UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE EXCHANGE ACT
For the transition period from to
FIRST CAPITAL BANCORP, INC.
(Name of Small Business Issuer in its charter)
| Virginia | 001-33543 | 11-3782033 | ||
(State or other jurisdiction of Incorporation or organization) | (Commission File Number) | (I.R.S. Employer Identification No.) |
4222 Cox Road, Suite 200, Glen Allen, Virginia 23060
(Address of principal executive offices)
804-273-1160
(Issuer’s telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
2,968,921 shares of Common Stock, par value $4.00 per share, were outstanding at August 13, 2007.
Transitional Small Business Disclosure Format (check one) Yes ¨ No x
TABLE OF CONTENTS
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PART 1 - FINANCIAL INFORMATION
First Capital Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
June 30, 2007 and December 31, 2006
| 2007 | 2006 | |||||||
| (Unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 6,447,509 | $ | 7,034,047 | ||||
Federal funds sold | 1,540,000 | — | ||||||
Short term debt securities | 14,983,500 | 4,997,979 | ||||||
Total cash and cash equivalents | 22,971,009 | 12,032,026 | ||||||
Investment securities: | ||||||||
Available for sale, at fair value | 30,589,978 | 38,730,975 | ||||||
Restricted, at cost | 2,207,990 | 2,389,139 | ||||||
Loans, net of allowance for losses | 226,506,586 | 199,751,483 | ||||||
Premises and equipment, net | 2,147,535 | 2,119,379 | ||||||
Accrued interest receivable | 1,398,006 | 1,425,364 | ||||||
Deferred tax asset | 355,493 | 308,503 | ||||||
Other assets | 813,538 | 483,776 | ||||||
Total assets | $ | 286,990,135 | $ | 257,240,645 | ||||
LIABILITIES | ||||||||
Deposits | ||||||||
Noninterest-bearing | $ | 37,680,363 | $ | 32,878,408 | ||||
Interest-bearing | 181,363,273 | 161,424,027 | ||||||
Total deposits | 219,043,636 | 194,302,435 | ||||||
Accrued expenses and other liabilities | 2,382,731 | 2,431,031 | ||||||
Securities sold under repurchase agreements | 2,110,288 | 1,667,064 | ||||||
Federal funds purchased | — | 6,026,000 | ||||||
Subordinated debt | 7,155,000 | 7,155,000 | ||||||
Federal Home Loan Bank advances | 25,000,000 | 30,000,000 | ||||||
Total liabilities | 255,691,655 | 241,581,530 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock, $4.00 par value (authorized 5,000,000 shares; shares issued and outstanding, 2,816,021 at June 30, 2007 and 1,796,021 at December 31, 2006) | 11,264,084 | 7,184,084 | ||||||
Additional paid-in capital | 16,948,829 | 6,010,352 | ||||||
Retained earnings | 3,488,382 | 2,776,277 | ||||||
Accumulated other comprehensive (loss), net of tax | (402,815 | ) | (311,598 | ) | ||||
Total stockholders’ equity | 31,298,480 | 15,659,115 | ||||||
Total liabilities and stockholders’ equity | $ | 286,990,135 | $ | 257,240,645 | ||||
See notes to consolidated financial statements.
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First Capital Bancorp Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
Interest income | ||||||||||||
Loans | $ | 4,291,749 | $ | 3,186,445 | $ | 8,256,105 | $ | 6,052,448 | ||||
Investments: | ||||||||||||
Taxable interest income | 353,846 | 408,114 | 776,983 | 822,591 | ||||||||
Tax exempt interest income | 10,264 | 10,264 | 20,528 | 20,528 | ||||||||
Dividends | 32,141 | 36,036 | 62,742 | 54,016 | ||||||||
Federal funds sold | 133,248 | 34,808 | 208,060 | 43,989 | ||||||||
Total interest income | 4,821,248 | 3,675,667 | 9,324,418 | 6,993,572 | ||||||||
Interest expense | ||||||||||||
Deposits | 2,194,999 | 1,437,872 | 4,229,446 | 2,678,429 | ||||||||
FHLB advances | 264,785 | 304,498 | 520,609 | 512,173 | ||||||||
Federal funds purchased | — | 22,012 | 7,023 | 77,350 | ||||||||
Subordinated debt and other borrowed money | 146,974 | 43,842 | 288,612 | 85,890 | ||||||||
Total interest expense | 2,606,758 | 1,808,224 | 5,045,690 | 3,353,842 | ||||||||
Net interest income | 2,214,490 | 1,867,443 | 4,278,728 | 3,639,730 | ||||||||
Provision for loan loss | 130,000 | 123,000 | 252,000 | 229,300 | ||||||||
Net interest income after provision for loan loss | 2,084,490 | 1,744,443 | 4,026,728 | 3,410,430 | ||||||||
Noninterest income | ||||||||||||
Fees on deposits | 49,695 | 37,896 | 99,326 | 66,070 | ||||||||
Fees on mortgage loans | 48,594 | — | 94,980 | — | ||||||||
Other | 91,159 | 47,621 | 162,054 | 114,934 | ||||||||
Total noninterest income | 189,448 | 85,517 | 356,360 | 181,004 | ||||||||
Noninterest expenses | ||||||||||||
Salaries and employee benefits | 936,118 | 567,955 | 1,754,723 | 1,136,014 | ||||||||
Occupancy expense | 187,802 | 148,119 | 371,940 | 299,535 | ||||||||
Data processing | 135,020 | 100,642 | 259,218 | 218,156 | ||||||||
Professional services | 28,181 | 42,801 | 81,256 | 74,515 | ||||||||
Virginia capital stock tax | 45,000 | 38,000 | 90,000 | 74,500 | ||||||||
Depreciation | 83,914 | 77,078 | 169,476 | 151,945 | ||||||||
Other expenses | 305,404 | 249,067 | 566,070 | 464,878 | ||||||||
Total noninterest expense | 1,721,439 | 1,223,662 | 3,292,683 | 2,419,543 | ||||||||
Net income before provision for income taxes | 552,499 | 606,298 | 1,090,405 | 1,171,891 | ||||||||
Income tax expense | 190,400 | 204,000 | 378,300 | 394,000 | ||||||||
Net income | $ | 362,099 | $ | 402,298 | $ | 712,105 | $ | 777,891 | ||||
Basic income per share | $ | 0.19 | $ | 0.22 | $ | 0.38 | $ | 0.43 | ||||
Diluted income per share | $ | 0.18 | $ | 0.21 | $ | 0.37 | $ | 0.41 | ||||
See notes to consolidated financial statements.
