Quarterly Report (10-q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

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, 2013

¨	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)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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.

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:

12,319,966 shares of Common Stock, par value $4.00 per share, were outstanding at August 12, 2013.

TABLE OF CONTENTS


	Page
PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements
Consolidated Statements of Financial Condition June 30, 2013 (unaudited) and December 31, 2012		3
Consolidated Statements of Operations For the Three Months and Six Months Ended June 30, 2013 and 2012 (unaudited)		4
Consolidated Statements of Comprehensive Income/(Loss) For the Three Months and Six Months Ended June 30, 2013 and 2012 (unaudited)		5
Consolidated Statements of Stockholders’ Equity For the Six Months Ended June 30, 2013 and 2012 (unaudited)		6
Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2013 and 2012 (unaudited)		7
Notes to the Consolidated Financial Statements (unaudited)		9
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		40
Item 4 – Controls and Procedures		41

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings – None to Report		41
Item 1A – Risk Factors – Not Applicable		41
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds-None to Report		41
Item 3 – Defaults Upon Senior Securities – None to Report		41
Item 4 – Mine Safety Disclosures – None to Report		41
Item 5 – Other Information – None to Report		41
Item 6 – Exhibits		41

SIGNATURES		43

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition


	June 30, 2013			December 31, 2012
	(Unaudited)			(*)
	(Dollars in thousands)
ASSETS
Cash and due from banks	$	10,526		$	8,577
Interest-bearing deposits in other banks		10,146			26,744

Total cash and cash equivalents		20,672			35,321
Investment securities:
Available for sale, at fair value		72,033			86,825
Held to maturity, at cost		2,877			2,880
Restricted, at cost		3,366			3,479
Loans held for sale		3,996			9,912
Loans, net of allowance for losses of $8,582 in 2013 and $7,269 in 2012		404,037			368,920
Other real estate owned (OREO)		2,158			3,771
Premises and equipment, net		10,690			10,945
Accrued interest receivable		1,787			1,807
Bank owned life insurance		9,418			9,251
Deferred tax asset		6,664			6,781
Prepaid FDIC premiums		—			809
Other assets		1,239			2,246

Total assets	$	538,937		$	542,947

LIABILITIES
Deposits
Noninterest-bearing	$	73,060		$	60,098
Interest-bearing		381,858			399,015

Total deposits		454,918			459,113

Securities sold under repurchase agreements		1,132			871
Subordinated debt and trust preferred		7,155			7,155
Federal Home Loan Bank advances		25,000			25,000
Accrued expenses and other liabilities		3,107			3,720

Total liabilities		491,312			495,859

STOCKHOLDERS’ EQUITY
Preferred stock, See Note 10		22			22
Common stock, See Note 11		49,482			49,100
Additional paid-in capital		4,494			4,072
Accumulated deficit		(6,497	)		(8,120	)
Warrants		—			661
Discount on preferred stock		(50	)		(84	)
Accumulated other comprehensive income, net of tax		174			1,437

Total stockholders’ equity		47,625			47,088

Total liabilities and stockholders’ equity	$	538,937		$	542,947

*	Derived from audited, consolidated financial statements

See notes to consolidated financial statements

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013		2012
	(Dollars in thousands, except per share data)						(Dollars in thousands, except per share data)
Interest and dividend income
Loans	$	5,137		$	5,122		$	10,170	$	10,268
Investments:
Taxable interest income		459			551			941		1,104
Tax exempt interest income		58			66			116		140
Dividends		37			35			68		69
Interest bearing deposits		5			11			12		23

Total interest income		5,696			5,785			11,307		11,604

Interest expense
Deposits		1,166			1,378			2,420		2,822
FHLB advances		82			388			163		791
Subordinated debt and other borrowings		35			38			71		80

Total interest expense		1,283			1,804			2,654		3,693

Net interest income		4,413			3,981			8,653		7,911
Provision for loan losses		—			8,310			100		8,875

Net interest income/(loss) after provision for loan losses		4,413			(4,329	)		8,553		(964	)

Noninterest income
Fees on deposits		88			99			176		186
Gain on sale of securities		145			—			176		27
Gain on sale of loans		303			55			586		93
Other		208			234			407		421

Total noninterest income		744			388			1,345		727

Noninterest expenses
Salaries and employee benefits		2,117			2,101			4,137		3,830
Occupancy expense		211			192			405		391
Data processing		253			214			490		419
Professional services		93			165			224		318
Advertising and marketing		165			68			290		107
FDIC assessment		105			184			186		366
Virginia franchise tax		120			(43	)		240		2
(Gain)/loss on sale and write down of OREO		(55	)		1,519			44		1,643
Depreciation		151			157			302		316
FHLB prepayment penalty		—			2,755			—		2,755
Other		550			582			1,002		1,139

Total noninterest expense		3,710			7,894			7,320		11,286

Net income/(loss) before income taxes		1,447			(11,835	)		2,578		(11,523	)
Income tax expense/(benefit)		446			(4,056	)		783		(4,048	)

Net income/(loss)		1,001			(7,779	)		1,795		(7,475	)
Effective dividend on preferred stock		86			156			172		327

Net income available/(loss) allocable to common stockholders		915			(7,935	)	$	1,623	$	(7,802	)

Basic net income/(loss) per common share	$	0.08		$	(0.99	)	$	0.14	$	(1.42	)

Diluted net income/(loss) per common share	$	0.07		$	(0.99	)	$	0.12	$	(1.42	)

See notes to consolidated financial statements

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income/(Loss)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(Dollars in thousands)						(Dollars in thousands)

Net income/(loss)	$	1,001		$	(7,779	)	$	1,795		$	(7,475	)
Other comprehensive (loss) income:
Investment securities:
Unrealized gains (losses) on investment securities available for sale		(1,726	)		395			(1,738	)		1,176
Tax effect		588			(134	)		591			(400	)
Reclassification of gains recognized in net income		(145	)		—			(176	)		(27	)
Tax effect		49			—			60			10

Total other comprehensive (loss) income		(1,234	)		261			(1,263	)		759

Comprehensive income/(loss)	$	(233	)	$	(7,518	)	$	532		$	(6,716	)

See notes to consolidated financial statements

First Capital Bancorp, Inc. Subsidiary

Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2013 and 2012

(Unaudited)

(Dollars in thousands)


