FCVA (MM)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

Form 10-QSB

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

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, Suite 200, Glen Allen, Virginia 23060

(Address of principal executive offices)

804-273-1160

(Issuer’s telephone number)

 

 

Check 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.    Yes   x     No   ¨

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 April 30, 2008.

Transitional Small Business Disclosure Format (check one)    Yes   ¨     No   x

 

 

 

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TABLE OF CONTENTS

 

				Page
PART I – FINANCIAL INFORMATION
		Item 1 – Financial Statements
		Consolidated Statements of Financial Condition March 31, 2008 (unaudited) and December 31, 2007		3
		Consolidated Statements of Income For the Three Months Ended March 31, 2008 and 2007 (unaudited)		4
		Consolidated Statements of Stockholders’ Equity and Comprehensive Income For the Three Months Ended March 31, 2008 and 2007 (unaudited)		5
		Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2008 and 2007 (unaudited)		6
		Notes to Consolidated Financial Statements (unaudited)		7
		Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
		Item 3 – Controls and Procedures		19
PART II – OTHER INFORMATION
		Item 1 – Legal Proceedings – None to Report.		20
		Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds – Not Applicable.		20
		Item 3 – Defaults Upon Senior Securities – Not Applicable.		20
		Item 4 – Submission of Matters to a Vote of Security Holders – None to Report		20
		Item 5 – Other Information – None to Report		20
		Item 6 – Exhibits		20
SIGNATURE				21

 

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PART 1 - FINANCIAL INFORMATION

Item 1 - Financial Statements

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

March 31, 2008 and December 31, 2007

 

		2008			2007
		(Unaudited)
ASSETS
Cash and due from banks		$	11,536,607		$	16,779,538
Federal funds sold			13,277,000			—
Short term debt securities			10,000,000			—
Total cash and cash equivalents			34,813,607			16,779,538
Investment securities:
Available for sale, at fair value			33,007,576			32,824,537
Restricted, at cost			3,804,040			3,183,739
Loans, net of allowance for losses			314,390,784			294,234,285
Loans held for sale			417,000			—
Premises and equipment, net			3,700,618			2,077,820
Accrued interest receivable			1,666,165			1,807,939
Deferred tax asset			395,505			319,097
Other assets			453,988			640,013
Total assets		$	392,649,283		$	351,866,968
LIABILITIES
Deposits
Noninterest-bearing		$	36,116,494		$	36,541,568
Interest-bearing			258,799,448			218,566,755
Total deposits			294,915,942			255,108,323
Accrued expenses and other liabilities			2,618,557			3,380,648
Securities sold under repurchase agreements			2,584,239			2,102,939
Federal funds purchased			—			9,261,000
Subordinated debt			7,155,000			7,155,000
Federal Home Loan Bank advances			50,000,000			40,000,000
Total liabilities			357,273,738			317,007,910
STOCKHOLDERS’ EQUITY
Common stock, $4.00 par value (authorized 5,000,000 shares; shares issued and outstanding, 2,971,171 at March 31, 2008 and December 31, 2007)			11,884,684			11,884,684
Additional paid-in capital			18,532,552			18,492,528
Retained earnings			4,933,415			4,518,278
Accumulated other comprehensive income (loss), net of tax			24,894			(36,432	)
Total stockholders’ equity			35,375,545			34,859,058
Total liabilities and stockholders’ equity		$	392,649,283		$	351,866,968

See notes to consolidated financial statements.

 

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First Capital Bancorp Inc. and Subsidiary

Consolidated Statements of Income

For the Three Months Ended March 31, 2008 and 2007

 

		Three Months Ended March 31,
		2008			2007
		(Unaudited)
Interest income
Loans		$	5,479,986		$	3,964,356
Investments:
Taxable interest income			369,559			423,137
Tax exempt interest income			13,473			10,264
Dividends			47,470			30,601
Federal funds sold			113,038			74,812
Total interest income			6,023,526			4,503,170
Interest expense
Deposits			2,615,823			2,034,447
FHLB advances			457,065			255,824
Federal funds purchased			25,902			7,023
Subordinated debt and other borrowed money			123,865			141,638
Total interest expense			3,222,655			2,438,932
Net interest income			2,800,871			2,064,238
Provision for loan loss			325,000			122,000
Net interest income after provision for loan loss			2,475,871			1,942,238
Noninterest income
Fees on deposits			63,901			49,631
Fees on mortgage loans			12,383			46,386
Other			95,956			70,895
Total noninterest income			172,240			166,912
Noninterest expenses
Salaries and employee benefits			1,039,622			818,605
Occupancy expense			205,279			184,138
Data processing			138,127			124,198
Professional services			68,462			53,075
Advertising and marketing			43,652			28,006
FDIC assessment			51,000			20,871
Virginia franchise tax			82,000			45,000
Depreciation			85,831			85,562
Other expenses			291,251			211,789
Total noninterest expense			2,005,224			1,571,244
Net income before provision for income taxes			642,887			537,906
Income tax expense			227,750			187,900
Net income		$	415,137		$	350,006
Basic income per share		$	0.14		$	0.19
Diluted income per share		$	0.14		$	0.19

See notes to consolidated financial statements.