4
First Capital Bancorp, Inc. and Subsidiary
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
Six Months Ended June 30, 2007 and 2006
(Unaudited)
| Common Stock | Additional Paid-in | Retained Earnings | Accumulated Other | Total Stockholders’ Equity | ||||||||||||||
Balance January 1, 2006 | $ | 7,184,084 | $ | 6,004,655 | $ | 1,205,058 | $ | (424,183 | ) | $ | 13,969,614 | |||||||
Net income | — | — | 777,891 | 777,891 | 777,891 | |||||||||||||
Other comprehensive loss | ||||||||||||||||||
Unrealized holding (losses) arising during period, (net of tax, ($176,081)) | — | — | — | (341,804 | ) | (341,804 | ) | |||||||||||
Total comprehensive income | $ | 436,087 | ||||||||||||||||
Balance June 30, 2006 | $ | 7,184,084 | $ | 6,004,655 | $ | 1,982,949 | $ | (765,987 | ) | $ | 14,405,701 | |||||||
Balance January 1, 2007 | $ | 7,184,084 | $ | 6,010,352 | $ | 2,776,277 | $ | (311,598 | ) | $ | 15,659,115 | |||||||
Stock offering | 4,080,000 | 11,985,000 | 16,065,000 | |||||||||||||||
Cost associated with stock offering | — | (1,071,592 | ) | — | — | (1,071,592 | ) | |||||||||||
Net income | — | — | 712,105 | 712,105 | 712,105 | |||||||||||||
Other comprehensive loss | ||||||||||||||||||
Unrealized holding (losses) arising during period, (net of tax, ($46,991)) | — | — | — | (91,217 | ) | (91,217 | ) | |||||||||||
Total comprehensive income | $ | 620,888 | ||||||||||||||||
Stock based compensation expense | — | 25,069 | — | — | 25,069 | |||||||||||||
Balance at June 30, 2007 | $ | 11,264,084 | $ | 16,948,829 | $ | 3,488,382 | $ | (402,815 | ) | $ | 31,298,480 | |||||||
See notes to consolidated financial statements.
5
First Capital Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2007 and 2006
(Unaudited)
| 2007 | 2006 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 712,105 | $ | 777,891 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Provision for loan losses | 252,000 | 229,300 | ||||||
Depreciation of premises and equipment | 169,476 | 151,945 | ||||||
Stock based compensation expense | 25,069 | — | ||||||
Net (accretion) amortization of bond premiums/discounts | (1,472 | ) | 20,878 | |||||
Increase in other assets | (329,763 | ) | (78,202 | ) | ||||
Decrease (increase) in accrued interest receivable | 27,358 | (71,939 | ) | |||||
Decrease in accrued expenses and other liabilities | (48,300 | ) | (164,353 | ) | ||||
Net cash provided by operating activities | 806,473 | 865,520 | ||||||
Cash flows from investing activities | ||||||||
Proceeds from maturities and calls of securities | 8,000,000 | — | ||||||
Proceeds from paydowns of securities available-for-sale | 1,501,262 | 1,627,837 | ||||||
Purchase of Federal Reserve Stock | (150 | ) | (5,950 | ) | ||||
Purchase of securities available-for-sale | (1,497,000 | ) | — | |||||
Redemption (purchase) of FHLB Stock | 181,300 | (428,800 | ) | |||||
Purchases of property and equipment | (197,632 | ) | (144,410 | ) | ||||
Net increase in loans | (27,007,103 | ) | (25,620,812 | ) | ||||
Net cash used in investing activities | (19,019,323 | ) | (24,572,135 | ) | ||||
Cash flows from financing activities | ||||||||
Net increase in demand, savings and money market accounts | 20,999,615 | 5,178,953 | ||||||
Net increase in certificates of deposit | 3,741,586 | 28,857,196 | ||||||
Stock offering proceeds, net of related expenses | 14,993,408 | — | ||||||
Advances from FHLB | 5,000,000 | 7,000,000 | ||||||
FHLB advances called | (10,000,000 | ) | — | |||||
Decrease in Federal funds purchased | (6,026,000 | ) | (10,270,000 | ) | ||||
Net increase in repurchase agreements | 443,224 | 896,848 | ||||||
Net cash provided by financing activities | 29,151,833 | 31,662,997 | ||||||
Net increase in cash and cash equivalents | 10,938,983 | 7,956,382 | ||||||
Cash and cash equivalents, beginning of period | 12,032,026 | 10,181,623 | ||||||
Cash and cash equivalents, end of period | $ | 22,971,009 | $ | 18,138,005 | ||||
Supplemental disclosure of cash flow information | ||||||||
Interest paid during the period | $ | 5,090,090 | $ | 3,294,828 | ||||
Taxes paid during the period | $ | 713,533 | $ | 972,430 | ||||
See notes to consolidated financial statements.
6
First Capital Bancorp, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
Note 1 – Basis of Presentation
First Capital Bancorp, Inc. (the “Company”) is the holding company of and successor to First Capital Bank (the “Bank”). Effective September 8, 2006, the Company acquired all of the outstanding stock of the Bank in a statutory share exchange transaction (the “Share Exchange”) pursuant to an Agreement and Plan of Reorganization dated September 5, 2006, between the Company and the Bank (the “Agreement”). The Agreement was approved by the shareholders of the Bank at the annual meeting of shareholders held on May 16, 2006. Under the terms of the Agreement, the shares of the Bank’s common stock were exchanged for shares of the Company’s common stock, par value $4.00 per share, on a one-for-one basis. As a result, the Bank became a wholly owned subsidiary of the Company, the Company became the holding company of the Bank and the shareholders of the Bank became shareholders of the Company. All references to the Company in this quarterly report for dates or periods prior to September 8, 2006 are references to the Bank.
In management’s opinion the accompanying consolidated financial statements, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of June 30, 2007 and December 31, 2006 and for the three months and six months ended June 30, 2007 and 2006, in conformity with accounting principles generally accepted in the United States of America. Results for the three months and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2007.
