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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 September 30, 2011

 

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

For the transition period from              to             

 

 

FIRST CAPITAL BANCORP, INC.

(Name of Small Business Issuer in its charter)

 

 

 

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

4222 Cox Road, Glen Allen, Virginia 23060

(Address of principal executive offices)

804-273-1160

(Issuer’s telephone number)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company in Rule 12b-2 of the Exchange Act.

 

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

2,971,171 shares of Common Stock, par value $4.00 per share, were outstanding at November 11, 2011.

 

 

 

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TABLE OF CONTENTS

 

				Page
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
		Consolidated Statements of Financial Condition September 30, 2011 (unaudited) and December 31, 2010			3
		Consolidated Statements of Operations For the Three Months and Nine Months Ended September 30, 2011 and 2010 (unaudited)			4
		Consolidated Statements of Stockholders’ Equity and Comprehensive Income For the Nine Months Ended September 30, 2011 and 2010 (unaudited)			5
		Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2011 and 2010 (unaudited)			6
		Notes to Consolidated Financial Statements (unaudited)			7
Item  2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations					28
Item  3 – Quantitative and Qualitative Disclosures About Market Risk – Not Applicable					37
Item 4 – Controls and Procedures					37
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings – None to Report					38
Item 1A – Risk Factors – Not Applicable					38
Item  2 – Unregistered Sales of Equity Securities and Use of Proceeds – None to Report					38
Item 3 – Defaults Upon Senior Securities – None to Report					38
Item 4 – (Removed and Reserved)					38
Item 5 – Other Information – None to Report					38
Item 6 – Exhibits					38
SIGNATURES					40

 

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PART 1 - FINANCIAL INFORMATION

Item 1 - Financial Statements

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

(dollars shown in thousands)

 

		September 30, 2011				December 31, 2010
		(Unaudited)				(*)
ASSETS
Cash and due from banks		$	8,186			$	6,210
Interest-bearing deposits in other banks			26,040				26,157
Investment securities:
Available for sale, at fair value			91,566				86,787
Held to maturity, at cost			2,885				2,389
Restricted, at cost			4,681				4,669
Loans, net of allowance for losses			363,986				386,209
Other real estate owned			8,536				2,615
Premises and equipment, net			11,192				11,400
Accrued interest receivable			2,008				2,062
Bank owned life insurance			8,834				448
Deferred tax asset			2,711				3,530
Prepaid FDIC premiums			1,396				2,206
Other assets			3,610				1,343
Total assets		$	535,631			$	536,025
LIABILITIES
Deposits
Noninterest-bearing		$	48,897			$	40,379
Interest-bearing			383,572				386,491
Total deposits			432,469				426,870
Accrued expenses and other liabilities			3,373				2,248
Securities sold under repurchase agreements			1,477				1,077
Subordinated debt			7,155				7,155
Federal Home Loan Bank advances			50,000				55,000
Total liabilities			494,474				492,350
STOCKHOLDERS’ EQUITY
Preferred stock, $4.00 par value, $1,000 liquidation preference, 2,000,000 authorized shares, 10,958 issued and outstanding			44				44
Common stock, $4.00 par value, 30,000,000 authorized shares, 2,971,171 issued and outstanding			11,885				11,885
Additional paid-in capital			29,834				29,739
Retained (deficit) earnings			(2,347	)			1,643
Warrants			661				661
Discount on preferred stock			(336	)			(434	)
Accumulated other comprehensive income, net of tax			1,416				137
Total stockholders’ equity			41,157				43,675
Total liabilities and stockholders’ equity		$	535,631			$	536,025

See notes to consolidated financial statements.

 

(*)	Derived from audited consolidated financial statements

 

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First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

(Unaudited)

(dollars shown in thousands, except per share amounts)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
Interest income
Loans		$	5,376			$	5,947			$	16,269			$	17,551
Investments:
Taxable interest income			513				628				1,582				1,867
Tax exempt interest income			128				147				430				388
Dividends			25				20				83				63
Federal funds sold and interest bearing deposits			12				13				42				32
Total interest income			6,054				6,755				18,406				19,901
Interest expense
Deposits			1,619				2,007				5,031				6,270
FHLB advances			414				478				1,234				1,423
Subordinated debt and other borrowed money			34				64				104				180
Total interest expense			2,067				2,549				6,369				7,873
Net interest income			3,987				4,206				12,037				12,028
Provision for loan loss			4,726				375				8,572				7,121
Net interest (loss) income after provision for loan loss			(739	)			3,831				3,465				4,907
Noninterest income
Fees on deposits			81				71				238				204
Gain on sale of securities			—				50				644				216
Other			232				131				491				378
Total noninterest income			313				252				1,373				798
Noninterest expenses
Salaries and employee benefits			1,794				1,487				4,796				4,281
Occupancy expense			213				183				626				554
Data processing			207				158				590				561
Professional services			178				185				540				565
Advertising and marketing			136				42				245				110
FDIC assessment			275				239				826				738
Virginia franchise tax			110				127				380				402
Write-down and losses on OREO			—				195				321				737
Depreciation			151				129				453				364
Other			518				424				1,536				1,290
Total noninterest expenses			3,582				3,169				10,313				9,602
Net (loss) income before provision for income taxes			(4,008	)			914				(5,475	)			(3,897	)
Income tax (benefit) expense			(1,416	)			277				(1,993	)			(1,413	)
Net (loss) income			(2,592	)			637				(3,482	)			(2,484	)
Effective dividend on preferred stock			170				170				509				508
Net (loss) income allocable to common shareholders		$	(2,762	)		$	467			$	(3,991	)		$	(2,992	)
Basic and diluted (loss) income per common share		$	(0.93	)		$	0.16			$	(1.34	)		$	(1.01	)

See notes to consolidated financial statements.

 

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First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

(dollars shown in thousands)

 

		Preferred Stock				Common Stock				Additional Paid-in Capital				Retained Earnings				Warrants				Discount on Preferred Stock				Accumulated Other Comprehensive Income				Total
Balance December 31, 2009		$	44			$	11,885			$	29,696			$	4,493			$	661			$	(565	)		$	244			$	46,458
Net loss			—				—				—				(2,484	)			—				—				—				(2,484	)
Other comprehensive income
Unrealized holding gain arising during period, (net of tax, $710)			—				—				—				—				—				—				1,379				1,379
Total comprehensive loss																															(1,105	)
Preferred stock dividend			—				—				—				(411	)			—				—				—				(411	)
Accretion of discount on preferred stock			—				—				—				(97	)			—				97				—				—
Stock based compensation			—				—				33				—				—				—				—				33
Balance September 30, 2010		$	44			$	11,885			$	29,729			$	1,501			$	661			$	(468	)		$	1,623			$	44,975
Balance December 31, 2010		$	44			$	11,885			$	29,739			$	1,643			$	661			$	(434	)		$	137			$	43,675
Net loss			—				—				—				(3,482	)			—				—				—				(3,482	)
Other comprehensive income
Unrealized holding gain arising during period, (net of tax, $659)			—				—				—				—				—				—				1,279				1,279
Total comprehensive loss																															(2,203	)
Preferred stock dividend			—				—				—				(410	)			—				—				—				(410	)
Accretion of discount on preferred stock			—				—				—				(98	)			—				98				—				—
Stock based compensation			—				—				95				—				—				—				—				95
Balance September 30, 2011		$	44			$	11,885			$	29,834			$	(2,347	)		$	661			$	(336	)		$	1,416			$	41,157

See notes to consolidated financial statements.

