FIRST CAPITAL BANCORP, INC. - FORM 10-Q

Attached files

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EX-31.3 - EX-31.3 - FIRST CAPITAL BANCORP, INC.	fcva-20150930ex313694834.htm
EX-31.1 - EX-31.1 - FIRST CAPITAL BANCORP, INC.	fcva-20150930xex311.htm
EX-31.2 - EX-31.2 - FIRST CAPITAL BANCORP, INC.	fcva-20150930xex312.htm
EX-32 - EX-32 - FIRST CAPITAL BANCORP, INC.	fcva-20150930xex32.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________

Form 10-Q

________________________________________

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

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

For the transition period from _______ to _______

FIRST CAPITAL BANCORP, INC.

(Exact name of registrant as specified in its charter)


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

4222 Cox Road, Glen Allen, Virginia 23060

(Address of principal executive offices)

804-273-1160

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ 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 ☒ No ☐

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


Large accelerated filer ☐	Accelerated filer ☐
Non‑accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

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

12,996,691 shares of Common Stock, par value $.01 per share, were outstanding at October 28, 2015.



TABLE OF CONTENTS
				Page
PART I – FINANCIAL INFORMATION

	Item 1 – Financial Statements
		Consolidated Statements of Financial Condition
			September 30, 2015 (unaudited) and December 31, 2014	3
		Consolidated Statements of Operations
			Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)	4
		Consolidated Statements of Comprehensive Income
			Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)	5
		Consolidated Statements of Stockholders’ Equity
			Nine Months Ended September 30, 2015 and 2014 (unaudited)	6
		Consolidated Statements of Cash Flows
			For the Nine Months Ended September 30, 2015 and 2014 (unaudited)	7
		Notes to Unaudited Consolidated Financial Statements		9
	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
	Item 3 – Quantitative and Qualitative Disclosures About Market Risk – Not Applicable			40
	Item 4 – Controls and Procedures			40

PART II – OTHER INFORMATION

	Item 1 – Legal Proceedings – None to Report			41
	Item 1A – Risk Factors			41
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds			42
	Item 3 – Defaults Upon Senior Securities – None to Report			43
	Item 4 – Mine Safety Disclosures – None to Report			43
	Item 5 – Other Information – None to Report			43
	Item 6 – Exhibits			43

SIGNATURES				45

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

September 30, 2015 (Unaudited) and December 31, 2014

(Dollars in Thousands)



	September 30,		December 31,
	2015		2014
ASSETS
Cash and due from banks	$	15,772	$	11,093
Federal funds sold		3,695		-
Total cash and cash equivalents		19,467		11,093
Time deposits in other banks		2,250		2,000
Investment securities:
Available-for-sale, at fair value		78,032		74,283
Held-to-maturity, at amortized cost (fair value of $2,605 in 2015 and $2,638 in 2014)		2,368		2,371
Restricted, at cost		3,736		4,228
Loans, net of allowance for losses of $7,866 in 2015 and $7,874 in 2014		487,431		473,789
Other real estate owned (OREO)		495		1,810
Premises and equipment, net		11,935		11,461
Accrued interest receivable		1,849		1,736
Bank owned life insurance		10,138		9,900
Deferred tax asset		3,834		4,115
Other assets		1,718		1,752
Total assets	$	623,253	$	598,538
LIABILITIES
Deposits
Noninterest-bearing	$	97,922	$	70,770
Interest-bearing		422,606		408,737
Total deposits		520,528		479,507
Securities sold under repurchase agreements		-		1,761
Federal funds purchased		-		6,318
Subordinated debt and trust preferred		9,987		11,559
Federal Home Loan Bank advances		35,000		45,000
Accrued expenses and other liabilities		4,367		4,741
Total liabilities		569,882		548,886
STOCKHOLDERS' EQUITY
Preferred stock (Note 10)		-		-
Common stock (Note 11)		129		128
Additional paid-in capital		48,713		48,569
Retained earnings		4,269		1,020
Accumulated other comprehensive income (loss), net of tax		260		(65)
Total stockholders' equity		53,371		49,652
Total liabilities and stockholders' equity	$	623,253	$	598,538

See notes to consolidated financial statements.

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

(Unaudited)

(Dollars in Thousands, except per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014

Interest and dividend income
Loans	$	6,148	$	5,822	$	18,065	$	16,918
Investments:
Taxable interest income		297		341		884		1,064
Tax exempt interest income		42		28		100		103
Dividends		53		46		151		140
Interest bearing deposits		17		10		52		21
Total interest and dividend income		6,557		6,247		19,252		18,246
Interest expense
Deposits		998		1,073		2,945		3,235
FHLB advances		166		113		483		315
Subordinated debt and other borrowings		82		124		280		369
Total interest expense		1,246		1,310		3,708		3,919
Net interest income		5,311		4,937		15,544		14,327
Recovery of provision for loan losses		-		(60)		(145)		(352)
Net interest income after
recovery of provision for loan losses		5,311		4,997		15,689		14,679
Noninterest income
Fees on deposits		78		87		226		254
Gain on sale of securities		48		81		120		352
Gain on sale of loans		-		-		-		55
Other		398		263		981		719
Total noninterest income		524		431		1,327		1,380
Noninterest expense
Salaries and employee benefits		2,291		2,171		6,477		6,584
Occupancy expense		201		217		621		635
Data processing		240		236		771		708
Professional services		121		99		419		357
Advertising and marketing		130		126		360		381
FDIC assessment		93		93		275		273
Virginia franchise tax (benefit)		(57)		135		197		389
(Gain) Loss on sale and write down of OREO, net		-		(16)		140		(93)
Depreciation		210		161		602		444
Other operating expenses		721		499		1,984		1,767
Total noninterest expense		3,950		3,721		11,846		11,445
Net income before income taxes		1,885		1,707		5,170		4,614
Income tax expense		606		556		1,662		1,477
Net income		1,279		1,151		3,508		3,137
Effective dividend on preferred stock		-		-		-		24
Net income available to common stockholders	$	1,279	$	1,151	$	3,508	$	3,113
Basic net income per common share (Note 3)	$	0.10	$	0.09	$	0.28	$	0.25
Diluted net income per common share (Note 3)	$	0.09	$	0.08	$	0.24	$	0.21

See notes to consolidated financial statements.

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in Thousands)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014


Net income	$	1,279	$	1,151	$	3,508	$	3,137
Other comprehensive income (loss):
Investment securities:
Unrealized (losses) gains on investment securities
available for sale		442		(207)		592		802
Tax effect		(152)		68		(188)		(275)
Reclassification of gains recognized in net income		(48)		(81)		(120)		(352)
Tax effect		16		27		41		119
Total other comprehensive income (loss)		258		(193)		325		294
Comprehensive income	$	1,537	$	958	$	3,833	$	3,431

See notes to consolidated financial statements

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2015 and 2014

(Unaudited)

(Dollars in Thousands)




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

Balances December 31, 2013	$	22	$	50,208	$	4,448	$	(4,590)	$	(16)	$	(390)	$	49,682
Net income		-		-		-		3,137		-		-		3,137
Other comprehensive income		-		-		-		-		-		294		294
Preferred stock dividend		-		-		-		(8)		-		-		(8)
Accretion of discount on
preferred stock		-		-		-		(16)		16		-		-
Stock based compensation		-		-		253		-		-		-		253
Redemption of preferred stock		(22)		-		(5,509)		-		-		-		(5,531)
Change in par value				(50,083)		48,837		1,246
Exercise of warrants issued
in connection with
rights offering		-		2		427		-		-		-		429
Issuance of 98 thousand shares
of restricted common stock		-		1		(1)		-		-		-		-
Balances September 30, 2014	$	-	$	128	$	48,455	$	(231)	$	-	$	(96)	$	48,256

Balances December 31, 2014	$	-	$	128	$	48,569	$	1,020	$	-	$	(65)	$	49,652
Net income		-		-		-		3,508		-		-		3,508
Other comprehensive income		-		-		-		-		-		325		325
Stock based compensation		-		-		304		-		-		-		304
Repurchase of common stock		-		-		(182)		-		-		-		(182)
Exercise of rights offering warrants		-		-		23		-		-		-		23
Payments of dividends		-		-		-		(259)		-		-		(259)
Issuance of 94 thousand shares of
restricted common stock		-		1		(1)		-		-		-		-
Balances September 30, 2015	$	-	$	129	$	48,713	$	4,269	$	-	$	260	$	53,371

