XNAS:FCVA First Capital Bancorp Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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, 2012

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

 

 

FIRST CAPITAL BANCORP, INC.

(Exact name of registrant as specified 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

(Registrant’s telephone number, including area code)

 

 

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ¨    No  ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

11,884,682 shares of Common Stock, par value $4.00 per share, were outstanding at August 13, 2012.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

PART I – FINANCIAL INFORMATION

  
 

Item 1 – Financial Statements

  
   

Consolidated Statements of Financial Condition
June 30, 2012 (unaudited) and December 31, 2011

     1   
   

Consolidated Statements of Operations
For the Three Months and Six Months Ended June 30, 2012 and 2011 (unaudited)

     2   
   

Consolidated Statements of Comprehensive Income/(Loss)
For the Three Months and Six Months Ended June 30, 2012 and 2011 (unaudited)

     3   
   

Consolidated Statements of Stockholders’ Equity
For the Six Months Ended June 30, 2012 and 2011 (unaudited)

     4   
   

Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2012 and 2011 (unaudited)

     5   
   

Notes to the Consolidated Financial Statements (unaudited)

     6   
 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   
 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk – Not Applicable

     41   
 

Item 4 – Controls and Procedures

     41   

PART II – OTHER INFORMATION

  
 

Item 1 – Legal Proceedings – None to Report

     42   
 

Item 1A – Risk Factors – Not Applicable

     42   
 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

     42   
 

Item 3 – Defaults Upon Senior Securities – None

     42   
 

Item 4 – Mine Safety Disclosures – None

     42   
 

Item 5 – Other Information – None to Report

     42   
 

Item 6 – Exhibits

     42   

SIGNATURES

     44   

 

iii


Table of Contents

PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

 

     June 30,     December 31,  
     2012     2011  
     (Unaudited)     (*)  
     (Dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 10,799      $ 9,187   

Interest-bearing deposits in other banks

     7,976        41,172   

Investment securities:

    

Available for sale, at fair value

     93,114        84,035   

Held to maturity, at cost

     2,882        2,884   

Restricted, at cost

     4,500        4,597   

Loans held for sale

     1,826        1,366   

Loans, net of allowance for losses of $7,253 in 2012 and $9,271 in 2011

     361,712        360,969   

Other real estate owned

     4,787        7,646   

Premises and equipment, net

     11,163        11,273   

Accrued interest receivable

     1,749        1,689   

Bank owned life insurance

     9,084        8,917   

Deferred tax asset

     7,439        3,822   

Prepaid FDIC premiums

     1,132        1,482   

Other assets

     2,369        2,651   
  

 

 

   

 

 

 

Total assets

   $ 520,532      $ 541,690   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

    

Noninterest-bearing

   $ 53,468      $ 46,426   

Interest-bearing

     384,949        393,773   
  

 

 

   

 

 

 

Total deposits

     438,417        440,199   
  

 

 

   

 

 

 

Securities sold under repurchase agreements

     926        1,608   

Subordinated debt

     7,155        7,155   

Federal Home Loan Bank advances

     25,000        50,000   

Accrued expenses and other liabilities

     3,424        2,045   
  

 

 

   

 

 

 

Total liabilities

     474,922        501,007   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Preferred stock, See Note 10

     22        44   

Common stock, See Note 11

     47,539        11,885   

Additional paid-in capital

     5,521        29,695   

Retained deficit

     (9,417     (1,942

Warrants

     661        661   

Discount on preferred stock

     (118     (303

Accumulated other comprehensive income, net of tax

     1,402        643   
  

 

 

   

 

 

 

Total stockholders’ equity

     45,610        40,683   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 520,532      $ 541,690   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

* Derived from audited, consolidated financial statements

 

1


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
    

(Dollars in thousands,

except per share data)

   

(Dollars in thousands,

except per share data)

 

Interest and dividend income

        

Loans

   $ 5,122      $ 5,368      $ 10,268      $ 10,893   

Investments:

        

Taxable interest income

     551        496        1,104        1,069   

Tax exempt interest income

     66        145        140        301   

Dividends

     35        32        69        58   

Interest bearing deposits

     11        15        23        30   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     5,785        6,056        11,604        12,351   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Deposits

     1,378        1,672        2,822        3,411   

FHLB advances

     388        412        791        820   

Subordinated debt and other borrowings

     38        34        80        70   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,804        2,118        3,693        4,301   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     3,981        3,938        7,911        8,050   

Provision for loan losses

     8,310        3,147        8,875        3,847   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest (expense)/income after provision for loan losses

     (4,329     791        (964     4,203   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income

        

Fees on deposits

     99        82        186        157   

Gain on sale of securities

     —          623        27        644   

Other

     289        135        514        259   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     388        840        727        1,060   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expenses

        

Salaries and employee benefits

     2,101        1,583        3,830        3,002   

Occupancy expense

     192        208        391        413   

Data processing

     214        196        419        383   

Professional services

     165        224        318        361   

Advertising and marketing

     68        64        107        109   

FDIC assessment

     184        278        366        552   

Virginia franchise tax

     (43     135        2        270   

Loss on sale and write down of other real estate owned

     1,519        293        1,643        320   

Depreciation

     157        152        316        302   

FHLB prepayment penalty

     2,755        —          2,755        —     

Other

     582        594        1,139        1,017   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     7,894        3,727        11,286        6,729   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (11,835     (2,096     (11,523     (1,466

Income tax benefit

     (4,056     (755     (4,048     (577
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (7,779     (1,341     (7,475     (889
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective dividend on preferred stock

     156        170        327        340   

Net loss allocable to common stockholders

     (7,935     (1,511     (7,802     (1,229
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share

   $ (0.99   $ (0.51   $ (1.42   $ (0.41
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

2


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income/(Loss)

Three Months and Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  
     (Dollars in thousands)     (Dollars in thousands)  

Net loss

   $ (7,779   $ (1,341   $ (7,475   $ (889

Other comprehensive income:

        

Investment securities:

        

Unrealized holding gains on investment securities available for sale

     395        1,462        1,177        1,918   

Tax effect

     (134     (497     (400     (652

Reclassification of gains recognized in net income

     —          (623     (27     (644

Tax effect

     —          212        9        219   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     261        554        759        841   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (7,518   $ (787   $ (6,716   $ (48
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

3


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2012 and 2011

(Unaudited)

(Dollars in thousands)

 

    Preferred
Stock
    Common
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
(Deficit)
    Warrants     Discount
on
Preferred
Stock
    Accumulated
Other
Comprehensive
Income
    Total  

Balances December 31, 2010

  $ 44     $ 11,885     $ 29,739     $ 1,644     $ 661     $ (435   $ 137     $ 43,675  

