Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

Form 10-Q

 

 

 

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

  ¨ TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT

For the transition period from             to            

 

 

FIRST CAPITAL BANCORP, INC.

(Name of Small Business Issuer in its charter)

 

 

 

Virginia		001-33543		11-3782033
(State or other jurisdiction of Incorporation or organization)		(Commission File Number)		(I.R.S. Employer Identification No.)

4222 Cox Road, Glen Allen, Virginia 23060

(Address of principal executive offices)

804-273-1160

(Issuer’s telephone number)

 

 

Indicate by check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 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.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    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 in Rule 12b-2 of the Exchange Act.

 

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

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

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, par value $4.00 per share, were outstanding at August 12, 2011.

 

 

 

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TABLE OF CONTENTS

 

		Page
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
Consolidated Statements of Financial Condition June 30, 2011 (unaudited) and December 31, 2010			3
Consolidated Statements of Operations For the Three Months and Six Months Ended June 30, 2011 and 2010 (unaudited)			4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income For the Six Months Ended June 30, 2011 and 2010 (unaudited)			5
Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2011 and 2010 (unaudited)			6
Notes to Consolidated Financial Statements (unaudited)			7
Item 2  – Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3 – Quantitative and Qualitative Disclosures About Market Risk – Not Applicable			27
Item 4 – Controls and Procedures			27
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings – None to Report.			28
Item 1A – Risk Factors – Not Applicable			28
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds – None			28
Item 3 – Defaults Upon Senior Securities – None.			28
Item 4 – (Removed and Reserved)			28
Item 5 – Other Information – None to Report			28
Item 6 – Exhibits			28
SIGNATURES			29

 

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PART 1 - FINANCIAL INFORMATION

Item 1 - Financial Statements

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

 

		June 30, 2011				December 31, 2010
		(Unaudited)				(Audited)
ASSETS
Cash and due from banks			8,025,589			$	6,210,383
Interest-bearing deposits in other banks			24,231,576				26,157,038
Investment securities:
Available for sale, at fair value			76,836,362				86,786,676
Held to maturity, at cost			2,885,978				2,389,391
Restricted, at cost			4,680,039				4,668,789
Loans, net of allowance for losses			372,557,510				386,208,792
Other real estate owned			7,534,230				2,614,828
Premises and equipment, net			11,298,269				11,400,268
Accrued interest receivable			1,728,006				2,061,532
Bank owned life insurance			8,743,174				448,006
Deferred tax asset			3,262,597				3,530,265
Prepaid FDIC premiums			1,669,236				2,206,038
Other assets			2,313,156				1,343,029
Total assets		$	525,765,722			$	536,025,035
LIABILITIES
Deposits
Noninterest-bearing		$	45,273,745			$	40,379,369
Interest-bearing			370,608,912				386,491,424
Total deposits			415,882,657				426,870,793
Accrued expenses and other liabilities			3,173,436				2,248,185
Securities sold under repurchase agreements			1,142,116				1,076,521
Subordinated debt			7,155,000				7,155,000
Federal Home Loan Bank advances			55,000,000				55,000,000
Total liabilities			482,353,209				492,350,499
STOCKHOLDERS’ EQUITY
Preferred stock, $4.00 par value, $1,000 liquidation preference, 2,000,000 authorized shares, 10,958 issued and outstanding			43,832				43,832
Common stock, $4.00 par value, 30,000,000 authorized shares, 2,971,171 issued and outstanding			11,884,684				11,884,684
Additional paid-in capital			29,798,884				29,739,129
Retained earnings			414,677				1,643,335
Warrants			660,769				660,769
Discount on preferred stock			(368,936	)			(434,494	)
Accumulated other comprehensive income, net of tax			978,603				137,281
Total stockholders’ equity			43,412,513				43,674,536
Total liabilities and stockholders’ equity		$	525,765,722			$	536,025,035

See notes to consolidated financial statements.

 

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First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

Unaudited

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Interest income
Loans		$	5,367,940			$	5,774,185			$	10,893,131			$	11,603,729
Investments:
Taxable interest income			496,093				594,794				1,068,594				1,239,180
Tax exempt interest income			144,702				129,741				301,554				241,880
Dividends			32,042				27,060				57,929				43,120
Federal funds sold and interest bearing deposits			15,209				12,014				29,934				19,676
Total interest income			6,055,986				6,537,794				12,351,142				13,147,585
Interest expense
Deposits			1,671,669				2,112,986				3,411,626				4,263,347
FHLB advances			412,407				478,337				820,282				944,944
Subordinated debt and other borrowed money			34,477				57,793				69,703				115,861
Total interest expense			2,118,553				2,649,116				4,301,611				5,324,152
Net interest income			3,937,433				3,888,678				8,049,531				7,823,433
Provision for loan loss			3,146,877				6,285,000				3,846,877				6,746,000
Net interest income (loss) after provision for loan loss			790,556				(2,396,322	)			4,202,654				1,077,433
Noninterest income
Fees on deposits			81,545				69,579				157,120				133,710
Gain on sale of securities			623,166				141,537				644,081				166,249
Other			134,777				104,043				259,200				247,274
Total noninterest income			839,488				315,159				1,060,401				547,233
Noninterest expenses
Salaries and employee benefits			1,583,307				1,401,318				3,002,356				2,793,809
Occupancy expense			207,907				155,805				412,885				370,330
Data processing			195,581				236,287				382,625				402,579
Professional services			224,221				263,298				361,285				380,499
Advertising and marketing			64,457				37,039				108,569				67,711
FDIC assessment			278,038				226,874				551,802				499,020
Virginia franchise tax			135,000				140,000				270,000				275,000
Write-down and losses on OREO			292,656				188,683				320,478				541,519
Depreciation			151,577				128,089				301,957				235,041
Other expenses			593,265				446,855				1,017,148				868,814
Total noninterest expense			3,726,009				3,224,248				6,729,105				6,434,322
Net loss before provision for income taxes			(2,095,965	)			(5,305,411	)			(1,466,050	)			(4,809,656	)
Income tax benefit			(754,500	)			(1,833,500	)			(576,900	)			(1,689,500	)
Net loss			(1,341,465	)			(3,471,911	)			(889,150	)			(3,120,156	)
Effective dividend on preferred stock			169,805				169,299				339,508				338,598
Net loss allocable to common shareholders		($	1,511,270	)		($	3,641,210	)		($	1,228,658	)		($	3,458,754	)
Basic and diluted net loss per common share		$	(0.51	)		$	(1.23	)		$	(0.41	)		$	(1.16	)

See notes to consolidated financial statements.