See notes to consolidated financial statements

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2015 and 2014

(Unaudited)

(Dollars in Thousands)



	2015		2014
Cash flows from operating activities
Net income	$	3,508	$	3,137
Adjustments to reconcile net income to net cash
provided by operating activities:
Recovery of provision for loan losses		(145)		(352)
Depreciation of premises and equipment		602		444
Net amortization of bond premiums/discounts		537		481
Stock based compensation expense		304		253
Deferred income tax expense		134		1,062
Gain on sale of securities		(120)		(352)
Gain on loans sold		-		(55)
Loss (gain) on sale and write down of OREO, net		140		(93)
Increase in cash surrender value of bank owned life insurance		(238)		(242)
Proceeds from sale of loans held for sale		-		7,167
Origination of loans held for sale		-		(6,120)
Decrease (increase) in other assets		34		(322)
Increase in accrued interest receivable		(113)		(70)
Decrease in accrued expenses and other liabilities		(374)		(500)
Net cash provided by operating activities		4,269		4,438
Cash flows from investing activities
Proceeds from paydowns of securities available-for-sale		9,327		8,592
Purchase of securities available-for-sale		(26,271)		(31,319)
Proceeds from sale of securities available-for-sale		13,253		18,513
Proceeds from sale of OREO		1,275		1,013
Improvements in OREO		(100)		(256)
Proceeds from sale of equipment		51		-
Redemption (purchase) of Federal Home Loan Bank (FHLB) Stock, net		492		(291)
Purchase of Federal Reserve Stock		-		(158)
Purchase of time deposits in other banks		(250)		-
Payment of stock dividend		(259)		-
Purchases of premises and equipment		(1,127)		(693)
Net increase in loans		(13,497)		(37,361)
Net cash used in investing activities		(17,106)		(41,960)
Cash flows from financing activities
Net increase in deposits		41,021		32,216
FHLB advances		32,000		20,000
FHLB advance repayments		(42,000)		(10,000)
Federal funds purchased, net		(6,318)		-
Dividends on preferred stock		-		(8)
Cash paid for redemption of common stock warrants and preferred stock, net of expenses		-		(5,531)
Proceeds from issuance of subordinated debt		-		6,500
Repurchase of common stock		(182)		-
Repayment of subordinated debt		(1,572)		(2,072)
Warrants exercised in connection with the rights offering		23		429
Net (decrease) increase in repurchase agreements		(1,761)		7,555
Net cash provided by financing activities		21,211		49,089
Net increase in cash and cash equivalents		8,374		11,567
Cash and cash equivalents, beginning of period		11,093		14,187
Cash and cash equivalents, end of period	$	19,467	$	25,754

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2015 and 2014

(Dollars in Thousands)

(Unaudited)

(Continued)



	2015		2014

	(Unaudited)
	(Dollars in thousands)
Supplemental disclosure of cash flow information
Interest paid during the period	$	3,705	$	3,919
Taxes paid during the period	$	1,470	$	410

See notes to consolidated financial statements

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

Note 1 – Basis of Presentation

First Capital Bancorp, Inc. (the Company) is the holding company of and successor to First Capital Bank (the Bank). In 2006, the Company acquired all of the outstanding stock of the Bank in a statutory share exchange transaction pursuant to an Agreement and Plan of Reorganization dated September 5, 2006, between the Company and the Bank (the Agreement). Under the terms of the Agreement, the shares of the Bank’s common stock were exchanged for shares of the Company’s common stock 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 stockholders of the Bank became stockholders of the Company.

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

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

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

In management’s opinion, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of September 30, 2015, and December 31, 2014, and for the three and nine months ended September 30, 2015 and 2014, in conformity with accounting principles generally accepted in the United States of America (GAAP). Results for the three and nine-month periods ended September 30, 2015, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015.

The organization and business of the Company, accounting policies followed, and other related information are contained in the notes to the consolidated financial statements of the Company as of and for the year ended December 31, 2014, filed as part of the Company’s annual report on Form 10-K. These interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements.

Certain reclassifications have been made to amounts presented in the prior period consolidated financial statements to conform to the current period presentation.

Note 2 – Use of Estimates

To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results may be different. In particular, the allowance for loan losses, valuation of other real estate owned, income taxes, and fair values of financial instruments are subject to change.

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

Note 3 – Earnings per common share

Basic earnings per share (EPS) excludes potential 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 that have a dilutive impact on shares outstanding were exercised or converted into common stock, or resulted in the issuance of common stock that then shared in the earnings of the Company.

The basic and diluted EPS calculations are as follows:


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		(in thousands,				(in thousands,
		except per share amounts)				except per share amounts)
	2015		2014		2015		2014

Net income available to common stockholders	$	1,279	$	1,151	$	3,508	$	3,113
Weighted average number of shares outstanding		12,636		12,568		12,638		12,513
Net income per common share - basic	$	0.10	$	0.09	$	0.28	$	0.25

Effect of dilutive securities:

Weighted average number of common shares outstanding		12,636		12,568		12,638		12,513
Effect of stock options, warrants and restricted stock		2,340		2,442		2,227		2,415
Diluted average common shares outstanding		14,976		15,010		14,865		14,928
Net income per common share - diluted	$	0.09	$	0.08	$	0.24	$	0.21

For the three and nine months ended September 30, 2015, the Company has excluded options convertible into 2 and 29 thousand shares of common stock, respectively, from the calculation of diluted earnings per share because they were anti-dilutive.

For the three and nine months ended September 30, 2014, the Company excluded options convertible into 31 thousand shares of common stock from the calculation of diluted earnings per share because they were anti-dilutive.

Note 4 – Stock-Based Compensation

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

Stock-based compensation expense during the three and nine months ended September 30, 2015 was $110 thousand and $304 thousand, respectively, and the amount expensed during the three and nine months ended September 30, 2014, was $95 thousand and $253 thousand, respectively. Stock-based compensation is included in salaries and employee benefits in the accompanying consolidated statements of operations.

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

Note 5 – Investment Securities

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



		September 30, 2015
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value

		(Dollars in thousands)
Available-for-sale
Mortgage-backed securities	$	26,636	$	213	$	28	$	26,821
Corporate bonds		2,501		-		38		2,463
Collateralized mortgage obligation (CMO) securities		21,876		202		14		22,064
State and political subdivisions - taxable		16,024		123		60		16,087
State and political subdivisions - tax exempt		4,059		13		14		4,058
SBA pools		6,552		15		28		6,539
	$	77,648	$	566	$	182	$	78,032



		December 31, 2014
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value

		(Dollars in thousands)
Available-for-sale
Mortgage-backed securities	$	29,447	$	190	$	73	$	29,564
Corporate bonds		3,502		8		12		3,498
Collateralized mortgage obligation (CMO) securities		19,686		196		91		19,791
State and political subdivisions - taxable		18,046		37		329		17,754
State and political subdivisions - tax exempt		-		-		-		-
SBA pools		3,690		3		17		3,676
	$	74,371	$	434	$	522	$	74,283



	September 30, 2015
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value

Held-to-maturity		(Dollars in thousands)
Tax-exempt municipal bonds	$	2,368	$	237	$	-	$	2,605
	$	2,368	$	237	$	-	$	2,605



	December 31, 2014
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value

Held-to-maturity		(Dollars in thousands)
Tax-exempt municipal bonds	$	2,371	$	267	$	-	$	2,638
	$	2,371	$	267	$	-	$	2,638

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

The following table summarizes securities with unrealized losses at September 30, 2015, and December 31, 2014, aggregated by major security type and length of time in a continuous unrealized loss position. The unrealized losses are largely due to changes in interest rates and other market conditions. At September 30, 2015, 36 out of 125 securities the Company held had fair values less than amortized cost, primarily in municipal securities. At December 31, 2014, 55 out of 111 securities the Company held had fair values less than amortized cost, primarily in municipal and mortgage-backed securities. All unrealized losses are considered by management to be temporary given investment security credit ratings, the intent and ability to retain these securities for a period of time sufficient to recover all unrealized losses, and because it is unlikely that the Company will be required to sell the impaired securities before their anticipated recovery. As such, management’s assessment of other than temporary impairment (OTTI) for the quarter ended September 30, 2015, resulted in no recognition of an impairment loss.