 

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First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2011 and 2010

(dollars shown in thousands)

 

		2011				2010
		(Unaudited)
Cash flows from operating activities
Net loss		($	3,482	)		($	2,484	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses			8,572				7,121
Depreciation of premises and equipment			453				364
Stock based compensation expense			95				33
Deferred income taxes			160				(1,412	)
Gain on sale of securities			644				216
Loss on sale and write-down of OREO			321				—
Increase cash surrender value BOLI			(137	)			—
Net amortization of bond premiums/discounts			597				446
Decrease in other assets			(1,457	)			(1,381	)
Decrease in accrued interest receivable			54				221
Increase in accrued expenses and other liabilities			1,125				263
Net cash provided by operating activities			6,945				3,387
Cash flows from investing activities
Proceeds from maturities and calls of securities			6,500				15,950
Proceeds from paydowns of securities available-for-sale			8,437				9,741
Purchase of securities available-for-sale			(43,736	)			(40,225	)
Proceeds from sale of securities available-for-sale			24,221				4,178
Proceeds from sale of OREO			1,075				851
Purchase Bank owned life insurance			(8,249	)			—
Purchase of FHLB Stock			(9	)			(243	)
Purchase of Federal Reserve Stock			(3	)			(268	)
Purchases of premises and equipment			(245	)			(3,771	)
Net decrease (increase) in loans			6,334				(7,765	)
Net cash used in investing activities			(5,675	)			(21,552	)
Cash flows from financing activities
Net increase in deposits			5,599				14,403
(Repayments) advances from FHLB			(5,000	)			5,000
Dividends on preferred stock			(410	)			(411	)
Net decrease in certificates of deposit			—				(7,703	)
Net increase in repurchase agreements			400				224
Net cash provided by financing activities			589				11,513
Net increase (decrease) in cash and cash equivalents			1,859				(6,652	)
Cash and cash equivalents, beginning of period			32,367				31,667
Cash and cash equivalents, end of period		$	34,226			$	25,015
Supplemental disclosure of cash flow information
Interest paid during the period		$	6,375			$	7,918
Taxes paid during the period		$	611			$	825
Supplemental schedule of noncash investing and financing activities
Transfer of loans to other real estate owned		$	7,317			$	302
Unrealized gain on securities available for sale		$	1,938			$	2,090

See notes to consolidated financial statements.

 

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First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation

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

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

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

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

Note 2 – Use of Estimates

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

Note 3 – Earnings per share

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

 

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

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		(dollars shown in thousands, except per share amounts)
		2011				2010				2011				2010
Net (loss) income allocable to common shareholders		$	(2,762	)		$	467			$	(3,991	)		$	(2,992	)
Weighted average number of shares outstanding			2,971,171				2,971,171				2,971,171				2,971,171
Loss per common share - basic		($	0.93	)		$	0.16			($	1.34	)		($	1.01	)
Effect of dilutive securities:
Weighted average number of shares outstanding			2,971,171				2,971,171				2,971,171				2,971,171
Effect of stock options			—				—				—				—
Diluted average shares outstanding			2,971,171				2,971,171				2,971,171				2,971,171
Loss per common share - assuming dilution		($	0.93	)		$	0.16			($	1.34	)		($	1.01	)

The Company has excluded 472,157 shares and 439,388 shares for the three months and nine months ended September 30, 2011 and 292,947 shares and 153,764 shares for the three months and nine months ended September 30, 2010 from the calculation of diluted earnings per share as they were anti-dilutive due to the Company’s net losses during the three and nine month periods ended September 30, 2011 and 2010, since the strike price was greater than the average market price during all periods.

Note 4 – Stock Options

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

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

 

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

 

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

The stock based compensation, in thousands, expensed during the three months and nine months ended September 30, 2011 was $36 and $95, respectively and is included in salaries and employee benefits.

Note 5 – Investment Securities

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

 

		September 30, 2011
		Amortized Costs				Gross Unrealized								Fair Values
						Gains				Losses
		(dollars shown in thousands)
Available-for-sale
U.S. Government agencies		$	—			$	—			$	—			$	—
Mortgage-backed securities			15,562				483				—				16,045
Corporate bonds			14,538				4				484				14,058
CMO securities			38,749				1,103				—				39,852
State and political subdivisions - taxable			8,971				594				—				9,565
State and political subdivisions - tax exempt			9,911				408				—				10,319
SBA - Guarantee portion			1,679				38				—				1,717
		$	89,410			$	2,630			$	484			$	91,556
		December 31, 2010
		Amortized Costs				Gross Unrealized								Fair Values
						Gains				Losses
		(dollars shown in thousands)
Available-for-sale
U.S. Government agencies		$	6,533			$	48			$	—			$	6,581
Mortgage-backed securities			14,834				347				159				15,022
Corporate bonds			6,412				21				31				6,402
CMO securities			30,587				568				111				31,044
State and political subdivisions - taxable			12,319				106				419				12,006
State and political subdivisions - tax exempt			12,150				88				246				11,992
SBA - Guarantee portion			3,743				12				15				3,740
		$	86,578			$	1,190			$	981			$	86,787

 

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		September 30, 2011
		Amortized Costs				Gross Unrealized								Fair Values
						Gains				Losses
		(dollars shown in thousands)
Held-to-maturity
Tax-exempt municipal bonds		$	2,885			$	237			$	2			$	3,120
		$	2,885			$	237			$	2			$	3,120
		December 31, 2010
		Amortized Costs				Gross Unrealized								Fair Values
						Gains				Losses
		(dollars shown in thousands)
Held-to-maturity
Tax-exempt municipal bonds		$	2,389			$	54			$	81			$	2,362
		$	2,389			$	54			$	81			$	2,362

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

 

•

the entity intends to sell the security;

 

•

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

 

•

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

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

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

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

 

		September 30, 2011
		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Number of Investments				Fair Value				Unrealized Losses
		(dollars shown in thousands)
Assets:
Corporate bonds		$	10,060			$	482			$	998			$	2				8			$	11,058			$	484
All securities		$	10,060			$	482			$	998			$	2				8			$	11,058			$	484

 

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		December 31, 2010
		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Number of Investments				Fair Value				Unrealized Losses
		(dollars shown in thousands)
Assets:
Mortgage-backed securities		$	6,051			$	160			$	—			$	—				4			$	6,051			$	160
Corporate bonds			5,337				31				—				—				5				5,337				31
CMO securities			6,545				111				—				—				7				6,545				111
State & political subdivisions-taxable			10,011				419				—				—				13				10,011				419
State & political subdivisions-tax exempt			8,918				326				—				—				16				8,918				326
SBA			2,073				15				—				—				2				2,073				15
All securities		$	38,935			$	1,062			$	—			$	—				47			$	38,935			$	1,062

Note 6 – Loans

Major classifications of loans are as follows:

 

		September 30, 2011				December 31, 2010
		Amount				Amount
		(dollars shown in thousands)
Commercial		$	39,337			$	48,004
Real estate - 1-4 residential			123,398				118,209
Real estate - commercial			146,021				145,399
Real estate - construction			10,696				15,852
Real estate - land development & land loans			50,233				66,041
Consumer			3,163				3,693
Total loans			372,848				397,198
Less:
Allowance for loan losses			9,026				11,036
Net deferred (income) costs			164				47
Loans, net		$	363,986			$	386,209

A summary of risk characteristics by loan portfolio classification follows:

Commercial and Industrial Business – 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. This category of loans sustained lower than average losses in 2010 and 2011.