 

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First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Six Months Ended June 30, 2011 and 2010

(Unaudited)

 

		Preferred Stock				Common Stock				Additional Paid-in Capital				Retained Earnings				Warrants				Discount on Preferred Stock				Accumulated Other Comprehensive Income (Loss)				Total
Balance December 31, 2009		$	43,832			$	11,884,684			$	29,696,114			$	4,493,471			$	660,769			($	564,395	)		$	243,955			$	46,458,430
Net loss			—				—				—				(3,120,156	)			—				—								(3,120,156	)
Other comprehensive income
Unrealized holding gain arising during period, (net of tax, $377,091)			—				—				—				—				—				—				732,002				732,002
Total comprehensive loss																															(2,388,154	)
Preferred stock dividend			—				—				—				(273,950	)			—				—				—				(273,950	)
Accretion of discount on preferred stock			—				—				—				(64,748	)			—				64,748				—				—
Stock based compensation			—				—				22,295				—				—				—				—				22,295
Balance June 30, 2010		$	43,832			$	11,884,684			$	29,718,409			$	1,034,617			$	660,769			($	499,647	)		$	975,957			$	43,818,621
Balance December 31, 2010		$	43,832			$	11,884,684			$	29,739,129			$	1,643,335			$	660,769			($	434,494	)		$	137,281			$	43,674,536
Net loss			—				—				—				(889,150	)			—				—				—				(889,150	)
Other comprehensive income
Unrealized holding gain arising during period, (net of tax, $433,408)			—				—				—				—				—				—				841,322				841,322
Total comprehensive loss																															(47,828	)
Preferred stock dividend			—				—				—				(273,950	)			—				—				—				(273,950	)
Accretion of discount on preferred stock			—				—				—				(65,558	)			—				65,558				—				—
Stock based compensation			—				—				59,755				—				—				—				—				59,755
Balance June 30, 2011		$	43,832			$	11,884,684			$	29,798,884			$	414,677			$	660,769			($	368,936	)		$	978,603			$	43,412,513

See notes to consolidated financial statements.

 

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First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2011 and 2010

 

		2011				2010
		(Unaudited)
Cash flows from operating activities
Net loss		($	889,150	)		($	3,120,156	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision for loan losses			3,846,877				6,746,000
Depreciation of premises and equipment			301,957				235,041
Stock based compensation expense			59,755				22,295
Deferred income taxes			(165,741	)			(1,411,670	)
Gain on sale of securities			(644,081	)			(166,249	)
Loss on sale and write-down of OREO			320,478				541,519
Increase cash surrender value BOLI			(46,335	)			—
Net amortization of bond premiums/discounts			359,894				288,971
Increase (decrease) in other assets			(433,325	)			(1,107,018	)
Decrease in accrued interest receivable			333,526				203,342
Increase in accrued expenses and other liabilities			925,251				(427,747	)
Net cash provided by operating activities			3,969,106				1,804,328
Cash flows from investing activities
Proceeds from maturities and calls of securities			5,000,000				8,950,000
Proceeds from paydowns of securities available-for-sale			6,063,828				6,214,270
Purchase of securities available-for-sale			(25,559,876	)			(22,001,196	)
Proceeds from sale of securities available-for-sale			25,508,693				3,577,000
Proceeds from sale of OREO			880,185				851,156
Purchase Bank owned life insurance			(8,248,833	)			(434,000	)
Purchase of FHLB Stock			(9,000	)			(242,800	)
Purchase of Federal Reserve Stock			(2,250	)			(267,700	)
Purchases of premises and equipment			(199,958	)			(3,724,420	)
Net decrease (increase) in loans			3,684,340				(11,512,027	)
Net cash provided (used) in investing activities			7,117,129				(18,589,717	)
Cash flows from financing activities
Net (decrease) increase in deposits			(10,988,136	)			13,615,310
Advances from FHLB			—				5,000,000
Dividends on preferred stock			(273,950	)			(273,950	)
Net increase (decrease) in repurchase agreements			65,595				(157,984	)
Net cash (used) provided by financing activities			(11,196,491	)			18,183,376
Net increase (decrease) in cash and cash equivalents			(110,256	)			1,397,987
Cash and cash equivalents, beginning of period			32,367,421				31,666,612
Cash and cash equivalents, end of period		$	32,257,165			$	33,064,599
Supplemental disclosure of cash flow information
Interest paid during the period		$	4,301,611			$	5,302,678
Taxes paid during the period		$	575,000			$	825,000
Supplemental schedule of noncash investing and financing activities
Transfer of loans to other real estate owned		$	6,120,065			$	302,000
Unrealized gain on securities available for sale		$	1,274,731			$	732,002

See notes to consolidated financial statements.

 

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First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation

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.

In management’s opinion the accompanying consolidated financial statements, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of June 30, 2011 and December 31, 2010 and for the three month and six month period ended June 30, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America. Results for the three month and six month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011.

The organization and business of the Company, accounting policies followed, and other related information are contained in the notes to the financial statements of the Company as of and for the year ended December 31, 2010 filed as part of the Company’s annual report on Form 10-K. These interim financial statements should be read in conjunction with the annual financial statements.

The Company’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 losses in the Company’s existing portfolio. The allowance for loan losses is established through a provision for loan loss based on available information including the composition of the loan portfolio, historical loan losses (to the extent available due to limited history), specific impaired loans, availability and quality of the collateral, age of the various portfolios, changes in local economic conditions, and loan performance and quality of the portfolio. Different assumptions used in evaluating the adequacy of the Company’s allowance for loan losses could result in material changes in its financial condition and results of operations. The Company’s policies with respect to the methodology for determining the allowance for loan losses involve a high degree of complexity and require management to make subjective judgments that often require assumptions or estimates about certain matters. This critical policy and its assumptions are periodically reviewed with the Company’s Board of Directors.

Note 2 – Use of Estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Note 3 – Earnings per share

Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of common stock that then shared in the earnings of the entity.

 

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The basic and diluted earnings per share calculations are as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Net loss allocable to common shareholders		$	(1,511,270	)		$	(3,641,210	)		$	(1,228,658	)		$	(3,458,754	)
Weighted average number of shares outstanding			2,971,171				2,971,171				2,971,171				2,971,171
Loss per common share - basic		($	0.51	)		($	1.23	)		($	0.41	)		($	1.16	)
Effect of dilutive securities:
Weighted average number of shares outstanding			2,971,171				2,971,171				2,971,171				2,971,171
Effect of stock options			—				—				—				—
Diluted average shares outstanding			2,971,171				2,971,171				2,971,171				2,971,171
Loss per common share - assuming dilution		($	0.51	)		($	1.23	)		($	0.41	)		($	1.16	)

The Company has excluded 349,437 shares and 392,688 shares for the three months and six months ended June 30, 2011 and 49,487 shares and 84,061 shares for the three months and six months ended June 30, 2010 from the calculation of diluted earnings per share as they were anti-dilutive, since the strike price was greater than the average market price.

