UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-QSB
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 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:
2,971,171 shares of Common Stock, par value $4.00 per share, were outstanding at November 9, 2007.
Transitional Small Business Disclosure Format (check one) Yes ¨ No x
| Page | ||
Item 1 –Financial Statements | ||
Consolidated Statements of Financial Condition September 30, 2007 (unaudited) and December 31, 2006 | 3 | |
| 4 | ||
| 5 | ||
| 6 | ||
| 7 | ||
Item 2 –Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | |
Item 3 –Controls and Procedures | 20 | |
| 21 | ||
Item 2 –Unregistered Sales of Equity Securities and Use of Proceeds – Not Applicable. | 21 | |
| 21 | ||
| 21 | ||
| 22 | ||
Item 6 –Exhibits | 22 | |
| 23 | ||
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PART 1 - FINANCIAL INFORMATION
First Capital Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
September 30, 2007 and December 31, 2006
| 2007 | 2006 | |||||||
| (Unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 6,983,584 | $ | 7,034,047 | ||||
Short term debt securities | 9,996,437 | 4,997,979 | ||||||
Total cash and cash equivalents | 16,980,021 | 12,032,026 | ||||||
Investment securities: | ||||||||
Available for sale, at fair value | 34,314,290 | 38,730,975 | ||||||
Restricted, at cost | 2,958,739 | 2,389,139 | ||||||
Loans, net of allowance for losses | 251,863,181 | 199,751,483 | ||||||
Premises and equipment, net | 2,158,447 | 2,119,379 | ||||||
Accrued interest receivable | 1,673,598 | 1,425,364 | ||||||
Deferred tax asset | 211,866 | 308,503 | ||||||
Other assets | 895,545 | 483,776 | ||||||
Total assets | $ | 311,055,687 | $ | 257,240,645 | ||||
LIABILITIES | ||||||||
Deposits | ||||||||
Noninterest-bearing | $ | 35,300,837 | $ | 32,878,408 | ||||
Interest-bearing | 188,605,658 | 161,424,027 | ||||||
Total deposits | 223,906,495 | 194,302,435 | ||||||
Accrued expenses and other liabilities | 1,803,680 | 2,431,031 | ||||||
Securities sold under repurchase agreements | 1,922,304 | 1,667,064 | ||||||
Federal funds purchased | 7,088,000 | 6,026,000 | ||||||
Subordinated debt | 7,155,000 | 7,155,000 | ||||||
Federal Home Loan Bank advances | 35,000,000 | 30,000,000 | ||||||
Total liabilities | �� | 276,875,479 | 241,581,530 | |||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock, $4.00 par value (authorized 5,000,000 shares; shares issued and outstanding, 2,968,921 at September 30, 2007 and 1,796,021 at December 31, 2006) | 11,875,684 | 7,184,084 | ||||||
Additional paid-in capital | 18,439,082 | 6,010,352 | ||||||
Retained earnings | 3,989,451 | 2,776,277 | ||||||
Accumulated other comprehensive (loss), net of tax | (124,009 | ) | (311,598 | ) | ||||
Total stockholders’ equity | 34,180,208 | 15,659,115 | ||||||
Total liabilities and stockholders’ equity | $ | 311,055,687 | $ | 257,240,645 | ||||
See notes to consolidated financial statements.