The organization and business of the Company, accounting policies followed, and other related information are contained in the notes to the financial statements of the Company as of and for the year ended December 31, 2006 filed as part of the Company’s annual report on Form 10-KSB. These interim financial statements should be read in conjunction with the annual financial statements.
First Capital Bancorp, Inc.’s critical accounting policy relates to the evaluation of the allowance for loan losses which is based on management’s opinion of an amount that is adequate to absorb losses in the Company’s existing portfolio. The allowance for loan losses is established through a provision for loan loss based on available information including the composition of the loan portfolio, historical loan losses (to the extent available due to limited history), specific impaired loans, availability and quality of the collateral, age of the various portfolios, changes in local economic conditions, and loan performance and quality of the portfolio. Different assumptions used in evaluating the adequacy of the Company’s allowance for loan losses could result in material changes in its financial condition and results of operations. The Company’s policies with respect to the methodology for determining the allowance for loan losses involve a high degree of complexity and require management to make subjective judgments that often require assumptions or estimates about certain matters. This critical policy and its assumptions are periodically reviewed with the Company’s Board of Directors.
Note 2 – Use of Estimates
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
Note 3 – Earnings per share
Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period.Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of common stock that then shared in the earnings of the entity.
7
The basic and diluted earnings per share calculations are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
Net income (numerator, basic and diluted) | $ | 362,099 | $ | 402,298 | $ | 712,105 | $ | 777,891 | ||||
Weighted average number of shares outstanding (denominator) | 1,919,318 | 1,796,021 | 1,858,010 | 1,796,021 | ||||||||
Earnings per common share - basic | $ | 0.19 | $ | 0.22 | $ | 0.38 | $ | 0.43 | ||||
Effect of dilutive securities: | ||||||||||||
Weighted average number of shares outstanding | 1,919,318 | 1,796,021 | 1,858,010 | 1,796,021 | ||||||||
Effect of stock options | 81,275 | 106,795 | 86,259 | 106,468 | ||||||||
Diluted average shares outstanding (denominator) | 2,000,593 | 1,902,816 | 1,944,269 | 1,902,489 | ||||||||
Earnings per common share - assuming dilution | $ | 0.18 | $ | 0.21 | $ | 0.37 | $ | 0.41 | ||||
Note 4 – Stock Options
Effective January 1, 2006, the Company adopted SFAS No. 123(R),Share-Based Payment, using the modified prospective method and, accordingly, did not restate the consolidated statements of operations for periods prior to January 1, 2006. This pronouncement amended SFAS No. 123,Accounting for Stock-Based Compensation, and superseded Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees. Under SFAS No. 123(R), the Company measures compensation cost for all stock-based awards at fair value on the date of grant and recognizes compensation expense in the consolidated statements of income over the service period that the awards are expected to vest.
In January 2007, 15,775 options were granted at an exercise price equal to 100% of the fair market value of the common stock on the date of grant. These options vest over three years. The stock based compensation expensed during the three months and six month ended June 30, 2007 was $13,341 and $25,069 respectively, and is included in salaries and employee benefits.
Note 5 – Investment Securities
The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities as of June 30, 2007 and December 31, 2006 are as follows:
| June 30, 2007 | ||||||||||||
Amortized Costs | Gross Unrealized | Fair Values | ||||||||||
| Gains | Losses | |||||||||||
| (Dollars in thousands) | ||||||||||||
Available-for-sale | ||||||||||||
U.S. Government agencies | $ | 20,485 | $ | — | $ | 307 | $ | 20,178 | ||||
Mortgage-backed securities | 9,697 | 6 | 277 | 9,426 | ||||||||
Tax-exempt municipal bonds | 1,010 | — | 24 | 986 | ||||||||
| $ | 31,192 | $ | 6 | $ | 608 | $ | 30,590 | |||||
8
| December 31, 2006 | ||||||||||||
Amortized Costs | Gross Unrealized | Fair Values | ||||||||||
| Gains | Losses | |||||||||||
| (Dollars in thousands) | ||||||||||||
Available-for-sale | ||||||||||||
U.S. Government agencies | $ | 26,977 | $ | — | $ | 272 | $ | 26,705 | ||||
Mortgage-backed securities | 11,215 | 5 | 210 | 11,010 | ||||||||
Tax-exempt municipal bonds | 1,011 | 5 | 0 | 1,016 | ||||||||
| $ | 39,203 | $ | 10 | $ | 482 | $ | 38,731 | |||||
The unrealized losses in the portfolio as of June 30, 2007 are considered temporary and are a result of the current interest rate environment and not increased credit risk. The Company has the ability and intent to hold debt securities in an unrealized loss position for the foreseeable future.
Note 6 – Loans
Major classifications of loans are as follows:
June 30, 2007 | December 31, 2006 | |||||
| Amount | Amount | |||||
Commercial | $ | 34,978 | $ | 22,619 | ||
Real estate - residential | 59,296 | 62,166 | ||||
Real estate - commercial | 67,100 | 63,062 | ||||
Real estate - construction | 64,027 | 51,450 | ||||
Consumer | 3,256 | 2,387 | ||||
Total loans | 228,657 | 201,684 | ||||
Less: | ||||||
Allowance for loan losses | 2,062 | 1,834 | ||||
Net deferred fees | 88 | 99 | ||||
Loans, net | $ | 226,507 | $ | 199,751 | ||
A summary of the transactions affecting the allowance for loan losses follows:
Analysis of Allowance for Loan Losses
(Dollars in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Beginning balance | $ | 1,956 | $ | 1,565 | $ | 1,834 | $ | 1,460 | ||||||||
Provision for loan losses | 130 | 123 | 252 | 229 | ||||||||||||
Charge-offs | (24 | ) | (10 | ) | (24 | ) | (11 | ) | ||||||||
Recoveries | — | — | — | — | ||||||||||||
Ending balance | $ | 2,062 | $ | 1,678 | $ | 2,062 | $ | 1,678 | ||||||||
Ratio of allowance for loan losses as a percent of loans outstanding at the end of the period. | 0.90 | % | 0.92 | % | 0.90 | % | 0.92 | % | ||||||||
9
Note 7 – Stock Offering
On June 19, 2007, the Company closed on a public stock offering of 1,020,000 shares of common stock at $15.75 per share. The offering was underwritten by two local brokerage houses. Gross proceeds totaled $16.1 million. Total costs of the offering through June 30, 2007 were $1.1 million. The Company will use the net proceeds from the offering to increase equity and for general corporate purposes, including using the net proceeds to provide additional equity to the Bank to support the growth of its operations.