Note 4 – Stock Options

Accounting standards require the Company to measure compensation cost for all stock-based awards at fair value on the date of grant and recognizes compensation expense in the consolidated statements of income over the service period that the awards are expected to vest.

A total of 2,500 options were granted in May 2011. These shares vested immediately and the Company expensed the compensation cost in the second quarter of 2011. In the first quarter of 2011, options were granted totaling 130,500. Vesting of 67,500 shares issued to the Directors, will occur over two years. The remaining 63,000 shares, issued to executive officers and employees, will vest over three years.

The options were granted at an exercise price equal to 100% of the fair market value of the common stock on the date of grant. The fair value of each stock option was estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table:

 

		2011
		Second Qtr				First Qtr
Dividend yield			0.00	%			0.00	%
Expected life in years			6				6
Expected volatility			51.77	%			51.77	%
Risk-free interest rate			2.54	%			2.87	%
Weighted average fair value per option granted		$	1.45			$	1.35

The stock based compensation expensed during the three months and six months ended June 30, 2011 was $41,793 and $59,755, respectively and is included in salaries and employee benefits.

 

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Note 5 – Investment Securities

The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities as of June 30, 2011 and December 31, 2010 were as follows:

 

		June 30, 2011
		Amortized Costs				Gross Unrealized								Fair Values
						Gains				Losses
		(Thousands)
Available-for-sale
U.S. Government agencies		$	1,501			$	3			$	—			$	1,504
Mortgage-backed securities			12,217				334				54				12,497
Corporate bonds			6,141				—				27				6,114
CMO securities			35,326				801				—				36,127
State and political subdivisions - taxable			8,982				193				31				9,144
State and political subdivisions - tax exempt			9,379				252				8				9,623
SBA - Guarantee portion			1,807				20				—				1,827
		$	75,353			$	1,603			$	120			$	76,836
		December 31, 2010
		Amortized Costs				Gross Unrealized								Fair Values
						Gains				Losses
		(Thousands)
Available-for-sale
U.S. Government agencies		$	6,533			$	48			$	—			$	6,581
Mortgage-backed securities			14,834				347				159				15,022
Corporate bonds			6,412				21				31				6,402
CMO securities			30,587				568				111				31,044
State and political subdivisions - taxable			12,319				106				419				12,006
State and political subdivisions - tax exempt			12,150				88				246				11,992
SBA - Guarantee portion			3,743				12				15				3,740
		$	86,578			$	1,190			$	981			$	86,787
		June 30, 2011
		Amortized Costs				Gross Unrealized								Fair Values
						Gains				Losses
		(Thousands)
Held-to-maturity
Tax-exempt municipal bonds		$	2,886			$	117			$	42			$	2,961
		$	2,886			$	117			$	42			$	2,961
		December 31, 2010
		Amortized Costs				Gross Unrealized								Fair Values
						Gains				Losses
		(Thousands)
Held-to-maturity
Tax-exempt municipal bonds		$	2,389			$	54			$	81			$	2,362
		$	2,389			$	54			$	81			$	2,362

 

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In the second quarter of 2009, the Company adopted Other-Than-Temporary Impairment (“OTTI”) guidance, as amended, for debt securities regarding recognition and disclosure. The major change in the guidance was that impairment is other-than-temporary if any of the following conditions exists:

 

•

the entity intends to sell the security;

 

•

it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or

 

•

the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell).

If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss.

The Company conducts an assessment of its securities portfolio for OTTI consideration during each quarter. The assessment considers factors such as external credit ratings, delinquency ratios, market price, management’s judgment, expectations of future performance and relevant industry research and analysis. 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 and ability to retain these securities for a period of time sufficient to recover all unrealized losses. Management’s assessment for the current quarter ended June 30, 2011 resulted in no recognition of OTTI.

The following table details unrealized loss and related fair values in the Company’s available-for-sale investment portfolio aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2011 and December 31, 2010.

 

		June 30, 2011
		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(Thousands)
Assets:
Mortgage-backed securities		$	5,292			$	54			$	—			$	—			$	5,292			$	54
Corporate bonds			5,115				27				—				—				5,115				27
State & political subdivisions-taxable			1,683				31				—				—				1,683				31
State & political subdivisions-tax exempt			1,413				8				—				—				1,413				8
All securities		$	13,503			$	120			$	—			$	—			$	13,503			$	120
		December 31, 2010
		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(Thousands)
Assets:
Mortgage-backed securities		$	6,051			$	159			$	—			$	—			$	6,051			$	159
Corporate bonds			5,337				31				—				—				5,337				31
CMO securities			6,545				111				—				—				6,545				111
State & political subdivisions-taxable			10,011				419				—				—				10,011				419
State & political subdivisions-tax exempt			8,918				246				—				—				8,918				246
SBA			2,073				15				—				—				2,073				15
All securities		$	38,935			$	981			$	—			$	—			$	38,935			$	981

 

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Note 6 – Loans

Major classifications of loans are as follows:

 

		June 30,				December 31,
		2011				2010
		Amount				Amount
		(Thousands)
Commercial		$	43,594			$	48,004
Real estate - 1-4 residential			122,860				118,209
Real estate - commercial			141,669				145,399
Real estate - construction			12,212				15,852
Real estate - land development & land loans			58,951				66,041
Consumer			3,281				3,693
Total loans			382,567				397,198
Less:
Allowance for loan losses			10,153				11,036
Net deferred (income) costs			144				47
Loans, net		$	372,558			$	386,209

Activity in the allowance for loan losses for the six months ended June 30, 2011 and 2010:

 

		2011				2010
		(Thousands)
Balance, beginning of year		$	11,036			$	6,600
Provision for loan losses			3,847				6,746
Recoveries			818				12
Charge-offs			(5,548	)			(1,877	)
Balance, June 30, 2011		$	10,153			$	11,481
Ratio of allowance for loan losses as a percent of loans outstanding at the end of the period			2.65	%			2.78	%

 

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The following table presents the aging of the unpaid principal in past due loans as of June 30, 2011 and December 31, 2010:

 