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

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


Balances December 31, 2012	$	22		$	49,100	$	4,072		$	(8,120	)	$	661		$	(84	)	$	1,437		$	47,088
Net income		—			—		—			1,795			—			—			—			1,795
Other comprehensive loss		—			—		—			—			—			—			(1,263	)		(1,263	)
Preferred stock dividend		—			—		—			(138	)		—			—			—			(138	)
Accretion of discount on preferred stock		—			—		—			(34	)		—			34			—			—
Stock based compensation		—			—		233			—			—			—			—			233
Redemption of common stock warrants on preferred stock		—			—		395			—			(661	)		—			—			(266	)
Costs associated with redemption of common stock warrants		—			—		(15	)		—			—			—			—			(15	)
Warrants exercised in connection with 8.9 million shares issued		—			382		(191	)		—			—			—			—			191

Balances June 30, 2013	$	22		$	49,482	$	4,494		$	(6,497	)	$	—		$	(50	)	$	174		$	47,625

See notes to consolidated financial statements

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2013 and 2012

(Unaudited)


	2013			2012
	(Dollars in thousands)
Cash flows from operating activities
Net income (loss)	$	1,795		$	(7,475	)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		100			8,875
Depreciation of premises and equipment		302			316
Net amortization of bond premiums/discounts		416			517
Stock based compensation expense		233			56
Deferred income tax expense (benefit)		768			(4,008	)
Gain on sale of securities		(176	)		(27	)
Gain on loans sold		(586	)		(93	)
Loss on sale and write-down of other real estate owned		44			1,643
Increase in cash surrender value of bank owned life insurance		(167	)		(167	)
Proceeds from sale of loans held for sale		57,958			13,742
Origination of loans held for sale		(51,456	)		(14,109	)
Decrease in other assets		1,816			632
Decrease (increase) in accrued interest receivable		20			(60	)
(Decrease) increase in accrued expenses and other liabilities		(613	)		1,379

Net cash provided by operating activities		10,454			1,221

Cash flows from investing activities
Proceeds from maturities and calls of securities		410			2,050
Proceeds from paydowns of securities available-for-sale		7,044			5,858
Purchase of securities available-for-sale		(8,839	)		(17,338	)
Proceeds from sale of securities available-for-sale		14,026			1,013
Proceeds from sale of other real estate owned		1,567			1,327
Purchase of Federal Home Loan Bank Stock		(225	)		(9	)
Purchase of Federal Reserve Stock		(48	)		(3	)
Redemption of Federal Home Loan Bank Stock		386			109
Purchases of premises and equipment		(47	)		(206	)
Net increase in loans		(35,215	)		(9,729	)

Net cash used in investing activities		(20,941	)		(16,928	)

Cash flows from financing activities
Net decrease in deposits		(4,195	)		(1,782	)
Repayments to FHLB, net of borrowings		—			(25,000	)
Dividends on preferred stock		(138	)		(266	)
Cash paid for redemption of common stock warrants, net of expenses		(281	)		—
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
Warrants exercised in connection with the rights offering		191			—
Net increase (decrease) in repurchase agreements		261			(682	)

Net cash used in financing activities		(4,162	)		(15,877	)

Net decrease in cash and cash equivalents		(14,649	)		(31,584	)
Cash and cash equivalents, beginning of period		35,321			50,359

Cash and cash equivalents, end of period	$	20,672		$	18,775

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2013 and 2012

(Unaudited)

(Continued)


	2013			2012
	(Dollars in thousands)
Supplemental disclosure of cash flow information
Interest paid during the period	$	2,654		$	3,779

Taxes refunded, net of taxes paid during the period	$	997		$	—

Supplemental schedule of noncash investing and financing activities
Transfer of loans to other real estate owned	$	2,298		$	111

Unrealized (loss) gain on securities available for sale, net of tax	$	(1,263	)	$	759

Company financed sales of other real estate owned	$	2,300		$	—

See notes to consolidated financial statements

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

Note 1 – Basis of Presentation

First Capital Bancorp, Inc. (the “Company”) is the holding company of and successor to First Capital Bank (sometimes referred to herein as 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.

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

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, 2013, and December 31, 2012 and for the three and six months ended June 30, 2013, and 2012, in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Results for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013.

The organization and business of the Company, accounting policies followed, and other related information are contained in the notes to the consolidated financial statements of the Company as of and for the year ended December 31, 2012, filed as part of the Company’s annual report on Form 10-K. These interim consolidated financial statements should be read in conjunction with the annual financial statements.

First Capital Bank’s critical accounting policies relate to the evaluation of the allowance for loan losses and the establishment of fair value of financial instruments, and other assets.

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

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

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

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

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

Although management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if future economic conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

Securities available for sale and certain mortgage loans held for sale, are recorded at fair value on a recurring basis. From time to time, certain assets, consisting primarily of other real estate owned and impaired loans, may be recorded at fair value on a non-recurring basis. These non-recurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring during the period. For example, if the fair value of an asset in these categories falls below its cost basis, it is considered to be at fair value at the end of the period of the adjustment. In periods where there is no adjustment, the asset is generally not considered to be at fair value. Management believes this is a critical accounting policy because the estimation of fair value involves a high degree of complexity and requires us to make subjective judgments that often require assumptions or estimates about various matters.

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

Note 2 – Use of Estimates

To prepare financial statements in conformity with GAAP management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, valuation of other real estate owned, and fair values of financial instruments are particularly subject to change.

Note 3 – Income 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 income per share calculations are as follows:


	Three Months Ended June 30, (in thousands, except per share amounts)					Six Months Ended June 30, (in thousands, except per share amounts)
	2013		2012			2013		2012

Net income available to common stockholders	$	915	$	(7,935	)	$	1,623	$	(7,802	)
Weighted average number of shares outstanding		11,966		7,967			11,950		5,469

Net income per common share - basic	$	0.08	$	(0.99	)	$	0.14	$	(1.42	)


Effect of dilutive securities:

Weighted average number of common shares outstanding		11,966		7,967			11,950		5,469
Effect of stock options and warrants		1,653		—			1,630		—

Diluted average common shares outstanding		13,619		7,967			13,581		5,469

Net income per common share - assuming dilution	$	0.07	$	(0.99	)	$	0.12	$	(1.42	)

The Company has excluded options convertible into 324 thousand shares of common stock for the three and six months ended June 30, 2013, from the calculation of diluted earnings per share because they were anti-dilutive since the strike price was greater than the average market price during all periods. The Company has excluded options and warrants convertible into 1.1 million and 1.2 million shares of stock for the three and six months ended June 30, 2012, respectively, from the calculation of diluted earnings per share because they were anti-dilutive due to the Company’s net loss in all periods. The Company excluded 348 thousand shares of restricted common stock for the three and six months ended June 30, 2013, since the shares were outstanding but were not vested.

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

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.

The stock based compensation, in thousands, expensed during the three and six months ended June 30, 2013, was $158 thousand and $233 thousand, respectively, and the amount expensed during the three and six months ended June 30, 2012, was $28 and $56, respectively. Expensed amounts are included in salaries and employee benefits.