On July 11, 2007, an additional 152,900 shares of common stock was issued as a result of the exercise of the over-allotment option granted to the underwriters of the Company’s public offering of 1,020,000 shares of common stock at $15.75 per share. The net proceeds to the Company from this exercise of the over-allotment were $2.3 million.
Note 8 – Recently Adopted Accounting Pronouncements
During the first quarter of 2007, the Company adopted the following accounting pronouncements: SFAS No. 155,Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140,SFAS No. 156,Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140,SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, and 132(R) and FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109. The adoption of these accounting pronouncements did not have a material impact on the Company’s consolidated results of operations or consolidated financial position.
Note 9 – Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of this new standard to have a material impact on the Company’s consolidated results of operations or consolidated financial position.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115. SFAS 159 permits entities to elect to measure eligible financial instruments at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The provisions of this standard will be effective for the Company’s 2008 fiscal year. Management is currently evaluating the impact of the provisions of SFAS 159.
10
| Item 2. | Management’s Discussion and Analysis of Financial Conditions and Results of Operations |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate” or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits. The Company does not update any forward-looking statements that may be made from time to time by or on behalf of the Company.
GENERAL
The Company was organized under the laws of the Commonwealth of Virginia as a bank holding company whose activities consist of investment in its wholly-owned subsidiary, the Bank. The Bank is a Virginia state-chartered bank headquartered in Glen Allen, Virginia. A member of the Federal Reserve System, it began operations in late 1998. The Bank is a community oriented financial institution that offers a full range of banking and related financial services to small and medium-sized businesses, professionals and individuals located in its market area, which encompasses western Henrico County, Ashland, western City of Richmond, Chesterfield County and the City of Petersburg. The Bank’s goal is to provide its customers with high quality, responsive and technologically advanced banking services. In addition, the Bank strives to develop personal, hometown relationships with it customers, while at the same time offering products comparable to statewide regional banks located in its market area. Management believes that the marketing of customized banking services has enabled it to establish a niche in the financial services marketplace in the Richmond metropolitan area.
The operating results of the Bank depend primarily upon its net interest income, which is determined by the difference between (i) interest and dividend income on interest earning assets, which consist primarily of loans, investment securities and other investments, and (ii) interest expense on interest-bearing liabilities, which consist principally of deposits, advances from the Federal Home Loan Bank of Atlanta and junior subordinated debt. Net income is also affected by its provision for loan loss, as well as the level of its other operating income, including loan fees and service charges, and its other operating expenses, including salaries and employee benefits, occupancy expense, miscellaneous other expenses, franchise taxes and income taxes.
The Bank currently serves its customers through the following six full-service offices: the main office located at 4101 Dominion Boulevard in Glen Allen, Virginia, a branch located at 409 South Washington Highway in Ashland, Virginia, a branch located at 1580 Koger Center Boulevard in Chesterfield County, Virginia, a branch located at 1776 Staples Mill Road near the Richmond / Henrico County boundary, a branch located in Forest Office Park in Henrico County and its newest branch at 901 E. Cary Street in the James Center in Richmond, Virginia.
The following discussion represents management’s discussion and analysis of the financial condition and results of operations for the Company as of June 30, 2007 and December 31, 2006 and for the three months and six months ended June 30, 2007 and 2006. It should be read in conjunction with the financial statements included elsewhere herein.
11
SUMMARY OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Financial Condition Summary
June 30, 2007 as Compared to December 31, 2006
Total assets increased $29.8 million for the first six months of 2007 to $287.0 million compared with $257.2 million at December 31, 2006. The 11.6% increase in total assets during the six months ended June 30, 2007 resulted from the growth of our business and customer base. Net loans increased $26.7 million to $226.5 million at June 30, 2007, an increase of 13.4% over net loans of $199.8 million at December 31, 2006. Deposits increased $24.7 million to $219.0 million or 12.7% for the first six months of 2007. Federal Home Loan Bank advances totaled $25.0 million at June 30, 2007, a decrease of $5.0 million from year end 2006. Federal funds purchased decreased $6.0 million from December 31, 2006 to $0.
As of June 30, 2007 and December 31, 2006, our regulatory capital levels exceeded those established for well-capitalized institutions.
Results of Operations
Comparison of the Three Months Ended June 30, 2007 and 2006
Net income for the three months ended June 30, 2007 decreased to $362 thousand, or $0.18 per diluted share compared to $402 thousand for the three months ended June 30, 2006, or $0.21 per diluted share. The decrease in net income was due primarily to the additional costs associated with the growth of the bank which includes the opening and staffing of two new branches, one in the third quarter of 2006, and one in the first quarter of 2007, coupled with the hiring in the first quarter of 2007 of a Private Client Group Leader and a Business Banking Group Leader, both of whom have established relationships in the Richmond market.
Net interest income increased by $347 thousand, or 18.6%, from $1.9 million in the second quarter of 2006 to $2.2 million in the second quarter of 2007. This increase in net interest income is a direct result of our growth in loans and deposits. Average net loans outstanding for the three months ended June 30, 2007 increased $45.4 million over the average net loans outstanding for the quarter ended June 30, 2006. Over the same period, average deposits increased $41.4 million. The net interest margin decreased 8 basis points for the three months ended June30, 2007 to 3.36% as compared to 3.44% for the three months ended June 30, 2006. The yield on interest earning assets increased from 6.77% for the quarter ended June 30, 2006 to 7.32% for the quarter ended June 30, 2007. The cost of interest bearing liabilities increased 70 basis points from 4.05% for the quarter ended June 30, 2006 to 4.75% for the quarter ended June 30, 2007. Cost of deposits increased from 3.99% for the quarter ended June 30, 2006 to 4.74% for the quarter ended June 30, 2007. Certificates of deposits and money market accounts had the largest increase in interest expense. Certificates of deposits increased 69 basis points due to high short term rates and the roll-up of existing deposits. Money market accounts increased 168 basis points with the introduction of the Capital Reserve Account which is tied to federal funds rate less 25 basis points.
Noninterest income increased by $104 thousand, or 121.5%, from $86 thousand in the second quarter of 2006 to $189 thousand in the second quarter of 2007. This increase in noninterest income is attributable to increases in service charges and fees on deposits and loans, and fees on mortgage loans.