		June 30, 2011
		30 - 89 Days				90+ Days				Nonaccrual				Current
		Past Due				Past Due				Loans				Loans				Total
		(Dollars in thousands)
Commercial		$	1,802			$	—			$	4,148			$	37,644			$	43,594
Real Estate
Residential			423				—				7,445				114,992				122,860
Commercial			147				—				291				141,231				141,669
Construction			623				—				810				10,779				12,212
Land Development and land loans			4,486				50				8,443				45,972				58,951
Consumer			94				—				707				2,480				3,281
Total		$	7,575			$	50			$	21,844			$	353,098			$	382,567
		December 31, 2010
		30 - 89 Days				90+ Days				Nonaccrual				Current
		Past Due				Past Due				Loans				Loans				Total
		(Dollars in thousands)
Commercial		$	—			$	993			$	5,615			$	41,396			$	48,004
Real Estate
Residential			719				564				8,402				108,524				118,209
Commercial			—				—				355				145,044				145,399
Construction			492				—				1,366				13,994				15,852
Land Development and land loans			16				—				6,617				59,408				66,041
Consumer			10				—				—				3,683				3,693
Total		$	1,237			$	1,557			$	22,355			$	372,049			$	397,198

 

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The following table provides details of the Company’s loan portfolio internally assigned grade at June 30, 2011 and December 31, 2010:

 

		June 30, 2011
		Pass				Special Mention				Substandard				Doubtful				Loss				Total
		(Dollars in thousands)
Commercial		$	35,450			$	2,903			$	5,241			$	—			$	—			$	43,594
Real Estate
Residential			103,766				8,274				10,820				—				—				122,860
Commercial			134,018				3,750				3,901				—				—				141,669
Construction			3,120				4,057				5,035				—				—				12,212
Land Development and land loans			22,814				9,825				26,312				—				—				58,951
Consumer			2,322				162				797				—				—				3,281
		$	301,490			$	28,971			$	52,106			$	—			$	—			$	382,567
		December 31, 2010
		Pass				Special Mention				Substandard				Doubtful				Loss				Total
		(Dollars in thousands)
Commercial		$	36,318			$	3,884			$	7,802			$	—			$	—			$	48,004
Real Estate
Residential			101,115				4,962				12,087				45				—				118,209
Commercial			132,060				12,180				1,159				—				—				145,399
Construction			4,009				6,739				5,104				—				—				15,852
Land Development and land loans			24,220				21,409				20,412				—				—				66,041
Consumer			3,415				188				90				—				—				3,693
		$	301,137			$	49,362			$	46,654			$	45			$	—			$	397,198

These credit quality indicators are defined as follows:

Pass – A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.

Special mention – A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.

Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful – An asset classified doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values.

Loss – Assets classified loss are considered uncollectible and of such little value that their continuing to be carried as an asset is not warranted. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be effected in the future.

 

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The following table provides details regarding impaired loans by segment and class at June 30, 2011 and December 31, 2010:

 

		June 30, 2011												December 31, 2010
		Recorded Balance in Impaired Loans				Unpaid Principal Balance of Impaired Loans				Related Allowance				Recorded Balance in Impaired Loans				Unpaid Principal Balance of Impaired Loans				Related Allowance
		(Dollars in thousands)
With no related allowance:
Commercial		$	520			$	527			$	—			$	543			$	545			$	—
Real Estate
Residential			3,966				4,148				—				3,312				3,382				—
Commercial			—				1				—				—				—				—
Construction			810				816				—				505				505				—
Land Development and land loans			4,851				6,670				—				1,942				3,044				—
Total		$	10,147			$	12,162			$	—			$	6,302			$	7,476			$	—
With an allowance:
Commercial		$	3,628			$	4,184			$	1,250			$	5,072			$	5,088			$	1,912
Real Estate
Residential			4,674				5,210				1,237				6,246				6,266				1,977
Commercial			291				303				75				355				367				138
Construction			—				—				—				1,474				1,489				241
Land Development and land loans			5,017				5,017				1,950				6,091				6,091				1,450
Total		$	13,610			$	14,714			$	4,512			$	19,238			$	19,301			$	5,718
Total:
Commercial		$	4,148			$	4,711			$	1,250			$	5,615			$	5,633			$	1,912
Real Estate
Residential			8,640				9,358				1,237				9,558				9,648				1,977
Commercial			291				304				75				355				367				138
Construction			810				816				—				1,979				1,994				241
Land Development and land loans			9,868				11,687				1,950				8,033				9,135				1,450
Total		$	23,757			$	26,876			$	4,512			$	25,540			$	26,777			$	5,718

 

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Note 7 – Other Real Estate Owned

Changes in other real estate owned were as follows for the six months ended June 30, 2011 and 2010 in thousands:

 

		2011				2010
Beginning Balance		$	2,615			$	3,388
Additions			6,120				337
Sales			(1,001	)			(1,126	)
Write-downs			(200	)			(497	)
Balance June 30		$	7,534			$	2,102

Note 8 – Fair Value Disclosures

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic ASC 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

 

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The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would conduct a transaction at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value of a reasonable point within this range is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, we group financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value.

 

•

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities in active markets at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

•

Level 2 – Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market date for substantially the full term of the asset or liability.

 

•

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flows methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

Following is a description of the valuation methodologies used for instruments measured as fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2). We obtain a single quote for all securities. Quotes for all of our securities are provided by our securities accounting and safekeeping correspondent bank. We perform a review of pricing data by comparing prices received from third party vendors to the previous month’s quote for the same security and evaluate any substantial changes.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010. Securities identified as restricted securities, including stock in the Federal Home Loan Bank of Atlanta (FHLB) and the Federal Reserve Bank (FRB), are excluded from the table below since there is no ability to sell these securities except when the FHLB or FRB require redemption based on either our borrowings at the FHLB, or in the case of the FRB, changes in certain portions of our capital.

 

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		June 30, 2011
		Fair Value Measurements Using												Fair
		Level 1				Level 2				Level 3				Values
		(Thousands)
Assets:
Available-for-sale securities		$	—			$	76,836			$	—			$	76,836
		December 31, 2010
		Fair Value Measurements Using												Fair
		Level 1				Level 2				Level 3				Values
		(Thousands)
Assets:
Available-for-sale securities		$	—			$	86,787			$	—			$	86,787

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual loans.

The following describes the valuation techniques used to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements.