3
First Capital Bancorp Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
Interest income | ||||||||||||
Loans | $ | 4,799,584 | $ | 3,487,726 | $ | 13,055,689 | $ | 9,540,174 | ||||
Investments: | ||||||||||||
Taxable interest income | 384,582 | 401,612 | 1,161,565 | 1,224,203 | ||||||||
Tax exempt interest income | 10,093 | 10,263 | 30,621 | 30,791 | ||||||||
Dividends | 35,472 | 28,448 | 98,214 | 82,464 | ||||||||
Federal funds sold | 49,576 | 114,824 | 257,636 | 158,813 | ||||||||
Total interest income | 5,279,307 | 4,042,873 | 14,603,725 | 11,036,445 | ||||||||
Interest expense | ||||||||||||
Deposits | 2,189,338 | 1,811,171 | 6,418,784 | 4,489,600 | ||||||||
FHLB advances | 289,778 | 244,311 | 810,387 | 756,484 | ||||||||
Federal funds purchased | 5,092 | — | 12,115 | 77,350 | ||||||||
Subordinated debt and other borrowed money | 147,040 | 51,220 | 435,652 | 137,110 | ||||||||
Total interest expense | 2,631,248 | 2,106,702 | 7,676,938 | 5,460,544 | ||||||||
Net interest income | 2,648,059 | 1,936,171 | 6,926,787 | 5,575,901 | ||||||||
Provision for loan loss | 185,700 | 55,000 | 437,700 | 284,300 | ||||||||
Net interest income after provision for loan loss | 2,462,359 | 1,881,171 | 6,489,087 | 5,291,601 | ||||||||
Noninterest income | ||||||||||||
Fees on deposits | 58,236 | 50,078 | 157,562 | 116,148 | ||||||||
Fees on mortgage loans | 40,045 | — | 135,025 | — | ||||||||
Other | 76,264 | 67,956 | 238,318 | 182,890 | ||||||||
Total noninterest income | 174,545 | 118,034 | 530,905 | 299,038 | ||||||||
Noninterest expenses | ||||||||||||
Salaries and employee benefits | 947,472 | 713,482 | 2,702,195 | 1,849,496 | ||||||||
Occupancy expense | 187,250 | 148,540 | 559,190 | 448,075 | ||||||||
Data processing | 131,570 | 101,978 | 390,788 | 320,134 | ||||||||
Professional services | 37,713 | 40,094 | 118,969 | 114,609 | ||||||||
Virginia capital stock tax | 99,000 | 39,500 | 189,000 | 114,000 | ||||||||
Depreciation | 83,054 | 81,486 | 252,530 | 233,431 | ||||||||
Other expenses | 380,776 | 261,740 | 946,846 | 726,618 | ||||||||
Total noninterest expense | 1,866,835 | 1,386,820 | 5,159,518 | 3,806,363 | ||||||||
Net income before provision for income taxes | 770,069 | 612,385 | 1,860,474 | 1,784,276 | ||||||||
Income tax expense | 269,000 | 208,000 | 647,300 | 602,000 | ||||||||
Net income | $ | 501,069 | $ | 404,385 | $ | 1,213,174 | $ | 1,182,276 | ||||
Basic income per share | $ | 0.17 | $ | 0.23 | $ | 0.54 | $ | 0.66 | ||||
Diluted income per share | $ | 0.17 | $ | 0.21 | $ | 0.53 | $ | 0.62 | ||||
See notes to consolidated financial statements.
4
First Capital Bancorp, Inc. and Subsidiary
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) | Total Stockholders’ Equity | ||||||||||||||
Balance January 1, 2006 | $ | 7,184,084 | $ | 6,004,655 | $ | 1,205,058 | $ | (424,183 | ) | $ | 13,969,614 | |||||||
Net income | — | — | 1,182,276 | 1,182,276 | 1,182,276 | |||||||||||||
Other comprehensive loss | ||||||||||||||||||
Unrealized holding gain arising during period, (net of tax, $27,729) | — | — | — | 53,827 | 53,827 | |||||||||||||
Total comprehensive income | $ | 1,236,103 | ||||||||||||||||
Stock based compensation expense | — | 1,503 | — | — | 1,503 | |||||||||||||
Balance June 30, 2006 | $ | 7,184,084 | $ | 6,006,158 | $ | 2,387,334 | $ | (370,356 | ) | $ | 15,207,220 | |||||||
Balance January 1, 2007 | $ | 7,184,084 | $ | 6,010,352 | $ | 2,776,277 | $ | (311,598 | ) | $ | 15,659,115 | |||||||
Stock offering | 4,691,600 | 13,781,575 | 18,473,175 | |||||||||||||||
Cost associated with stock offering | — | (1,396,330 | ) | — | — | (1,396,330 | ) | |||||||||||
Net income | — | — | 1,213,174 | 1,213,174 | 1,213,174 | |||||||||||||
Other comprehensive loss | ||||||||||||||||||
Unrealized holding gain arising during period, (net of tax, $96,637) | — | — | — | 187,589 | 187,589 | |||||||||||||
Total comprehensive income | $ | 1,400,763 | ||||||||||||||||
Stock based compensation expense | — | 43,485 | — | — | 43,485 | |||||||||||||
Balance at June 30, 2007 | $ | 11,875,684 | $ | 18,439,082 | $ | 3,989,451 | $ | (124,009 | ) | $ | 34,180,208 | |||||||
See notes to consolidated financial statements.