 

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First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Three Months Ended March 31, 2008 and 2007

(Unaudited)

 

		Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity
Balance January 1, 2007		$	7,184,084		$	6,010,352		$	2,776,277		($	311,598	)		$	15,659,115
Net income			—			—			350,006			350,006				350,006
Other comprehensive loss
Unrealized holding gain arising during period, (net of tax, $31,230)			—			—			—			60,622				60,622
Total comprehensive income											$	410,628
Stock based compensation expense			—			11,828			—			—				11,828
Balance March 31, 2007		$	7,184,084		$	6,022,180		$	3,126,283		($	250,976	)		$	16,081,571
Balance January 1, 2008		$	11,884,684		$	18,492,528		$	4,518,278		($	36,432	)		$	34,859,058
Net income			—			—			415,137			415,137				415,137
Other comprehensive loss
Unrealized holding gain arising during period, (net of tax, $31,592)			—			—			—			61,326				61,326
Total comprehensive income											$	476,463
Stock based compensation expense			—			40,024			—			—				40,024
Balance at March 31, 2008		$	11,884,684		$	18,532,552		$	4,933,415		$	24,894			$	35,375,545

See notes to consolidated financial statements.

 

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First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2008 and 2007

(Unaudited)

 

		2008				2007
Cash flows from operating activities
Net income		$	415,137			$	350,006
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses			325,000				122,000
Depreciation of premises and equipment			85,831				85,562
Stock based compensation expense			40,024				11,828
Deferred income taxes			(108,000	)			—
Net accretion of bond premiums/discounts			(36,775	)			(1,257	)
Decrease (increase) in other assets			186,025				(233,697	)
Increase in accrued interest receivable			141,774				191,951
Increase (decrease) in accrued expenses and other liabilities			(762,091	)			214,638
Net cash provided by operating activities			286,925				741,031
Cash flows from investing activities
Proceeds from maturities and calls of securities			17,614,286				8,000,000
Proceeds from paydowns of securities available-for-sale			725,265				588,017
Purchase of securities available-for-sale			(18,392,898	)			—
Redemption (purchase) of FHLB Stock			(620,300	)			181,300
Purchases of property and equipment			(195,081	)			(149,679	)
Purchase of land			(1,513,548	)			—
Increase in loans held for sale			(417,000	)			—
Net increase in loans			(20,481,499	)			(11,578,893	)
Net cash used in investing activities			(23,280,775	)			(2,959,255	)
Cash flows from financing activities
Net (decrease) increase in demand, savings and money market accounts			(3,618,504	)			14,444,187
Net increase in certificates of deposit			43,426,123				15,538,787
Advances from FHLB			10,000,000				5,000,000
FHLB advances called			—				(10,000,000	)
Decrease in Federal funds purchased			(9,261,000	)			(6,026,000	)
Net increase in repurchase agreements			481,300				69,644
Net cash provided by financing activities			41,027,919				19,026,618
Net increase in cash and cash equivalents			18,034,069				16,808,394
Cash and cash equivalents, beginning of period			16,779,538				12,032,026
Cash and cash equivalents, end of period		$	34,813,607			$	28,840,420
Supplemental disclosure of cash flow information
Interest paid during the period		$	2,410,961			$	2,488,163
Taxes paid during the period		$	100,000			$	228,533

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. All references to the Company in this quarterly report for dates or periods prior to September 8, 2006 are references to the Bank.

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 March 31, 2008 and December 31, 2007 and for the three months ended March 31, 2008 and 2007, in conformity with accounting principles generally accepted in the United States of America. Results for the three month ended March 31, 2007 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2008.

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, 2007 filed as part of the Company’s annual report on Form 10-KSB. These interim financial statements should be read in conjunction with the annual financial statements.