Impaired Loans: Loans are designated as impaired when, in the judgment of management, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed external appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. In the event a real estate loan becomes a nonperforming loan, or if the valuation is over one year old, either an evaluation by an officer of the Bank or an outside vendor, or an appraisal is performed to determine current market value. We consider the value of a partially completed project for our loan analysis. For nonperforming construction loans, we obtain a valuation of each partially completed project “as is” from a third party appraiser. We use this third party valuation to determine if any charge-offs are necessary.

The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Other Real Estate Owned: Certain assets such as other real estate owned (“OREO”) are measured at fair value less cost to sell. We believe the fair value component in our valuation of OREO follows the provisions of accounting standards.

The following tables summarize our financial assets that were measured at fair value on a nonrecurring basis during the periods.

 

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		June 30, 2011
		Fair Value Measurements Using												Fair
		Level 1				Level 2				Level 3				Values
		(Thousands)
Impaired loans		$	—			$	—			$	23,757			$	23,757
Other real estate owned			—				—				7,534				7,534
Total		$	—			$	—			$	31,291			$	31,291
		December 31, 2010
		Fair Value Measurements Using												Fair
		Level 1				Level 2				Level 3				Values
		(Thousands)
Impaired loans		$	—			$	—			$	25,540			$	25,540
Other real estate owned			—				—				2,615				2,615
Total		$	—			$	—			$	28,155			$	28,155

The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:

Cash and due from banks – The carrying amounts of cash and due from banks approximate their fair value.

Available-for-sale and held-to-maturity securities – Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relaying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities, and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets. The carrying value of restricted FRB and FHLB stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the following table.

Loans receivable – Fair values are based on carrying values for variable-rate loans that reprice frequently and have no significant change in credit risk. Fair values for certain mortgage loans (for example, one-to-four family residential) and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for commercial real estate and commercial loans are estimated using discounted cash flow analyses and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The interest rates on loans at June 30, 2011 and December 31, 2010 are current market rates for their respective terms and associated credit risk.

Deposit liabilities – The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Accrued interest – The carrying amounts of accrued interest approximate their fair values.

Advances from Federal Home Loan Bank – The carrying value of advances from the FHLB due within ninety days from the balance sheet date approximate fair value. Fair values for convertible advances are estimated using a discounted cash flow calculation that applies interest rates currently being offered on convertible advances with similar remaining maturities.

 

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Federal Funds purchased and repurchase agreements – The carrying value of federal funds purchased and repurchase agreements due within ninety days from the balance sheet date approximate fair value.

Off-balance-sheet instruments – Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and counterparties’ credit standings. These are not deemed to be material at June 30, 2011 and December 31, 2010.

The estimated fair values of the Company’s financial instruments as of June 30, 2011 and December 31, 2010 are as follows:

 

		June 30, 2011								December 31, 2010
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
		(Dollars in thousands)
Financial assets
Cash and cash equivalents		$	32,257			$	32,257			$	32,367			$	32,367
Investment securities			79,722				79,798				89,176				89,149
Loans receivable, net			372,558				380,037				386,209				394,489
Accrued interest			1,728				1,728				2,062				2,062
Financial liabilities
Deposits		$	415,883			$	419,813			$	426,871			$	429,597
FHLB advances			55,000				58,296				55,000				57,766
Federal funds purchased			—				—				—				—
Subordinated debt			7,155				3,651				7,155				3,455
Repurchase agreements			1,142				1,142				1,077				1,077
Unrecognized financial instruments
Standby letters of credit issued		$	—			$	—			$	—			$	—

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of our normal operations. As a result, the fair values of our financial instruments will change when interest rates levels change and that change may be either favorable or unfavorable to us. We attempt to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to repay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. We monitor rates and maturities of assets and liabilities and attempt to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate our overall interest rate risk.

Note 9 – Recently Issued Accounting Pronouncements

In April 2011, the Financial Accounting Standard Board (“FASB”) amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring (“TDR”). The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on newly identified troubled debt restructurings, the amendments should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company has not determined the impact, if any, upon the adoption of the standard.

In May, 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective during interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the impact of this amendment on the consolidated financial statements.

 

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In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholder’s equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in a two separate consecutive statement approach. The adoption of this amendment will change the presentation of the components of comprehensive income for the Company as part of the consolidated statement of shareholder’s equity. This amendment is effective for fiscal and interim periods beginning after December 15, 2011.

ITEM 2.

FIRST CAPITAL BANCORP, INC

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The purpose of this discussion is to focus on important factors affecting the Company’s financial condition and results of operations. The discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements included elsewhere in this report.

This report contains forward-looking statements with respect to the financial condition, results of operations and business of the Company. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on information available at the time these statements and disclosures were prepared. Factors that may cause actual results to differ materially from those expected included the following:

 

•

General economic conditions may deteriorate and negatively impact the ability of borrowers to repay loans and depositors to maintain balances.

 

•

Changes in interest rates could reduce income.

 

•

Competitive pressures among financial institutions may increase.

 

•

The businesses that the Company is engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards.

 

•

New products developed or new methods of delivering products could result in a reduction in business and income for the Company.

 

•

Adverse changes may occur in the securities market.

OVERVIEW

The net loss for the second quarter of 2011 was $1.3 million, and net loss allocable to common shareholders was $1.5 million, or ($0.51) per fully diluted share compared to a net loss of $3.5 million, and a net loss allocable to common shareholders of $3.6 million or ($1.23) per fully diluted share, in the second quarter of 2010. The loss in the second quarter of 2011 was primarily due to the addition of $3.1 million to the Company’s allowance for loan losses due to net charge-off of loans totaling $3.6 million during the quarter. This compares to net charge-offs in the second quarter of 2010 of $1.6 million. This resulted in the allowance for loan losses representing 2.65% of the loans outstanding at June 30, 2011 compared to 2.78% at June 30, 2010.

 

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The net loss for the first six months of 2011 was $889 thousand and the net loss allocable to common shareholders was $1.2 million or ($0.41) per fully diluted share compared to a net loss of $3.1 million and a net loss allocable to common shareholders was $3.5 million or ($1.16) per fully diluted share for the same period of 2010.

From a revenue and cost perspective, income before tax and provision for loan losses increased from $980 thousand for the second quarter of 2010 to $1.1 million for the second quarter of 2011, an increase of 7.2%. For the six months ended June 30, 2011, income pre-tax and pre-provision as compared to the comparable period in 2010 increased 22.9% to $2.4 million from 1.9 million. The following chart reconciles the above to the net income (loss) for the periods presented.