Net loss

    —          —          —          (889     —          —          —          (889

Other comprehensive income

    —          —          —          —          —          —          841       841  

Preferred stock dividend

    —          —          —          (274     —          —          —          (274

Accretion of discount on preferred stock

    —          —          —          (66     —          66       —          —     

Stock based compensation

    —          —          60       —          —          —          —          60  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances June 30, 2011

  $ 44     $ 11,885     $ 29,799     $ 415     $ 661     $ (369   $ 978     $ 43,413  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances December 31, 2011

  $ 44     $ 11,885     $ 29,695     $ (1,942   $ 661     $ (303   $ 643     $ 40,683  

Net loss

    —          —          —          (7,475     —          —          —          (7,475

Other comprehensive income

    —          —          —          —          —          —          759       759  

Preferred stock dividend

    —          —          (266     —          —          —          —          (266

Accretion of discount on preferred stock

    —          —          (61     —          —          61       —          —     

Stock based compensation

    —          —          56       —          —          —          —          56  

Redemption of preferred stock

    (22     —          (5,627     —          —          124       —          (5,525

Proceeds from issuance of 8.9 million shares of common stock, net of costs

    —          35,654       (18,276     —          —          —          —          17,378  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances June 30, 2012

  $ 22     $ 47,539     $ 5,521     $ (9,417   $ 661     $ (118   $ 1,402     $ 45,610  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

4


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2012 and 2011

(Unaudited)

 

     2012     2011  
     (Dollars in thousands)  

Cash flows from operating activities

    

Net loss

   $ (7,475   $ (889

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Provision for loan losses

     8,875        3,847   

Depreciation of premises and equipment

     316        302   

Net amortization of bond premiums/discounts

     517        360   

Stock based compensation expense

     56        60   

Deferred income taxes

     (4,008     (166

Gain on sale of securities

     (27     (644

Gain on loans sold

     (93     —     

Loss on sale and write-down of other real estate owned

     1,643        320   

Increase in cash surrender value of bank owned life insurance

     (167     (46

Proceeds from sale of loans held for sale

     13,742        —     

Origination of loans held for sale

     (14,109     —     

(Increase) decrease in other assets

     632        (433

Decrease (increase) in accrued interest receivable

     (60     333   

Increase in accrued expenses and other liabilities

     1,379        925   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,221        3,969   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Proceeds from maturities and calls of securities

     2,050        5,000   

Proceeds from paydowns of securities available-for-sale

     5,858        6,064   

Purchase of securities available-for-sale

     (17,338     (25,560

Proceeds from sale of securities available-for-sale

     1,013        25,509   

Proceeds from sale of other real estate owned

     1,327        880   

Purchase bank owned life insurance

     —          (8,249

Purchase of FHLB Stock

     (9     (9

Purchase of Federal Reserve Stock

     (3     (2

Redemption of FHLB Stock

     109        —     

Purchases of premises and equipment

     (206     (200

Net (increase) decrease in loans

     (9,729     3,684   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (16,928     7,117   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net decrease in deposits

     (1,782     (10,988

Repayments to FHLB, net of borrowings

     (25,000     —     

Dividends on preferred stock

     (266     (274

Cash paid for TARP preferred stock redemption

     (5,525     —     

Proceeds from issuance of additional stock under rights offering, net of associated offering costs

     17,378        —     

Net (decrease) increase in repurchase agreements

     (682     66   
  

 

 

   

 

 

 

Net cash used in financing activities

     (15,877     (11,196
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (31,584     (110

Cash and cash equivalents, beginning of period

     50,359        32,367   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 18,775      $ 32,257   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Interest paid during the period

   $ 3,779      $ 4,302   
  

 

 

   

 

 

 

Taxes paid during the period

   $ —        $ 575   
  

 

 

   

 

 

 

Supplemental schedule of noncash investing and financing activities

    

Transfer of loans to other real estate owned

   $ 111      $ 6,120   
  

 

 

   

 

 

 

Unrealized gain on securities available for sale, net of tax

   $ 759      $ 841   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

5


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

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.

The Company conducts all of its business activities through the branch offices of its wholly owned subsidiary bank, First Capital Bank. First Capital Bank created RE1, LLC, and RE2, LLC, wholly owned Virginia limited liability companies in 2008 and 2011 respectively, for the sole purpose of taking title to property acquired in lieu of foreclosure. RE1, LLC and RE2, LLC have been consolidated with First Capital Bank. The Company exists primarily for the purpose of holding the stock of the Bank, and such other subsidiaries as it may acquire or establish.

The Company has one other wholly owned subsidiary, FCRV Statutory Trust 1 (the “Trust”), a Delaware Business Trust that was formed in connection with the issuance of trust preferred debt in September, 2006. Pursuant to current accounting standards, the Company does not consolidate the Trust.

In management’s opinion the accompanying unaudited 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, 2012 and December 31, 2011 and for the three and six month periods ended June 30, 2012 and 2011, in conformity with accounting principles generally accepted in the United States of America. Results for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012.

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, 2011 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.

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

 

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Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

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.

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

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

Note 3 – Loss 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.

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

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     (dollars shown in thousands,     (dollars shown in thousands,  
     except per share amounts)     except per share amounts)  
     2012     2011     2012     2011  

Net loss allocable to common stockholders

   $ (7,935   $ (1,511   $ (7,802   $ (1,229

Weighted average number of shares outstanding

     7,967        2,971        5,469        2,971   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per common share – basic

   $ (0.99   $ (0.51   $ (1.42   $ (0.41
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of dilutive securities:

        

Weighted average number of shares outstanding

     7,967        2,971        5,469        2,971   

Effect of stock options and warrants

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted average shares outstanding

     7,967        2,971        5,469        2,971   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per common share – assuming dilution

   $ (0.99   $ (0.51   $ (1.42   $ (0.41
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company has excluded 1.1 million options and warrants and 1.2 million options and warrants for the three and six months ended June 30, 2012 and 349 thousand options and 393 thousand options for the three and six months ended June 30, 2011 from the calculation of diluted earnings per share as they were anti-dilutive due to the Company’s net loss in all periods.

 

7


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

During the second quarter of 2012, the Company raised approximately $17.8 million, net of fees and costs, through a rights offering. As a result of the rights offering, approximately 8.9 million shares of common stock were issued. Consequently, the average weighted shares of common stock increased from 3.0 million shares for the quarter ended June 30, 2011 to 8.0 million shares for the quarter ended June 30, 2012. In connection with the rights offering, the Company distributed 8.9 million warrants to purchase one-half of a share of common stock for $2.00 per whole share.