	September 30, 2015
	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses

		(Dollars in thousands)
Assets:
Mortgage-backed securities	$	3,967	$	17	$	714	$	11	$	4,681	$	28
Corporate bonds		-		-		2,463		38		2,463		38
CMO securities		3,421		8		1,644		6		5,065		14
State and political subdivisions-taxable		3,356		33		4,481		27		7,837		60
State & political subdivisions-tax exempt		3,208		14		-		-		3,208		14
SBA Pools		2,969		23		1,444		5		4,413		28
All securities	$	16,921	$	95	$	10,746	$	87	$	27,667	$	182



	December 31, 2014
	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses

		(Dollars in thousands)
Assets:
Mortgage-backed securities	$	9,722	$	30	$	4,236	$	43	$	13,958	$	73
Corporate bonds		998		5		1,492		7		2,490		12
CMO securities		6,568		34		3,542		57		10,110		91
State and political subdivisions-taxable		8,074		79		6,728		250		14,802		329
SBA Pools		2,686		17		-		-		2,686		17
All securities	$	28,048	$	165	$	15,998	$	357	$	44,046	$	522

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

Restricted investment securities consist primarily of Federal Home Loan Bank of Atlanta (FHLB) stock in the amount of $2.0 and $2.5 million as of September 30, 2015, and December 31, 2014, respectively, and Federal Reserve Bank stock in the amount of $1.6 million at September 30, 2015, and December 31, 2014. Restricted equity securities are carried at cost because there is no ability to resell these securities. The FHLB requires the Bank to maintain stock in an amount equal to 4.5% of outstanding borrowings and a specific percentage of the Company’s total assets. The Federal Reserve Bank of Richmond requires the Company to maintain stock with a par value equal to 3% of the Company’s outstanding capital.

Mortgage-backed securities with a fair value of approximately $1.8 million were pledged as collateral at December 31, 2014, respectively, to secure overnight repurchase agreements.

Note 6 – Loans

Major classifications of loans are as follows:



	September 30,		December 31,
	2015		2014

		(Dollars in thousands)

Real estate
Residential	$	141,822	$	145,241
Commercial		167,643		182,718
Residential Construction		43,102		32,184
Other Construction, Land
Development & Other Land		70,035		52,937
Commercial		70,861		66,868
Consumer		1,910		1,886
Total loans		495,373		481,834
Less:
Allowance for loan losses		7,866		7,874
Net deferred fees		76		171
Loans, net	$	487,431	$	473,789

A summary of risk characteristics by loan portfolio classification follows:

Real Estate – Residential – This portfolio primarily consists of investor loans secured by properties in the Bank’s normal lending area. These investor loans are typically five year rate adjustment loans and they generally have an original loan-to-value (LTV) of 80% or less. This category also includes home equity lines of credit (HELOC). The HELOCs generally have an adjustable rate tied to prime rate and a term of 10 years. Multifamily residential real estate is moderately seasoned and is generally secured by properties in the Bank’s normal lending area.

Real Estate – Commercial – This portfolio consists of nonresidential improved real estate, which includes shopping centers and office buildings. These properties are generally located in the Bank’s normal lending area. This category of loans has a higher than average level of risk because its performance is impacted by market forces over a longer time horizon.

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

Real Estate – Residential Construction – These loans are located in the Bank’s normal lending area. Although it has represented a growth area for the portfolio, this category also has a higher level of risk due to inherent market change and construction risks.

Real Estate – Other Construction, Land Development and Other Land Loans – This portfolio includes developed residential and commercial lots held by developers as well as non-residential construction projects. This category has a higher level of risk due to inherent risks associated with market changes and construction.

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

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

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



	September 30,
	2015			2014

	(Dollars in thousands)

Balance, beginning of period	$	7,874		$	8,165
Recovery of provision for loan losses		(145)			(352)
Recoveries		190			752
Charge-offs		(53)			(662)
Balance, end of period	$	7,866		$	7,903
Ratio of allowance for loan
losses as a percent of total loans
outstanding at the end of the period		1.59	%		1.69	%

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

The following tables present activity in the allowance for loan losses by portfolio segment:



	Three Months Ended
	Real Estate
							Other
							Construction
							Land Devel.
					Residential		& Other
	Residential		Commercial		Construction		Land		Commercial		Consumer		Total

		(Dollars in thousands)

Balance, July 1, 2015	$	2,079	$	2,736	$	1,115	$	812	$	1,108	$	15	$	7,865
(Provision for) recovery of loan losses		17		(95)		84		90		(95)		(1)		-
Recoveries		15		-		1		1		3		-		20
Charge-offs		(19)		-		-		-		-		-		(19)
Balance, September 30, 2015	$	2,092	$	2,641	$	1,200	$	903	$	1,016	$	14	$	7,866

Balance, July 1, 2014	$	2,783	$	2,901	$	624	$	619	$	953	$	14	$	7,894
(Provision for) recovery of loan losses		7		(251)		144		(16)		57		(1)		(60)
Recoveries		42		212		16		-		4		-		274
Charge-offs		(110)		-		(50)		-		(45)		-		(205)
Balance, September 30, 2014	$	2,722	$	2,862	$	734	$	603	$	969	$	13	$	7,903



	Nine Months Ended
	Real Estate
							Other
							Construction
							Land Devel.
					Residential		& Other
	Residential		Commercial		Construction		Land		Commercial		Consumer		Total

		(Dollars in thousands)
Balance, January 1, 2015	$	2,324	$	3,168	$	711	$	626	$	1,031	$	14	$	7,874
Provision for (recovery of) loan losses		(214)		(527)		485		175		(64)		-		(145)
Recoveries		35		-		4		102		49		-		190
Charge-offs		(53)		-		-		-		-		-		(53)
Balance, September 30, 2015	$	2,092	$	2,641	$	1,200	$	903	$	1,016	$	14	$	7,866

Balance, January 1, 2014	$	2,891	$	3,050	$	591	$	624	$	996	$	13	$	8,165
Provision for (recovery of) loan losses		343		(400)		8		(21)		(282)		-		(352)
Recoveries		54		212		185		-		301		-		752
Charge-offs		(566)		-		(50)		-		(46)		-		(662)
Balance, September 30, 2014	$	2,722	$	2,862	$	734	$	603	$	969	$	13	$	7,903

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

The charge 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 from the contractual due date and open-end retail loans that become past due 180 cumulative days from the contractual due date will generally be charged off.

The following table presents the aging of unpaid loan principal:



	September 30, 2015
			90+ Days
	30-89 Day		Past Due
	Past Due		and Accruing		Nonaccrual		Current		Total

		(Dollars in thousands)
Real estate
Residential	$	386	$	-	$	1,711	$	139,725	$	141,822
Commercial		985		-		162		166,496		167,643
Residential Construction		-		-		-		43,102		43,102
Other Construction, Land
Development & Other Land		277		-		309		69,449		70,035
Commercial		-		-		49		70,812		70,861
Consumer		-		-		274		1,636		1,910
Total	$	1,648	$	-	$	2,505	$	491,220	$	495,373



	December 31, 2014
			90+ Days
	30-89 Day		Past Due
	Past Due		and Accruing		Nonaccrual		Current		Total

		(Dollars in thousands)
Real estate
Residential	$	77	$	-	$	1,560	$	143,604	$	145,241
Commercial		428		-		218		182,072		182,718
Residential Construction		-		-		-		32,184		32,184
Other Construction, Land
Development & Other Land		-		-		1,360		51,577		52,937
Commercial		-		-		-		66,868		66,868
Consumer		-		-		292		1,594		1,886
Total	$	505	$	-	$	3,430	$	477,899	$	481,834

Loans are determined past due or delinquent based on the contractual terms of the loans. 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.

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

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

The following tables provide details of the Company’s loan portfolio by internally assigned grade:



	September 30, 2015
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total

		(Dollars in thousands)
Real estate
Residential	$	138,329	$	677	$	2,816	$	-	$	-	$	141,822
Commercial		161,052		4,387		2,204		-		-		167,643
Residential Construction		43,102		-		-		-		-		43,102
Other Construction, Land
Development & Other Land		67,773		84		2,178		-		-		70,035
Commercial		70,372		-		489		-		-		70,861
Consumer		1,636		-		274		-		-		1,910
Total	$	482,264	$	5,148	$	7,961	$	-	$	-	$	495,373



		December 31, 2014
			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total

		(Dollars in thousands)
Real estate
Residential	$	140,491	$	2,141	$	2,609	$	-	$	-	$	145,241
Commercial		176,063		3,098		3,557		-		-		182,718
Residential Construction		32,013		-		171		-		-		32,184
Other Construction, Land
Development & Other Land		44,595		4,819		3,523		-		-		52,937
Commercial		65,915		598		355		-		-		66,868
Consumer		1,594		-		292		-		-		1,886
Total	$	460,671	$	10,656	$	10,507	$	-	$	-	$	481,834

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

These credit quality grades 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 continuing to carry them 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.