Noninterest expense increased $498 thousand, or 40.7%, from $1.2 million in the second quarter of 2006 to $1.7 million in the second quarter of 2007. This increase in noninterest expense is attributable to the growth and expansion of the Company. We opened our fifth branch during the third quarter of 2006 and our sixth branch in February 2007. There were 64 employees as of June 30, 2007 as compared to 52 at June 30, 2006. The increase in employees includes staff for the new branches, additional lenders and additional staff at the corporate level to support our growth. Salaries and employee benefits increased 64.8% from $568 thousand for the second three months of 2006 to $936 thousand for the comparable period of 2007.
The provision for loan losses increased 5.7% from $123 thousand for the second quarter of 2006 to $130 thousand for the three months ended June 30, 2007. This increase reflects the increased volume of loans closed during the period as compared to the three months ended June 30, 2006.
12
Net interest income
Net interest income represents our principal source of earnings. Net interest income is the amount by which interest generated from earning assets exceeds the expense of funding those assets. Changes in volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income
Earning assets consist primarily of loans, investment securities and other investments. Interest-bearing liabilities consist principally of deposits, Federal Home Loan Bank advances and other borrowings. Since January 1, 2005, the Board of Governors of the Federal Reserve increased short-term interest rates by 3.00% in twelve 25 basis point increases.
The following table illustrates average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders’ equity and related income, expense and corresponding weighted-average yields and rates. The average balances used in these tables were calculated using daily average balances.
Average Balances, Income and Expenses, Yields and Rates
| Three Months Ended June 30, | ||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||
| Average | Income/ | Yields/ | Average | Income/ | Yields/ | |||||||||||||||
| Balance | Expense | Rates | Balance | Expense | Rates | |||||||||||||||
Earning Assets: | ||||||||||||||||||||
Loans and leases, net of unearned income: | $ | 219,019 | $ | 4,292 | 7.86 | % | $ | 173,640 | $ | 3,186 | 7.36 | % | ||||||||
Investment securities: | ||||||||||||||||||||
U.S. Agencies | 21,699 | 247 | 4.56 | % | 25,077 | 275 | 4.40 | % | ||||||||||||
Mortgage backed securities | 10,213 | 107 | 4.21 | % | 13,079 | 133 | 4.08 | % | ||||||||||||
Municipal securities | 1,010 | 10 | 4.07 | % | 1,013 | 10 | 4.06 | % | ||||||||||||
Other investments | 2,119 | 32 | 6.08 | % | 2,160 | 36 | 6.69 | % | ||||||||||||
Total investment securities | 35,041 | 396 | 4.54 | % | 41,329 | 454 | 4.41 | % | ||||||||||||
Federal funds sold | 10,280 | 133 | 5.20 | % | 2,841 | 35 | 4.91 | % | ||||||||||||
Total earning assets | 264,340 | 4,821 | 7.32 | % | 217,810 | 3,675 | 6.77 | % | ||||||||||||
Cash and cash equivalents | 5,728 | 5,627 | ||||||||||||||||||
Allowance for loan losses | (2,055 | ) | (1,643 | ) | ||||||||||||||||
Other assets | 4,149 | 2,951 | ||||||||||||||||||
Total assets | $ | 272,162 | $ | 224,745 | ||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||
Interest checking | $ | 7,882 | $ | 21 | 1.06 | % | $ | 6,143 | $ | 8 | 0.51 | % | ||||||||
Money market deposit accounts | 44,280 | 461 | 4.18 | % | 21,558 | 134 | 2.50 | % | ||||||||||||
Statement savings | 745 | 3 | 1.52 | % | 590 | 2 | 1.54 | % | ||||||||||||
Certificates of deposit | 132,861 | 1,710 | 5.16 | % | 116,094 | 1,294 | 4.47 | % | ||||||||||||
Total interest-bearing deposits | 185,768 | 2,195 | 4.74 | % | 144,385 | 1,438 | 3.99 | % | ||||||||||||
Federal funds purchased | — | — | — | 1,659 | 22 | 5.32 | % | |||||||||||||
Repurchase agreements | 1,992 | 22 | 4.51 | % | 1,107 | 12 | 4.29 | % | ||||||||||||
Subordinated debt | 7,155 | 125 | 6.98 | % | 2,000 | 32 | 6.42 | % | ||||||||||||
FHLB Advances | 25,000 | 265 | 4.25 | % | 29,890 | 304 | 4.09 | % | ||||||||||||
Total interest bearing liabilities | 219,915 | 2,607 | 4.75 | % | 179,041 | 1,808 | 4.05 | % | ||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||
Noninterest-bearing deposits | 31,078 | 29,150 | ||||||||||||||||||
Other liabilities | 2,738 | 2,208 | ||||||||||||||||||
Shareholders’ equity | 18,431 | 14,346 | ||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 272,162 | $ | 224,745 | ||||||||||||||||
Net interest income / spread | 2.56 | % | 2.72 | % | ||||||||||||||||
Impact of noninterest-bearing sources | 0.80 | % | 0.72 | % | ||||||||||||||||
Net interest income / margin | $ | 2,214 | 3.36 | % | $ | 1,867 | 3.44 | % | ||||||||||||
Ratio of average interest earning assets to average interest-bearing liabilities | 120.20 | % | 121.65 | % | ||||||||||||||||
13
Results of Operations
Comparison of the Six Months Ended June 30, 2007 and 2006
Net income for the six months ended June 30, 2007 decreased to $712 thousand, or $0.37 per diluted share compared to $778 thousand for the six months ended June 30, 2006, or $0.41 per diluted share. As explained above, the addition of two branches, staffing additions and hiring of experienced lending professionals, resulted in the decrease in earnings for the six months ended June 30, 2007 as compared to June 30, 2006.