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.

There were no stock options granted during the three and six month periods ended June 30, 2012.

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, in thousands, expensed during the three and six months ended June 30, 2012 was $28 and $56 and expensed during the three and six months ended June 30, 2011 was $42 thousand and $60 thousand, respectively. Expensed amounts are included in salaries and employee benefits.

 

8


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

Note 5 – Investment Securities

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

 

     June 30, 2012  
     Amortized      Gross Unrealized      Fair  
     Costs      Gains      Losses      Values  
     (Dollars in thousands)  

Available-for-sale

           

U.S. Government agencies

   $ 999       $ 7       $ —         $ 1,006   

Mortgage-backed securities

     13,634         494         3         14,125   

Corporate bonds

     16,839         7         333         16,513   

CMO securities

     42,629         1,026         4         43,651   

State and political subdivisions – taxable

     12,351         752         17         13,086   

State and political subdivisions – tax exempt

     3,145         153         —           3,298   

SBA – Guarantee portion

     1,394         41         —           1,435   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 90,991       $ 2,480       $ 357       $ 93,114   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

     December 31, 2011  
     Amortized      Gross Unrealized      Fair  
     Costs      Gains      Losses      Values  
     (Dollars in thousands)  

Available-for-sale

           

U.S. Government agencies

   $ 1,998       $ 7       $ 4       $ 2,001   

Mortgage-backed securities

     15,484         424         —           15,908   

Corporate bonds

     15,472         3         781         14,694   

CMO securities

     37,803         919         —           38,722   

State and political subdivisions – taxable

     6,490         256         23         6,723   

State and political subdivisions – tax exempt

     4,203         131         —           4,334   

SBA – Guarantee portion

     1,610         43         —           1,653   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 83,060       $ 1,783       $ 808       $ 84,035   
  

 

 

    

 

 

    

 

 

    

 

 

 
     June 30, 2012  
     Amortized      Gross Unrealized      Fair  
     Costs      Gains      Losses      Values  
     (Dollars in thousands)  

Held-to-maturity

           

Tax-exempt municipal bonds

   $ 2,882       $ 282       $ —         $ 3,164   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,882       $ 282       $ —         $ 3,164   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     Amortized      Gross Unrealized      Fair  
     Costs      Gains      Losses      Values  
     (Dollars in thousands)  

Held-to-maturity

           

Tax-exempt municipal bonds

   $ 2,884       $ 237       $ 5       $ 3,116   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,884       $ 237       $ 5       $ 3,116   
  

 

 

    

 

 

    

 

 

    

 

 

 

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,

 

10


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

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, 2012 resulted in no recognition of OTTI.

The following table details unrealized losses and related fair values in the Company’s available-for-sale investment securities portfolios. All unrealized losses on investment securities are a result of volatility in the market during 2012 and 2011. At June 30, 2012, 17 out of 137 securities we held had fair values less than amortized cost primarily in municipal securities and corporate bonds. At June 30, 2011, 16 out of 125 securities we held had fair values less than amortized cost primarily in municipal securities and corporate bonds. 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. This information is aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2012 and December 31, 2011:

 

     June 30, 2012  
     Less than 12 Months      12 Months or More      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  
     Value      Losses      Value      Losses      Value      Losses  
     (Dollars in thousands)  

Assets:

                 

U.S. Government agencies

   $ —         $ —         $ —         $ —         $ —         $ —     

Mortgage-backed securities

     1,004         3         —           —           1,004         3   

Corporate bonds

     5,762         233         9,245         100         15,007         333   

CMO securities

     940         4         —           —           940         4   

State & political subdivisions-taxable

     1,281         17         —           —           1,281         17   

State & political subdivisions-tax exempt

     —           —           —           —           —           —     

SBA

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All securities

   $ 8,987       $ 257       $ 9,245       $ 100       $ 18,232       $ 357   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     Less than 12 Months      12 Months or More      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  
     Value      Losses      Value      Losses      Value      Losses  
     (Dollars in thousands)  

Assets:

                 

U.S. Government agencies

   $ 996       $ 4       $ —         $ —         $ 996       $ 4   

Mortgage-backed securities

     —           —           —           —           —           —     

Corporate bonds

     13,220         755         473         26         13,693         781   

CMO securities

     916         —           —           —           916         —     

State & political subdivisions-taxable

     1,070         23         —           —           1,070         23   

State & political subdivisions-tax exempt

     —           —           —           —           —           —     

SBA

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All securities

   $ 16,202       $ 782       $ 473       $ 26       $ 16,675       $ 808   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

Restricted equity securities consist primarily of Federal Home Loan Bank of Atlanta stock in the amount of $3.5 million and $3.3 million as of June 30, 2012 and December 31, 2011, respectively, and Federal Reserve Bank stock in the amount of $1.3 million at both June 30, 2012 and December 31, 2011. Restricted equity securities are carried at cost. The Federal Home Loan Bank requires the Bank to maintain stock in an amount equal to 4.5% of outstanding borrowings and a specific percentage of the member’s total assets. The Federal Reserve Bank of Richmond requires the Company to maintain stock with a par value equal to 3% of its outstanding capital.

Securities with a market value of approximately $3.5 million and $14.5 million were pledged as collateral at June 30, 2012 and December 31, 2011, respectively, to secure purchases of federal funds, repurchase agreements, and collateral for customer’s deposits.

Note 6 – Loans

Major classifications of loans are as follows:

 

     June 30,      December 31,  
     2012      2011  
     (Dollars in thousands)  

Real estate

     

Residential

   $ 130,093       $ 127,541   

Commercial

     144,359         142,989   

Residential Construction

     8,946         9,712   

Other Construction, Land

     

Development & Other Land

     40,412         48,637   

Commercial

     42,252         37,922   

Consumer

     2,788         3,250   
  

 

 

    

 

 

 

Total loans

     368,850         370,051   

Less:

     

Allowance for loan losses

     7,253         9,271   

Net deferred costs

     115         189   
  

 

 

    

 

 

 

Loans, net

   $ 361,712       $ 360,969   
  

 

 

    

 

 

 

A summary of risk characteristics by loan portfolio classification follows:

Real Estate – Residential – This portfolio primarily consists of investor loans secured by properties in the Bank’s normal lending area. Those investor loans are typically five year rate adjustment loans. These loans generally have an original loan-to-value (“LTV”) of 80% or less. This category also includes home equity lines of credit (“HELOC”). The HELOCs generally have an adjustable rate tied to prime rate and a term of 10 years. Given the declining value of residential properties over the past several years, these loans possess a higher than average level of risk of loss to the bank. Multifamily residential real estate is moderately seasoned and is generally secured by properties in the Bank’s normal lending area.