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

The following table provides details regarding impaired loans by segment and class:



	September 30, 2015						December 31, 2014
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance

	(Dollars in thousands)
With no related allowance:
Real estate
Residential	$	1,971	$	2,439	$	-	$	1,826	$	2,359	$	-
Commercial		162		187		-		217		242		-
Residential Construction		-		-		-		-		-		-
Other Construction, Land
Development & Other Land		309		818		-		6,180		9,080		-
Commercial		49		49		-		-		-		-
Consumer		274		396		-		292		396		-
Total	$	2,765	$	3,889	$	-	$	8,515	$	12,077	$	-

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

Total
Real estate
Residential	$	1,971	$	2,439	$	-	$	1,826	$	2,359	$	-
Commercial		162		187		-		217		242		-
Residential Construction		-		-		-		-		-		-
Other Construction, Land
Development & Other Land		309		818		-		6,180		9,080		-
Commercial		49		49		-		-		-		-
Consumer		274		396		-		292		396		-
Total	$	2,765	$	3,889	$	-	$	8,515	$	12,077	$	-

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

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



		Real Estate
								Other
								Construction,
								Land Devel.
						Residential		& Other
		Residential		Commercial		Construction		Land		Commercial		Consumer		Total

		(Dollars in thousands)
September 30, 2015
Allowance for loan losses, evaluated
Individually	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively		2,092		2,641		1,200		903		1,016		14		7,866
Total ending allowance	$	2,092	$	2,641	$	1,200	$	903	$	1,016	$	14	$	7,866

Loans, evaluated
Individually	$	1,971	$	162	$	-	$	309	$	49	$	274	$	2,765
Collectively		139,851		167,481		43,102		69,726		70,812		1,636		492,608
Total ending loans	$	141,822	$	167,643	$	43,102	$	70,035	$	70,861	$	1,910	$	495,373

December 31, 2014
Allowance for loan losses, evaluated
Individually	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively		2,324		3,168		711		626		1,031		14		7,874
Total ending allowance	$	2,324	$	3,168	$	711	$	626	$	1,031	$	14	$	7,874

Loans, evaluated
Individually	$	1,826	$	217	$	-	$	6,180	$	-	$	292	$	8,515
Collectively		143,415		182,501		32,184		46,757		66,868		1,594		473,319
Total ending loans	$	145,241	$	182,718	$	32,184	$	52,937	$	66,868	$	1,886	$	481,834

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

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015



	Three Months Ended				Nine Months Ended
	September 30, 2015				September 30, 2015
	Interest		Average		Interest		Average
	Income		Recorded		Income		Recorded
	Recognized		Investment		Recognized		Investment

		(Dollars in thousands)				(Dollars in thousands)

Real estate
Residential	$	97	$	2,004	$	178	$	1,844
Commercial		8		165		18		182
Residential Construction		-		-		-		-
Other Construction, Land
Development & Other Land		-		352		3		1,820
Commercial		-		24		-		12
Consumer		18		277		36		283
Total	$	123	$	2,822	$	235	$	4,141



	Three Months Ended				Nine Months Ended
	September 30, 2014				September 30, 2014
	Interest		Average		Interest		Average
	Income		Recorded		Income		Recorded
	Recognized		Investment		Recognized		Investment

		(Dollars in thousands)				(Dollars in thousands)

Real estate
Residential	$	120	$	2,019	$	218	$	1,826
Commercial		11		366		45		456
Residential Construction		-		90		9		188
Other Construction, Land
Development & Other Land		265		6,056		550		4,130
Commercial		-		24		1		117
Consumer		2		149		2		75
Total	$	398	$	8,704	$	825	$	6,792

Cash payments received on nonaccrual, 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. Cash payments received on active, impaired loans are applied to both interest and principal.

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

Troubled Debt Restructurings

Accounting Standards Codification (ASC) 310 defines a troubled debt restructuring as a restructuring of a debt where a creditor for economic or legal reasons related to a debtor’s financial difficulties grants a concession to the debtor that it would not otherwise render. The concession is granted by the creditor in an attempt to protect as much of its investment as possible. The concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. Troubled debt restructurings include modification of the terms of a debt, such as a reduction of the stated interest rate to a new rate that is lower than the current market rate for new debt with similar risk, a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, or a reduction of accrued interest owed.

Management reviews all modifications that occur during the year for identification as troubled debt restructurings. Management identified as troubled debt restructurings certain loans for which the allowance for loan losses had previously been measured under a general allowance for loan losses methodology (ASC 450). Upon identifying the reviewed loans as troubled debt restructurings, management also identified them as impaired under the guidance in ASC 310.

Modification Categories

The Company offers a variety of modifications to borrowers. The modification alternatives 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 described above.

As of September 30, 2015, and December 31, 2014, there were no available commitments outstanding for troubled debt restructurings.

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

The following tables present troubled debt restructurings as of the dates indicated:



	September 30, 2015
	Total
	Number		Accrual		Nonaccrual		Total
	of Contracts		Status		Status		Modifications

		(Dollars in thousands)

Real estate
Residential		1	$	260	$	-	$	260
Commercial		-		-		-		-
Residential Construction		-		-		-		-
Other Construction, Land
Development & Other Land		-		-		-		-
Commercial		-		-		-		-
Consumer		-		-		-		-
Total		1	$	260	$	-	$	260



	December 31, 2014
	Total
	Number		Accrual		Nonaccrual		Total
	of Contracts		Status		Status		Modifications

		(Dollars in thousands)

Real estate
Residential		1	$	266	$	-	$	266
Commercial		-		-		-		-
Residential Construction		-		-		-		-
Other Construction, Land
Development & Other Land		4		4,819		1,052		5,871
Commercial		-		-		-		-
Consumer		-		-		-		-
Total		5	$	5,085	$	1,052	$	6,137

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.

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

There were no newly restructured loans that occurred during the three or nine months ended September 30, 2015. The following table presents troubled debt restructurings that occurred during the three and nine months ended September 30, 2014:


	Three Months Ended
	September 30, 2014
	Number of	Rate		Term		Interest Only		Payment		Combination
	Contracts	Modifications		Modifications		Modifications		Modifications		Modifications		Total

	(Dollars in thousands)
Real estate
Residential	1	$	-	$	-	$	-	$	-	$	550	$	550
Commercial	-		-		-		-		-		-		-
Residential Construction	-		-		-		-		-		-		-
Other Construction, Land	-		-		-		-		-		-		-
Residential Construction	-		-		-		-		-		-		-
Commercial	-		-		-		-		-		-		-
Consumer	-		-		-		-		-		-		-
Total	1	$	-	$	-	$	-	$	-	$	550	$	550


	Nine Months Ended
	September 30, 2014
	Number of Contracts		Rate Modifications		Term Modifications		Interest Only Modifications		Payment Modifications		Combination Modifications		Total

	(Dollars in thousands)
Real estate
Residential	2	$	-	$	-	$	-	$	-	$	818	$	818
Commercial	-		-		-		-		-		-		-
Residential Construction	-		-		-		-		-		-		-
Other Construction, Land
Development & Other Land	1		-		-		-		-		3,873		3,873
Commercial	-		-		-		-		-		-		-
Consumer	-		-		-		-		-		-		-
Total	3	$	-	$	-	$	-	$	-	$	4,691	$	4,691

There were no 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 or nine month periods ended September 30, 2015, or 2014.

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

Note 7 – Other Real Estate Owned (OREO)

Changes in OREO were as follows for the periods indicated:


	Nine Months Ended
	September 30,
	2015		2014

	(dollars in thousands)

Beginning Balance	$	1,810	$	2,658
Additions		100		256
Sales		(1,261)		(952)
Write-downs		(154)		-
Ending Balance	$	495	$	1,962

Note 8 – Fair Value

The fair value of an asset or liability is the price that would be received upon a sale of that asset or paid to transfer that liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact, and willing to transact.