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
		(Dollars in thousands)
Pre-provision, pre-tax income		$	1,051			$	980			$	2,381			$	1,937
Provision for loan losses			3,147				6,285				3,847				6,746
Loss before income tax benefit			(2,096	)			(5,305	)			(1,466	)			(4,809	)
Income tax benefit			(755	)			(1,833	)			(577	)			(1,689	)
Net loss		$	(1,341	)		$	(3,472	)		$	(889	)		$	(3,120	)

Financial Condition

Total assets at June 30, 2011 were $525.8 million, down $10.3 million, or 1.9% from $536.0 million at December 31, 2010. Net loans outstanding were $372.6 million at June 30, 2011, a decrease of $13.7 million, compared to the 2010 year-end balance. This was the result of a continued, focused effort by the Bank to decrease its exposure to speculative real estate loans. Deposits decreased by $11.0 million to $415.9 million, down 2.6% from December 31, 2010. Our deposit strategy was focused on decreasing noncore funding sources and single service CD relationships and increasing noninterest-bearing deposit accounts which increased $4.9 million or 12.1% from December 31, 2010.

At June 30, 2011, the Company’s investment portfolio totaled $79.7 million, a decrease of $9.5 million from $89.2 million at December 31, 2010. Most of the funds that are invested in the Company’s investment portfolio are part of management’s effort to balance interest rate risk and to provide liquidity and income to the Company. Bank owned life insurance of $8.2 million was purchased during the second quarter of 2011 as an additional investment for the Company and to provide life insurance benefits for senior executives.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income represents a principal source of earnings for the Company. Changes in net interest income during 2011 to date compared to net interest income for the first quarter of 2010 are attributable to relatively stable loan portfolio yields and a decrease in total funding costs.

Net interest margin increased 17 basis points for the three months ended June 30, 2011 to 3.23% as compared to 3.06% for the second quarter of 2010, reflecting a decrease in average rate paid on interest-bearing liabilities of 40 basis points from 2.35% for the second quarter of 2010 to 1.95% for the second quarter of 2011. This was offset by a 19 basis point decrease in the average yield on earning assets. The yield on loans, net of discount, was 5.52% and 5.57% for the second quarters of 2011 and 2010, respectively, with the decrease due primarily to decreases in loans outstanding and nonaccrual loans during the period. The average yield on investments decreased from 4.10% for the second quarter of 2010 to 3.61% for the second quarter of 2011 while average balances in investments increased from $77.4 million for the second quarter of 2010 to $79.5 million for the second quarter of 2011. Average interest bearing deposits and fed funds sold, which were earning 0.23% for the second quarter of 2010 and 2011, increased $5.1 million due to reduction in loans outstanding and investments.

 

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For the three months ended June 30, 2011, net interest income was up $49 thousand remaining at $3.9 million, consistent with the same period in 2010.

Total interest and fees on loans, the largest component of net interest income, decreased $406 thousand or 7.0% to $5.4 million during the second quarter of 2011 compared to $5.8 million for the same period in 2010 primarily due to decreases in loans outstanding of $30.7 million since June 30, 2010.

Interest expense on deposits decreased $441 thousand to $1.7 million, or 20.9% for the second quarter of 2011 compared to the same period of 2010. The decrease in deposit expense is due to the restructuring of the deposit mix and by a decrease in overall rates paid on deposits as interest rates paid on interest bearing deposits decreased 40 basis points to 1.95% from 2.35% for the second quarter of 2011.

For the six months ended June 30, 2011, the net interest margin increased 13 basis points from 3.14% for the first six months of 2010 to 3.27% for the second quarter of 2011. The primary increase in the net interest margin is the reduction of the average rate paid on interest bearing liabilities from 2.42% for the six months ended June 30, 2010 to 1.97% for the same period of 2011, a reduction in interest expense of $852 thousand from $4.3 million for the first six months of 2010 to $3.4 million for the comparable period of 2011. This was offset by a reduction in the average loans outstanding from $411.7 million as of June 30, 2010 to $393.0 million as of June 30, 2011. This resulted in a decrease in interest income on loans of $711 thousand from $11.6 million for the first six months of 2010 to $10.9 million for the comparable period in 2011.

Net interest income increased $226 thousand for the first six months of 2011 to $8.0 million from $7.8 million for the comparable period in 2010.

Average Balances, Income and Expenses, Yields and Rates

Net interest income represents our principal source of earnings. Net interest income is the amount by which interest generated from earning assets exceeds the expense of funding those assets. Changes in volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income.

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

The following table illustrates average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders’ equity and related income, expense and corresponding weighted-average yields and rates. The average balances used in these tables were calculated using daily average balances.

 

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Average Balances, Income and Expenses, Yields and Rates

 

		Three Months Ended June 30,
		2011												2010
		Average Balance				Income/ Expense				Yields/ Rates				Average Balance				Income/ Expense				Yields/ Rates
		(Dollars in thousands)
Assets:
Securities:
Taxable		$	65,608			$	497				3.01	%		$	64,801			$	595				3.68	%
Tax exempt (1)			13,876				219				6.34	%			12,644				197				6.24	%
Total securities			79,484				716				3.61	%			77,445				792				4.10	%
Federal funds sold & interest on deposits			26,000				15				0.23	%			20,906				12				0.23	%
FHLB & Federal Reserve Bank stock			4,591				31				2.73	%			4,579				27				2.37	%
Bank owned life insurance			2,561				42				6.60	%			—				—				0.00	%
Loans, net of unearned income (2)			390,106				5,368				5.52	%			415,853				5,774				5.57	%
Total earning assets			502,742				6,172				4.92	%			518,783				6,605				5.11	%
Allowance for loan losses			(10,739	)											(6,892	)
Cash and cash equivalents			6,739												6,501
OREO			2,547												2,565
Fixed assets			11,361												10,632
Other nonearning assets			12,255												9,547
Total assets		$	524,905											$	541,136
Liabilities & Stockholders’ Equity:
Interest checking		$	10,154			$	9				0.37	%		$	8,950			$	8				0.38	%
Money market deposit accounts			141,802				288				0.81	%			150,198				490				1.31	%
Statement savings			947				1				0.42	%			720				1				0.50	%
Certificates of deposit			219,235				1,373				2.51	%			229,893				1,613				2.81	%
Total interest-bearing deposits			372,138				1,671				1.80	%			389,761				2,112				2.17	%
Federal funds purchased			—				—				0.00	%			—				—				0.00	%
Repurchase agreements			1,093				1				0.50	%			911				1				0.50	%
Subordinated debt			7,155				34				1.93	%			7,155				58				3.24	%
FHLB Advances			55,000				413				3.01	%			55,000				478				3.49	%
Total interest bearing liabilities			435,386				2,119				1.95	%			452,827				2,649				2.35	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits			43,268												39,011
Other noninterest-bearing liabilities			1,670												2,003
Shareholders’ equity			44,581												47,295
Total liabilities and shareholders’ equity		$	524,905											$	541,136
Net interest spread											2.97	%											2.76	%
Impact of noninterest-bearing sources											0.26	%											0.30	%
Net interest margin						$	4,053				3.23	%						$	3,956				3.06	%
Ratio of average interest earning assets to average interest-bearing liabilities											115.47	%											114.57	%

 

(1)	Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%.