Note 5 – Investment Securities

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


	June 30, 2013
	Amortized		Gross Unrealized				Fair
	Costs		Gains		Losses		Values
	(Dollars in thousands)
Available-for-sale
U.S. Government agencies	$	—	$	—	$	—	$	—
Mortgage-backed securities		13,812		248		260		13,800
Corporate bonds		5,996		38		84		5,950
Collateralized mortgage obligation securities		31,794		606		79		32,321
State and political subdivisions - taxable		17,720		274		571		17,423
State and political subdivisions - tax exempt		2,445		94		—		2,539
SBA - Guarantee portion		—		—		—		—

	$	71,767	$	1,260	$	994	$	72,033


	December 31, 2012
	Amortized		Gross Unrealized				Fair
	Costs		Gains		Losses		Values
	(Dollars in thousands)
Available-for-sale
U.S. Government agencies	$	—	$	—	$	—	$	—
Mortgage-backed securities		11,563		476		4		12,035
Corporate bonds		16,708		114		123		16,699
Collateralized mortgage obligation securities		36,996		945		10		37,931
State and political subdivisions - taxable		15,247		684		122		15,809
State and political subdivisions - tax exempt		2,862		179		—		3,041
SBA - Guarantee portion		1,271		39		—		1,310

	$	84,647	$	2,437	$	259	$	86,825

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013


	June 30, 2013
	Amortized		Gross Unrealized				Fair
	Costs		Gains		Losses		Values
	(Dollars in thousands)
Held-to-maturity
Tax-exempt municipal bonds	$	2,877	$	152	$	—	$	3,029

	$	2,877	$	152	$	—	$	3,029


	December 31, 2012
	Amortized		Gross Unrealized				Fair
	Costs		Gains		Losses		Values
	(Dollars in thousands)
Held-to-maturity
Tax-exempt municipal bonds	$	2,880	$	345	$	—	$	3,225

	$	2,880	$	345	$	—	$	3,225

Management’s assessment for the current quarter ended June 30, 2013, resulted in no recognition of other than temporary impairment (“OTTI”).

The following table summarizes securities with unrealized losses at June 30, 2013, and December 31, 2012, aggregated by major security type and length of time in a continuous unrealized loss position. The unrealized losses are largely due to changes in interest rates and other market conditions. At June 30, 2013, 28 out of 132 securities we held had fair values less than amortized cost primarily in municipal securities and corporate bonds. At December 31, 2012, 17 out of 139 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, the intent and ability to retain these securities for a period of time sufficient to recover all unrealized losses, and the fact it is unlikely that we will be required to sell the securities before their anticipated recovery.


	June 30, 2013
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
Assets:
U.S. Government agencies	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities		4,771		260		—		—		4,771		260
Corporate bonds		1,481		20		1,433		64		2,914		84
CMO securities		6,153		79		—		—		6,153		79
State & political subdivisions-taxable		10,178		571		—		—		10,178		571
State & political subdivisions-tax exempt		—		—		—		—		—		—
SBA		—		—		—		—		—		—

All securities	$	22,583	$	930	$	1,433	$	64	$	24,016	$	994

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013


	December 31, 2012
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
Assets:
U.S. Government agencies	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities		1,011		4		—		—		1,011		4
Corporate bonds		964		32		4,908		91		5,872		123
CMO securities		611		10		—		—		611		10
State & political subdivisions-taxable		4,807		122		—		—		4,807		122
State & political subdivisions-tax exempt		—		—		—		—		—		—
SBA		—		—		—		—		—		—

All securities	$	7,393	$	168	$	4,908	$	91	$	12,301	$	259

Restricted equity securities consist primarily of Federal Home Loan Bank of Atlanta stock in the amount of $1.8 million and $1.9 million as of June 30, 2013, and December 31, 2012, respectively, and Federal Reserve Bank stock in the amount of $1.5 million at June 30, 2013, and December 31, 2012. 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 carrying value of approximately $1.1 million and $871 thousand were pledged as collateral at June 30, 2013, and December 31, 2012, 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, 2013			December 31, 2012
	(Dollars in thousands)
Real estate
Residential	$	136,643		$	131,144
Commercial		160,443			144,034
Residential Construction		18,948			13,202
Other Construction, Land Development & Other Land		47,357			45,053
Commercial		47,186			40,423
Consumer		2,074			2,215

Total loans		412,651			376,071
Less:
Allowance for loan losses		8,582			7,269
Net deferred (fees) costs		(32	)		118

Loans, net	$	404,037		$	368,920

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

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. These investor loans are typically five year rate adjustment loans and they 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.

Real Estate – Residential Construction – This portfolio has changed 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 three months ended is as follows:


	June 30,
	2013			2012
	(Dollars in thousands)

Balance, beginning of period	$	7,269		$	9,271
Provision for loan losses		100			8,875
Recoveries		3,136			99
Charge-offs		(1,923	)		(10,992	)

Balance, end of period	$	8,582		$	7,253

Ratio of allowance for loan losses as a percent of loans outstanding at the end of the period		2.08	%		1.97	%

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

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, 2013	$	2,577		$	2,898		$	375		$	658		$	947		$	12	$	7,467
Provision for loan losses		361			(70	)		76			(471	)		100			4		—
Recoveries		4			998			62			1,217			1			—		2,282
Charge-offs		(84	)		(333	)		(38	)		(660	)		(52	)		—		(1,167	)

Balance, June 30, 2013	$	2,858		$	3,493		$	475		$	744		$	996		$	16	$	8,582


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


	Six Months Ended
	Real Estate
	Residential			Commercial			Residential Construction			Other Construction Land Devel. & Other Land			Commercial			Consumer		Total
	(Dollars in thousands)
Balance, January 1, 2013	$	2,654		$	2,947		$	284		$	606		$	762		$	16	$	7,269
Provision for loan losses		353			(119	)		(645	)		124			387			—		100
Recoveries		7			998			904			1,224			3			—		3,136
Charge-offs		(156	)		(333	)		(68	)		(1,210	)		(156	)		—		(1,923	)

Balance, June 30, 2013	$	2,858		$	3,493		$	475		$	744		$	996		$	16	$	8,582


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

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.