First Capital Bancorp, Inc.’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 March 31,
		2008			2007
Net income (numerator, basic and diluted)		$	415,137		$	350,006
Weighted average number of shares outstanding (denominator)			2,971,171			1,796,021
Earnings per common share - basic		$	0.14		$	0.19
Effect of dilutive securities:
Weighted average number of shares outstanding			2,971,171			1,796,021
Effect of stock options			29,929			91,842
Diluted average shares outstanding (denominator)			3,001,100			1,887,863
Earnings per common share - assuming dilution		$	0.14		$	0.19

Note 4 – Stock Options

Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, using the modified prospective method and, accordingly, did not restate the consolidated statements of operations for periods prior to January 1, 2006. This pronouncement amended SFAS No. 123, Accounting for Stock-Based Compensation, and superseded Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Under SFAS No. 123(R), the Company measures 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.

In January 2008, 5,000 options were granted at an exercise price equal to 100% of the fair market value of the common stock on the date of grant. These options vest over three years. The stock based compensation expensed during the quarter was $40,024 and is included in salaries and employee benefits.

Note 5 – Investment Securities

The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities as of March 31, 2008 and December 31, 2007 are as follows:

 

		March 31, 2008
		Amortized Costs			Gross Unrealized						Fair Values
					Gains			Losses
Available-for-sale
U.S. Government agencies		$	20,068,027		$	141,707					$	20,209,734
Mortgage-backed securities			7,761,817			48,727			25,607			7,784,937
Corporate bonds			3,378,251			—			121,721			3,256,530
Tax-exempt municipal bonds			1,761,247			11,552			16,424			1,756,375
		$	32,969,342		$	201,986		$	163,752		$	33,007,576

 

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		December 31, 2007
		Amortized Costs			Gross Unrealized						Fair Values
					Gains			Losses
Available-for-sale
U.S. Government agencies		$	21,455,876		$	50,543		$	5,590		$	21,500,829
Mortgage-backed securities			8,493,006			27,725			102,396			8,418,335
Corporate bonds			1,921,847			—			26,722			1,895,125
Tax-exempt municipal bonds			1,008,492			3,495			1,739			1,010,248
		$	32,879,221		$	81,763		$	136,447		$	32,824,537

The unrealized losses in the portfolio as of March 31, 2008 are considered temporary and are a result of the current interest rate environment and not increased credit risk. The Company has the ability and intent to hold debt securities in an unrealized loss position for the foreseeable future.

Note 6 – Loans

Major classifications of loans are as follows:

 

		March 31, 2008			December 31, 2007
		Amount			Amount
Commercial		$	43,613,469		$	44,366,926
Real estate - residential			85,694,299			83,035,119
Real estate - commercial			96,477,757			86,301,455
Real estate - construction			87,208,198			79,095,777
Consumer			4,420,132			4,105,713
Total loans			317,413,855			296,904,990
Less:
Allowance for loan losses			2,819,166			2,489,066
Net deferred fees			203,905			181,640
Loans, net		$	314,390,784		$	294,234,284

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

 

		Three Months Ended March 31,
		2008			2007
Balance, beginning of year		$	2,489,066		$	1,833,604
Provision for loan losses			325,000			122,000
Recoveries			5,100			—
Charge-offs			—			—
Balance, end of year		$	2,819,166		$	1,955,604

 

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Note 7 – Premises and equipment

Major classifications of these assets are summarized as follows:

 

		March 31, 2008			December 31, 2007
Land		$	1,741,553		$	228,005
Building			719,434			719,434
Furniture and equipment			1,855,108			1,832,126
Leasehold improvements			717,498			711,598
Construction in progress			166,199			—
			5,199,792			3,491,163
Less accumulated depreciation			1,499,174			1,413,343
Premises and equipment, net		$	3,700,618		$	2,077,820

Note 8 – Stock Offering

On June 19, 2007, the Company closed on a public stock offering of 1,020,000 shares of common stock at $15.75 per share. The offering was underwritten by two local brokerage houses. Gross proceeds totaled $16.1 million. Total costs of the offering through June 30, 2007 were $1.1 million. The Company will use the net proceeds from the offering to increase equity and for general corporate purposes, including using the net proceeds to provide additional equity to the Bank to support the growth of its operations.

On July 11, 2007, an additional 152,900 shares of common stock was issued as a result of the exercise of the over-allotment option granted to the underwriters of the Company’s public offering of 1,020,000 shares of common stock at $15.75 per share. The net proceeds to the Company from this exercise of the over-allotment were $2.3 million.

Note 9 – Fair Value Disclosures

Effective January 1, 2008, the Company adopted FAS 157, Fair Value Measurement. FAS 157 clarifies the definition of fair value and describes methods available to appropriately measure fair value in accordance with generally accepted accounting principles. This statement applies whenever other accounting pronouncements require or permit fair value measurements.