Real Estate – 1-4 Residential – This portfolio primarily consists of investor loans secured by properties in the Bank’s normal lending area. Those investor loans are typically a five year rate adjustment loans. These loans generally have an original loan-to-value (“LTV”) of 80% or less. This category also includes home equity lines of credit (“HELOC”). The HELOCs generally had 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.

 

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

Real Estate – Land Development and Land Loans – This portfolio includes raw undeveloped land and developed residential lots held by builders and 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.

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 nine months ended September 30, 2011 and 2010 is as follows:

 

		2011				2010
		(dollars shown in thousands)
Balance, beginning of year		$	11,036			$	6,600
Provision for loan losses			8,572				7,121
Recoveries			845				12
Charge-offs			(11,427	)			(2,710	)
Balance, September 30		$	9,026			$	11,023
Ratio of allowance for loan losses as a percent of loans outstanding at the end of the period			2.42	%			2.70	%

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

 

		Three Months Ended September 30, 2011
		RE-Construction, Land and Land Development				RE- Commercial				Commercial				Consumer				RE-1-4 Residential				Total
		(dollars shown in thousands)
Balance, July 1, 2011		$	4,000			$	2,437			$	2,415			$	36			$	1,265			$	10,153
Provision for loan losses			2,926				150				—				—				1,650				4,726
Loans charged off			(3,727	)			(150	)			(287	)			—				(1,715	)			(5,879	)
Recoveries			20				—				2				—				4				26
Balance, September 30, 2011		$	3,219			$	2,437			$	2,130			$	36			$	1,204			$	9,026

 

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		Three Months Ended September 30, 2010
		RE-Construction, Land and Land Development				RE- Commercial				Commercial				Consumer				RE-1-4 Residential				Total
		(dollars shown in thousands)
Balance, July 1, 2010		$	4,828			$	2,569			$	1,696			$	15			$	2,373			$	11,481
Provision for loan losses			—				—				375				—				—				375
Loans charged off			(426	)			(85	)			—				—				(322	)			(833	)
Recoveries			—				—				—				—				—				—
Balance September 30, 2010		$	4,402			$	2,484			$	2,071			$	15			$	2,051			$	11,023

 

		Nine Months Ended September 30, 2011
		RE-Construction, Land and Land Development				RE- Commercial				Commercial				Consumer				RE-1-4 Residential				Total
		(dollars shown in thousands)
Balance, January 1, 2011		$	4,000			$	2,500			$	3,000			$	36			$	1,500			$	11,036
Provision for loan losses			5,370				150				600				—				2,453				8,573
Loans charged off			(6,971	)			(213	)			(1,477	)			—				(2,766	)			(11,427	)
Recoveries			820				—				7				—				17				844
Balance, September 30, 2011		$	3,219			$	2,437			$	2,130			$	36			$	1,204			$	9,026

 

		Nine Months Ended September 30, 2010
		RE-Construction, Land and Land Development				RE- Commercial				Commercial				Consumer				RE-1-4 Residential				Total
		(dollars shown in thousands)
Balance, January 1, 2010		$	2,500			$	2,285			$	800			$	15			$	1,000			$	6,600
Provision for loan losses			3,400				500				1,436				—				1,785				7,121
Loans charged off			(1,498	)			(301	)			(177	)			—				(734	)			(2,710	)
Recoveries			—				—				12				—				—				12
Balance September 30, 2010		$	4,402			$	2,484			$	2,071			$	15			$	2,051			$	11,023

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.

 

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

 

		September 30, 2011
		30 - 89 Days Past Due				90+ Days Past Due				Nonaccrual Loans				Current Loans				Total
		(dollars shown in thousands)
Commercial		$	92			$	—			$	1,263			$	37,982			$	39,337
Real Estate
Residential			2,111				—				5,366				115,921				123,398
Commercial			140				—				2,929				142,952				146,021
Construction			—				—				1,173				9,523				10,696
Land Development and land loans			—				—				7,017				43,216				50,233
Consumer			—				—				707				2,456				3,163
Total		$	2,343			$	—			$	18,455			$	352,050			$	372,848

 

		December 31, 2010
		30 - 89 Days Past Due				90+ Days Past Due				Nonaccrual Loans				Current Loans				Total
		(dollars shown in thousands)
Commercial		$	—			$	993			$	5,615			$	41,396			$	48,004
Real Estate
Residential			719				564				8,402				108,524				118,209
Commercial			—				—				355				145,044				145,399
Construction			492				—				1,366				13,994				15,852
Land Development and land loans			16				—				6,617				59,408				66,041
Consumer			10				—				—				3,683				3,693
Total		$	1,237			$	1,557			$	22,355			$	372,049			$	397,198

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

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

 

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

 

		September 30, 2011
		Pass				Special Mention				Substandard				Doubtful				Loss				Total
		(dollars shown in thousands)
Commercial		$	34,296			$	3,098			$	1,944			$	—			$	—			$	39,338
Real Estate
Residential			107,536				5,983				9,878				—				—				123,397
Commercial			134,123				5,502				6,397				—				—				146,022
Construction			2,239				3,607				4,849				—				—				10,695
Land Development and land loans			20,312				14,576				15,345				—				—				50,233
Consumer			2,216				150				797				—				—				3,163
		$	300,722			$	32,916			$	39,210			$	—			$	—			$	372,848

 

		December 31, 2010
		Pass				Special Mention				Substandard				Doubtful				Loss				Total
		(dollars shown in thousands)
Commercial		$	36,318			$	3,884			$	7,802			$	—			$	—			$	48,004
Real Estate
Residential			101,115				4,962				12,087				45				—				118,209
Commercial			132,060				12,180				1,159				—				—				145,399
Construction			4,009				6,739				5,104				—				—				15,852
Land Development and land loans			24,220				21,409				20,412				—				—				66,041
Consumer			3,415				188				90				—				—				3,693
		$	301,137			$	49,362			$	46,654			$	45			$	—			$	397,198

These credit quality indicators are defined as follows:

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

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

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

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

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

 

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The loan risk rankings were updated for the quarter ended September 30, 2011 on September 20, 21 and 22. The loan risk rankings were updated for the quarter ended September 30, 2010 on September 27, 28 and 29.