Real Estate – Commercial – This portfolio consists of nonresidential improved real estate which includes shopping centers, office buildings, etc. These properties are generally located in the Bank’s normal lending area. Decreased rental income due to the economic slowdown has caused some deterioration in values. As a result, this category of loans has a higher than average level of risk.

 

12


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

Real Estate – Residential Construction – This portfolio has decreased significantly over the past several years as fewer construction loans have been made during the economic downtown. These loans are located in the Bank’s normal lending area.

Real Estate – Other Construction, Land Development and Other Land Loans – This portfolio includes raw undeveloped land and developed residential and commercial lots held by developers. Given the significant decline in value for both developed and undeveloped land due to reduced demand, this portfolio possesses an increased level of risk compared to other loan portfolios. Continuing deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for customers.

Commercial – These loans include loans to businesses that are not secured by real estate. These loans are typically secured by accounts receivable, inventory, equipment, etc. Commercial loans are typically granted to local businesses that have a strong track record of profitability and performance.

Consumer – Loans in this portfolio are either unsecured or secured by automobiles, marketable securities, etc. They are generally granted to local customers that have a banking relationship with our Bank.

Activity in the allowance for loan losses for the six months ended is as follows:

 

     June 30,  
     2012     2011  
     (Dollars in thousands)  

Balance, beginning of period

   $ 9,271      $ 11,036   

Provision for loan losses

     8,875        3,847   

Recoveries

     99        818   

Charge-offs

     (10,992     (5,548
  

 

 

   

 

 

 

Balance, end of period

   $ 7,253      $ 10,153   
  

 

 

   

 

 

 

Ratio of allowance for loan losses as a percent of loans outstanding at the end of the period

     1.97     2.65
  

 

 

   

 

 

 

 

13


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

The following table presents activity in the allowance for loan losses by portfolio segment:

 

     Three Months Ended  
     Real Estate                     
     Residential     Commercial     Residential
Construction
    Other
Construction
Land Devel.
& Other
Land
    Commercial     Consumer      Total  
     (Dollars in thousands)  

Balance, April 1, 2012

   $ 3,308      $ 1,453      $ 650      $ 1,317      $ 1,253      $ 21       $ 8,002   

Provision for loan losses

     674        4,283        971        1,854        528        —           8,310   

Recoveries

     1        —          —          8        —          —           9   

Charge-offs

     (1,403     (2,580     (1,418     (2,702     (965     —           (9,068
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2012

   $ 2,580      $ 3,156      $ 203      $ 477      $ 816      $ 21       $ 7,253   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, April 1, 2011

   $ 3,236      $ 760      $ 477      $ 4,244      $ 1,831      $ 21       $ 10,569   

Provision for loan losses

     862        400        400        863        622        —           3,147   

Recoveries

     6        —          —          800        5        —           811   

Charge-offs

     (549     (63     (222     (2,950     (590     —           (4,374
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2011

   $ 3,555      $ 1,097      $ 655      $ 2,957      $ 1,868      $ 21       $ 10,153   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     Six Months Ended  
     Real Estate                     
     Residential     Commercial     Residential
Construction
    Other
Construction
Land Devel.
& Other
Land
    Commercial     Consumer      Total  
     (Dollars in thousands)  

Balance, January 1, 2012

   $ 3,680      $ 1,375      $ 650      $ 2,175      $ 1,370      $ 21       $ 9,271   

Provision for loan losses

     1,239        4,283        971        1,854        528        —           8,875   

Recoveries

     4        78        —          17        —          —           99   

Charge-offs

     (2,343     (2,580     (1,418     (3,569     (1,082     —           (10,992
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2012

   $ 2,580      $ 3,156      $ 203      $ 477      $ 816      $ 21       $ 7,253   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, January 1, 2011

   $ 3,431      $ 760      $ 494      $ 4,299      $ 2,031      $ 21       $ 11,036   

Provision for loan losses

     1,162        400        400        863        1,022        —           3,847   

Recoveries

     13        —          —          800        5        —           818   

Charge-offs

     (1,051     (63     (239     (3,005     (1,190     —           (5,548
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2011

   $ 3,555      $ 1,097      $ 655      $ 2,957      $ 1,868      $ 21       $ 10,153   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The charging off of uncollectible loans is determined on a case-by-case basis. Determination of a collateral shortfall, prospects for recovery, delinquency and the financial resources of the borrower and any guarantor are all considered in determining whether to charge-off a loan. Closed-end retail loans that become past due 120 cumulative days and open-end retail loans that become past due 180 cumulative days from the contractual due date will be charged off.

 

14


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

The following table presents the aging of unpaid principal in loans as of June 30, 2012 and December 31, 2011:

 

     June 30, 2012  
     30-89 Day
Past Due
     90+ Days
Past Due
and Accruing
     Nonaccrual      Current      Total  
     (Dollars in thousands)  

Real estate

              

Residential

   $ 790       $ —         $ 2,420       $ 126,883       $ 130,093   

Commercial

     148         —           911         143,300         144,359   

Residential Construction

     250         —           1,395         7,301         8,946   

Other Construction, Land

              

Development & Other Land

     —           —           4,380         36,032         40,412   

Commercial

     —           —           672         41,580         42,252   

Consumer

     —           —           —           2,788         2,788   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,188       $ —         $ 9,778       $ 357,884       $ 368,850   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     30-89 Day
Past Due
     90+ Days
Past Due and
Accruing
     Nonaccrual      Current      Total  
     (Dollars in thousands)  

Real estate

              

Residential

   $ 1,334       $ —         $ 6,410       $ 119,797       $ 127,541   

Commercial

     132         —           2,909         139,948         142,989   

Residential Construction

     250         —           748         8,714         9,712   

Other Construction, Land

              

Development & Other Land

     —           —           5,803         42,834         48,637   

Commercial

     470         —           1,114         36,338         37,922   

Consumer

     90         —           707         2,453         3,250   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,276       $ —         $ 17,691       $ 350,084       $ 370,051   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans are determined past due or delinquent based on the contractual terms of the loan. Payments past due 30 days or more are considered delinquent. The accrual of interest is generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual at an earlier date if collection of principal or interest is considered doubtful or charged-off if a loss is considered imminent.

All interest accrued but not collected for loans that are placed on nonaccrual are reversed against interest income when the loan is placed on nonaccrual status. Because of the uncertainty of the expected cash flows, the Company is accounting for nonaccrual loans under the cost recovery method, in which all cash payments are applied to principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future collection of principal and interest are reasonably assured. The number of payments needed to meet this criteria varies from loan to loan. However, as a general rule, this criteria will be considered to have been met with the timely payment of six consecutive regularly scheduled monthly payments.