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

The following table presents the aging of unpaid principal in loans as of June 30, 2013 and December 31, 2012:


	June 30, 2013
	30-89 Day Past Due		90+ Days Past Due and Accruing		Nonaccrual		Current		Total
	(Dollars in thousands)
Real estate
Residential	$	925	$	—	$	1,452	$	134,266	$	136,643
Commercial		92		—		527		159,824		160,443
Residential Construction		—		—		848		18,100		18,948
Other Construction, Land Development & Other Land		—		—		1,903		45,454		47,357
Commercial		85		—		378		46,723		47,186
Consumer		—		—		—		2,074		2,074

Total	$	1,102	$	—	$	5,108	$	406,441	$	412,651


	December 31, 2012
	30-89 Day Past Due		90+ Days Past Due and Accruing		Nonaccrual		Current		Total
	(Dollars in thousands)
Real estate
Residential	$	1,752	$	—	$	2,005	$	127,387	$	131,144
Commercial		198		1,338		810		141,688		144,034
Residential Construction		—		—		1,255		11,947		13,202
Other Construction, Land Development & Other Land		28		—		3,406		41,619		45,053
Commercial		—		—		538		39,885		40,423
Consumer		79		—		—		2,136		2,215

Total	$	2,057	$	1,338	$	8,014	$	364,662	$	376,071

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 is reversed against interest income when the loan is placed on nonaccrual status. Because of the uncertainty of the expected cash flows, the Company accounts for nonaccrual loans under the cost recovery method, under 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.

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

The following table provides details of the Company’s loan portfolio internally assigned grade at June 30, 2013 and December 31, 2012:


	June 30, 2013
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(Dollars in thousands)
Real estate
Residential	$	124,261	$	8,813	$	3,569	$	—	$	—	$	136,643
Commercial		153,263		5,044		2,136		—		—		160,443
Residential Construction		14,269		2,949		1,730		—		—		18,948
Other Construction, Land Development & Other Land		35,115		6,674		5,568		—		—		47,357
Commercial		46,208		6		972		—		—		47,186
Consumer		1,999		75		—		—		—		2,074

Total	$	375,115	$	23,561	$	13,975	$	—	$	—	$	412,651


	December 31, 2012
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(Dollars in thousands)
Real estate
Residential	$	117,996	$	8,895	$	4,253	$	—	$	—	$	131,144
Commercial		126,220		14,131		3,683		—		—		144,034
Residential Construction		8,123		2,515		2,564		—		—		13,202
Other Construction, Land Development & Other Land		25,857		10,713		8,483		—		—		45,053
Commercial		38,295		962		1,166		—		—		40,423
Consumer		2,049		88		78		—		—		2,215

Total	$	318,540	$	37,304	$	20,227	$	—	$	—	$	376,071

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.

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

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, 2013 on June 17 and 18, 2013. The loan risk rankings were updated for the year ended December 31, 2012 on December 13, 2012.

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

The following table provides details regarding impaired loans by segment and class at June 30, 2013 and December 31, 2012:


	June 30, 2013						December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance:
Real estate
Residential	$	1,452	$	1,948	$	—	$	2,184	$	2,522	$	—
Commercial		527		867		—		810		3,570		—
Residential Construction		848		1,346		—		1,255		1,974		—
Other Construction, Land Development & Other Land		3,880		5,715		—		5,428		14,050		—
Commercial		378		964		—		538		1,071		—
Consumer		—		—		—		—		—		—

Total	$	7,085	$	10,840	$	—	$	10,215	$	23,187	$	—


With an allowance:
Real estate
Residential	$	—	$	—	$	—	$	—	$	—	$	—
Commercial		—		—		—		—		—		—
Residential Construction		—		—		—		—		—		—
Other Construction, Land Development & Other Land		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—

Total	$	—	$	—	$	—	$	—	$	—	$	—


Total
Real estate
Residential	$	1,452	$	1,948	$	—	$	2,184	$	2,522	$	—
Commercial		527		867		—		810		3,570		—
Residential Construction		848		1,346		—		1,255		1,974		—
Other Construction, Land Development & Other Land		3,880		5,715		—		5,428		14,050		—
Commercial		378		964		—		538		1,071		—
Consumer		—		—		—		—		—		—

Total	$	7,085	$	10,840	$	—	$	10,215	$	23,187	$	—

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

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, 2013
Allowance for loan losses, evaluated
Individually	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively		2,858		3,493		475		744		996		16		8,582

Total ending allowance	$	2,858	$	3,493	$	475	$	744	$	996	$	16	$	8,582


Loans, evaluated
Individually	$	1,452	$	527	$	848	$	3,880	$	378	$	—	$	7,085
Collectively		135,191		159,916		18,100		43,477		46,808		2,074		405,566

Total ending loans	$	136,643	$	160,443	$	18,948	$	47,357	$	47,186	$	2,074	$	412,651


December 31, 2012
Allowance for loan losses, evaluated
Individually	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively		2,654		2,947		284		606		762		16		7,269

Total ending allowance	$	2,654	$	2,947	$	284	$	606	$	762	$	16	$	7,269


Loans, evaluated
Individually	$	2,184	$	810	$	1,255	$	5,428	$	538	$	—	$	10,215
Collectively		128,960		143,224		11,947		39,625		39,885		2,215		365,856

Total ending loans	$	131,144	$	144,034	$	13,202	$	45,053	$	40,423	$	2,215	$	376,071

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 substandard 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 tables present interest income recognized and the average recorded investment of impaired loans.

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013


	Three Months Ended					Six Months Ended
	June 30, 2013					June 30, 2013
	Interest Income Recognized			Average Recorded Investment		Interest Income Recognized			Average Recorded Investment
	(Dollars in thousands)					(Dollars in thousands)

Real estate
Residential	$	17		$	1,462	$	53		$	1,703
Commercial		4			656		19			708
Residential Construction		(4	)		918		(2	)		1,030
Other Construction, Land Development & Other Land		23			4,375		60			4,726
Commercial		1			405		2			449
Consumer		—			—		—			—

Total	$	41		$	7,816	$	132		$	8,616


	Three Months Ended					Six Months Ended
	June 30, 2012					June 30, 2012
	Interest Income Recognized			Average Recorded Investment		Interest Income Recognized			Average Recorded 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

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 Restructuring s

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 then 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

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

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.

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, 2013 and December 31, 2012, there were no available commitments outstanding for troubled debt restructurings.