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

 

		September 30, 2011												December 31, 2010
		Recorded Investment in Impaired Loans				Unpaid Principal Balance of Impaired Loans				Related Allowance				Recorded Investment in Impaired Loans				Unpaid Principal Balance of Impaired Loans				Related Allowance
		(dollars shown in thousands)
With no related allowance:
Commercial		$	409			$	409			$	—			$	543			$	545			$	—
Consumer			707				707				—				—				—				—
Real Estate
Residential			3,221				3,295				—				3,312				3,382				—
Commercial			34				45				—				—				—				—
Construction			1,173				2,423				—				505				505				—
Land Development and land loans			6,497				7,501				—				1,942				3,044				—
Total		$	12,041			$	14,380			$	—			$	6,302			$	7,476			$	—
With an allowance:
Commercial		$	821			$	854			$	250			$	5,072			$	5,088			$	1,912
Consumer			—
Real Estate
Residential			3,151				4,304				962				6,246				6,266				1,977
Commercial			2,929				3,627				912				355				367				138
Construction			—				6				—				1,474				1,489				241
Land Development and land loans			1,425				1,574				950				6,091				6,091				1,450
Total		$	8,326			$	10,365			$	3,074			$	19,238			$	19,301			$	5,718

 

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Total:
Commercial		$	1,230			$	1,263			$	250			$	5,615			$	5,633			$	1,912
Consumer			707				707				—				—				—				—
Real Estate
Residential			6,372				7,599				962				9,558				9,648				1,977
Commercial			2,963				3,672				912				355				367				138
Construction			1,173				2,429				—				1,979				1,994				241
Land Development and land loans			7,922				9,075				950				8,033				9,135				1,450
Total		$	20,367			$	24,745			$	3,074			$	25,540			$	26,777			$	5,718

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:

 

		Construction and Land Development				Commercial Real Estate				Commercial and Industrial				Consumer				Residential				Total
		(dollars shown in thousands)
September 30, 2011
Allowance for loan losses
Individually evaluated for impairment		$	950			$	912			$	250			$	—			$	962			$	3,074
Collectively evaluated for impairment			2,269				1,525				1,880				36				242				5,952
Total ending allowance		$	3,219			$	2,437			$	2,130			$	36			$	1,204			$	9,026
Loans
Individually evaluated for impairment		$	9,615			$	2,929			$	1,264			$	707			$	5,852			$	20,367
Collectively evaluated for impairment			51,314				143,092				38,073				2,456				117,546				352,481
Total loans		$	60,929			$	146,021			$	39,337			$	3,163			$	123,398			$	372,848
December 31, 2010
Allowance for loan losses
Individually evaluated for impairment		$	1,691			$	138			$	1,912			$	—			$	1,977			$	5,718
Collectively evaluated for impairment			2,756				2,362				16				15				169				5,318
Total ending allowance		$	4,447			$	2,500			$	1,928			$	15			$	2,146			$	11,036
Loans
Individually evaluated for impairment		$	10,012			$	355			$	5,615			$	—			$	9,558			$	25,540
Collectively evaluated for impairment			71,881				145,044				42,389				3,693				113,302				376,309
Total loans		$	81,893			$	145,399			$	48,004			$	3,693			$	122,860			$	401,849

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

 

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loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The following table presents interest income recognized and the average recorded investment of impaired loans.

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		(dollars shown in thousands)								(dollars shown in thousands)
		Interest income recognized				Average Recorded Investment  in Impaired Loans				Interest income recognized				Average Recorded Investment  in Impaired Loans
2011
Real Estate
Construction, land and land development		$	2			$	11,630			$	226			$	11,630
Commercial			—				3,638				—				3,638
Residential			(5	)			8,307				222				8,307
Commercial			(8	)			1,368				87				1,368
Consumer			—				236				—				236
Total		$	(11	)		$	25,179			$	535			$	25,179
2010
Real Estate
Construction, land and land development		$	(43	)		$	9,879			$	76			$	9,879
Commercial			(21	)			580				(16	)			580
Residential			330				10,142				423				10,142
Commercial			(58	)			5,257				(58	)			5,257
Consumer			—				1				—				1
Total		$	208			$	25,859			$	425			$	25,859

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.

As of September 30, 2011, the Company had $2.7 million accruing loans classified as trouble debt restructurings where the measurement of impairment was based on the present value of expected future cash flows.

Troubled Debt Restructurings

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

 

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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 September 30, 2011 and December 31, 2010, there were no available commitments outstanding for troubled debt restructurings.

The following tables present troubled debt restructurings as of September 30, 2011 and December 31, 2010:

 

		September 30, 2011
		Accrual Status				Non-Accrual Status				Total Number of Contracts				Total Modifications
		(dollars shown in thousands)
Commercial		$	2,200			$	186				6			$	2,386
Real estate - 1-4 residential			487				3,844				11				4,331
Real estate - commercial			—				—				—				—
Real estate - construction			—				1,153				5				1,153
Real estate - land development and land loans			—				—				—				—
Consumer			—				—				—				—
Total		$	2,687			$	5,183				22			$	7,870

 

		December 31, 2010
		Accrual Status				Non-Accrual Status				Total Number of Contracts				Total Modifications
		(dollars shown in thousands)
Commercial		$	—			$	244				4			$	244
Real estate - 1-4 residential			490				4,942				11				5,432
Real estate - commercial			—				—				—				—
Real estate - construction			—				1,078				4				1,078
Real estate - land development and land loans			—				—				—				—
Consumer			—				—				—				—
Total		$	490			$	6,264				19			$	6,754

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

 

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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.

The following tables present newly restructured loans that occurred during the three and nine months ended September 30, 2011 and 2010, respectively, of which all loans presented the same outstanding recorded investment both pre-modification and post modification:

 

		Three months ended September 30, 2011
		Number of Contracts				Rate Modifications				Term Modifications				Interest Only Modifications				Payment Modifications				Combination Modifications				Total Modifications
		(dollars shown in thousands)
Commercial			—			$	—			$	—			$	—			$	—			$	—			$	—
Real estate - 1-4 residential			—				—				—				—				—				—				—
Real estate - commercial			—				—				—				—				—				—				—
Real estate - construction			1				—				—				—				—				107				107
Real estate - land development and land loans			—				—				—				—				—				—				—
Consumer			—				—				—				—				—				—				—
Total			1			$	—			$	—			$	—			$	—			$	107			$	107

 

		Three months ended September 30, 2010
		Number of Contracts				Rate Modifications				Term Modifications				Interest Only Modifications				Payment Modifications				Combination Modifications				Total Modifications
		(dollars shown in thousands)
Commercial			—			$	—			$	—			$	—			$	—			$	—			$	—
Real estate - 1-4 residential			8				—				—				—				—				1,879				1,879
Real estate - commercial			—				—				—				—				—				—				—
Real estate - construction			—				—				—				—				—				—				—
Real estate - land development and land loans			—				—				—				—				—				—				—
Consumer			—				—				—				—				—				—				—
Total			8			$	—			$	—			$	—			$	—			$	1,879			$	1,879

 

		Nine months ended September 30, 2011
		Number of Contracts				Rate Modifications				Term Modifications				Interest Only Modifications				Payment Modifications				Combination Modifications				Total Modifications
		(dollars shown in thousands)
Commercial			—			$	—			$	—			$	—			$	—			$	—			$	—
Real estate - 1-4 residential			—				—				—				—				—				—				—
Real estate - commercial			—				—				—				—				—				—				—
Real estate - construction			3				—				—				—				—				2,307				2,307
Real estate - land development and land loans			—				—				—				—				—				—				—
Consumer			—				—				—				—				—				—				—
Total			3			$	—			$	—			$	—			$	—			$	2,307			$	2,307