(2)	Nonaccrual loans have been included in the computations of average loan balances.

 

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Average Balances, Income and Expenses, Yields and Rates

 

		Six Months Ended June 30,
		2011												2010
		Average Balance				Income/ Expense				Yields/ Rates				Average Balance				Income/ Expense				Yields/ Rates
		(Dollars in thousands)
Assets:
Securities:
Taxable		$	69,214			$	1,069				3.11	%		$	65,900			$	1,239				4.06	%
Tax exempt (1)			14,370				457				6.41	%			11,690				366				6.32	%
Total securities			83,584				1,526				3.68	%			77,590				1,605				4.06	%
Federal funds sold & interest on deposits			25,639				30				0.24	%			16,970				20				0.23	%
FHLB & Federal Reserve Bank stock			4,585				56				2.48	%			4,491				43				1.94	%
Bank owned life insurance			2,870				60				4.22	%			—				—				0.00	%
Loans, net of unearned income (2)			392,956				10,893				5.59	%			411,697				11,604				5.68	%
Total earning assets			509,634				12,565				4.97	%			510,748				13,272				5.24	%
Allowance for loan losses			(11,001	)											(6,792	)
Cash and cash equivalents			6,951												6,311
OREO			2,592												2,926
Fixed assets			11,375												8,887
Other nonearning assets			9,606												9,308
Total assets		$	529,157											$	531,388
Liabilities & Stockholders’ Equity:
Interest checking		$	9,714			$	18				0.37	%		$	7,582			$	16				0.44	%
Money market deposit accounts			142,829				590				0.83	%			146,171				1,017				1.40	%
Statement savings			906				2				0.43	%			683				2				0.50	%
Certificates of deposit			223,401				2,800				2.53	%			228,347				3,227				2.85	%
Total interest-bearing deposits			376,850				3,410				1.82	%			382,783				4,262				2.25	%
Federal funds purchased			—				—				0.00	%			—				—				0.00	%
Repurchase agreements			1,055				2				0.46	%			956				2				0.50	%
Subordinated debt			7,155				69				1.94	%			7,155				115				3.23	%
FHLB Advances			55,000				821				3.01	%			53,370				945				3.57	%
Total interest bearing liabilities			440,060				4,302				1.97	%			444,264				5,324				2.42	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits			43,247												38,008
Other noninterest-bearing liabilities			1,652												2,046
Shareholders’ equity			44,198												47,070
Total liabilities and shareholders’ equity		$	529,157											$	531,388
Net interest spread											3.00	%											2.82	%
Impact of noninterest-bearing sources											0.27	%											0.31	%
Net interest margin						$	8,263				3.27	%						$	7,948				3.14	%
Ratio of average interest earning assets to average interest-bearing liabilities											114.96	%											114.96	%

 

(1)	Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%.

(2)	Nonaccrual loans have been included in the computations of average loan balances.

 

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Noninterest Income

Total noninterest income was $839 thousand for the second quarter of 2011, compared to $315 thousand for the same period of 2010. Fees on deposits increased 17.2% to $82 thousand for the second quarter of 2011 compared to $70 thousand for the comparable period in 2010. Gain on sale of securities increased $481 thousand to $623 thousand for the three months ended June 30, 2011 compared to $142 thousand for the comparable period in 2010. During the second quarter of 2011, the Company sold securities with a book value of $23.3 million to restructure the investment portfolio to reduce the duration, volatility, and provide more cash flow to take advantage of rising rates over the next two years.

For the six months ended June 30, 2011, noninterest income increased $513 thousand from $547 thousand for the first six months on 2010 to $1.1 million for the comparable period in 2011, primarily attributable to the gain on sale of securities in the second quarter to 2011 totaling $623 thousand.

Noninterest Expense

This category includes all expenses other than interest paid on deposits and borrowings. Total noninterest expenses for the second quarter of 2011 totaled $3.7 million, an increase of $502 thousand, compared to $3.2 million for the same period in 2010. The primary cause of the increase was losses on sale of OREO and write-down of existing OREO as a result of the change in market value of those assets. Losses and write-down of OREO for the three months ended June 30, 2011 was $293 thousand compared to $189 thousand in the second quarter of 2010. Salaries and employee benefits increased $182 thousand to $1.6 million for the three months ended June 30, 2011 compared to $1.4 million for the comparable period in 2010. The Company added a Compliance officer and an additional lending officer during the period. Occupancy expense increased $52 thousand for the second quarter of 2011 to $208 thousand from $156 thousand for the comparable period in 2010 as the Company purchased its’ headquarters building in April 2010 as compared to renting the building during the first and second quarter of 2010. Depreciation expense increased $23 thousand to $152 thousand for the three months ended June 30, 2011 as compared to the comparable period in 2010 due to additional depreciation on the headquarters building purchased in 2010. Professional fees decreased $39 thousand for the second quarter of 2011 to $224 thousand compared to $263 thousand for the comparable period in 2010 as less legal fees were incurred related to resolution of problem loans.

For the six months ended June 30, 2011, total noninterest expense increased $295 thousand, or 4.6% to $6.7 million from $6.4 million for the comparable period in 2010. The primary factor in the small increase in noninterest expense was the reduction in write-down and losses on OREO totaling $320 thousand for the first six months of 2011 compared to $542 thousand for the comparable period in 2010 reflecting a more appropriate valuation of the OREO in 2010.

Income Taxes

The provision for income taxes is based upon the results of operations, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.

The effective tax benefit rate for the six months ended June 30, 2011 and 2010 was 39.4% and 35.1%, respectively.

ASSET QUALITY

The Company’s allowance for loan losses is an estimate of the amount needed to provide for probable losses inherent in the loan portfolio. In determining adequacy of the allowance, management considers a number of factors, including, the Company’s historical loss experience, the size and composition of the loan portfolio, specific impaired loans, the overall level of nonperforming loans, the value and adequacy of collateral and guarantors, experience and depth of lending staff, effects of credit concentrations and economic conditions. Because the risk of loan loss includes general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses can only be an estimate.