The following tables present troubled debt restructurings as of June 30, 2013 and December 31, 2012:


	June 30, 2013
	Total Number of Contracts		Accrual Status		Nonaccrual Status		Total Modifications
	(Dollars in thousands)

Real estate
Residential		1	$	—	$	117	$	117
Commercial		—		—		—		—
Residential Construction		—		—		—		—
Other Construction, Land Development & Other Land		3		1,977		95		2,072
Commercial		—		—		—		—
Consumer		—		—		—		—

Total		4	$	1,977	$	212	$	2,189

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013


	December 31, 2012
	Total Number of Contracts		Accrual Status		Nonaccrual Status		Total Modifications
	(Dollars in thousands)

Real estate
Residential		1	$	179	$	—	$	179
Commercial		—		—		—		—
Residential Construction		—		—		—		—
Other Construction, Land Development & Other Land		4		2,022		98		2,120
Commercial		—		—		—		—
Consumer		—		—		—		—

Total		5	$	2,201	$	98	$	2,299

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, 2013 or 2012 or 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, 2013. 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:


	Three Months Ended June 30, 2012				Six Months Ended June 30, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	(Dollars in thousands)				(Dollars in thousands)
Real estate
Residential		1	$	286		1	$	286
Commercial		—		—		—		—
Residential Construction		—		—		—		—
Other Construction, Land Development & Other Land		—		—		—		—
Commercial		—		—		—		—
Consumer		—				—

Total		1	$	286		1	$	286

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

Note 7 – Other Real Estate Owned

Changes in other real estate owned were as follows for the:


	Six Months Ended June 30,
	2013			2012
	(dollars in thousands)

Beginning Balance	$	3,771		$	7,646
Additions		2,298			111
Sales		(3,767	)		(1,327	)
Write-downs		(144	)		(1,643	)

Ending Balance	$	2,158		$	4,787

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.

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.

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

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. They perform a review of pricing data by comparing prices received from third party vendors to the previous month’s quote for the same security and evaluate any substantial changes.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2013, and December 31, 2012. 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 no ability to sell these securities except when the FHLB or FRB require redemption based on either our borrowings at the FHLB, or in the case of the FRB changes in certain portions of our capital.


	June 30, 2013
	Fair Value Measurements Using						Fair
	Level 1		Level 2		Level 3		Values
	(Dollars in thousands)
Assets:

Available-for-sale securities	$	—	$	72,033	$	—	$	72,033


	December 31, 2012
	Fair Value Measurements Using						Fair
	Level 1		Level 2		Level 3		Values
	(Dollars in thousands)
Assets:

Available-for-sale securities	$	—	$	86,825	$	—	$	86,825

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

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 data (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.

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.

Other Real Estate Owned : Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly. Such appraisals may be discounted for current market conditions which ranged from 0% to 30% for each of the respective periods.

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

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


	June 30, 2013
	Fair Value Measurements Using						Fair
	Level 1		Level 2		Level 3		Values
	(Dollars in thousands)
Impaired loans	$	—	$	—	$	7,085	$	7,085
Loans held for sale		—		3,996		—		3,996
Other real estate owned		—		—		2,158		2,158

Total	$	—	$	3,996	$	9,243	$	13,239


	December 31, 2012
	Fair Value Measurements Using						Fair
	Level 1		Level 2		Level 3		Values
	(Dollars in thousands)
Impaired loans	$	—	$	—	$	10,215	$	10,215
Loans held for sale		—		9,912		—		9,912
Other real estate owned		—		—		3,771		3,771

Total	$	—	$	9,912	$	13,986	$	23,898

The methods and assumptions, not previously presented, used by the Company in estimating fair values are disclosed as follows:

Cash and cash equivalents – The carrying amounts of cash and cash equivalents approximate their fair value.

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, 2013 and December 31, 2012 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, 2013 and December 31, 2012. Gains and losses on the sale of loans are recorded within income on the Consolidated Statements of Operations.

Deposits – 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.

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

Accrued interest – The carrying amounts of accrued interest approximate fair value.

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, 2013, and December 31, 2012.

The estimated fair values of the Company’s financial instruments as of June 30, 2013, and December 31, 2012 are as follows:


	June 30, 2013				December 31, 2012
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)				(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	20,672	$	20,672	$	35,321	$	35,321
Investment securities		74,910		75,062		89,705		90,050
Loans receivable, net		404,037		401,310		368,920		367,217
Loans held for sale		3,996		4,016		9,912		9,962
Accrued interest		1,787		1,787		1,807		1,807
BOLI		9,418		9,418		9,251		9,251

Financial liabilities
Deposits	$	454,918	$	455,410	$	459,113	$	466,390
FHLB advances		25,000		25,361		25,000		25,638
Subordinated debt		7,155		3,577		7,155		3,750
Repurchase agreements		1,132		1,132		871		871

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

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

and that change may be either favorable or unfavorable to us. We attempt to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to repay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. We monitor rates and maturities of assets and liabilities and attempt to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate our overall interest rate risk.

Note 9 – Recently Issued Accounting Pronouncements

On February 5, 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under GAAP.

The new amendments will require a company to:

•

Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.

•

Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.

The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual).

The amendments are effective for reporting periods beginning after December 15, 2012, for public companies and are effective for reporting periods beginning after December 15, 2013, for private companies. Early adoption is permitted. The Company does not anticipate that this pronouncement will have a material effect on the financial statements.

On February 7, 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies that ordinary trade receivables and receivables are not in the scope of ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Specifically, ASU 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the FASB Accounting Standards Codification ™ (Codification) or subject to a master netting arrangement or similar agreement.

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

The FASB undertook this clarification project in response to concerns expressed by U.S. stakeholders about the standard’s broad definition of financial instruments. After the standard was finalized, companies realized that many contracts have standard commercial provisions that would equate to a master netting arrangement, significantly increasing the cost of compliance at minimal value to financial statement users.

An entity is required to apply the amendments in ASU 2013-01 for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of ASU 2011-11. The Company does not anticipate that this pronouncement will have a material effect on the financial statements.

Note 10 – Preferred Stock

The Preferred Shares have a $4.00 par value, with $1,000 liquidation preference. With 2,000,000 authorized shares, at June 30, 2013, and December 31, 2012, there were 5,531 shares outstanding.

Note 11 – Common Stock

The Common Stock has a $4.00 par value. With 30,000,000 authorized shares, at June 30, 2013, and December 31, 2012, there were 12,370,668 and 12,274,964 shares outstanding, respectively.

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

Net income for the second quarter of 2013 was $1.0 million, and net income available to common stockholders was $915 thousand, or $0.07 per fully diluted share, compared to a net loss of $7.8 million, and a net loss allocable to common stockholders of $7.9 million or $0.99 per fully diluted share, for the second quarter of 2012.

From a revenue and cost perspective, income after excluding certain items, which is a non-GAAP measurement, increased to $1.2 million for the second quarter of 2013 from $1.0 million for the second quarter of 2012. Contributing to the increase was an increase in net interest income of $432 thousand due to a reduction in interest expense resulting mostly from the restructuring of the FHLB advance portfolio with additional benefit provided by a the shift in the deposit liabilities base from interest bearing to non-interest bearing deposits. The following chart reconciles income before excluded items to net income (loss) for the periods presented.