 

		Nine months ended September 30, 2010
		Number of Contracts				Rate Modifications				Term Modifications				Interest Only Modifications				Payment Modifications				Combination Modifications				Total Modifications
		(dollars shown in thousands)
Commercial			1			$	—			$	—			$	—			$	—			$	134			$	134
Real estate - 1-4 residential			9				—				—				—				—				2,068				2,068
Real estate - commercial			—				—				—				—				—				—				—
Real estate - construction			3				—				—				—				—				113				113
Real estate - land development and land loans			—				—				—				—				—				—				—
Consumer			—				—				—				—				—				—				—
Total			13			$	—			$	—			$	—			$	—			$	2,315			$	2,315

 

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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 nine month periods ended September 30, 2011 and 2010, respectively:

 

		Three months ended
		September 30, 2011								September 30, 2010
		Number of Contracts				Recorded Investment				Number of Contracts				Recorded Investment
		(dollars shown in thousands)
Commercial			—			$	—				1			$	134
Real estate - 1-4 residential			1				139				6				1,194
Real estate - commercial			—				—				—				—
Real estate - construction			1				108				—				—
Real estate - land development and land loans			—				—				—				—
Consumer			—				—				—				—
Total			2			$	247				7			$	1,328

 

		Nine months ended
		September 30, 2011								September 30, 2010
		Number of Contracts				Recorded Investment				Number of Contracts				Recorded Investment
		(dollars shown in thousands)
Commercial			—			$	—				1			$	134
Real estate - 1-4 residential			1				139				6				1,194
Real estate - commercial			—				—				—				—
Real estate - construction			4				220				—				—
Real estate - land development and land loans			—				—				—				—
Consumer			—				—				—				—
Total			5			$	359				7			$	1,328

 

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Note 7 – Other Real Estate Owned

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

 

		Nine Months Ended
		September 30,
		2011				2010
		(dollars shown in thousands)
Beginning Balance		$	2,615			$	3,388
Additions			7,317				1,417
Sales			(1,196	)			(851	)
Write-downs			(200	)			(1,103	)
Balance September 30		$	8,536			$	2,851

Note 8 – Fair Value Disclosures

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

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

Fair Value Hierarchy

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

 

•

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

 

•

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

 

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•

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

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

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

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

 

		September 30, 2011
		Fair Value Measurements Using												Fair Values
		Level 1				Level 2				Level 3
		(dollars shown in thousands)
Assets:
Available-for-sale securities		$	—			$	91,556			$	—			$	91,556
		December 31, 2010
		Fair Value Measurements Using												Fair Values
		Level 1				Level 2				Level 3
		(dollars shown in thousands)
Assets:
Available-for-sale securities		$	—			$	86,787			$	—			$	86,787

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

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

Impaired Loans: Loans are designated as impaired when, in the judgment of management, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans.

 

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Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed external appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. In the event a real estate loan becomes a nonperforming loan, or if the valuation is over one year old, either an evaluation by an officer of the Bank or an outside vendor, or an appraisal is performed to determine current market value. We consider the value of a partially completed project for our loan analysis. For nonperforming construction loans, we obtain a valuation of each partially completed project “as is” from a third party appraiser. We use this third party valuation to determine if any charge-offs are necessary.

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

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

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

 

		September 30, 2011
		Fair Value Measurements Using												Fair Values
		Level 1				Level 2				Level 3
		(Dollars shown in thousands)
Impaired loans		$	—			$	—			$	17,293			$	17,293
Other real estate owned			—				—				8,536				8,536
Total		$	—			$	—			$	25,829			$	25,829

 

		December 31, 2010
		Fair Value Measurements Using												Fair Values
		Level 1				Level 2				Level 3
		(dollars shown in thousands)
Impaired loans		$	—			$	—			$	19,822			$	19,822
Other real estate owned			—				—				2,615				2,615
Total		$	—			$	—			$	22,437			$	22,437

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

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

Available-for-sale and held-to-maturity securities – Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relaying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities

 

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exchanges, U.S. Treasury securities, and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets. The carrying value of restricted FRB and FHLB stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the following table.

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

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

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

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

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

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

 

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

 

		September 30, 2011								December 31, 2010
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
		(dollars shown in thousands)
Financial assets
Cash and cash equivalents		$	34,226			$	34,226			$	32,367			$	32,367
Investment securities			94,451				94,676				89,176				89,149
Loans receivable, net			363,986				372,603				386,209				394,489
Accrued interest			2,008				2,008				2,062				2,062
Financial liabilities
Deposits		$	432,469			$	441,102			$	426,871			$	429,597
FHLB advances			50,000				53,957				55,000				57,766
Federal funds purchased			—								—				—
Subordinated debt			7,155				3,740				7,155				3,455
Repurchase agreements			1,477				1,477				1,077				1,077
Unrecognized financial instruments
Standby letters of credit issued		$	—			$	—			$	—			$	—

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

Note 9 – Recently Issued Accounting Pronouncements

In July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company is required to include these disclosures in its interim and annual financial statements. Disclosures about Troubled Debt Restructurings (“TDR”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011, the FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present. Disclosures related to TDRs under ASU 2010-20 are effective for reporting periods beginning after June 15, 2011.

In April 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The ASU is intended to improve financial reporting of repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. In a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. FASB Accounting Standards Codification Topic 860, Transfers and Servicing, prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repo agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets. The amendments to the Codification in this ASU are intended to improve the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets. The guidance in the ASU is effective for the first interim or annual period beginning on or after

 

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December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is currently in the process of evaluating the impact that this ASU may have on the consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.“ The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the FASB Accounting Standards Codification in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company is currently in the process of evaluating the impact that this ASU may have on the consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends the FASB Accounting Standards Codification to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements other than the change in presentation of comprehensive income when this ASU is adopted.

In September 2011, The FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

 

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ITEM 2.

FIRST CAPITAL BANCORP, INC

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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

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

 

•

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

 

•

Changes in interest rates could reduce income.

 

•

Competitive pressures among financial institutions may increase.

 

•

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

 

•

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

 

•

Adverse changes may occur in the securities market.

OVERVIEW

The net loss for the third quarter of 2011 was $2.6 million, and net loss allocable to common shareholders was $2.8 million, or ($0.93) per fully diluted share compared to a net income of $637 thousand, and a net income allocable to common shareholders of $467 thousand or $0.16 per fully diluted share, in the third quarter of 2010. The loss in the third quarter of 2011 was due primarily to the recognition of losses on several nonaccrual loans and properties included in other real estate owned. In that regard, the Company disposed of other real estate owned and charged-off loans totaling $6.1 million during the third quarter of 2011.

The net loss for the first nine months of 2011 was $3.5 million and the net loss allocable to common shareholders was $4.0 million or ($1.34) per fully diluted share compared to a net loss of $2.5 million and a net loss allocable to common shareholders was $3.0 million or ($1.01) per fully diluted share for the same period of 2010.

