 31, 2009 and 2008. Restricted equity securities are carried at cost. The Federal Home Loan Bank requires the Bank to maintain stock in an amount equal to 4.5% of outstanding borrowings and a specific percentage of the member’s total assets. The Federal Reserve Bank of Richmond requires the Company to maintain stock with a par value equal to 3% of its outstanding capital.

The remainder of restricted securities consists of investments in a Limited Liability Company that provides title insurance services to the Bank’s customers. Investment in this Limited Liability Company was $17,089 as of December 31, 2009 and 2008, respectively.

 

F-11


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Years Ended December 31, 2009 and 2008

 

Securities with a market value of approximately $5,177,000 and $14,603,000 were pledged as collateral at December 31, 2009 and 2008, respectively to secure purchases of federal funds, repurchase agreements, collateral for customer’s deposits and collateral to secure public deposits.

Note 4 – Loans

Major classifications of loans are as follows:

 

     December 31,  
   2009    2008  
   Amount    Amount  

Commercial

   $ 54,590,024    $ 51,138,208   

Real estate - residential

     137,981,388      122,551,828   

Real estate - commercial

     125,444,710      106,796,170   

Real estate - construction

     81,106,396      86,515,314   

Consumer

     4,541,791      5,584,100   
               

Total loans

     403,664,309      372,585,620   

Less:

     

Allowance for loan losses

     6,600,360      5,060,433   

Net deferred costs (fees)

     56,149      (85,169
               

Loans, net

   $ 397,120,098    $ 367,440,018   
               

A summary of the transactions affecting the allowance for loan losses follows:

 

     2009     2008  

Balance, beginning of year

   $ 5,060,433      $ 2,489,066   

Provision f