 

15


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

The following table provides details of the Company’s loan portfolio internally assigned grade at June 30, 2012 and December 31, 2011:

 

     June 30, 2012  
     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  
     (Dollars in thousands)  

Real estate

                 

Residential

   $ 112,253       $ 13,590       $ 4,250       $ —         $ —         $ 130,093   

Commercial

     124,424         16,935         3,000         —           —           144,359   

Residential Construction

     2,466         4,002         2,478         —           —           8,946   

Other Construction, Land

                 

Development & Other Land

     20,018         12,636         7,758         —           —           40,412   

Commercial

     39,193         1,794         1,265         —           —           42,252   

Consumer

     2,580         128         80         —           —           2,788   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 300,934       $ 49,085       $ 18,831       $ —         $ —         $ 368,850   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  
     (Dollars in thousands)  

Real estate

                 

Residential

   $ 112,070       $ 5,549       $ 9,922       $ —         $ —         $ 127,541   

Commercial

     127,916         8,064         7,009         —           —           142,989   

Residential Construction

     1,954         3,582         4,176         —           —           9,712   

Other Construction, Land

                 

Development & Other Land

     19,460         14,551         14,626         —           —           48,637   

Commercial

     33,084         3,076         1,762         —           —           37,922   

Consumer

     2,316         137         797         —           —           3,250   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 296,800       $ 34,959       $ 38,292       $ —         $ —         $ 370,051   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

16


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

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.

The loan risk rankings were updated for the quarter ended June 30, 2012 on June 11 and 12. The loan risk rankings were updated for the year ended December 31, 2011 on December 13, 14, and 15.

 

17


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

The following table provides details regarding impaired loans by segment and class at June 30, 2012 and December 31, 2011:

 

     June 30, 2012      December 31, 2011  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 
     (Dollars in thousands)  

With no related allowance:

                 

Real estate

                 

Residential

   $ 2,601       $ 3,170       $ —         $ 4,013       $ 4,168       $ —     

Commercial

     911         3,738         —           291         303         —     

Residential Construction

     2,595         3,284         —           1,772         1,785         —     

Other Construction, Land Development & Other Land

     6,448         15,872         —           4,747         7,519         —     

Commercial

     672         1,500         —           294         300         —     

Consumer

     —           —           —           707         707         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,227       $ 27,564       $ —         $ 11,824       $ 14,782       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance:

                 

Real estate

                 

Residential

   $ —         $ —         $ —         $ 2,580       $ 3,619       $ 787   

Commercial

     —           —           —           2,618         3,336         818   

Residential Construction

     —           —           —           —           —           —     

Other Construction, Land Development & Other Land

     —           —           —           4,659         4,969         1,450   

Commercial

     —           —           —           821         848         250   

Consumer

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ —         $ 10,678       $ 12,772       $ 3,305   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

                 

Real estate

                 

Residential

   $ 2,601       $ 3,170       $ —         $ 6,593       $ 7,787       $ 787   

Commercial

     911         3,738         —           2,909         3,639         818   

Residential Construction

     2,595         3,284         —           1,772         1,785         —     

Other Construction, Land Development & Other Land

     6,448         15,872         —           9,406         12,488         1,450   

Commercial

     672         1,500         —           1,115         1,148         250   

Consumer

     —           —           —           707         707         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,227       $ 27,564       $ —         $ 22,502       $ 27,554       $ 3,305   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

The following table provides details of the balance of the allowance for loan losses and the recorded investment in financing receivables by impairment method for each loan portfolio segment:

 

     Real Estate                       
     Residential      Commercial      Residential
Construction
     Other
Construction,
Land Devel.
& Other
Land
     Commercial      Consumer      Total  
     (Dollars in thousands)  

June 30, 2012

                    

Allowance for loan losses, evaluated

                    

Individually

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Collectively

     2,580         3,156         203         477         816         21         7,253   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 2,580       $ 3,156       $ 203       $ 477       $ 816       $ 21       $ 7,253   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans, evaluated

                    

Individually

   $ 2,601       $ 911       $ 2,595       $ 6,448       $ 672       $ —         $ 13,227   

Collectively

     127,492         143,448         6,351         33,964         41,580         2,788         355,623   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans

   $ 130,093       $ 144,359       $ 8,946       $ 40,412       $ 42,252       $ 2,788       $ 368,850   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                    

Allowance for loan losses, evaluated

                    

Individually

   $ 787       $ 818       $ —         $ 1,450       $ 250       $ —         $ 3,305   

Collectively

     2,893         557         650         725         1,120         21         5,966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 3,680       $ 1,375       $ 650       $ 2,175       $ 1,370       $ 21       $ 9,271   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans, evaluated

                    

Individually

   $ 6,593       $ 2,909       $ 1,772       $ 9,406       $ 1,115       $ 707       $ 22,502   

Collectively

     120,948         140,080         7,940         39,231         36,807         2,543         347,549   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans

   $ 127,541       $ 142,989       $ 9,712       $ 48,637       $ 37,922       $ 3,250       $ 370,051   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments on principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining whether a loan is impaired include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Additionally, management’s policy is generally to evaluate only those loans greater than $250 thousand for impairment as these are considered to be individually significant in relation to the size of the loan portfolio. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The following table presents interest income recognized and the average recorded investment of impaired loans.

 

19


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

     Three Months Ended      Six Months Ended  
     June 30, 2012      June 30, 2012  
     Interest      Average      Interest     Average  
     Income      Recorded      Income     Recorded  
     Recognized      Investment      Recognized     Investment  
     (Dollars in thousands)      (Dollars in thousands)  

Real estate

          

Residential

   $ 35       $ 2,745       $ 20      $ 2,709   

Commercial

     20         1,023         20        1,030   

Residential Construction

     12         2,609         42        2,553   

Other Construction, Land Development & Other Land

     78         6,719         164        6,749   

Commercial

     —           702         (4     705   

Consumer

     —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 145       $ 13,798       $ 242      $ 13,746   
  

 

 

    

 

 

    

 

 

   

 

 

 
     Three Months Ended      Six Months Ended  
     June 30, 2011      June 30, 2011  

Real estate

          

Residential

   $ 103       $ 9,190       $ 155      $ 9,186   

Commercial

     —           303         20        303   

Residential Construction

     10         816         26        816   

Other Construction, Land Development & Other Land

     57         13,539         330        13,536   

Commercial

     41         4,711         37        4,746   

Consumer

     —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 211       $ 28,559       $ 568      $ 28,587   
  

 

 

    

 

 

    

 

 

   

 

 

 

Cash payments received on impaired loans are applied on a cash basis with all cash receipts applied first to principal and any payments received in excess of the unpaid principal balance being applied to interest.