Net interest income increased by $639 thousand, or 17.6%, from $3.6 million for the six months ended June 30, 2006 to $4.3 million for the same period in 2007. This increase in net interest income is a direct result of our growth in loans and deposits. Average net loans outstanding for the six months ended June 30, 2007 increased $44.5 million over the average net loans outstanding for the comparable period in 2006. Over the same period, average deposits increased $40.0 million. The net interest margin decreased 12basis points for the six months ended June 30, 2007 to 3.36% as compared to 3.48% for the comparable period in 2006. The yield on interest earning assets increased from 6.68% for the six months ended June 30, 2006 to 7.31% for the six months ended June 30, 2007. The cost of interest bearing liabilities increased 88 basis points from 3.90% for 2006 period to 4.72% for the comparable period in 2007. Cost of deposits increased from 3.64% for the two quarters ended June 30, 2006 to 4.70% for the two quarters ended June 30, 2007. Certificates of deposits and money market accounts had the largest increase in interest expense. Certificates of deposits increased 83 basis points due to high short term rates and the roll-up of existing deposits. Money market accounts increased 172 basis points with the introduction of the Capital Reserve Account which is tied to federal funds rate less 25 basis points.
Noninterest income increased by $175 thousand, or 96.9%, from $181 thousand for the first two quarters of 2006 to $356 thousand in the comparable period of 2007. This increase in noninterest income is attributable to increases in service charges and fees on deposits and loans, and fees on mortgage loans which began in the fourth quarter of 2006.
Noninterest expense increased $873 thousand, or 36.1%, from $2.4 million for the six months ended June 30, 2006 to $3.3 million in the comparable period in 2007. This increase in noninterest expense is attributable to the growth and expansion of the Company. The largest increases in noninterest income occurred in salaries and employee benefits of $619 thousand, $72 thousand in occupancy and $41 thousand in data processing.
The provision for loan losses increased 9.9% from $229 thousand for the first six months of 2006 to $252 thousand for the comparable period in 2007. This increase reflects the growth of the loans outstanding at June 30, 2007 as compared to June 30, 2006.
Net interest income
Net interest income represents our principal source of earnings. Net interest income is the amount by which interest generated from earning assets exceeds the expense of funding those assets. Changes in volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income
Earning assets consist primarily of loans, investment securities and other investments. Interest-bearing liabilities consist principally of deposits, Federal Home Loan Bank advances and other borrowings
The following table illustrates average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders’ equity and related income, expense and corresponding weighted-average yields and rates. The average balances used in these tables were calculated using daily average balances.
14
Average Balances, Income and Expenses, Yields and Rates
| Six Months Ended June 30, | ||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||
| Average | Income/ | Yields/ | Average | Income/ | Yields/ | |||||||||||||||
| Balance | Expense | Rates | Balance | Expense | Rates | |||||||||||||||
Assets: | ||||||||||||||||||||
Loans and leases, net of unearned income: | $ | 212,032 | $ | 8,256 | 7.85 | % | $ | 167,541 | $ | 6,053 | 7.28 | % | ||||||||
Investment securities: | ||||||||||||||||||||
U.S. Agencies | 23,346 | 553 | 4.78 | % | 25,125 | 551 | 4.42 | % | ||||||||||||
Mortgage backed securities | 10,590 | 224 | 4.26 | % | 13,486 | 272 | 4.06 | % | ||||||||||||
Municipal securities | 1,011 | 20 | 4.10 | % | 1,013 | 20 | 4.09 | % | ||||||||||||
Other investments | 2,108 | 63 | 6.00 | % | 1,928 | 54 | 5.65 | % | ||||||||||||
Total investment securities | 37,055 | 860 | 4.68 | % | 41,552 | 897 | 4.35 | % | ||||||||||||
Federal funds sold | 8,067 | 208 | 5.20 | % | 1,896 | 44 | 4.68 | % | ||||||||||||
Total earning assets | 257,154 | 9,324 | 7.31 | % | 210,989 | 6,994 | 6.68 | % | ||||||||||||
Cash and cash equivalents | 5,479 | 5,881 | ||||||||||||||||||
Allowance for loan losses | (1,984 | ) | (1,584 | ) | ||||||||||||||||
Other assets | 4,113 | 2,612 | ||||||||||||||||||
Total assets | $ | 264,762 | $ | 217,898 | ||||||||||||||||
Liabilities and Stockholders’ Equity: | ||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||
Interest checking | $ | 7,959 | $ | 33 | 0.85 | % | $ | 6,361 | $ | 16 | 0.51 | % | ||||||||
Money market deposit accounts | 40,230 | 820 | 4.11 | % | 22,312 | 264 | 2.39 | % | ||||||||||||
Statement savings | 934 | 7 | 1.52 | % | 581 | 4 | 1.54 | % | ||||||||||||
Certificates of deposit | 132,249 | 3,369 | 5.14 | % | 112,125 | 2,394 | 4.31 | % | ||||||||||||
Total interest-bearing deposits | 181,372 | 4,229 | 4.70 | % | 141,379 | 2,678 | 3.64 | % | ||||||||||||
Federal funds purchased | 268 | 7 | 5.30 | % | 3,160 | 77 | 4.94 | % | ||||||||||||
Repurchase agreements | 1,826 | 41 | 4.57 | % | 1,080 | 23 | 4.15 | % | ||||||||||||
Subordinated debt | 7,155 | 247 | 6.97 | % | 2,000 | 64 | 6.42 | % | ||||||||||||
FHLB Advances | 24,983 | 521 | 4.20 | % | 25,901 | 512 | 3.99 | % | ||||||||||||
Total interest bearing liabilities | 215,604 | 5,045 | 4.72 | % | 173,520 | 3,354 | 3.90 | % | ||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||
Noninterest-bearing deposits | 29,352 | 27,903 | ||||||||||||||||||
Other liabilities | 2,660 | 2,242 | ||||||||||||||||||
Shareholders’ equity | 17,146 | 14,233 | ||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 264,762 | $ | 217,898 | ||||||||||||||||
Net interest income / spread | 2.59 | % | 2.78 | % | ||||||||||||||||
Impact of noninterest-bearing sources | 0.76 | % | 0.69 | % | ||||||||||||||||
Net interest income / margin | $ | 4,279 | 3.36 | % | $ | 3,640 | 3.48 | % | ||||||||||||
Ratio of average interest earning assets to average interest-bearing liabilities | 119.27 | % | 121.59 | % | ||||||||||||||||
15
Loan Portfolio
The following table presents the composition of the loan portfolio at the dates indicated:
| June 30, | December 31, | |||||||||||
| 2007 | 2006 | |||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||
Commercial | $ | 34,978 | 15.30 | % | $ | 22,619 | 11.22 | % | ||||
Real estate – residential | 59,296 | 25.93 | % | 62,166 | 30.82 | % | ||||||
Real estate – commercial | 67,100 | 29.35 | % | 63,062 | 31.27 | % | ||||||
Real estate – construction | 64,027 | 28.00 | % | 51,450 | 25.51 | % | ||||||
Consumer | 3,256 | 1.42 | % | 2,387 | 1.18 | % | ||||||
Total loans | $ | 228,657 | 100.00 | % | $ | 201,684 | 100.00 | % | ||||
Less: | ||||||||||||
Allowance for loan losses | 2,062 | 1,834 | ||||||||||
Net deferred fees | 88 | 99 | ||||||||||
Loans, net | $ | 226,507 | $ | 199,751 | ||||||||
Allowance for loan losses
The allowance for loan losses at June 30, 2007 was $2.1 million, compared to $1.7 million at June 30, 2006. The ratio of the allowance for loan losses to gross portfolio loans was 0.90% at June 30, 2007 as compared to 0.92% at June 30, 2006. At June 30, 2007, the Company had one foreclosed single family real estate property non-performing asset valued at $154 thousand. At June 30, 2006, there were no non-performing loans or assets. The amount of the allowance for loans losses is determined by an evaluation of the level of loans outstanding, the level of non-performing loans, loan concentrations, historical loan loss experience, delinquency trends and assessment of present and anticipated economic conditions.