	Three Months Ended June 30,					Six Months Ended June 30,
	2013		2012			2013			2012
	(Dollars in thousands)					(Dollars in thousands)
Income Before Excluded Items (non-GAAP measurement)	$	1,247	$	1,049		$	2,546		$	2,023
Gain on Sale of Securities		145		—			176			27
Provision for Loan Losses		—		(8,310	)		(100	)		(8,875	)
FHLB Prepayment Penalty		—		(2,755	)		—			(2,755	)
(Gains) Losses on Sale and Writedown of OREO		55		(1,519	)		(44	)		(1,643	)
Additional Accrual		—		(300	)		—			(300	)

Net Income (Loss) Before Income Taxes		1,447		(11,835	)		2,578			(11,523	)
Income Tax Expense (Benefit)		446		(4,056	)		783			(4,048	)

Net Income (Loss)	$	1,001	$	(7,779	)	$	1,795		$	(7,475	)

The three months ended June 30, 2013, presents the continued positive results of the successful activities undertaken in the second quarter of 2012. The three month period ended June 30, 2012 was one of the most active and exciting quarters in the Company’s history. 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 $5.0 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, with an additional $5 million in FHLB advances retired in the third quarter of 2012. These activities have provided a reduction in interest expense related to the FHLB advance portfolio and allowed for immediate and continued improvement in our credit quality statistics which have ultimately led to a better return for our shareholders.

Financial Condition

Total assets at June 30, 2013, were $538.9 million, down $4.0 million from $542.9 million at December 31, 2012. Cash and cash equivalents decreased $14.6 million to $20.7 at June 30, 2013. This decrease was used to fund the increase in net loans outstanding, which were $404.0 million at June 30, 2013, an increase of $35.1 million compared to the 2012 year-end balance. The remaining funds used to provide for the growth in the loan portfolio were obtained from available for sale securities, which decreased $14.8 million from the December 31, 2012 balance and the decrease in loans held for sale, which decreased $5.9 million from the December 31, 2012 balance. Total deposit liabilities decreased $4.2 million to $454.9 million at June 30, 2013 from $459.1 million at December 31, 2013. A favorable shift in the composition of our deposits, with an increase in non-interest bearing deposits of $13.0 million from the December 31, 2012 balance and a decrease in interest bearing deposits of $17.2 million from the December 31, 2013, has bolstered additional improvement to net interest income. Our deposit strategy during the second quarter was focused on decreasing noncore funding sources and single service CD relationships and increasing noninterest-bearing deposit accounts.

At June 30, 2013, the Company’s investment portfolio totaled $74.9 million, a decrease of $14.8 million from $89.7 million at December 31, 2012. Most of the funds that are invested in the Company’s investment portfolio are part of management’s effort to balance interest rate risk, and to provide liquidity and income to the Company.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income represents the principal source of earnings for the Company. Net interest income during 2013 to date compared to net interest income for the comparable period of 2012 improved to $8.7 million from $7.9 million, resulting primarily from the effective restructuring of the FHLB advance portfolio and the decline in rate and balance of interest bearing deposit liabilities.

The net interest margin increased 32 basis points to 3.61% for the three months ended June 30, 2013 from 3.29% for the second quarter of 2012, due largely to a decrease in average rate paid on interest-bearing liabilities of 45 basis points to 1.22% for the second quarter of 2013 from 1.67% for the second quarter of 2012. This was slightly offset by a 10 basis point decrease in the average yield on earning assets. The yield on loans, net of unamortized fees and costs, was 5.06% and 5.44% for the second quarters of 2013 and 2012, respectively, with the decrease due primarily to lower rates during the period. The average yield on investments increased to 2.81% for the second quarter of 2013 from 2.76% for the second quarter of 2012 while average balances in investments decreased to $83.2 million for the second quarter of 2013 from $99.6 million for the second quarter of 2012. Average interest bearing deposits at the Federal Reserve, which were earning 0.25% and 0.23% for the second quarters of 2013 and 2012, respectively, decreased to $8.5 million at the end of the second quarter of 2013 from $19.0 million at the end of the second quarter 2012. The average balance of interest bearing deposits increased to $386.5 million for the second quarter of 2013 from $378.5 million for the second quarter of 2012.

For the three months ended June 30, 2013, net interest income was up $432 thousand to $4.4 million from $4.0 million for the second quarter of 2012. This increase was due primarily to the effective restructuring of the FHLB advance portfolio in the second quarter of 2012 and the reduction of interest expense resulting from the change in composition of deposit liabilities.

Total interest and fees on loans, the largest component of net interest income, remained stable at $5.1 million during the second quarters of both 2013 and 2012 despite the increased pressure of the rate environment.

Interest expense on deposits decreased $212 thousand to $1.2 million, or 15.38% for the second quarter of 2013 compared to $1.4 million for the same period of 2012. This decrease was due to the restructuring of the deposit mix and a decrease in overall rates paid on time deposits as interest rates paid on interest bearing deposits decreased 25 basis points to 1.21% for the second quarter of 2013 from 1.46% for the second quarter of 2012.

For the six months ended June 30, 2013, the net interest margin increased to 3.59% from 3.28% for the six months ended June 30, 2012. The improvement in year to date margin is primarily the result of the successful restructuring of the FHLB advance portfolio which offset the decline in the yield in the loan portfolio.

Net interest income increased $742 thousand for the first six months of 2013 compared to the first six months of 2012.

Average Balances, Income and Expenses, Yields and Rates

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

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

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


	Three Months Ended June 30,
	2013								2012
	Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
	(Dollars in thousands)
Assets:
Loans, net of unearned income ⁽¹⁾	$	407,105		$	5,136		5.06	%	$	378,860		$	5,121		5.44	%
Bank owned life insurance ⁽²⁾		9,382			128		5.47	%		9,044			128		5.68	%
Investment securities:
U.S. Agencies		—			—		0.00	%		1,955			17		3.63	%
Mortgage backed securities		14,342			73		2.04	%		14,252			73		2.06	%
Corporate bonds		8,544			52		2.45	%		16,454			101		2.47	%
Municipal securities ⁽²⁾		5,424			87		6.47	%		6,272			100		6.39	%
Taxable municipal securities		18,177			147		3.23	%		10,954			107		3.92	%
CMO		33,314			188		2.26	%		43,759			248		2.28	%
SBA		—			—		0.00	%		1,464			4		1.09	%
Other investments		3,361			36		4.29	%		4,459			34		3.07	%

Total investment securities		83,162			583		2.81	%		99,569			684		2.76	%
Interest bearing deposits		8,488			5		0.25	%		19,015			11		0.23	%