Troubled Debt Restructurings

The Company adopted the amendments in Accounting Standards Update No. 2011-02 during the period ended September 30, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the current fiscal year (January 1, 2011) for identification as troubled debt restructurings. The Company identified as troubled debt restructurings certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology (ASC 450-20). Upon identifying the reassessed receivables as troubled debt restructurings, the Company also identified them as impaired under the guidance in ASC 310-10-35. The amendments in Accounting Standards Update No. 2011-02 require prospective application of the impairment measurement guidance in Section 310-10-35 for those receivables newly identified as impaired. At the end of the first interim period of adoption for the Company (September 30, 2011), the Company determined that there were no receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under Section 310-10-35.

 

20


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

Modification Categories

The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories:

Rate Modification – A modification in which the interest rate is changed.

Term Modification – A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Combination Modification – Any other type of modification, including the use of multiple categories above.

As of June 30, 2012 and December 31, 2011, there were no available commitments outstanding for troubled debt restructurings.

The following tables present troubled debt restructurings as of June 30, 2012 and December 31, 2011:

 

     June 30, 2012  
     Total
Number
of Contracts
     Accrual
Status
     Nonaccrual
Status
     Total
Modifications
 
     (Dollars in thousands)  

Real estate

           

Residential

     2       $ 181       $ 191       $ 372   

Commercial

     —           —           —           —     

Residential Construction

     1         1,200         —           1,200   

Other Construction, Land Development & Other Land

     4         2,068         299         2,367   

Commercial

     —           —           —           —     

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7       $ 3,449       $ 490       $ 3,939   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

     December 31, 2011  
     Total
Number
of Contracts
     Accrual
Status
     Nonaccrual
Status
     Total
Modifications
 
     (Dollars in thousands)  

Real estate

           

Residential

     11       $ 183       $ 4,133       $ 4,316   

Commercial

     —           —           —           —     

Residential Construction

     1         1,025         —           1,025   

Other Construction, Land Development & Other Land

     4         2,164         641         2,805   

Commercial

     4         —           185         185   

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     20       $ 3,372       $ 4,959       $ 8,331   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appear relatively certain. The Company’s policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.

Loans reviewed for consideration of modification are reviewed for potential impairment at the time of the restructuring. Any identified impairment is recognized as a reduction in the allowance.

There were no newly restructured loans that occurred during the three or six months ended June 30, 2012 or 2011. The following tables represent financing receivables modified as troubled debt restructurings and with a payment default, with the payment default occurring within 12 months of the restructure date, and the payment default occurring during the three and six month periods ended June 30, 2012 or 2011.

 

     Three Months Ended      Three Months Ended  
     June 30, 2012      June 30, 2011  
     Number of
Contracts
     Recorded Investment      Number of
Contracts
     Recorded Investment  
     (Dollars in thousands)      (Dollars in thousands)  

Real estate

           

Residential

     1       $ 286         —         $ —     

Commercial

     —           —           —           —     

Residential Construction

     —           —           —           —     

Other Construction, Land Development & Other Land

     —           —           —           —     

Commercial

     —           —           —           —     

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 286         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

     Six Months Ended      Six Months Ended  
     June 30, 2012      June 30, 2011  
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 
     (Dollars in thousands)      (Dollars in thousands)  

Real estate

           

Residential

     1       $ 286         —         $ —     

Commercial

     —           —           —           —     

Residential Construction

     —           —           —           —     

Other Construction, Land Development & Other Land

     —           —           —           —     

Commercial

     —           —           —           —     

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 286         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 7 – Other Real Estate Owned

Changes in other real estate owned were as follows for the six months ended June 30, 2012 and 2011 in thousands:

 

     Six Months Ended
June 30,
 
     2012     2011  
     (dollars in thousands)  

Beginning Balance

   $ 7,646      $ 2,615   

Additions

     111        6,120   

Sales

     (1,327     (1,001

Write-downs

     (1,643     (200
  

 

 

   

 

 

 

Balance June 30

   $ 4,787      $ 7,534   
  

 

 

   

 

 

 

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, the fair value of a financial instrument is the price that would be received in the sale of 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.

 

23


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

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 transact 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 consider 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.

 

24


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011. Securities identified in Note 3 as restricted securities including stock in the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank are excluded from the table below since there is not 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.

 

     June 30, 2012  
     Fair Value Measurements Using      Fair  
     Level 1      Level 2      Level 3      Values  
     (Dollars in thousands)  

Assets:

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

   $ —         $ 93,114       $ —         $ 93,114   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     Fair Value Measurements Using      Fair  
     Level 1      Level 2      Level 3      Values  
     (Dollars in thousands)  

Assets:

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

   $  —         $ 84,035       $ —         $ 84,035   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 when 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 date (Level 3). 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. If 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.

 

25


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

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 and the discount to reflect current market conditions ranged from 0% to 30% for each of the respective periods. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Operations.

Loans held for sale: The fair value of loans held for sale is determined using quoted secondary-market prices. As such, we classify loans subjected to nonrecurring fair value adjustments as Level 2.

Held-to-maturity securities: Securities held to maturity are recorded at amortized cost. Fair value measurement is based upon quoted market prices, when available (Level 1). In 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.

Other Real Estate Owned: Certain assets such as other real estate owned (“OREO”) are measured at fair value less cost to sell and the discount to reflect current market conditions ranged from 0% to 30% for each of the respective periods. 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.

 

     June 30, 2012  
     Fair Value Measurements Using      Fair  
     Level 1      Level 2      Level 3      Values  
     (Dollars in thousands)  

Impaired loans

   $ —         $ —         $ 13,227       $ 13,227   

Loans held for sale

     —           1,826         —           1,826   

Held-to-maturity securities

     —           3,164         —           3,164   

Other real estate owned

     —           —           4,787         4,787   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 4,990       $ 18,014       $ 23,004   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

     December 31, 2011  
     Fair Value Measurements Using      Fair  
     Level 1      Level 2      Level 3      Values  
     (Dollars in thousands)  

Impaired loans

   $ —         $ —         $ 19,197       $ 19,197   

Loans held for sale

     —           1,366         —           1,366   

Held-to-maturity securities

     —           3,116         —           3,116   

Other real estate owned

     —           —           7,646         7,646   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 4,482       $ 26,843       $ 31,325   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 – Fair values 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). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, the fair value reflects the Company’s assumptions about what market participants would use and information that is reasonably available under the circumstances without undue cost or effort (Level 3). The carrying value of restricted Federal Reserve Bank and Federal Home Loan Bank 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, 2012 and December 31, 2011 are current market rates for their respective terms and associated credit risk.