The following table presents activity in the allowance for loan losses for the periods indicated:
Analysis of Allowance for Loan Losses
(Dollars in thousands)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Beginning balance | $ | 1,956 | $ | 1,565 | $ | 1,834 | $ | 1,460 | ||||||||
Provision for loan losses | 130 | 123 | 252 | 229 | ||||||||||||
Charge-offs | (24 | ) | (10 | ) | (24 | ) | (11 | ) | ||||||||
Recoveries | — | — | — | — | ||||||||||||
Ending balance | $ | 2,062 | $ | 1,678 | $ | 2,062 | $ | 1,678 | ||||||||
Ratio of allowance for loan losses as a percent of loans outstanding at the end of the period. | 0.90 | % | 0.92 | % | 0.90 | % | 0.92 | % | ||||||||
Deposits
Total deposits increased by $24.7 million, or 12.7% for the first six months of 2007 as compared to an increase of $34.0 million, or 21.0%, for the first six months of 2006. During the first six months of 2007, the increase in deposits occurred primarily in interest-bearing accounts which increased by $19.9 million, or 12.4%. Certificates of deposit increased by $3.7 million, money market and savings and NOW accounts increased by $16.2 million and noninterest-bearing demand deposits increased by $4.8 million.
16
The mix of our deposits continues to be weighted toward certificates of deposit which represent 57.2% of our total deposits as of June 30, 2007. Certificates of deposit as a percentage of total deposits were 62.5% at December 31, 2006 and 65.8% at June 30, 2006. Recent efforts to lessen the dependency on high cost of certificates of deposit have resulted in the decrease percentage of certificates of deposits to total deposits. Money market accounts, with a low cost of interest, and noninterest bearing demand deposits have replaced the higher cost certificates of deposit.
The average cost of interest-bearing deposits for the six months ended June 30, 2007 and 2006 was 4.70% and 3.82%, respectively. This increase in our average cost of interest-bearing deposits is attributable to the overall increase in interest rates resulting from the actions by the Federal Reserve to increase short-term rates. Existing certificates of deposit during the first quarter of 2007 continued to roll up to current market rates. As rates have been steady for the last quarter, it is anticipated that the increase in average interest-bearing deposits will continue to abate.
Borrowings
We use borrowings to supplement deposits when they are available at a lower overall cost than is available from retail deposits and to assist in asset liability management.
Subordinated debt totaled $7.2 million as of June 30, 2007 as compared to $2.0 million at June 30, 2006. $5.2 million in subordinated debt was issued in September 2006. The subordinated debt issued in September 2006 may be included in Tier 1 capital for regulatory adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. The portion of subordinated debt not considered as Tier 1 capital may be included in Tier 2 capital. The $2.0 million in subordinated debt issued in December 2005, qualifies as Tier 2 capital only.
As of June 30, 2007, the Company had borrowed $25.0 million from the FHLB of Atlanta, a decrease of $5.0 million from December 31, 2006. The advances have an average interest rate of 4.25% and are callable in one to five years with a final maturity of ten years. The proceeds were used to fund loan growth. The FHLB advances are secured by our residential and commercial mortgage loans and the pledge of our FHLB stock.
We have $2.1 million outstanding under securities sold under repurchase agreements as of June 30, 2007 compared to $1.7 million as of December 31, 2006. These agreements are generally corporate cash management accounts for our larger corporate depositors. These agreements are settled on a daily basis and the securities underlying the agreements remain under the bank’s control.
Capital Resources
On June 19, 2007, the Company closed on a stock offering of 1,020,000 shares of common stock in a public offering at $15.75 per share, aggregating $16.1 million in gross proceeds. Total cost through June 30, 2007 for the offering was $1.1 million.
Stockholders’ equity at June 30, 2007 was $31.3 million, compared to $15.7 million at December 31, 2006. The $15.6 million increase in equity during the first six months of 2007 was due to net income of $712 thousand, a $91 thousand increase in net unrealized losses on securities available-for-sale and the sale of 1,020,000 shares of stock which increased stockholders’ equity by $15.0 million after expenses.
During the third quarter of 2006, the Company issued $5.2 million in Trust Preferred Capital Notes. The Trust Preferred Capital Notes may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion.
The Company’s current capital position meets the definition of a well-capitalized institution. The following table presents the capital ratios at the dates indicated:
17
| June 30, 2007 | December 31, 2006 | Well Capitalized Requirement | |||||||
Capital ratios | |||||||||
Tier 1 risk-based capital ratio | 15.46 | % | 10.39 | % | 6.00 | % | |||
Total risk-based capital ratio | 17.16 | % | 12.28 | % | 10.00 | % | |||
Leverage ratio | 13.54 | % | 8.80 | % | 5.00 | % | |||
Off Balance Sheet Arrangements and Commitments
In the normal course of business there are outstanding commitments for the extension of credit which are not reflected in the financial statements. At June 30, 2007 and December 31, 2006, pre-approved but unused lines of credit for loans totaled approximately $111.8 million and $118.4 million, respectively. In addition, we had $4.7 million and $3.5 million in financial and performance standby letters of credit at June 30, 2007 and December 31, 2006, respectively. These commitments represent no more than the normal lending risk that we commit to borrowers. If these commitments are drawn, we will obtain collateral if it is deemed necessary based on our credit evaluation of the counterparty.