Total earning assets	$	508,137		$	5,852		4.62	%	$	506,488		$	5,944		4.72	%

Cash and cash equivalents		8,223								8,366
Allowance for loan losses		(7,810	)							(7,498	)
Other assets		26,230								29,032

Total assets	$	534,780							$	536,388


Liabilities & Stockholders’ Equity:
Interest checking	$	13,413		$	11		0.33	%	$	11,157		$	8		0.28	%
Money market deposit accounts		146,522			150		0.41	%		138,507			172		0.50	%
Statement savings		1,455			1		0.32	%		1,280			1		0.42	%
Certificates of deposit		225,135			1,004		1.79	%		227,542			1,196		2.11	%

Total interest-bearing deposits		386,525			1,166		1.21	%		378,486			1,377		1.46	%

Fed funds purchased		171			—		0.61	%		—			—		—	%
Repurchase agreements		965			1		0.40	%		962			1		0.40	%
Subordinated debt		7,155			35		1.93	%		7,155			38		2.13	%
FHLB advances		26,759			82		1.23	%		48,737			388		3.20	%

Total interest-bearing liabilities		421,575			1,284		1.22	%		435,340			1,804		1.67	%


Noninterest-bearing liabilities:
Noninterest-bearing deposits		63,330								48,818
Other liabilities		1,788								1,763

Total liabilities		65,118								50,581
Shareholders’ equity		48,087								50,467

Total liabilities and shareholders’ equity	$	534,780							$	536,388


Net interest income				$	4,568							$	4,140

Interest rate spread							3.40	%							3.05	%


Net interest margin							3.61	%							3.29	%

Ratio of average interest earning assets to average interest-bearing liabilities							120.53	%							116.34	%

⁽¹⁾	Includes nonaccrual loans

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


	Six Months Ended June 30,
	2013									2012
	Average Balance			Income/ Expense			Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
	(Dollars in thousands)
Assets:
Loans, net of unearned income ⁽¹⁾	$	397,911		$	10,170			5.15	%	$	377,455		$	10,269		5.48	%
Bank owned life insurance ⁽²⁾		9,339			253			5.46	%		9,003			253		5.66	%
Investment securities:
U.S. Agencies		—			—			0.00	%		1,977			35		3.61	%
Mortgage backed securities		13,195			131			2.01	%		14,524			154		2.13	%
Corporate bonds		11,722			142			2.44	%		16,386			200		2.45	%
Municipal securities ⁽²⁾		5,475			176			6.50	%		6,618			212		6.45	%
Taxable municipal securities		17,445			285			3.30	%		10,242			201		3.94	%
CMO		34,590			385			2.24	%		43,470			501		2.32	%
SBA		317			(2	)		(1.49	)%		1,521			13		1.69	%
Other investments		3,382			67			3.97	%		4,484			67		2.99	%

Total investment securities		86,126			1,184			2.77	%		99,222			1,383		2.80	%
Interest bearing deposits		9,521			12			0.25	%		19,600			23		0.24	%

Total earning assets	$	502,897		$	11,619			4.66	%	$	505,280		$	11,928		4.75	%

Cash and cash equivalents		7,972									8,223
Allowance for loan losses		(7,866	)								(8,322	)
Other assets		26,768									29,138

Total assets	$	529,771								$	534,319


Liabilities & Stockholders’ Equity:
Interest checking	$	13,015		$	21			0.33	%	$	11,285		$	16		0.29	%
Money market deposit accounts		144,726			295			0.41	%		145,474			361		0.50	%
Statement savings		1,431			2			0.32	%		1,214			3		0.42	%
Certificates of deposit		227,849			2,102			1.86	%		224,781			2,440		2.18	%

Total interest-bearing deposits		387,021			2,420			1.26	%		382,754			2,820		1.48	%

Fed funds purchased		122			—			0.61	%		—			—		—	%
Repurchase agreements		1,035			2			0.40	%		991			2		0.40	%
Subordinated debt		7,155			69			1.93	%		7,155			80		2.24	%
FHLB advances		25,884			163			1.27	%		49,368			790		3.22	%

Total interest-bearing liabilities		421,217			2,654			1.27	%		440,268			3,692		1.69	%


Noninterest-bearing liabilities:
Noninterest-bearing deposits		59,119									46,572
Other liabilities		1,818									1,744

Total liabilities		60,937									48,316
Shareholders’ equity		47,617									45,735

Total liabilities and shareholders’ equity	$	529,771								$	534,319

Net interest income				$	8,965								$	8,236

Interest rate spread								3.39	%							3.06	%


Net interest margin								3.59	%							3.28	%

Ratio of average interest earning assets to average interest-bearing liabilities								119.39	%							114.77	%

⁽¹⁾	Includes nonaccrual loans

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

Noninterest Income

Total noninterest income was $744 thousand for the second quarter of 2013, compared to $388 thousand for the same period of 2012. The mortgage division added $303 thousand to noninterest income from gains on sales of loans in the second quarter of 2013 compared to $55 thousand for the second quarter of 2012 as the division was newly operational in the first quarter of 2012 and was continuing to become established in the market in the second quarter of 2012. Other noninterest income decreased $26 thousand for the second quarter of 2013 to $208 thousand compared to $234 thousand for the same period of 2012. This decrease was primarily driven by reduced income from the investment group.

For the six months ended June 30, 2013, noninterest income increased $618 thousand to $1.3 million from $727 thousand for the first six months of 2012, attributable to $493 thousand in additional gains on sale of loans and $149 thousand additional gains on sale of securities.

Noninterest Expense

This category includes all expenses other than interest paid on deposits and borrowings. Total noninterest expenses for the second quarter of 2013 decreased to $3.7 million, a decrease of $4.2 million or 53.00%, compared to $7.9 million for the same period in 2012. The elevated expenses incurred in 2012 were primarily driven by the Asset Resolution Plan and restructuring of the FHLB advance portfolio. Other expense details are fairly consistent from one period compared to the other.

For the six months ended June 30, 2013, total noninterest expense decreased $4.0 million or 35.14% to $7.3 million from $11.3 million for the comparable period in 2012 driven by the actions taken in the second quarter of 2012.

Income Taxes

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

The effective tax rate for the three month periods ended June 30, 2013 and 2012 was 30.82% and 34.27%, respectively. The effective tax rate for the six month periods ended June 30, 2013 and 2012 was 30.37% and 35.13%, respectively.