During the third quarter of 2011, the Company commenced a mortgage operation. For the third quarter, the Company incurred approximately $180 thousand in start up expenses without production offsets. The Company expects the mortgage operation to make a positive contribution in the fourth quarter of 2011and a positive contribution for 2012.

From a revenue and cost perspective, income before tax and provision for loan losses decreased from $1.3 million for the third quarter of 2010 to $718 thousand for the third quarter of 2011. For the nine months ended September 30, 2011, income pre-tax and pre-provision as compared to the comparable period in 2010 decreased to $3.1 million from

 

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$3.2 million. Contributing to both the three and nine month decrease was the $180 thousand in mortgage operation start-up costs and a reduction in the net interest income for the three months ended September 30, 2011 of $219 thousand due to a reduction in the loan portfolio. The following chart reconciles the above to the net income (loss) for the periods presented.

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
		(Dollars in thousands)
Income before tax and provision		$	718			$	1,289			$	3,097			$	3,224
Provision for loan losses			4,726				375				8,572				7,121
Income before income tax			(4,008	)			914				(5,475	)			(3,897	)
Income tax (benefit)			(1,416	)			277				(1,993	)			(1,413	)
Net (loss) income		$	(2,592	)		$	637			$	(3,482	)		$	(2,484	)

Financial Condition

Total assets at September 30, 2011 were $535.6 million, down $394 thousand from $536.0 million at December 31, 2010. Net loans outstanding were $364.0 million at September 30, 2011, a decrease of $22.2 million, compared to the 2010 year-end balance. This was the result of a continued, focused effort by the Bank to decrease its exposure to speculative real estate loans. Deposits increased by $5.6 million to $432.5 million, up 1.3% from December 31, 2010. Our deposit strategy was focused on decreasing noncore funding sources and single service CD relationships and increasing noninterest-bearing deposit accounts which increased $8.5 million or 21.1% from December 31, 2010.

At September 30, 2011, the Company’s investment portfolio totaled $94.5 million, an increase of $5.3 million from $89.2 million at December 31, 2010. Most of the funds that are invested in the Company’s investment portfolio are part of management’s effort to balance interest rate risk, to provide liquidity and income to the Company. Bank owned life insurance of $8.2 million was purchased during the second quarter of 2011 primarily as an investment for the Company.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income represents a principal source of earnings for the Company. Changes in net interest income during 2011 to date compared to net interest income for the comparable period of 2010 are attributable to decreasing loan portfolio yields, decreasing average balances of loans outstanding and a decrease in total funding costs.

Net interest margin increased 2 basis points for the three months ended September 30, 2011 to 3.26% as compared to 3.24% for the third quarter of 2010, reflecting a decrease in average rate paid on interest-bearing liabilities of 37 basis points from 2.22% for the third quarter of 2010 to 1.85% for the third quarter of 2011. This was offset by a 30 basis point decrease in the average yield on earning assets. The yield on loans, net of discount, was 5.58% and 5.72% for the third quarters of 2011 and 2010, respectively, with the decrease due primarily to decreases in loans outstanding and lower rates during the period. The average yield on investments decreased from 4.00% for the third quarter of 2010 to 3.08% for the third quarter of 2011 while average balances in investments increased from $84.2 million for the third quarter of 2010 to $91.4 million for the third quarter of 2011. Average interest bearing deposits and fed funds sold, which were earning 0.23% for the both quarters of 2010 and 2011, remained unchanged.

For the three months ended September 30, 2011, net interest income was down $482 thousand from $2.5 million for the third quarter of 2010 to $2.1 million for the third quarter of 2011. This decrease is due to the reduction in average loans outstanding of $33.0 million from $412.5 million for the quarter ended September 30, 2010 compared to $379.5 million for the quarter ended September 30, 2011.

 

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Total interest and fees on loans, the largest component of net interest income, decreased $571 thousand or 9.60% to $5.4 million during the third quarter of 2011 compared to $5.9 million for the same period in 2010 primarily due to decreases in loans outstanding of $3.0 million since September 30, 2010.

Interest expense on deposits decreased $388 thousand to $1.6 million, or 19.3% for the third quarter of 2011 compared to the same period of 2010. The decrease in deposit expense is due to the restructuring of the deposit mix and a decrease in overall rates paid on deposits as interest rates paid on interest bearing deposits decreased 35 basis points to 1.68% from the third quarter of 2011 from 2.03% for the third quarter of 2010.

For the nine months ended September 30, 2011, the net interest margin increased 11 basis points from 3.17% for the first nine months of 2010 to 3.28% for the first nine months of 2011. The primary increase in the net interest margin is the reduction of the average rate paid on interest bearing liabilities from 2.35% for the nine months ended September 30, 2010 to 1.93% for the same period of 2011, a reduction in interest expense of $1.5 million from $7.9 million for the first nine months of 2010 to $6.4 million for the comparable period of 2011. This was offset by a reduction in the average loans outstanding from $412.0 million for the nine months ended September 30, 2010 to $388.4 million for the nine months ended September 30, 2011. This resulted in a decrease in interest income on loans of $1.3 million from $17.6 million for the first nine months of 2010 to $16.3 million for the comparable period in 2011.

Net interest income increased $9 thousand for the first nine months of 2011 compared to the comparable period in 2010.

Average Balances, Income and Expenses, Yields and Rates

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

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

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

 

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Average Balances, Income and Expenses, Yields and Rates

 

		Three Months Ended September 30,
		2011												2010
		Average Balance				Income/ Expense				Yields/ Rates				Average Balance				Income/ Expense				Yields/ Rates
		(Dollars in thousands)
Assets:
Securities:
Taxable		$	78,746			$	517				2.60	%		$	69,610			$	628				3.58	%
Tax exempt (1)			12,691				194				6.08	%			14,617				222				6.03	%
Total securities			91,437				711				3.08	%			84,227				850				4.00	%
Federal funds sold			—				—				0.00	%			1,000				1				0.24	%
Bank owned life insurance			8,792				138				6.24	%			—				—				0.00	%
Interest bearing deposits			21,027				12				0.23	%			20,976				12				0.23	%
FHLB & Federal Reserve Bank stock			4,591				24				2.09	%			4,579				18				1.52	%
Loans, net of unearned income (2)			379,535				5,331				5.58	%			412,513				5,947				5.72	%
Total earning assets			505,382				6,216				4.88	%			523,295				6,828				5.18	%
Allowance for loan losses			(9,603	)											(11,256	)
Cash and cash equivalents			7,935												6,206
OREO			7,535												2,321
Fixed assets			11,270												10,585
Other nonearning assets			10,080												11,881
Total assets		$	521,329											$	532,447
Liabilities & Stockholders’ Equity:
Interest checking		$	10,752			$	10				0.35	%		$	8,812			$	9				0.38	%
Money market deposit accounts			151,396				258				0.68	%			150,303				421				1.11	%
Statement savings			910				1				0.42	%			709				1				0.47	%
Certificates of deposit			218,012				1,349				2.46	%			231,886				1,577				2.70	%
Total interest-bearing deposits			381,070				1,618				1.68	%			391,710				2,008				2.03	%
Repurchase agreements			1,181				1				0.50	%			1,916				2				0.50	%
Subordinated debt			7,155				34				1.90	%			7,155				61				3.37	%
FHLB Advances			53,370				414				3.07	%			55,000				478				3.45	%
Total interest bearing liabilities			442,776				2,067				1.85	%			455,781				2,549				2.22	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits			44,685												41,391
Other noninterest-bearing liabilities			1,713												1,897
Stockholders’ equity			43,425												44,397
Total liabilities and stockholders’ equity		$	532,599											$	543,466
Net interest spread											3.03	%											2.96	%
Impact of noninterest-bearing sources											0.23	%											0.29	%
Net interest margin						$	4,149				3.26	%						$	4,279				3.24	%
Ratio of average interest earning assets to average interest-bearing liabilities											114.14	%											114.81	%