 

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Total nonperforming assets, which consist of nonaccrual loans, loans past due 90 days and still accruing interest, and OREO, were $29.4 million, up from $13.3 million at June 30, 2010 and $26.5 million at December 31, 2010. This increase is the result of a depressed economy and a weak real estate market, which has slowed sales of homes. Nonperforming assets are composed largely of loans secured by real estate and repossessed properties in our OREO portfolio. At the end of the second quarter, OREO was $7.5 million, up from $2.1 million at June 30, 2010 and $2.6 million at December 31, 2010. At June 30, 2011, there were $3.5 million of troubled debt restructurings that were performing loans.

Nonaccrual loans were $21.8 million at June 30, 2011, up slightly from $20.5 million at March 31, 2011 and down from $22.3 million at December 31, 2010. The fluctuation reflects the continued efforts by the Company to decrease nonaccruals in a challenging economic environment.

Loan charge-offs, less recoveries, amounted to $3.6 million for the second quarter of 2011 compared to $1.6 million for the second quarter of 2010. For the second quarter of 2011, the provision for loan losses was $3.1 million compared to $6.3 million for the second quarter of 2010, and compared to $1.1 million for the fourth quarter of 2010. With the level of real estate secured debt and the increased nonperforming assets, management is confident that we can successfully manage through the economic downturn. We anticipate continued provision expenses as the asset quality dictates the need.

Although the Company believes it has sufficient allowance for its existing portfolio, there can be no assurances that an additional allowance for losses on existing loans may not be necessary in the future. The allowance for loan losses totaled $10.2 million at June 30, 2011 compared to $11.0 million at December 31, 2010 and compared to $11.5 million at June 30, 2010. The ratio of the allowance for loan losses to total loans outstanding at June 30, 2011 was 2.65% compared to 2.78% at December 31, 2010 and June 30, 2010.

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

 

		Jun 30,				Mar 31,				Dec 31,				Jun 30,
		2011				2011				2010				2010
		(Dollars in thousands)
Nonaccrual loans		$	21,844			$	20,518			$	22,355			$	11,185
Loans past due 90 days and accruing interest			50				41				1,556				50
Total nonperforming loans			21,894				20,559				23,911				11,235
Other real estate owned			7,534				2,739				2,615				2,102
Total nonperforming assets		$	29,428			$	23,298			$	26,526			$	13,337
Allowance for loan losses to period end loans			2.65	%			2.69	%			2.78	%			2.78	%
Nonperforming assets to total loans & OREO			7.54	%			5.89	%			6.63	%			3.21	%
Nonperforming assets to total assets			5.60	%			4.40	%			4.95	%			2.44	%
Allowance for loan losses to nonaccrual loans			46.48	%			51.51	%			49.37	%			102.65	%

LIQUIDITY

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

 

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At June 30, 2011, cash and cash equivalents totaled $32.3 million. Investment securities not pledged totaled $77.3 million, for a total of 14.7% of total assets, which management believe is adequate to meet short-term liquidity needs. Management also has alternative sources of funding available, including unused unsecured federal funds facilities with three banks totaling $22.5 million and unused available term loans through the FHLB totaling $7.8 million.

Total liquidity and other alternative sources of liquidity totaled $139.9 million at June 30, 2011 if fully utilized, which represents 26.6% of total assets.

Off-Balance Sheet Arrangements

In the normal course of business there are outstanding commitments for the extension of credit which are not reflected in the financial statements. At June 30, 2011, pre-approved but unused lines of credit for loans totaled approximately $52.6 million. In addition, we had approximately $6.5 million in financial and performance standby letters of credit at June 30, 2011. These commitments represent no more than the normal lending risk that we commit to borrowers. If these commitments are drawn, we will obtain collateral if it is deemed necessary based on our credit evaluation of the counterparty.

CAPITAL RESOURCES

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

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

Federal regulatory risk-based capital ratio guidelines require percentages to be applied to various assets including off-balance sheet assets in relation to their perceived risk. Tier 1 capital consists of stockholders’ equity and minority interests in consolidated subsidiaries, less net unrealized gains on available-for-sale securities. Tier 2 capital, a component of total capital, consists of a portion of the allowance for loan losses, certain components of nonpermanent preferred stock and subordinated debt. The $5 million in trust preferred securities issued by the Company in September 2006 qualified as Tier 1 capital. First Capital Bank’s ratios exceed regulatory requirements. As of June 30, 2011, the Company had a Tier 1 risk-based capital ratio of 11.98% and a Total risk-based capital ratio of 13.57%. At December 31, 2010 these ratios were 12.04% and 13.7%, respectively.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

N/A

ITEM 4. CONTROLS AND PROCEDURES

Based upon an evaluation as of June 30, 2011 under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, they have concluded that our disclosure controls and procedures, as defined in Rule 13a-15 and Rule 15d-15 under the Securities Exchange Act of 1934, as amended, are effective in ensuring that all material information required to be disclosed in reports that it files or submits under such Act is recorded, processed, summarized and is made known to management in a timely fashion.

Our management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings – None to report

Item 1A. Risk Factors – Not Applicable

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – None

Item 3. Defaults Upon Senior Securities – None

Item 4. (Removed and Reserved)

Item 5. Other Information – None to report

Item 6. Exhibits

 

Exhibit No.		Description of Exhibit
3.1		Articles of Incorporation of First Capital Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of Form 10-QSB filed 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 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 April 6, 2009)
3.4		Articles of Amendment to the Company’s Articles of Incorporation, designation 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)
3.5		Articles of Amendment to the Company’s Articles of Incorporation, increasing the number of authorized shares of Common Stock to 30,000,000 (incorporated by reference to Exhibit 3.1 of Form 8-K filed on June 3, 2010)
4.1		Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 4.1 of Form 8-K filed April 6, 2009)
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, dated April 3, 2009 (incorporated by reference to Exhibit 4.2 of Form 8-K filed April 6, 2009)
31.1		Certification of John M. Presley Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 12, 2011.
31.2		Certification of Robert G. Watts, Jr. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 12, 2011.

 

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31.3		Certification of William W. Ranson Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 12, 2011.
32		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 12, 2011.
Exhibit 101		Interactive Data File (XBRL) furnished herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

First Capital Bancorp, Inc.

 

Date: August 12, 2011		By:		/s/ John M. Presley
				John M. Presley
				Managing Director and Chief Executive Officer
		By:		/s/ William W. Ranson
				William W. Ranson
				Chief Financial Officer, Treasurer and Secretary

 

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