Financial Accounting Standards Board (FASB) Codification Topic 820: Fair Value Measurements and Disclosures establishes a hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair values hierarchy is as follows:

Level 1 Inputs – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 Inputs – Significant other observable inputs other than Level 1 prices such as 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 data.

Level 3 Inputs – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

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

The following tables present the balances of financial assets measured at fair value on a recurring basis as of the dates indicated. See Note 5 for a detailed listing of the fair values of available-for-sale securities.



	September 30, 2015
	Fair Value Measurements Using						Fair
	Level 1		Level 2		Level 3		Values

	(Dollars in thousands)
Assets:
Available-for-sale securities	$	-	$	78,032	$	-	$	78,032



	December 31, 2014
	Fair Value Measurements Using						Fair
	Level 1		Level 2		Level 3		Values

	(Dollars in thousands)
Assets:
Available-for-sale securities	$	-	$	74,283	$	-	$	74,283

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: The fair values of impaired loans are measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed external appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value measurement is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant using observable market data. Likewise, fair values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses in the consolidated statements of operations.

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

Level 3 fair value measurements of impaired loans generally include discounts for unobservable input such as estimated selling costs, lack of marketability or practical life, and age of appraisal. Such discounts ranged from 0% to 30% for each of the respective periods presented.

Other Real Estate Owned: OREO assets are adjusted to fair value upon transfer of the loan collateral to the Company through or instead of foreclosure. Subsequently, OREO assets are carried at net realizable value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the OREO asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the OREO asset as nonrecurring Level 3.

Level 3 fair value measurements of OREO assets generally include discounts for unobservable input such as estimated selling costs, lack of marketability, and age of appraisal. Such discounts ranged from 0% to 30% for each of the respective periods presented.

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



	September 30, 2015
	Fair Value Measurements Using						Fair
	Level 1		Level 2		Level 3		Values

	(Dollars in thousands)
Impaired loans	$	-	$	-	$	2,765	$	2,765
Other real estate owned		-		-		495		495
Total	$	-	$	-	$	3,260	$	3,260



	December 31, 2014
	Fair Value Measurements Using						Fair
	Level 1		Level 2		Level 3		Values

	(Dollars in thousands)
Impaired loans	$	-	$	-	$	8,515	$	8,515
Other real estate owned		-		-		1,810		1,810
Total	$	-	$	-	$	10,325	$	10,325

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

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

In general, fair value of securities is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon market prices determined by an outside, independent entity that primarily uses as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.

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

Time Deposits in Other Banks – The fair values of time deposits are estimated based on bid quotations received from independent pricing services for similar assets.

Loans – For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For all other loans, fair values are calculated by discounting the contractual cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loans, or by using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits – The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts approximate their fair values at the reporting date. Fair values of certificates of deposit are based on the discounted value of contractual cash flows using the rates currently offered for deposits of similar remaining maturities.

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

FHLB Advances – The carrying value of advances from the FHLB due within 90 days from the balance sheet date approximate fair value. Fair values for convertible advances are estimated using a discounted cash flow calculation that applies interest rates currently being offered on convertible advances with similar remaining maturities.

Repurchase agreements – The carrying value of repurchase agreements, which are secured transactions with customers that generally mature the day following the date sold, approximate fair value.

Subordinated Debt and Trust Preferred – The Company’s subordinated debt consists of variable rate instruments that reprice on a periodic basis, therefore, carrying value is adjusted for the repricing lag in order to approximate fair value.

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

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

The estimated fair values of the Company’s financial instruments, which are all Level 2 in fair values hierarchy, as of September 30, 2015, and December 31, 2014, are as follows:



	September 30, 2015				December 31, 2014
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value

	(Dollars in thousands)				(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	19,467	$	19,467	$	11,093	$	11,093
Time deposits in other banks		2,250		2,016		2,000		1,989
Investment securities		80,400		80,637		76,654		76,921
Loans, net		487,431		489,574		473,789		472,105
Accrued interest		1,849		1,849		1,736		1,736
BOLI		10,138		10,138		9,900		9,900

Financial liabilities
Deposits	$	520,528	$	519,425	$	479,507	$	477,359
FHLB advances		35,000		36,021		45,000		46,068
Subordinated debt and trust preferred		9,987		10,085		11,559		11,554
Repurchase agreements		-		-		1,761		1,761
Accrued interest		40		40		37		37

Note 9 – Recently Issued Accounting Pronouncements

In January 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an “in substance” repossession for foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required in such event. The amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

In May of 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this ASU superseded the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of Codification. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. This amendment is intended to clarify that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments are effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In June of 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this ASU require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. In addition, the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions and the tenor of those transactions. For public business entities, the accounting changes and disclosure for certain transactions accounted for as a sale are effective for the first period (interim or annual) beginning after December 15, 2014. The disclosure for transactions accounted for as secured borrowings is required for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In June of 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718) – Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in this ASU require that a performance target that affects vesting and which could be achieved after the requisite service period be treated as a performance condition. The amendments apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. For all entities, the amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

Note 10 – Preferred Stock

The Company’s Preferred Stock has a $4.00 par value and a $1,000 liquidation preference. With 2,000,000 preferred shares authorized, there were no shares outstanding at September 30, 2015, or December 31, 2014.

First Capital Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2015

Note 11—Common Stock

In June 2014, the Board of Directors approved a change to the par value of the Company’s Common Stock from $4.00 per share to $.01 per share. With 30,000,000 shares of Common Stock authorized, at September 30, 2015, and at December 31, 2014, there were 12,923,392 and 12,864,542 shares outstanding, respectively.

In December 2014, the Board of Directors authorized a share repurchase program to purchase up to 300,000 shares of its outstanding common stock. During the nine months ended September 30, 2015, the Company repurchased 41,700 shares of its common stock.

On May 20, 2015, the Board of Directors declared a cash dividend of $0.01 per common share, payable on June 25, 2015, to stockholders of record on June 10, 2015. On August 19, 2015, the Board of Directors declared a cash dividend of $0.01 per common share, payable on September 28, 2015, to stockholders of record on September 14, 2015.

Note 12 – Commitments

Park Sterling Merger: On September 30, 2015, the Company and Park Sterling Corporation (Park Sterling) entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which the Company will be acquired by Park Sterling (the Park Sterling Merger).

Under the terms of the Merger Agreement, the Company’s shareholders will have the right to receive either $5.54 in cash or 0.7748 of a Park Sterling common share for each share of the Company’s common stock they hold, subject to the limitation that the total consideration for the Company’s shareholders will consist of 30% in cash and 70% in Park Sterling shares. In addition, the Company’s warrant holders will have the right to receive either $1.77 in cash or 0.24755 of a Park Sterling common share for each warrant they hold, subject to the limitation that the total consideration payable to the Company’s warrant holders will consist of 30% in cash and 70% in Park Sterling shares.

The Park Sterling Merger is expected to close in the first quarter of 2016, subject to customary conditions, including approval by the Company’s shareholders and receipt of regulatory approval.

Construction and Sales Contracts: In October 2015, the Company entered into a contract with a builder for construction of a building on land owned by the Company. Construction is scheduled to begin in November 2015. In September 2015, the Company entered into a sales contract with a different party for the sale of such building, when complete, with the closing anticipated to occur during the second quarter of 2016.

Note 13 – Subsequent Event

On October 28, 2015, the Board of Directors declared a cash dividend of $0.01 per common share, payable on December 21, 2015, to stockholders of record on November 30, 2015.

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 include, but are not limited to, the following:

the ability to successfully manage our growth or implement our growth strategies if we are unable to identify attractive markets, locations or opportunities to expand in the future;

our ability to continue to attract low cost core deposits to fund asset growth;

changes in interest rates and interest rate policies and the successful management of interest rate risk;

maintaining cost controls and asset quality as we open or acquire new locations;

maintaining capital levels adequate to support our growth and operations;

changes in general economic and business conditions in our market area;

reliance on our management team, including our ability to attract and retain key personnel;

risks inherent in making loans such as repayment risks and fluctuating collateral values;

competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

demand, development and acceptance of new products and services;

problems with technology utilized by us;

changing trends in customer profiles and behavior;

changes in banking and other laws and regulations applicable to us; and

changes in assumptions underlying the allowance for loan losses.