The fair value hierarchy under FAS 157 prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Levels 1, 2 and 3). Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability and reflect the reporting entity’s own evaluation about the assumptions that market participants would use in pricing the asset or liability.

SFAS 157 defines fair value as the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date.

Assets measured at fair value on a recurring basis are summarized below:

 

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		March 31, 2008
		Fair Value Measurements Using									Fair Values
		Level 1			Level 2			Level 3
		(Dollars in thousands)
Available-for-sale securities
U.S. Government agencies		$	20,210		$	—		$	—		$	20,210
Mortgage-backed securities			—			7,785			—			7,785
Corporate bonds			—			3,257			—			3,257
Municipal bonds			—			1,756			—			1,756
Total		$	20,210		$	12,798		$	—		$	33,008

Level 1 – Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Assets utilizing Level 1 inputs include U. S. Government agency securities.

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Assets utilizing Level 2 inputs include mortgage-backed securities, corporate and municipal bonds.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The Company had no Level 3 assets.

Note 10 – Recently Issued Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations (revised 2007).” SFAS No. 141R improves reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements. To achieve this goal, the new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first fiscal year that commences after December 15, 2008.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS No. 160 improves the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way—as equity in the consolidated financial statements. In addition, SFAS No.160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring that they be treated as equity transactions. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and is not expected to have a material impact on the Company’s financial condition or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115.” SFAS No. 159 provides companies with the option of electing fair value as an alternative measurement for most financial assets and liabilities. It also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of a company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the

 

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company has chosen to use fair value on the face of the balance sheet. Under SFAS No. 159, fair value is used for both the initial and subsequent measurement of the designated assets and/or liabilities, with the changes in value recognized in earnings. The Company adopted this statement on January 1, 2008 and did not elect the SFAS No. 159 fair value option for any of its financial assets or liabilities, therefore the adoption did not have an impact on its consolidated financial position, consolidated results of operations, or liquidity.

 

Item 2.

Management’s Discussion and Analysis of Financial Conditions and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate” or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits. The Company does not update any forward-looking statements that may be made from time to time by or on behalf of the Company.

GENERAL

The Company was organized under the laws of the Commonwealth of Virginia as a bank holding company whose activities consist of investment in its wholly-owned subsidiary, the Bank. The Bank is a Virginia state-chartered bank headquartered in Glen Allen, Virginia. A member of the Federal Reserve System, it began 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, which encompasses western Henrico County, Ashland, western City of Richmond, Chesterfield County and the City of Petersburg. 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, hometown relationships with it customers, while at the same time offering products comparable to statewide regional banks located in its market area. Management believes 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 operating results of the Bank depend primarily upon its net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits, advances from the Federal Home Loan Bank of Atlanta and junior subordinated debt. Net income is also affected by its provision for loan loss, as well as the level of its other operating income, including loan fees and service charges, and its other operating expenses, including salaries and employee benefits, occupancy expense, miscellaneous other expenses, franchise taxes and income taxes.

The Bank currently serves its customers through the following six full-service offices: the main office located at 4101 Dominion Boulevard in Glen Allen, Virginia, a branch located at 409 South Washington Highway in Ashland, Virginia, a branch located at 1580 Koger Center Boulevard in Chesterfield County, Virginia, a branch located at 1776 Staples Mill Road near the Richmond / Henrico County boundary, a branch located in Forest Office Park in Henrico County and at 901 E. Cary Street in the James Center in Richmond, Virginia.

 

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The following discussion represents management’s discussion and analysis of the financial condition and results of operations for the Company as of March 31, 2008 and December 31, 2007 and for the three months ended March 31, 2008 and 2007. It should be read in conjunction with the financial statements included elsewhere herein.

SUMMARY OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Financial Condition Summary

March 31, 2008 as Compared to December 31, 2007

Total assets increased $40.8 million, or 11.6%, for the first three months of 2008 to $392.6 million compared with $351.9 million at December 31, 2007. The increase in total assets during the first quarter resulted from the growth of our business and customer base. Net loans increased $20.2 million to $314.4 million at March 31, 2008, an increase of 6.9% over net loans of $294.2 million at December 31, 2007. Deposits increased $39.8 million to $294.9 million or 15.6% for the first three months of 2008. Federal Home Loan Bank advances totaled $50.0 million at March 31, 2008, an increase of $10.0 million from year end 2007. Federal funds purchased decreased $9.3 million from December 31, 2007 to $0.