Loans held for sale – Loans held for sale are carried at the lower of cost or market value. These loans currently consist of residential real estate, owner occupied loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different from cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the periods ended June 30, 2012 and December 31, 2011. Gains and losses on the sale of loans are recorded within income on the Consolidated Statements of Operations.

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.

 

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First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

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 Federal Home Loan Bank 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.

Repurchase agreements – The carrying value of repurchase agreements due within ninety days from the balance sheet date approximate fair value.

Subordinated Debt – The values of our subordinated debt are variable rate instruments that re-price on a quarterly basis, therefore, carrying value is adjusted for the three month repricing lag in order to approximate fair value.

Bank Owned Life Insurance – The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.

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, 2012 and December 31, 2011.

The estimated fair values of the Company’s financial instruments as of June 30, 2012 and December 31, 2011 are as follows:

 

     June 30, 2012      December 31, 2011  
     Carrying      Fair      Carrying      Fair  
     Amount      Value      Amount      Value  
     (Dollars in thousands)  

Financial assets

           

Cash and cash equivalents

   $ 18,775       $ 18,775       $ 50,359       $ 50,359   

Investment securities

     95,996         96,319         86,919         87,151   

Loans receivable, net

     361,712         370,546         360,969         369,843   

Loans held for sale

     1,826         1,826         1,366         1,373   

Accrued interest

     1,749         1,749         1,689         1,689   

Financial liabilities

           

Deposits

   $ 438,417       $ 447,313       $ 440,199       $ 446,429   

FHLB advances

     25,000         26,203         50,000         53,496   

Subordinated debt

     7,155         3,650         7,155         3,600   

Repurchase agreements

     926         926         1,608         1,608   

We assume 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.

 

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First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

Note 9 – Recently Issued Accounting Pronouncements

In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. The Update amends existing guidance to remove from the assessment of effective control, the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and, as well, the collateral maintenance implementation guidance related to that criterion. ASU No. 2011-03 is effective for the Company’s reporting period beginning on or after December 15, 2011. The guidance applies prospectively to transactions or modification of existing transactions that occur on or after the effective date and early adoption is not permitted. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The Update amends existing guidance regarding the highest and best use and valuation premise by clarifying these concepts are only applicable to measuring the fair value of nonfinancial assets. The Update also clarifies that the fair value measurement of financial assets and financial liabilities which have offsetting market risks or counterparty credit risks that are managed on a portfolio basis, when several criteria are met, can be measured at the net risk position. Additional disclosures about Level 3 fair value measurements are required including a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation process in place, and discussion of the sensitivity of fair value changes in unobservable inputs and interrelationships about those inputs as well disclosure of the level of the fair value of items that are not measured at fair value in the financial statements but disclosure of fair value is required. The provisions of ASU No. 2011-04 are effective for the Company’s reporting period beginning after December 15, 2011 and should be applied prospectively. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The Update amends current guidance to allow a company the option of presenting the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The provisions do not change the items that must be reported in other comprehensive income or when an item of other comprehensive must to reclassified to net income. The amendments do not change the option for a company to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense (benefit) related to the total of other comprehensive income items. The amendments do not affect how earnings per share is calculated or presented. The provisions of ASU No. 2011-05 are effective for the Company’s reporting period beginning after December 15, 2011 and should be applied retrospectively. Early adoption is permitted and there are no required transition disclosures. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The ASU defers indefinitely the requirement to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. The Updates did not have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. With the Update, a company testing goodwill for impairment now has the option of performing a qualitative assessment before calculating the fair value of the reporting unit (the first step of goodwill impairment test). If, on the basis of qualitative factors, the fair value of the reporting unit is more likely than not greater than the carrying amount, a quantitative calculation would not be needed. Additionally, new examples of events and circumstances that an entity should consider in performing its qualitative assessment about whether to proceed to the first step of the goodwill impairment have been made to the guidance and replace the previous guidance for triggering events for interim impairment assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

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First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The update requires an entity to offset, and present as a single net amount, a recognized eligible asset and a recognized eligible liability when it has an unconditional and legally enforceable right of setoff and intends either to settle the asset and liability on a net basis or to realize the asset and settle the liability simultaneously. The ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company is currently in the process of evaluating the ASU but does not expect it will have a material impact on the Company’s consolidated financial statements.

On December 23, 2011, the FASB issued ASI No. 2011-12, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income. The ASU amends current guidance to allow a company to defer the new requirement to present components of reclassifications of other comprehensive income on the face of the financial statements. Companies are still required to adopt the other requirements found in ASU 2011-05. The Company implemented the provisions of ASU No. 2011-05 by reporting a separate statement of comprehensive income for the three month and six month periods ended June 30, 2012 and 2011.

On July 27, 2012, the FASB issued ASU No. 2012-02, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The Update simplifies the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. The amendments allow an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired. Under former guidance, an organization was required to test an indefinite-lived intangible asset for impairment on at least an annual basis by comparing the fair value of the asset with its carrying amount. The ASU is effective for annual and interim impairment tests beginning on or after September 15, 2012. The Company has not implemented this ASU to date.

Note 10 – Redemption of TARP Preferred Stock

On June 14, 2012, the U. S. Department of the Treasury priced its secondary public offering of all 10,958 shares of the Preferred Stock. The Company successfully bid for the purchase of 5,427 shares of the Preferred Stock for a total purchase price of $5.0 million, plus accrued and unpaid dividends on the Preferred Stock from and including May 15, 2012 to the settlement date, June 19, 2012. The book value of the Preferred Stock retired was $5.4 million. As a result of its successful bid in the offering, the Company retired 5,427 shares of its original 10,958 shares of Preferred Stock on June 19, 2012. None of the remaining shares of the outstanding Preferred Stock are held by U. S. Treasury, though the common stock purchase warrants associated with the TARP program remain with the U. S. Treasury.

The repurchase of $5.4 million in stated value of the Preferred Stock at a discount of 8.0% (or an actual cost of $5.0 million) resulted in a one-time adjustment to capital totaling $5.4 million offset by the accretion of $124 thousand in Preferred Stock Discount and expenses related to the transaction approximating $215 thousand. The result is a net decrease in capital of approximately $5.1 million.

 

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First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2012

 

As a result of our participation in the TARP program, among other things, the Company was subject to the Treasury’s current standards for executive compensation and corporate governance for the periods during which Treasury held the Preferred Shares, including the second quarter of 2012. These standards were most recently set forth in the Interim Final Rule of TARP Standards for Compensation and Corporate Governance, published June 15, 2009. Because Treasury sold all of the Preferred Shares in the auction, these standards are no longer applicable.