ASSET QUALITY

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

Total nonperforming assets, which consist of nonaccrual loans, loans past due 90 days and still accruing interest, and OREO, were $7.3 million at June 30, 2013, down from $14.6 million at June 30, 2012. This

decrease reflects the results of the Asset Resolution Plan. At December 31, 2012, nonperforming assets totaled $13.1 million. Nonperforming assets are composed largely of loans secured by real estate and repossessed properties in our OREO portfolio. At the end of the second quarter of 2013, OREO was $2.2 million, down from $4.8 million at June 30, 2012. At June 30, 2013, there were $2.0 million of troubled debt restructurings that were performing loans.

Nonaccrual loans were $5.1 million at June 30, 2013, continuing to decrease from $9.8 million at June 30, 2012 and $8.0 million at December 31, 2012. The decrease reflects the continued efforts by the Company to decrease nonaccruals in a challenging economic environment.

Loan charge-offs, net of recoveries, amounted to a net recovery of $1.1 million for the second quarter of 2013 compared to a net charge-off of $9.1 million for the second quarter of 2012. For the second quarter of 2013, there was no provision for loan losses compared to $8.3 million for the second quarter of 2012 as a result of the implementation of the Asset Resolution Plan.

Loans past due 30 to 89 days decreased $1.0 million to $1.1 million at the end of the second quarter of 2013 compared to $2.1 million at the end of the year 2012, and decreased $86 thousand from $1.2 million at June 30, 2012.

Although the Company believes it has a sufficient allowance for its existing portfolio, there can be no assurances that an additional allowance for losses on existing loans may not be necessary in the future. The allowance for loan losses totaled $8.6 million at June 30, 2013, compared to $7.3 million at December 31, 2012 and June 30, 2012. The ratio of the allowance for loan losses to total loans outstanding at June 30, 2013 was 2.08% compared to 1.93% at December 31, 2012 and 1.97% at June 30, 2012. The movement in this ratio results from, and is directionally consistent with, the loan portfolio’s growth and the loan portfolio’s risk factors.

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


	2013			2012
	June 30,			December 31,			June 30,
	(Dollars in thousands)
Nonaccrual loans	$	5,108		$	8,014		$	9,778
Loans past due 90 days and accruing interest		—			1,338			—

Total nonperforming loans		5,108			9,352			9,778
Other real estate owned		2,158			3,771			4,787

Total nonperforming assets	$	7,266		$	13,123		$	14,565


Allowance for loan losses to period end loans		2.08	%		1.93	%		1.97	%
Nonperforming assets to total assets		1.35	%		2.42	%		2.80	%
Allowance for loan losses to nonaccrual loans		168.01	%		90.70	%		74.18	%

LIQUIDITY

Management monitors and plans the Company’s liquidity position for future periods. Liquidity is provided from cash, interest-bearing deposits in other banks, repayments of loans, increases in deposits, federal

funds facility from three correspondent banks, term loans from a federal agency bank and maturing investments. Management is committed to maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements.

At June 30, 2013, cash and cash equivalents totaled $20.1 million and unrestricted investment securities not pledged totaled $73.8 million, for a total of 13.69% of total assets, which management believes is adequate to meet short-term liquidity needs. Management also has alternative sources of funding available, including unused unsecured federal funds facilities with three banks totaling $23.5 million and unused available term loans through the FHLB totaling $47.4 million.

Total liquidity and other alternative sources of liquidity totaled $165.4 million at June 30, 2013 if fully utilized, which represents 36.35% of total deposits.

Off-Balance Sheet Arrangements

In the normal course of business there are outstanding commitments for the extension of credit which are not reflected in the financial statements. At June 30, 2013, pre-approved but unused lines of credit for loans totaled approximately $80.1 million. In addition, we had approximately $5.5 million in financial and performance standby letters of credit at June 30, 2013. These commitments represent no more than the normal lending risk that we commit to borrowers. If these commitments are drawn, we will obtain collateral if it is deemed necessary based on our credit evaluation of the counterparty.

CAPITAL RESOURCES

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

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

Federal regulatory risk-based capital ratio guidelines require percentages to be applied to various assets including off-balance sheet assets in relation to their perceived risk. Tier 1 capital consists of stockholders’ equity and minority interests in consolidated subsidiaries, less net unrealized gains on available-for-sale securities. Tier 2 capital, a component of total capital, consists of a portion of the allowance for loan losses, certain components of nonpermanent preferred stock and subordinated debt. The $5 million in trust preferred securities issued by the Company in September 2006 qualifies as Tier 1 capital. First Capital Bank’s ratios exceed regulatory requirements. As of June 30, 2013, the Company had a Tier 1 risk-based capital ratio of 12.24% and a Total risk-based capital ratio of 13.69%. At December 31, 2012 these ratios were 12.29% and 13.75%, respectively.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

N/A

ITEM 4.

CONTROLS AND PROCEDURES

Based upon an evaluation as of June 30, 2013 under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, they have concluded that our disclosure controls and procedures, as defined in Rule 13a-15 and Rule 15d-15 under the Securities Exchange Act of 1934, as amended, are effective in ensuring that all material information required to be disclosed in reports that it files or submits under such Act is recorded, processed, summarized and is made known to management in a timely fashion.

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

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings – None to report

Item 1A.

Risk Factors – Not Applicable

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds – None

Item 3.

Defaults Upon Senior Securities – None

Item 4.

Mine Safety Disclosures – None

Item 5.

Other Information – None to report

Item 6.

Exhibits


Exhibit No.		Description of Exhibit

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

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

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

3.4		Articles of Amendment to the Company’s Articles of Incorporation, increasing the number of authorized shares of Common Stock to 30,000,000 (incorporated by reference to Exhibit 3.1 of Form 8-K filed on September 3, 2010)

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



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

4.3		Warrant to Purchase Shares of Common Stock, dated April 3, 2009 (incorporated by reference to Exhibit 4.2 of Form 8-K filed April 6, 2009)

31.1		Certification of John M. Presley Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 14, 2013.

31.2		Certification of Robert G. Watts, Jr. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 14, 2013.

31.3		Certification of William W. Ranson Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 14, 2013.

32		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 14, 2013.

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

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

99.3		Certification of John M. Presley Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009 (incorporated by reference to Exhibit 99.3 of Form 10-K filed on March 29, 2013).

99.4		Certification of William W. Ranson Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009 (incorporated by reference to Exhibit 99.4 of Form 10-K filed on March 29, 2013).

101		The following materials from the Company’s 10-Q Report for the quarter ended June 30, 2013, formatted in XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operation, (iii) the Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss), (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.

SIGNATURES

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

First Capital Bancorp, Inc.


Date:	August 14, 2013	By:	/s/ John M. Presley
			John M. Presley
			Managing Director & Chief Executive Officer

		By:	/s/ William W. Ranson
			William W. Ranson
			Executive Vice President & Chief Financial Officer