At March 31, 2008, as compared to March 31, 2007, net loans increased $103.2 million to $314.4 million, an increase of 48.9%. Deposits increased $70.6 million to $294.9 million, an increase of 31.5% over the same period. Assets stood at $392.6 million, up $115.7 million from $276.9 million at March 31, 2007, an increase of 41.8%.

As of March 31, 2008 and December 31, 2007, our regulatory capital levels exceeded those established for well-capitalized institutions.

Results of Operations

Comparison of the Three Months Ended March 31, 2008 and 2007

Net income for the three months ended March 31, 2008 increased 18.6% to $415 thousand, or $0.14 basic and diluted earnings per share compared to $350 thousand for the three months ended March 31, 2007, or $0.19 basic and diluted earnings per share. The increase in net income was due primarily to the growth of the loan portfolio as loans grew $20.2 million for the three months ended March 31, 2008 and $103.2 million from March 31, 2007 to March 31, 2008. The loan portfolio continues to be funded with deposit growth and, when advantageous, through borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”). Deposits increased $39.8 million for the three months ended Marched 31, 2008 and $70.6 million from March 31, 2007 to March 31, 2008. Advances from the FHLB grew $10.0 million in the first quarter of 2008 and $25 million from March 31, 2007. In addition, the Company closed a public offering in June 2007 of 1,202,000 shares at $15.75 and closed on the underwriters’ exercise of the over-allotment option consisting of an additional 152,900 shares at $15.75 in July 2007, resulting in increases in cash and net worth of the Company totaling $17.1 million.

Net interest income increased by $737 thousand, or 35.7%, from $2.1 million in the first quarter of 2007 to $2.8 million in the first quarter of 2008. This increase in net interest income is a direct result of our growth in loans. The yield on our earning assets declined faster than the cost of our funds due to the drastic actions of the Federal Reserve Bank during the first quarter of 2008. The federal funds targeted rate and the associated prime rate of interest dropped 100 basis points late in 2007 and 200 basis points during the first quarter of 2008, resulting in a significant decline in this key rate that is tied to 40.1% of the loan portfolio having a daily rate change. Although the vast majority of our time deposits are set to reprice in the next twelve months and will lower funding costs, this rapid reduction in rates put pressure on our net interest margin. The net interest margin decreased 19 basis points for the three months ended March 31, 2008 to 3.16% as compared to 3.35% for the three months ended March 31, 2007. The yield on interest earning assets decreased from 7.31% for the quarter ended March 31, 2007 to 6.79% for the quarter ended March 31, 2008. The cost of interest bearing liabilities decreased 39 basis points from 4.68% for the quarter ended March 31, 2007 to 4.29% for the quarter ended March 31, 2008. Cost of deposits decreased from 4.66% for the quarter ended March 31, 2007 to 4.33% for the quarter ended March 31, 2008. Money market accounts (“MMA”) had the largest decrease in interest rates. MMA accounts decreased 154 basis points due to decreases in the prime rate.

Noninterest income increased by $5 thousand, or 3.2%, from $167 thousand in the first quarter of 2007 to $172 thousand in the first quarter of 2008. This increase in noninterest income is attributable to increases in fees on deposits and other

 

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income of $39 thousand offset by a reduction in fees on mortgage loans of $34 thousand. Reduction in fees on mortgage loans was the result of turmoil in the financial markets as single family originations decreased significantly in the quarter as compared to 2007.

Noninterest expense increased $434 thousand, or 27.6%, from $1.6 million in the first quarter of 2007 to $2.0 million in the first quarter of 2008. This increase in noninterest expense is attributable to the growth and expansion of the Company. Salaries and employee benefits represented the largest dollar increase of $221 thousand which represent a 27% increase. We opened and staffed our sixth branch in February 2007 and added two experienced lenders with support staff. Occupancy increased as the result of the new branch in 2007 and additional space at the corporate headquarters. Virginia franchise tax increased $37 thousand dollars as a result of additional investment in First Capital Bank by First Capital Bancorp, Inc. in 2007. Franchise tax is based on net worth of the subsidiary. Other expenses increased $79 thousand as a result of growth of the Company and expenses associated with the new branch in 2007.

The provision for loan losses increased from $122 thousand for the first quarter of 2007 to $325 thousand for the three months ended March 31, 2008 and up for $238 thousand for the fourth quarter of 2007. This increase was driven by loan growth and not due to credit quality issues. The reserve for loan losses of $2.8 million represents 0.89% of total loans as of March 31, 2008, up from .84% at December 31, 2007. Asset quality on the $317.4 million loan portfolio remained strong. There were three non-performing loans at March 31, 2008 totaling $59 thousand which represent .02% of loans. One nonaccrual loan totaled $47 thousand and has an SBA guarantee of $25 thousand. No losses are expected from these non-performing assets.