Although we believe that our expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that our actual results, performance or achievements will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

OVERVIEW

The Company’s results for the quarter and nine-month-period ended September 30, 2015 reflect management’s continuing commitment to controlled growth. Total assets grew 4% during the nine months ended September 30, 2015, which is primarily attributable to loan growth. Net income available to common stockholders for the quarter ended September 30, 2015, increased 11% compared to the same period in the prior year, to $1.3 million (or $0.09 per diluted share) and is primarily attributable to growth in net interest income. Net income available to common stockholders for the nine-month-period ended September 30, 2015, increased

13% compared to the same period in the prior year, to $3.5 million (or $0.24 per diluted share) and is primarily attributable to growth in net interest income. In addition, asset quality trends continue to improve, and the Company remains well capitalized with capital ratios in excess of the regulatory minimums.

Park Sterling Merger. On September 30, 2015, the Company and Park Sterling Corporation (Park Sterling) entered into an Agreement and Plan of Merger (Merger Agreement) pursuant to which the Company will be acquired by Park Sterling (the Park Sterling Merger).

Under the terms of the Merger Agreement, the Company’s shareholders will have the right to receive either $5.54 in cash or 0.7748 of a Park Sterling common share for each share of the Company’s common stock they hold, subject to the limitation that the total consideration for shareholders will consist of 30% in cash and 70% in Park Sterling common shares. In addition, the Company’s warrant holders will have the right to receive either $1.77 in cash or 0.24755 of a Park Sterling common share for each warrant they hold, subject to the limitation that the total consideration payable to the Company’s warrant holders will consist of 30% in cash and 70% in Park Sterling shares.

The Park Sterling Merger is expected to close in the first quarter of 2016, subject to customary conditions, including approval by the Company’s shareholders and receipt of regulatory approval

FINANCIAL CONDITION

Assets

Total assets at September 30, 2015, were $623.3 million, up $24.7 million (or 4.1%) from $598.5 million at December 31, 2014. The primary drivers of this increase were (i) growth in net loans of $13.6 million (or 2.9%) to $487.4 million at September 30, 2015 from $473.8 million at December 31, 2014, (ii) growth in available for sale investment securities of $3.7 million (or 5.0%) to $78.0 million at September 30, 2015 from $74.3 million at December 31, 2014, and (iii) an increase in cash and cash equivalents of $8.4 million (or 75.5%) to $19.5 million at September 30, 2015, from $11.1 million at December 31, 2014. The growth in net loans was due primarily to the increased loan demand in our market as the economy and consumer confidence continue to improve. The increase in cash and cash equivalents was driven by an increase in federal funds sold to $3.7 million at September 30, 2015, compared to federal funds purchased of $6.3 million at December 31, 2014, and an increase in cash and due from banks of $4.7 million (or 42.2%) resulting primarily from deposit growth. The increase in investment securities is primarily due to purchases of securities in response to the Company’s solid cash position resulting from deposit growth during 2015. The composition of the Company’s investment portfolio reflects management’s strategy to manage volatility, balance interest rate risk, and to provide liquidity and income to the Company.

Liabilities and Stockholders’ Equity

Customer deposits increased $41.0 million (or 8.6%) from $479.5 million at December 31, 2014 to $520.5 million at September 30, 2015. The Company had federal funds purchased of $6.3 million at December 31, 2014 compared to federal funds sold of $3.7 million at September 30, 2015 (see related increase in cash and cash equivalents above). Stockholders’ equity increased $3.7 million (or 7.5%) due primarily to net income during the nine-month-period ended September 30, 2015.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income represents the principal source of earnings for the Company. Net interest income is the amount of interest generated from earning assets that 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 the Company’s 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.

For the three months ended September 30, 2015, net interest income was up $374 thousand (or 7.6%) to $5.3 million compared to $4.9 million for the third quarter of 2014, due primarily to continued loan growth. Total interest and fees on loans, the largest component of net interest income, increased $326 thousand (or 5.6%) to $6.1 million during the third quarter of 2015 compared to $5.8 million for the third quarter of 2014. Interest expense on deposit liabilities decreased $75 thousand, or 7.0%, for the third quarter of 2015 compared to the same period of 2014. This decrease, despite the growth in deposit liabilities, was primarily due to an 11-basis-points decrease in average rates paid on interest-bearing deposit liabilities to 0.93% for the third quarter of 2015 compared to 1.04% for the third quarter of 2014.

For the nine months ended September 30, 2015, net interest income was up $1.2 million (or 8.5%) to $15.5 million compared to $14.3 million for the same period in 2014, due primarily to continued loan growth. Total interest and fees on loans, the largest component of net interest income, increased $1.1 million (or 6.8%) to $18.1 million during 2015 compared to $16.9 million for 2014. Interest expense on deposit liabilities decreased $290 thousand, or 9.0%, for 2015 compared to the same period of 2014. This decrease, despite the growth in deposit liabilities, was primarily due to a 15-basis-points decrease in average rates paid on interest-bearing deposit liabilities to 0.94% for 2015 compared to 1.09% for 2014.

The net interest margin increased nine basis points to 3.64% for the three months ended September 30, 2015, compared to 3.55% for the third quarter of 2014, due primarily to decreased interest rates related to deposit liabilities coupled with decreased yields in the loan portfolio. The yield on loans, net of unearned income, was 4.89% with an average balance of $499.0 million for the third quarter of 2015 compared to 4.98% on an average balance of $463.6 million for the same period in 2014, with the decrease in yield due primarily to continued rate pressure in the Company’s local market. The average balance of interest bearing deposit liabilities increased to $421.2 million with an average interest rate of 0.94% for the third quarter of 2015 compared to an average balance of $409.2 million with an average interest rate of 1.04% for the third quarter of 2014.

The net interest margin increased two basis points to 3.63% for the nine months ended September 30, 2015, compared to 3.61% for the same period of 2014, due primarily to decreased interest rates related to deposit liabilities coupled with decreased yields in the loan and investment portfolios. The yield on loans, net of unearned income, was 4.92% with an average balance of $490.6 million for 2015 compared to 5.02% on an average balance of $450.6 million for 2014, with the decrease in yield due primarily to continued rate pressure in the Company’s local market. The yield on investments was 2.08% with an average balance of $76.0 million for 2015 compared to 2.36% on an average balance of $76.9 million for 2014, with the decrease in yield due primarily to the purchase of shorter-term, variable rate investments in anticipation of rising interest rates. The average balance of interest bearing deposit liabilities increased to $417.7 million with an average interest rate of 0.94% for 2015 compared to $396.8 million with an average interest rate of 1.09% for 2014.

Average Balances, Income and Expenses, Yields and Rates

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, stockholders’ equity and related income, expense and corresponding weighted-average yields and rates. The average balances used in these tables were calculated using daily average balances.



		Three Months Ended September 30,
	2015						2014
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate

	(Dollars in thousands)
Assets:
Loans, net of unearned income (1)	$	499,003	$	6,148	4.89	%	$	463,592	$	5,822	4.98	%
Bank owned life insurance (2)		10,098		120	4.71	%		9,783		122	4.94	%
Investment securities:
Mortgage backed securities		26,713		78	1.16	%		30,435		91	1.18	%
Corporate bonds		2,599		9	1.43	%		3,533		16	1.77	%
Municipal securities (2)		5,403		64	4.67	%		2,373		42	7.11	%
Taxable municipal securities		16,057		97	2.41	%		18,214		116	2.52	%
CMO		19,119		101	2.10	%		19,981		111	2.21	%
SBA		4,007		11	1.06	%		2,856		7	1.02	%
Other investments		3,824		52	5.40	%		3,869		45	4.61	%
Total investment securities		77,722		412	2.11	%		81,261		428	2.09	%
Interest bearing deposits		7,007		17	0.97	%		11,646		10	0.34	%
Total earning assets	$	593,830		6,697	4.47	%	$	566,282		6,382	4.47	%
Cash and cash equivalents		13,474						10,615
Allowance for loan losses		(7,868)						(8,036)
Other assets		20,459						21,522
Total assets	$	619,895					$	590,383

Liabilities & Stockholders' Equity:
Interest checking	$	25,655		20	0.32	%	$	18,248		16	0.35	%
Money market deposit accounts		154,610		145	0.37	%		158,506		157	0.39	%
Statement savings		2,535		2	0.31	%		2,323		2	0.31	%
Certificates of deposit		238,428		829	1.38	%		230,146		898	1.55	%
Total interest-bearing deposits		421,228		996	0.94	%		409,223		1,073	1.04	%
Fed funds purchased		1,132		2	0.61	%		141		-	0.61	%
Repurchase agreements		1,240		-	0.05	%		3,586		2	0.25	%
Subordinated debt		10,003		82	3.25	%		13,251		122	3.64	%
FHLB advances		39,185		166	1.68	%		39,891		113	1.12	%
Total interest-bearing liabilities		472,788		1,246	1.05	%		466,092		1,310	1.12	%