 

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

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

 

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Average Balances, Income and Expenses, Yields and Rates

 

		Nine Months Ended September 30,
		2011												2010
		Average Balance				Income/ Expense				Yields/ Rates				Average Balance				Income/ Expense				Yields/ Rates
		(Dollars in thousands)
Assets:
Securities:
Taxable		$	72,426			$	1,584				2.92	%		$	67,151			$	1,867				3.72	%
Tax exempt (1)			13,804				651				6.31	%			12,676				589				6.21	%
Total securities			86,230				2,235				3.47	%			79,827				2,456				4.11	%
Federal funds sold			—				—				0.00	%			1,000				2				18.00	%
Bank owned life insurance			4,866				209				5.73	%			—				—				0.00	%
Interest bearing deposits			24,085				42				0.23	%			17,604				30				23.00	%
FHLB & Federal Reserve Bank stock			4,587				81				2.35	%			4,520				61				1.80	%
Loans, net of unearned income (2)			388,433				16,268				5.60	%			411,972				17,551				5.70	%
Total earning assets			508,201				18,835				4.96	%			514,923				20,100				5.22	%
Allowance for loan losses			(10,530	)											(8,296	)
Cash and cash equivalents			7,563												6,329
OREO			4,258												2,722
Fixed assets			11,340												10,585
Other nonearning assets			9,477												9,141
Total assets		$	530,309											$	535,404
Liabilities & Stockholders’ Equity:
Interest checking		$	10,063			$	28				37.00	%		$	8,716			$	25				0.38	%
Money market deposit accounts			145,716				847				78.00	%			147,564				1,438				1.30	%
Statement savings			907				3				43.00	%			692				3				49.00	%
Certificates of deposit			221,586				4,150				2.50	%			229,540				4,804				2.80	%
Total interest-bearing deposits			378,272				5,028				1.78	%			386,512				6,270				2.17	%
Repurchase agreements			1,098				4				47.00	%			1,279				5				0.50	%
Subordinated debt			7,155				103				1.92	%			7,155				175				3.28	%
FHLB Advances			54,450				1,234				3.03	%			53,919				1,423				3.53	%
Total interest bearing liabilities			440,975				6,369				1.93	%			448,865				7,873				2.35	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits			43,732												38,429
Other noninterest-bearing liabilities			1,664												1,941
Stockholders’ equity			43,938												46,169
Total liabilities and stockholders’ equity		$	530,309											$	535,404
Net interest spread											3.03	%											2.87	%
Impact of noninterest-bearing sources											0.26	%											30.00	%
Net interest margin						$	12,466				3.28	%						$	12,227				3.17	%
Ratio of average interest earning assets to average interest-bearing liabilities											115.24	%											114.72	%

 

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

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

 

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Noninterest Income

Total noninterest income was $313 thousand for the third quarter of 2011, compared to $252 thousand for the same period of 2010. Fees on deposits increased 14.1% to $81 thousand for the third quarter of 2011 compared to $71 thousand for the comparable period in 2010. There were no sales of securities for the three months ended September 30, 2011 compared to a reported $50 thousand gain for the comparable period in 2010. Other noninterest income increased $101 thousand for the third quarter of 2011 to $232 thousand compared the $131 thousand for the comparable period of 2010. This increase is due to increases in commission earned on investment activity and bank owned life insurance increases in cash surrender value of life insurance.

For the nine months ended September 30, 2011, noninterest income increased $575 thousand from $798 thousand for the first nine months on 2010 to $1.4 million for the comparable period in 2011, primarily attributable to the gain on sale of securities in the second quarter to 2011 totaling $623 thousand. During the second quarter of 2011, the Company sold securities with a book value of $23.3 million to restructure the investment portfolio to reduce the duration, volatility, and provide more cash flow to take advantage of rising rates over the next two years.

Noninterest Expense

This category includes all expenses other than interest paid on deposits and borrowings. Total noninterest expenses for the third quarter of 2011 totaled $3.6 million, an increase of $413 thousand, compared to $3.2 million for the same period in 2010. The primary cause of the increase was salaries and employee benefits increased $307 thousand to $1.8 million for the three months ended September 30, 2011 compared to $1.5 million for the comparable period in 2010. The Company added a Compliance officer, an additional lending officer and controller during the 2011 period. In addition, a mortgage operation was started during the third quarter resulting in salary and benefit costs of approximately $180 thousand during the period. Occupancy expense increased $30 thousand for the third quarter of 2011 to $213 thousand from $183 thousand for the comparable period in 2010 as the Company incurred rent expense for the mortgage operation, increased real estate taxes on properties, and executed new leases on several locations. Depreciation expense increased $22 thousand to $151 thousand for the three months ended September 30, 2011 as compared to the comparable period in 2010 due to additional depreciation on the headquarters building purchased in 2010. Professional fees decreased $7 thousand for the third quarter of 2011 to $178 thousand compared to $185 thousand for the comparable period in 2010 as less legal fees were incurred related to resolution of problem loans.

For the nine months ended September 30, 2011, total noninterest expense increased $709 thousand, or 7.4% to $10.3 million from $9.6 million for the comparable period in 2010. The primary factor in the small increase in noninterest expense was the reduction in write-down and losses on OREO totaling $321 thousand for the first nine months of 2011 compared to $737 thousand for the comparable period in 2010 reflecting a more appropriate valuation of the OREO in 2010. Salaries and employee benefits increased $515 thousand, or 12.0%, to $4.8 million for the nine months ended September 30, 2011 from $4.3 million for the comparable period in 2010 reflecting increasing personnel and the start up cost of the mortgage operation.

Income Taxes

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

The effective tax benefit rates for the nine months ended September 30, 2011 and 2010 were 36.4% and 36.8%, respectively.

 

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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 $27.0 million, down from $29.4 million at June 30, 2011. This decrease reflects recognition of losses on several nonaccrual loans and properties included in other real estate owned. At December 31, 2010 and September 30, 2010 nonperforming assets totaled $26.5 million and $16.8 million, respectively. Nonperforming assets are composed largely of loans secured by real estate and repossessed properties in our OREO portfolio. At the end of the third quarter, OREO was $8.5 million, up from $2.9 million at September 30, 2010 and $2.6 million at December 31, 2010. At September 30, 2011, there were $2.7 million of troubled debt restructurings that were performing loans.