Net interest income

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, Federal Home Loan Bank advances and other borrowings. Since January 1, 2007, the Board of Governors of the Federal Reserve decreased short-term interest rates by 500 basis points.

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 March 31,
		2008										2007
		Average Balance				Income/ Expense			Yield/ Rate			Average Balance				Income/ Expense			Yield/ Rate
		(Dollars in thousands)
Assets:
Loans, net of unearned income		$	306,723			$	5,480		7.19	%		$	205,039			$	3,964		7.84	%
Investment securities:
U.S. Agencies			17,897				244		5.47	%			25,010				307		4.97	%
Mortgage backed securities			8,176				89		4.36	%			10,972				116		4.31	%
Municipal securities			1,411				13		3.84	%			1,012				10		4.12	%
Corporate bonds			2,638				37		5.71	%			—				—		—
Other investments			3,446				48		5.54	%			2,097				31		5.92	%
Total investment securities			33,568				431		5.16	%			39,091				464		4.81	%
Federal funds sold			16,541				113		2.75	%			5,829				75		5.21	%
Total earning assets		$	356,832			$	6,024		6.79	%		$	249,959			$	4,503		7.31	%
Cash and cash equivalents			10,276										5,226
Allowance for loan losses			(2,640	)									(1,912	)
Other assets			6,211										4,007
Total assets		$	370,679									$	257,280
Liabilities and Stockholders’ Equity:
Interest bearing liabilities:
Interest checking		$	9,513			$	19		0.81	%		$	8,037			$	13		0.63	%
Money market deposit accounts			44,067				272		2.48	%			36,136				358		4.02	%
Statement savings			681				2		1.03	%			1,125				4		1.52	%
Certificates of deposit			188,603				2,323		4.95	%			131,630				1,659		5.11	%
Total interest-bearing deposits			242,864				2,616		4.33	%			176,928				2,034		4.66	%
Fed funds purchased			2,290				26		4.55	%			538				7		5.30	%
Repurchase agreements			2,130				11		2.02	%			1,658				19		4.65	%
Subordinated debt			7,155				113		6.36	%			7,155				123		6.95	%
FHLB advances			47,527				457		3.87	%			24,967				256		4.16	%
Total interest-bearing liabilities			301,966				3,223		4.29	%			211,246				2,439		4.68	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits			31,433										27,606
Other liabilities			2,189										2,582
Total liabilities			33,622										30,188
Shareholders’ equity			35,091										15,846
Total liabilities and shareholders’ equity		$	370,679									$	257,280
Net interest income						$	2,801									$	2,064
Interest rate spread									2.50	%									2.63	%
Net interest margin									3.16	%									3.35	%
Ratio of average interest earning assets to average interest-bearing liabilities									118.17	%									118.33	%

 

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FINANCIAL CONDITION

Loan Portfolio

The following table presents the composition of the loan portfolio at the dates indicated:

 

		March 31, 2008						December 31, 2007						March 31, 2007
		Amount			Percentages			Amount			Percentages			Amount			Percentage
Commercial		$	43,613,469		13.74	%		$	44,366,926		14.94	%		$	28,069,881		13.16	%
Real estate - residential			85,694,299		27.00	%			83,035,119		27.97	%			67,947,082		31.86	%
Real estate - commercial			96,477,757		30.40	%			86,301,455		29.07	%			66,198,956		31.04	%
Real estate - construction			87,208,198		27.47	%			79,095,777		26.64	%			48,523,635		22.76	%
Consumer			4,420,132		1.39	%			4,105,713		1.38	%			2,509,074		1.18	%
Total loans			317,413,855		100.00	%			296,904,990		100.00	%			213,248,628		100.00	%
Less:
Allowance for loan losses			2,819,166						2,489,066						1,955,874
Net deferred fees			203,905						181,640						84,378
Loans, net		$	314,390,784					$	294,234,284					$	211,208,376

Allowance for loan losses

The allowance for loan losses at March 31, 2008 was $2.8 million, compared to $2.0 million at March 31, 2007. The ratio of the allowance for loan losses to gross portfolio loans was 0.89% at March 31, 2008 as compared to 0.92% at March 31, 2007. At March 31, 2008, the Company had four non-performing loans which totaled $116 thousand. At March 31, 2007, the Company had one non-performing loan which totaled $120 thousand. The amount of the allowance for loans losses is determined by an evaluation of the level of loans outstanding, the level of non-performing loans, loan concentrations, historical loan loss experience, delinquency trends and assessment of present and anticipated economic conditions.