Noninterest-bearing liabilities:
Noninterest-bearing deposits		92,332						74,584
Other liabilities		2,217						2,048
Total liabilities		94,549						76,632
Shareholders' equity		52,558						47,659
Total liabilities and shareholders' equity	$	619,895					$	590,383

Net interest income			$	5,451					$	5,072
Interest rate spread					3.43	%					3.35	%

Net interest margin					3.64	%					3.55	%
Ratio of average interest earning assets to
average interest-bearing liabilities					125.60	%					121.50	%

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



		Nine Months Ended September 30,
	2015						2014
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate

	(Dollars in thousands)
Assets:
Loans, net of unearned income (1)	$	490,590	$	18,065	4.92	%	$	450,627	$	16,918	5.02	%
Bank owned life insurance (2)		10,022		359	4.79	%		9,705		367	5.05	%
Investment securities:
Mortgage backed securities		27,059		227	1.12	%		27,385		288	1.41	%
Corporate bonds		3,198		39	1.64	%		3,782		53	1.86	%
Municipal securities (2)		3,634		152	5.60	%		2,997		156	6.94	%
Taxable municipal securities		16,110		292	2.43	%		15,867		330	2.78	%
CMO		18,270		294	2.15	%		22,103		386	2.34	%
SBA		3,775		31	1.10	%		962		7	1.02	%
Other investments		3,980		149	5.00	%		3,807		138	4.83	%
Total investment securities		76,026		1,184	2.08	%		76,903		1,358	2.36	%
Interest bearing deposits		10,239		52	0.68	%		8,955		21	0.31	%
Total earning assets	$	586,877		19,660	4.48	%		546,190		18,664	4.57	%
Cash and cash equivalents		12,167						9,799
Allowance for loan losses		(7,892)						(8,081)
Other assets		20,581						21,752
Total assets	$	611,733					$	569,660

Liabilities & Stockholders' Equity:
Interest checking	$	27,392		64	0.31	%	$	17,745		46	0.34	%
Money market deposit accounts		154,943		429	0.37	%		155,777		481	0.41	%
Statement savings		2,473		6	0.31	%		2,343		5	0.31	%
Certificates of deposit		232,864		2,440	1.40	%		220,889		2,701	1.63	%
Total interest-bearing deposits		417,672		2,939	0.94	%		396,754		3,233	1.09	%
Fed funds purchased		1,044		5	0.69	%		282		1	0.61	%
Repurchase agreements		1,212		1	0.08	%		5,440		13	0.31	%
Subordinated debt and trust preferred		10,680		279	3.50	%		13,291		356	3.58	%
FHLB advances		42,293		483	1.53	%		37,857		315	1.11	%
Total interest-bearing liabilities		472,901		3,707	1.05	%		453,624		3,918	1.16	%

Noninterest-bearing liabilities:
Noninterest-bearing deposits		85,028						67,466
Other liabilities		2,251						2,009
Total liabilities		87,279						69,475
Shareholders' equity		51,553						46,561
Total liabilities and shareholders' equity	$	611,733					$	569,660

Net interest income			$	15,953					$	14,746
Interest rate spread					3.43	%					3.41	%

Net interest margin					3.63	%					3.61	%
Ratio of average interest earning assets to
average interest-bearing liabilities					124.10	%					120.41	%

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

Noninterest Income

Total noninterest income increased $93 thousand (or 21.6%) to $524 thousand for the third quarter of 2015, compared to $431 thousand for the same period of 2014 due primarily to a $108 thousand increase in loan prepayment penalties.

Total noninterest income decreased $53 thousand (or 3.8%) to $1.3 million for the nine months ended September 30, 2015, compared to $1.4 million for the same period of 2014 due primarily to a $232 thousand decline in gain on sale of securities coupled with a $154 thousand increase in loan prepayment penalties.

Noninterest Expense

This category includes all expenses other than interest paid on deposit liabilities and borrowings.

Total noninterest expense for the third quarter of 2015 increased to $4.0 million, up $229 thousand, or 6.2%, compared to the same period in 2014. This increase is due primarily to increases in operating expenses related to growth in operations and the proposed Park Sterling Merger.

Total noninterest expense for the nine months ended September 30, 2015, increased to $11.8 million, up $401 thousand, or 3.5%, compared to $11.4 million for the same period in 2014. This increase is due primarily to increases in operating expenses related to growth in operations coupled with a net write down of OREO related to fair market value measurement during the first quarter of 2015.

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 rates for the three-month periods ended September 30, 2015 and 2014 were 32.15% and 32.57%, respectively.

The effective tax rates for the nine-month periods ended September 30, 2015 and 2014 were 32.15% and 32.01%, respectively.

ASSET QUALITY

The Company’s allowance for loan losses is an estimate of the amount needed to provide for probable losses inherent in the loan portfolio. In determining the 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.

Loan charge-offs, net of recoveries, amounted to a net recovery of $1 thousand for the third quarter of 2015 compared to a net recovery of $69 thousand for the third quarter of 2014. There was no provision for or recovery of loan losses during the third quarter of 2015 and a recovery of the provision for loan losses of $60,000 during the third quarter of 2014.

Loan charge-offs, net of recoveries, amounted to a net recovery of $137 thousand for the nine months ended September 30, 2015, compared to a net recovery of $90 thousand for the same period of 2014. The provision for loan losses was recovered in the amount of $145 thousand for the nine months ended September 30, 2015 compared to $352 thousand recovered for the same period of 2014.

Although the Company believes it has a sufficient allowance for its existing portfolio, there can be no assurances that an additional allowance for losses on existing loans may not be necessary in the future. The allowance for loan losses was $7.9 million at September 30, 2015 and December 31, 2014. The ratio of the allowance for loan losses to total loans outstanding at September 30, 2015, was 1.59% compared to 1.63% at December 31, 2014. The movement in this ratio resulted primarily from the loan portfolio’s growth since December 31, 2014.

The following table summarizes asset quality information at the dates indicated.



	2015			2014
	September 30,			December 31,			September 30,

	(Dollars in thousands)
Nonaccrual loans	$	2,505		$	3,430		$	3,580
Loans past due 90 days
and accruing interest		-			-			-
Total nonperforming loans		2,505			3,430			3,580
OREO		495			1,810			1,962
Total nonperforming assets	$	3,000		$	5,240		$	5,542

Allowance for loan losses
to period end loans		1.59	%		1.63	%		1.69	%
Nonperforming assets to total assets		0.48	%		0.88	%		0.92	%
Allowance for loan losses
to nonaccrual loans		314.01	%		229.56	%		220.77	%

LIQUIDITY

Liquidity represents the ability of the Company to convert assets into cash or cash equivalents without significant loss and the ability to raise additional funds by increasing liabilities. Liquidity is provided from cash, interest-bearing deposits in other banks, repayments of customer loans, increases in deposits, borrowings on federal funds facilities from four correspondent banks, term loans from a federal agency bank and maturing investments. Management monitors our sources and uses of funds to meet our day-to-day cash flow requirements while maximizing profits and plans the Company’s liquidity position for future periods. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control. However, customer deposit inflows and outflows are far less predictable and are not subject to the same high degree of control. 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, 2015, the Company had cash and cash equivalents of $19.5 million, time deposits in other banks of $2.3 million, and unrestricted investment securities not pledged of $80.4 million, for a total of $102.2 million, or 16.4% of total assets, which management believes is adequate to meet short-term liquidity needs. Management also has alternative sources of funding available, including unused unsecured federal funds facilities with four banks totaling $35.0 million and unused available term loans through the FHLB totaling $44.8 million.

Total liquidity and other alternative sources of liquidity totaled $182 million at September 30, 2015, if fully utilized, which represents 35.0% of total deposits.