The Preferred Shares have a $4.00 par value, with $1,000 liquidation preference. With 2,000,000 authorized shares, at June 30, 2012 and December 31, 2011, there were 5,531 and 10,958 shares outstanding, respectively. In connection with the Preferred Shares, the Company has 251 thousand warrants to purchase one common share per warrant for $6.55 per share at June 30, 2012.

Note 11 – Common Stock

On May 11, 2012, the Company completed its rights offering and its offering of shares to a standby investor. Stockholders exercised subscription rights to purchase 4.0 million shares offered at a subscription price of $2.00 per share, and Kenneth R. Lehman, a private investor from Arlington, Virginia, purchased 4.9 million shares at the subscription price of $2.00 per share. In total, the Company raised gross proceeds of $17.8 million before expenses. The proceeds from the rights offering and the standby purchase were used to invest in the Company’s subsidiary, First Capital Bank, to bolster its regulatory capital ratios and for general corporate purposes.

The Common Stock has a $4.00 par value. With 30,000,000 authorized shares, at June 30, 2012 and December 31, 2011, there were 11,884,682 and 2,971,171 shares outstanding, respectively.

 

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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 2012 was $7.8 million, and net loss allocable to common shareholders was $7.9 million, or $0.99 per fully diluted share compared to a net loss of $1.3 million, and a net loss allocable to common shareholders of $1.5 million or $0.51 per fully diluted share, in the second quarter of 2011.

From a revenue and cost perspective, income before excluded items, which is a non-GAAP measurement, increased from $721 thousand for the second quarter of 2011 to $1.0 million for the second quarter of 2012. Contributing to the increase was an increase in net interest income of $43 thousand due to a reduction in interest expense and interest bearing liabilities and a $178 thousand benefit in Virginia franchise tax resulting from returns amended to correct an error in a previous filing. The following chart reconciles the above to the net income for the periods presented.

 

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     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Income Before Excluded Items (non-GAAP measurement)

   $ 1,049     $ 721     $ 2,023     $ 2,057  

Gain on Sale of Securities

     —          (623     (27     (644

Provision

     8,310       3,147       8,875       3,847  

FHLB Prepayment Penalty

     2,755       —          2,755       —     

Losses and Chargeoffs

     1,519       293       1,643       320  

Additional Accrual

     300       —          300       —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Taxes

     (11,835     (2,096     (11,523     (1,466

Taxes

     (4,056     (755     (4,048     (577
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ (7,779   $ (1,341   $ (7,475   $ (889
  

 

 

   

 

 

   

 

 

   

 

 

 

The three months ended June 30, 2012 was one of the most active and exciting quarters in the Company’s history. In addition to operating its core business during the quarter, the company successfully closed its $17.8 million rights offering, participated in the United States Treasury’s auction of its TARP securities, was the successful bidder for $5 million of the those securities, implemented the Asset Resolution Plan required in our Standby Purchase Agreement with our standby purchaser and now majority shareholder, Kenneth R. Lehman, and retired $40 million of the Company’s long term debt with the Federal Home Bank of Atlanta.

On May 11, 2012, the Company completed its rights offering and its offering of shares to a standby investor. Stockholders exercised subscription rights to purchase 4.0 million shares offered at a subscription price of $2.00 per share, and Kenneth R. Lehman, a private investor from Arlington, Virginia, purchased 4.9 million shares at the subscription price of $2.00 per share. In total, the Company raised gross proceeds of $17.8 million before expenses. The proceeds from the rights offering and the standby purchase were used to invest in the Company’s subsidiary, First Capital Bank, to bolster its regulatory capital ratios and for general corporate purposes.

Under the Standby Purchase Agreement with Lehman, the Company was required to use all or a portion of the capital raised in the rights offering to significantly change our strategy with respect to up to $50 million of our assets, consisting primarily of other real estate owned, nonperforming loans and performing loans graded substandard or lower. During the quarter, the Company and Lehman identified $33.5 million of nonperforming and performing loans and $5.9 million of other real estate owned as targets under the agreement. We have changed our strategy to accelerate the resolution of these assets prior to December 31, 2013 in accordance with the Standby Purchase Agreement and the Asset Resolution Plan. As a result of this change in strategy, during the second quarter of 2012 nonperforming and performing loans were written down by $7.4 million and other real estate owned was written down $1.2 million. Company management feels that with the actions taken in the second quarter to accelerate the resolution of the identified assets, further significant losses in these portfolios are not expected and the Company is better positioned to be profitable in the future.

These actions had significant positive effects on the Company’s credit statistics. The Bank’s nonperforming assets dropped to $14.6 million or 3.95% of total loans at the end of the second quarter of 2012 compared to $22.8 million or 6.07% of total loans at the end of the first quarter of 2012 and $29.4 million or 7.69% of total loans at the end of the second quarter of 2011. Total adversely classified loans as a percent of Tier One Capital plus the Allowance for Loan Losses fell to 45.2% at the end of the second quarter compared to 72.0% at the end of the first quarter of 2012 and 105.3% at the end of the second quarter of 2011.

 

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On June 13, 2012, the United States Department of the Treasury announced that it priced the secondary public offering of 10,958 shares of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Stock”) it held in First Capital Bancorp, Inc. at $920.11 per share. The Company was notified that it was the successful bidder for the purchase of 5,434 shares of the Preferred Stock for a total purchase price of $4,999,877.74, plus accrued and unpaid dividends on the Preferred Stock. The closing of the offering occurred on June 19, 2012. As a result of its successful bid in the offering, the Company retired 5,434 of its original 10,958 of shares of Preferred Stock. The remaining preferred shares of the Preferred Stock were purchased by one or more third parties.

During the second quarter of 2012 the Company retired $40 million of Federal Home Loan Bank of Atlanta advances. The advances had an average interest rate of 3.08% representing an annual cost of approximately $1.2 million. The Company incurred prepayment penalties of approximately $2.8 million during the quarter to retire this debt; however we believe the Company’s earnings and net interest margin will see significant improvement in future periods due to the repayment of this debt.

Financial Condition

Total assets at June 30, 2012 were $520.5 million, down $21.2 million from $541.7 million at December 31, 2011. Net loans outstanding were $361.7 million at June 30, 2012, an increase of $743 thousand compared to the 2011 year-end balance. Deposits decreased by $1.8 million to $438.4 million, down 0.4% from December 31, 2011. Our deposit strategy was focused on decreasing noncore funding sources and single