Liquidity
Liquidity provides the Company with the ability to meet normal deposit withdrawals, while also providing for the credit needs of our customers. We are committed to maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements.
At June 30, 2007, cash and cash equivalents totaled $23.0 million. Investment securities available for sale and not pledged totaled $16.2 million, for a total of 13.7% of total assets, which we believe is adequate to meet short-term liquidity needs. Management also has alternative sources of funding available, including lines of credit, purchase of federal funds, term loans through the Federal Home Loan Bank and correspondent banks.
Interest Rate Sensitivity
The most important element of asset/liability management is the monitoring of our sensitivity to interest rate movements. Our income stream is subject to risk resulting from interest rate fluctuations to the extent there is a difference between the amount of our interest earning assets and the amount of interest bearing liabilities that are prepaid, mature or reprice in specific periods. Our goal is to maximize net interest income within acceptable levels of risk to changes in interest rates. We seek to meet this goal by influencing the maturity and re-pricing characteristics of the various lending and deposit taking lines of business and by managing discretionary balance sheet asset and liability portfolios.
The data in the following table reflects repricing or expected maturities of various assets and liabilities at June 30, 2007. The gap analysis represents the difference between interest-sensitive assets and liabilities in a specific time interval. Interest sensitivity gap analysis presents a position that existed at one particular point in time, and assumes that assets and liabilities with similar repricing characteristics will reprice at the same time and to the same degree.
18
| June 30, 2007 | |||||||||||||||||||||||
| 1 to 90 | 90 Days | 1 to 3 | 3 to 5 | Over 5 | |||||||||||||||||||
| Days | to 1 Year | Years | Years | Years | Total | ||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
Earning Assets: | |||||||||||||||||||||||
Gross loans | $ | 90,113 | $ | 24,218 | $ | 32,847 | $ | 54,350 | $ | 27,129 | $ | 228,657 | |||||||||||
Investment securities | 19,522 | 908 | 15,790 | 3,418 | 5,936 | 45,574 | |||||||||||||||||
Federal funds sold | 1,540 | — | — | — | — | 1,540 | |||||||||||||||||
Total rate sensitive assets | $ | 111,175 | $ | 25,126 | $ | 48,637 | $ | 57,768 | $ | 33,065 | $ | 275,771 | |||||||||||
Cumulative totals | 111,175 | 136,301 | 184,938 | 242,706 | 275,771 | ||||||||||||||||||
Interest-Bearing Liabilities: | |||||||||||||||||||||||
Interest checking | $ | — | $ | — | $ | 3,800 | $ | 3,515 | $ | — | $ | 7,315 | |||||||||||
Money market accounts | 39,607 | 4,045 | 4,288 | — | — | 47,940 | |||||||||||||||||
Savings deposits | — | — | 866 | — | — | 866 | |||||||||||||||||
Certificates of deposit | 34,505 | 60,286 | 19,286 | 11,165 | — | 125,242 | |||||||||||||||||
FHLB borrowing and subordinated debt | 5,155 | 5,000 | 20,000 | 2,000 | 32,155 | ||||||||||||||||||
Other liabilities | 2,110 | — | — | — | 2,110 | ||||||||||||||||||
Total rate sensitive liabilities | $ | 81,377 | $ | 69,331 | $ | 48,240 | $ | 14,680 | $ | 2,000 | $ | 215,628 | |||||||||||
Cumulative totals | 81,377 | 150,708 | 198,948 | 213,628 | 215,628 | ||||||||||||||||||
Interest sensitivity gap | $ | 29,798 | $ | (44,205 | ) | $ | 397 | $ | 43,088 | $ | 31,065 | ||||||||||||
Cumulative interest sensitivity gap | 29,798 | (14,407 | ) | (14,010 | ) | 29,078 | 60,143 | ||||||||||||||||
Cumulative interest sensitive gap as a percentage of earning assets | 10.8 | % | -5.2 | % | -5.1 | % | 10.5 | % | 21.8 | % | |||||||||||||
Impact of inflation and changing prices and seasonality
The financial statements in this document have been prepared in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial position and operating results in terms of historical dollars, without consideration of changes in the relative purchasing power of money over time due to inflation.
Unlike industrial companies, most of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such prices are affected by inflation.
| Item 3. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-QSB, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
19
Changes in Internal Controls
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Item 1. Legal Proceedings – None to report
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – Not Applicable
Item 3. Defaults Upon Senior Securities – Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders – None to report
Item 5. Other Information – None to report
Exhibit No. | Description of Exhibit | |
3.1 | Articles of Incorporation of First Capital Bancorp, Inc.(1) | |
3.2 | Bylaws of First Capital Bancorp, Inc.(1) | |
31.1 | Certification of Robert G. Watts, Jr. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 13, 2007. | |
31.2 | Certification of William W. Ranson Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 13, 2007. | |
32 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 13, 2007. | |
(1) | Expressly incorporated by reference from the Company’s Report on Form 10-QSB filed with the Securities and Exchange Commission on November 13, 2006. The Exhibit number set forth above corresponds to the exhibit number in such Form 10-QSB. |
20
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
First Capital Bancorp, Inc.
| Date: August 13, 2007 | By: | /s/ Robert G. Watts, Jr. | ||||
| Robert G. Watts, Jr. | ||||||
| President and Chief Executive Officer | ||||||
| By: | /s/ William W. Ranson | |||||
| William W. Ranson | ||||||
| Chief Financial Officer, | ||||||
| Treasurer and Secretary | ||||||
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Index of Exhibits
Exhibit No. | Description of Exhibit | |
3.1 | Articles of Incorporation of First Capital Bancorp, Inc.(1) | |
3.2 | Bylaws of First Capital Bancorp, Inc.(1) | |
31.1 | Certification of Robert G. Watts, Jr. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 13, 2007. | |
31.2 | Certification of William W. Ranson Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 13, 2007. | |
32 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated August 13, 2007. | |
(1) | Expressly incorporated by reference from the Company’s Report on Form 10-QSB filed with the Securities and Exchange Commission on November 13, 2006. The Exhibit number set forth above corresponds to the exhibit number in such Form 10-QSB. |
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