Nonaccrual loans were $18.5 million at September 30, 2011, down from $21.8 million at June 30, 2011 and up slightly to $22.4 million at December 31, 2010. The fluctuation reflects the continued efforts by the Company to decrease nonaccruals in a challenging economic environment.

Loan charge-offs, less recoveries, amounted to $5.9 million for the third quarter of 2011 compared to $883 thousand for the third quarter of 2010. For the third quarter of 2011, the provision for loan losses was $4.7 million compared to $375 thousand for the third quarter of 2010. Despite the level of real estate secured debt and the increased nonperforming assets, management is confident that we can successfully manage through the economic downturn. We anticipate continued provision expenses as the asset quality dictates the need.

Loans past due 30 to 89 days dropped to its lowest level in two years from $7.6 million at the end of the second quarter of 2011 to $2.3 million at the end of the third quarter, a $5.2 million or 69% reduction in those balances.

Although the Company believes it has sufficient allowance for its existing portfolio, there can be no assurances that an additional allowance for losses on existing loans may not be necessary in the future. The allowance for loan losses totaled $9.0 million at September 30, 2011 compared to $11.0 million at December 31, 2010 and compared to $11.0 million at September 30, 2010. The ratio of the allowance for loan losses to total loans outstanding at September 30, 2011 was 2.42% compared to 2.78% at December 31, 2010 and 2.70% at September 30, 2010.

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

 

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		Sep 30,				Jun 30,				Dec 31,				Sep 30,
		2011				2011				2010				2010
		(Dollars in thousands)
Nonaccrual loans		$	18,455			$	21,844			$	22,355			$	13,146
Loans past due 90 days and accruing interest			—				50				1,556				765
Total nonperforming loans			18,455				21,894				23,911				13,911
Other real estate owned			8,536				7,534				2,615				2,851
Total nonperforming assets		$	26,991			$	29,428			$	26,526			$	16,762
Allowance for loan losses to period end loans			2.42	%			2.65	%			2.78	%			2.70	%
Nonperforming assets to total loans & OREO			7.07	%			7.54	%			6.63	%			4.08	%
Nonperforming assets to total assets			5.04	%			5.60	%			4.95	%			3.10	%
Allowance for loan losses to nonaccrual loans			48.91	%			46.48	%			49.37	%			83.85	%
Allowance for loan losses
Beginning balance		$	10,153			$	10,570			$	11,023			$	11,481
Provision for loan losses			4,726				3,147				1,100				375
Net charge-offs			5,853				3,564				1,087				833
Ending balance		$	9,026			$	10,153			$	11,036			$	11,023

Success of Modifications

The Bank has had varying degrees of success with different types of concessions. The following tables display troubled debt restructurings as of September 30, 2011 and September 30, 2010, which were performing according to agreement.

 

		September 30, 2011
		Rate Modifications				Term Modifications				Interest Only Modifications				Payment Modifications				Combination Modifications				Total Modifications
		(dollars shown in thousands)
Commercial		$	—			$	—			$	—			$	—			$	—			$	—
Real estate - 1-4 residential			—				—				—				—				487				487
Real estate - commercial			—				—				—				—				—				—
Real estate - construction			—				—				—				—				2,200				2,200
Real estate - land development and land loans			—				—				—				—				—				—
Consumer			—				—				—				—				—				—
Total		$	—			$	—			$	—			$	—			$	2,687			$	2,687

 

		September 30, 2010
		Rate Modifications				Term Modifications				Interest Only Modifications				Payment Modifications				Combination Modifications				Total Modifications
		(dollars shown in thousands)
Commercial		$	—			$	—			$	—			$	—			$	—			$	—
Real estate - 1-4 residential			—				—				—				—				491				491
Real estate - commercial			—				—				—				—				—				—
Real estate - construction			—				—				—				—				—				—
Real estate - land development and land loans			—				—				—				—				—				—
Consumer			—				—				—				—				—				—
Total		$	—			$	—			$	—			$	—			$	491			$	491

 

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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 September 30, 2011, cash and cash equivalents totaled $34.2 million. Investment securities not pledged totaled $79.6 million, for a total of 14.9% of total assets, which management believe is adequate to meet short-term liquidity needs. Management also has alternative sources of funding available, including unused unsecured federal funds facilities with three banks totaling $22.5 million and unused available term loans through the FHLB totaling $21.8 million.

Total liquidity and other alternative sources of liquidity totaled $156.3 million at September 30, 2011 if fully utilized, which represents 29.2% of total assets.

Off-Balance Sheet Arrangements

In the normal course of business there are outstanding commitments for the extension of credit which are not reflected in the financial statements. At September 30, 2011, pre-approved but unused lines of credit for loans totaled approximately $58.4 million. In addition, we had approximately $6.5 million in financial and performance standby letters of credit at September 30, 2011. These commitments represent no more than the normal lending risk that we commit to borrowers. If these commitments are drawn, we will obtain collateral if it is deemed necessary based on our credit evaluation of the counterparty.

CAPITAL RESOURCES

The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material 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 qualified as Tier 1 capital. First Capital Bank’s ratios exceed regulatory requirements. As of September 30, 2011, the Company had a Tier 1 risk-based capital ratio of 11.32% and a Total risk-based capital ratio of 12.99%. At December 31, 2010 these ratios were 12.04% and 13.7%, respectively.

 

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

N/A

 

ITEM 4.

CONTROLS AND PROCEDURES

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

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

 

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PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings – None to report

 

Item 1A.

Risk Factors – Not Applicable

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds – None

 

Item 3.

Defaults Upon Senior Securities – None

 

Item 4.

(Removed and Reserved)

 

Item 5.

Other Information – None to report

 

Item 6.

Exhibits

 

Exhibit No.		Description of Exhibit
3.1		Articles of Incorporation of First Capital Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of Form 10-QSB filed November 13, 2006)
3.2		Amended and Restated Bylaws of First Capital Bancorp, Inc. (incorporated by reference to Exhibit 3.2 of Form 8-K filed May 22, 2007)
3.3		Articles of Amendment to the Company’s Articles of Incorporation, designating the terms of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 3.1 of Form 8-K filed April 6, 2009)
3.4		Articles of Amendment to the Company’s Articles of Incorporation, designation the terms of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 3.1 of Form 8- K filed on April 6, 2009)
3.5		Articles of Amendment to the Company’s Articles of Incorporation, increasing the number of authorized shares of Common Stock to 30,000,000 (incorporated by reference to Exhibit 3.1 of Form 8-K filed on 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 August 12, 2011.
31.2		Certification of Robert G. Watts, Jr. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 12, 2011.

 

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31.3		Certification of William W. Ranson Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 12, 2011.
32		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, dated August 12, 2011.
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 31, 2011).
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 31, 2011).
101		Interactive Date File (XBRL) furnished herewith.

 

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SIGNATURES

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

First Capital Bancorp, Inc.

 

Date: November 11, 2011				By:		/s/ John M. Presley
						John M. Presley
						Managing Director and Chief Executive Officer
				By:		/s/ William W. Ranson
						William W. Ranson
						Senior Vice President & Chief Financial Officer,

 

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