The following table presents activity in the allowance for loan losses for the periods indicated:

Analysis of Allowance for Loan Losses

 

		Three Months Ended March 31,
		2008				2007
Beginning balance		$	2,489,066			$	1,833,874
Provision for loan losses			325,000				122,000
Charge-offs			—				—
Recoveries			5,100				—
Ending balance		$	2,819,166			$	1,955,874
Ratio of allowance for loan losses as a percent of loans outstanding at the end of the period.			0.89	%			0.92	%

 

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Bank Premises and Equipment

All of the Bank’s properties are in good operating condition and are adequate for the Bank’s present needs. There are plans to relocate the main office from 4101 Dominion Boulevard, Glen Allen, Virginia to 11001 West Broad Street, Glen Allen, Virginia an independent free standing facility. The land was purchased and construction began in the first quarter of 2008. Relocation is anticipated in the third quarter of 2008.

Deposits

Total deposits increased by $39.8 million, or 15.6% for the first three months of 2008. During the first three months of 2007, the increase in deposits occurred in interest-bearing accounts. Certificates of deposit increased by $43.4 million, money market and NOW accounts decreased by $3.2 million and interest-bearing demand deposits decreased by $456 thousand.

The mix of our deposits continues to be weighted toward certificates of deposit which represent 68.6% of our total deposits as of March 31, 2008. Certificates of deposit as a percentage of total deposits were 62.3% at December 31, 2007.

The average cost of interest-bearing deposits for the three months ended March 31, 2008 and 2007 was 4.33% and 4.66%, respectively. This decrease in our average cost of interest-bearing deposits is attributable to the overall decrease in interest rates resulting from the actions by the Federal Reserve to decrease short-term rates. Existing certificates of deposit during the first quarter of 2008 continued to roll down to current market rates.

Borrowings

We use borrowings to supplement deposits when they are available at a lower overall cost than is available from retail deposits and to assist in asset liability management.

Subordinated debt totaled $7.2 million as of March 31, 2007 and 2006. $5.2 million in subordinated debt was issued in September 2006. The subordinated debt issued in September 2006 may be included in Tier 1 capital for regulatory adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. The securities have a LIBOR-indexed rate of interest (three-month LIBOR plus 1.70%) which adjust, and is payable quarterly. The interest rate at March 31, 2008 and 2007 was 4.50% and 7.05%, respectively. The portion of subordinated debt not considered as Tier 1 capital may be included in Tier 2 capital. The $2.0 million in subordinated debt issued in December 2005, qualifies as Tier 2 capital only and carries a fixed rate of 6.33%.

As of March 31, 2008, the Company had borrowed $50.0 million from the FHLB, an increase of $10.0 million from December 31, 2007. The advances have an average interest rate of 3.76% and are callable in one to five years with a final maturity of ten years. The proceeds were used to fund loan growth. The FHLB advances are secured by our residential and commercial mortgage loans and the pledge of our FHLB stock.

We have $2.6 million outstanding under securities sold under repurchase agreements as of March 31, 2008 and $2.1 million at December 31, 2007. These agreements are generally corporate cash management accounts for our larger corporate depositors. These agreements are settled on a daily basis and the securities underlying the agreements remain under the bank’s control.

Capital Resources

Stockholders’ equity at March 31, 2008 was $35.4 million or 9.01% of assets, compared to $34.9 million at December 31, 2007. The $516 thousand increase in equity during the first three months of 2008 was due to net income of $415 thousand, the impact of the change in valuation of other comprehensive income of $61 thousand and equity addition resulting from stock-based compensation of $40 thousand.

The Bank’s current capital position meets the definition of a well-capitalized institution. The following table presents the capital ratios at the dates indicated:

 

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Capital Ratios

 

		March 31, 2008			December 31, 2007			Well Capitalized Requirement
Capital ratios
Tier 1 risk-based capital ratio		11.91	%		12.98	%		6.00	%
Total risk-based capital ratio		13.32	%		14.44	%		10.00	%
Leverage ratio		10.93	%		12.50	%		5.00	%

Off Balance Sheet Arrangements and Commitments

In the normal course of business there are outstanding commitments for the extension of credit which are not reflected in the financial statements. At March 31, 2008 and December 31, 2007, pre-approved but unused lines of credit for loans totaled approximately $140.2 million and $138.6 million, respectively. In addition, we had $8.8 million in financial and performance standby letters of credit at March 31, 2008 and December 31, 2007, respectively. 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.