OFF BALANCE SHEET ARRANGEMENTS

In the normal course of business there are outstanding commitments for the extension of credit which are not reflected in the Company’s financial statements. At September 30, 2015, pre-approved but unused lines of credit for loans totaled approximately $159.3 million. In addition, the Company had approximately $12.6 million in financial and performance standby letters of credit at September 30, 2015. These commitments represent no more than the normal lending risk that the Company commits to borrowers. If these commitments are drawn, the Company will obtain collateral if it is deemed necessary based on the 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 less net unrealized gains on available-for-sale securities and disallowed portion of the deferred tax asset. Tier 2 capital, a component of total capital, consists of a portion of the allowance for loan losses. The Bank’s ratios exceed regulatory requirements. As of September 30, 2015, the Bank had a Tier 1 risk-based capital ratio of 11.56%, total risk-based capital ratio of 12.82%, and common equity Tier 1 capital ratio of 11.56%. At December 31, 2014, the Bank’s Tier 1 risk-based capital ratio was 11.64% and total risk-based capital ratio was 12.90%. The modest declines in capital ratios at September 30, 2015 compared to December 31, 2014, are due primarily to the first quarter 2015 implementation of the Basel III framework for calculating capital ratios and asset growth during 2015.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

N/A

ITEM 4. CONTROLS AND PROCEDURES

Based upon an evaluation as of September 30, 2015, under the supervision and with the participation of the Company’s Chief Executive Officer, President, and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, the Company’s management has concluded that the Company’s 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.

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings – None to report

Item 1A. Risk Factors

In addition to the other information set forth in this report, the factors discussed in Part I, Item 1A, “Risk Factors,” in our annual report on Form 10-K for the year ended December 31, 2014, could materially affect our business, financial condition or future results. The risks described in our annual report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations. Other than the additional items disclosed below, there have been no material changes to the risk factors as previously disclosed in Part I, Item IA of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Combining Park Sterling and First Capital may be more difficult, costly or time-consuming than we expect.

The success of the Park Sterling Merger will depend, in part, on Park Sterling’s ability to realize the anticipated benefits and cost savings from combining the businesses of Park Sterling and First Capital. However, to realize these anticipated benefits and cost savings, Park Sterling must successfully combine the businesses of Park Sterling and First Capital. If Park Sterling is not able to achieve these objectives, the anticipated benefits and cost savings of the Park Sterling Merger may not be realized fully or at all or may take longer to realize than expected.

Park Sterling and First Capital have operated, and, until the completion of the Park Sterling Merger, will continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect Park Sterling’s ability to maintain relationships with customers, depositors and employees after the merger or to achieve the anticipated benefits of the merger. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of first Capital and Park Sterling during that transition period.

If Park Sterling is not able to merge First Capital Bank with and into Park Sterling Bank promptly following the completion of the Park Sterling Merger, Park Sterling may fail to realize some of the anticipated benefits and cost savings from the Park Sterling Merger, which could adversely impact Park Sterling’s financial condition and results of operations. Park Sterling has not previously operated a Virginia banking corporation. If Park Sterling were to separately operate Park Sterling Bank and First Capital Bank, Park Sterling Bank and First Capital Bank would be subject to separate examination by their respective primary regulators and Park Sterling would incur increased regulatory and compliance costs.

The Park Sterling Merger may distract management of First Capital from its other responsibilities.

The Park Sterling Merger could cause the management of First Capital to focus its time and energies on matters related to the Park Sterling Merger that otherwise would be directed to its business and operations. Any such distraction on the part of First Capital’s management, if significant, could affect its ability to service existing business and develop new business and adversely affect the business and earnings of First Capital before the Park Sterling Merger, or the business and earnings of Park Sterling after the Park Sterling Merger.

Termination of the Merger Agreement could negatively impact First Capital.

If the Merger Agreement is terminated, First Capital’s business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Park Sterling Merger, without realizing any of the anticipated benefits of completing the Park Sterling Merger. Additionally, if the Merger Agreement is terminated, the market price of First Capital’s common stock could decline to the extent that the current market prices reflect a market assumption that the Park Sterling Merger will be completed. Furthermore, costs relating to the Park Sterling Merger, such as legal, accounting and financial advisory fees, must be paid even if the merger is not completed. If the Merger Agreement is terminated under certain circumstances, including circumstances involving a change in recommendation by First Capital’s board of directors, First Capital may be required to pay to Park Sterling a termination fee of $3,250,000 and reimburse Park Sterling for expenses not to exceed $500,000.

The Merger Agreement limits the ability of First Capital to pursue alternatives to the Park Sterling Merger.

The Merger Agreement contains “no-shop” provisions that, subject to limited exceptions, limit the ability of First Capital to discuss, facilitate or commit to competing third-party proposals to acquire all or a significant part of First Capital. In addition, under certain circumstances, if the Merger Agreement is terminated and First Capital, subject to certain restrictions, consummates a similar transaction other than the Park Sterling Merger, First Capital must pay to Park Sterling a termination fee of $3,250,000 and reimburse Park Sterling for expenses not to exceed $500,000. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of First Capital from considering or proposing a competing acquisition.

First Capital will be subject to business uncertainties while the Park Sterling Merger is pending.

Uncertainty about the effect of the Park Sterling Merger on employees and customers may have an adverse effect on First Capital. These uncertainties may impair First Capital’s ability to attract, retain and motivate key personnel until the Park Sterling Merger is completed and could cause customers and others that deal with First Capital to seek to change existing business relationships with First Capital. Retention of certain employees by First Capital may be challenging while the Park Sterling Merger is pending, as certain employees may experience uncertainty about their future roles with First Capital or the combined company following the Park Sterling Merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with First Capital or Park Sterling following the Park Sterling Merger, First Capital’s business, or the business of Park Sterling following the Park Sterling Merger, could be harmed.

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

In December 2014, the Board of Directors authorized a share repurchase program to purchase up to 300,000 shares of the Company’s outstanding common stock. The Company intends and expects to accomplish the repurchases through open market transactions, though it could affect the repurchases through other means such as privately negotiated transactions or under a SEC 10b5-1 trading plan, which would allow repurchases under pre-set terms at times when the Company might otherwise be prevented from doing so under applicable securities laws or self-imposed blackouts. The authorization permits management to repurchase the Company’s shares from time to time at management’s discretion, depending on market conditions and other factors. The repurchase program is authorized through December 31, 2015. There were no stock repurchases during the third quarter of 2015. The following table details the Company’s purchases of its common stock during 2015.

Period	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plan	Maximum Number of Shares that may yet be Purchased Under the Plan
	(a)	(b)	(c)	(d)

April 1 - April 30, 2015	5,000	$ 4.45	5,000	295,000
May 1 - May 31, 2015	13,000	$ 4.40	18,000	282,000
June 1 - June 30, 2015	23,700	$ 4.37	41,700	258,300
Total	41,700	$ 4.39	41,700	258,300

Item 3. Defaults Upon Senior Securities – None

Item 4. Mine Safety Disclosures – None

Item 5. Other Information – None to report

Item 6. Exhibits


Exhibit No.	Description of Exhibit

2.1	Agreement and Plan of Merger dated as of September 30, 2015, between First Capital Bancorp, Inc., and Park Sterling Corporation (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed on October 1, 2015)

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

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

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

3.4	Articles of Amendment to the Company’s Articles of Incorporation, increasing the number of authorized shares of Common Stock to 30,000,000 (incorporated by reference to Exhibit 3.1 of Form 8-K filed on September 3, 2010)
3.5	Articles of Amendment to the Company’s Articles of Incorporation, changing the par value of the Company’s Common Stock from $4.00 per share to $.01 per share (incorporated by reference to Exhibit 3.1 of Form 8-K filed on June 24, 2014)
4.1	Specimen Common Stock Certificate of First Capital Bancorp, Inc., (incorporated by reference to Exhibit 4.1 of Form SB-2 filed on March 16, 2007)

31.1	Certification of John M. Presley Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated October 29, 2015.

31.2	Certification of Robert G. Watts, Jr. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated October 29, 2015.

31.3	Certification of William W. Ranson Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated October 29, 2015.

32	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated October 29, 2015.





101	The following materials from the Company’s 10-Q Report for the quarter ended September 30, 2015, formatted in XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operation, (iii) the Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss), (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.

SIGNATURES

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

First Capital Bancorp, Inc.


Date:	October 29, 2015	By:	/s/ John M. Presley
			John M. Presley
			Managing Director & Chief Executive Officer

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

FIRST CAPITAL BANCORP, INC. - FORM 10-Q - October 29, 2015

Attached files

FIRST CAPITAL BANCORP, INC. Reports