Liquidity

Liquidity provides the Company with the ability to meet normal deposit withdrawals, while also providing for the credit needs of our customers. We are committed to maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements.

At March 31, 2008, cash and cash equivalents totaled $21.5 million. Investment securities available for sale and not pledged totaled $16.1 million, for a total of 13.0% of total assets, which we believe is adequate to meet short-term liquidity needs. Management also has alternative sources of funding available, including lines of credit, purchase of federal funds, term loans through the Federal Home Loan Bank and correspondent banks.

Interest Rate Sensitivity

The most important element of asset/liability management is the monitoring of our sensitivity to interest rate movements. Our income stream is subject to risk resulting from interest rate fluctuations to the extent there is a difference between the amount of our interest earning assets and the amount of interest bearing liabilities that are prepaid, mature or reprice 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.

The data in the following table reflects repricing or expected maturities of various assets and liabilities at March 31, 2008. 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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		March 31, 2008
		1 to 90 Days				90 Days to 1 Year				1 to 3 Years				3 to 5 Years				Over 5 Years				Total
		(Dollars in thousands)
Earning Assets:
Gross loans		$	129,409			$	18,050			$	59,875			$	79,301			$	30,778			$	317,413
Investment securities			3,579				1,650				2,735				386				24,658				33,008
Federal funds sold			13,277				—				—				—				—				13,277
Total rate sensitive assets		$	146,265			$	19,700			$	62,610			$	79,687			$	55,436			$	363,698
Cumulative totals			146,265				165,965				228,575				308,262				363,698
Interest-Bearing Liabilities:
Interest checking		$	—			$	4,710			$	4,517			$	—			$	—			$	9,227
Money market accounts			31,235				8,500				6,891				—				—				46,626
Savings deposits			—				—				596				—				—				596
Certificates of deposit			32,143				119,664				30,817				19,726				—				202,350
FHLB borrowing and subordinated debt			10,155				35,000				12,000				—				—				57,155
Other liabilities			2,584				—				—				—				—				2,584
Total rate sensitive liabilities		$	76,117			$	167,874			$	54,821			$	19,726			$	—			$	318,538
Cumulative totals			76,117				243,991				298,812				318,538				318,538
Interest sensitivity gap		$	70,148			$	(148,174	)		$	7,789			$	59,961			$	55,436
Cumulative interest sensitivity gap			70,148				(78,026	)			(70,237	)			(10,276	)			45,160
Cumulative interest sensitive gap as a percentage of earning assets			19.3	%			-21.5	%			-19.3	%			-2.8	%			12.4	%

Impact of inflation and changing prices and seasonality

The financial statements in this document have been prepared in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial position and operating results in terms of historical dollars, without consideration of changes in the relative purchasing power of money over time due to inflation.

Unlike industrial companies, most of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such prices are affected by inflation.

 

Item 3.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-QSB, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

 

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Changes in Internal Controls

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings – None to report

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds – Not Applicable

 

Item 3.

Defaults Upon Senior Securities – Not Applicable

 

Item 4.

Submission of Matters to a Vote of Security Holders – None to report

 

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. (1)
3.2		Bylaws of First Capital Bancorp, Inc. (1)
31.1		Certification of Robert G. Watts, Jr. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 9, 2008.
31.2		Certification of William W. Ranson Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 9, 2008.
32		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 9, 2008.

 

(1)	Expressly incorporated by reference from the Company’s Report on Form 10-QSB filed with the Securities and Exchange Commission on November 13, 2006. The Exhibit number set forth above corresponds to the exhibit number in such Form 10-QSB.

 

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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: May 14, 2008		By:		/s/ Robert G. Watts, Jr.
				Robert G. Watts, Jr.
				President and Chief Executive Officer
		By:		/s/ William W. Ranson
				William W. Ranson
				Chief Financial Officer, Treasurer and Secretary

 

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Index of Exhibits

 

Exhibit No.		Description of Exhibit
3.1		Articles of Incorporation of First Capital Bancorp, Inc. (1)
3.2		Bylaws of First Capital Bancorp, Inc. (1)
31.1		Certification of Robert G. Watts, Jr. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 14, 2007.
31.2		Certification of William W. Ranson Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 14, 2007.
32		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 14, 2007.

 

(1)	Expressly incorporated by reference from the Company’s Report on Form 10-QSB filed with the Securities and Exchange Commission on November 13, 2006. The Exhibit number set forth above corresponds to the exhibit number in such Form 10-QSB.

 

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