5
First Capital Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
| 2007 | 2006 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 1,213,174 | $ | 1,182,276 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Provision for loan losses | 437,700 | 284,300 | ||||||
Depreciation of premises and equipment | 252,530 | 233,431 | ||||||
Stock based compensation expense | 43,485 | 1,503 | ||||||
Net amortization of bond premiums/discounts | 10,787 | 24,735 | ||||||
Reduction in equity in VBA Investment Services, Inc. | — | 1,900 | ||||||
Increase in other assets | (411,770 | ) | (133,448 | ) | ||||
(Increase) decrease in accrued interest receivable | (248,234 | ) | 30,706 | |||||
(Decrease) increase in accrued expenses and other liabilities | (627,351 | ) | 78,422 | |||||
Net cash provided by operating activities | 670,321 | 1,703,825 | ||||||
Cash flows from investing activities | ||||||||
Proceeds from maturities and calls of securities | 8,000,000 | 3,000,000 | ||||||
Proceeds from paydowns of securities available-for-sale | 2,125,750 | 2,359,127 | ||||||
Purchase of Federal Reserve Stock | (300,900 | ) | (5,950 | ) | ||||
Purchase of securities available-for-sale | (5,435,625 | ) | (2,998,158 | ) | ||||
Purchase of FHLB Stock | (268,700 | ) | (428,800 | ) | ||||
Purchase securities in FCRV Statutory Trust 1 | — | (155,000 | ) | |||||
Purchases of property and equipment | (291,598 | ) | (394,385 | ) | ||||
Net increase in loans | (52,549,398 | ) | (27,135,684 | ) | ||||
Net cash used in investing activities | (48,720,471 | ) | (25,758,850 | ) | ||||
Cash flows from financing activities | ||||||||
Net increase in demand, savings and money market accounts | 20,800,775 | 7,217,108 | ||||||
Net increase in certificates of deposit | 8,803,285 | 28,519,490 | ||||||
Stock offering proceeds, net of related expenses | 17,076,845 | — | ||||||
Advances from FHLB | 15,000,000 | 7,000,000 | ||||||
FHLB advances called | (10,000,000 | ) | — | |||||
Issuance of Junior Subordinated Debt | — | 5,155,000 | ||||||
Increase (decrease) in Federal funds purchased | 1,062,000 | (10,270,000 | ) | |||||
Net increase in repurchase agreements | 255,240 | 827,846 | ||||||
Net cash provided by financing activities | 52,998,145 | 38,449,444 | ||||||
Net increase in cash and cash equivalents | 4,947,995 | 14,394,419 | ||||||
Cash and cash equivalents, beginning of period | 12,032,026 | 10,181,623 | ||||||
Cash and cash equivalents, end of period | $ | 16,980,021 | $ | 24,576,042 | ||||
Supplemental disclosure of cash flow information | ||||||||
Interest paid during the period | $ | 7,703,708 | $ | 5,385,887 | ||||
Taxes paid during the period | $ | 973,533 | $ | 1,138,670 | ||||
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 September 30, 2007 and December 31, 2006 and for the three months and nine months ended September 30, 2007 and 2006, in conformity with accounting principles generally accepted in the United States of America. Results for the three months and nine months ended September 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.
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The basic and diluted earnings per share calculations are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
Net income (numerator, basic and diluted) | $ | 501,069 | $ | 404,385 | $ | 1,213,174 | $ | 1,182,276 | ||||
Weighted average number of shares outstanding (denominator) | 2,952,301 | 1,796,021 | 2,226,782 | 1,796,021 | ||||||||
Earnings per common share—basic | $ | 0.17 | $ | 0.23 | $ | 0.54 | $ | 0.66 | ||||
Effect of dilutive securities: | ||||||||||||
Weighted average number of shares outstanding | 2,952,301 | 1,796,021 | 2,226,782 | 1,796,021 | ||||||||
Effect of stock options | 48,969 | 105,513 | 63,161 | 106,638 | ||||||||
Diluted average shares outstanding (denominator) | 3,001,270 | 1,901,534 | 2,289,943 | 1,902,659 | ||||||||
Earnings per common share—assuming dilution | $ | 0.17 | $ | 0.21 | $ | 0.53 | $ | 0.62 | ||||
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. In September 2007, 46,500 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 two years. The stock based compensation expensed during the three months and nine months ended September 30, 2007 was $18,416 and $43,485 respectively, and is included in salaries and employee benefits.
Note 5 – Investment Securities
The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities as of September 30, 2007 and December 31, 2006 are as follows:
| September 30, 2007 | ||||||||||||
Amortized Costs | Gross Unrealized | Fair Values | ||||||||||
| Gains | Losses | |||||||||||
| (Dollars in thousands) | ||||||||||||
Available-for-sale | ||||||||||||
U.S. Government agencies | $ | 24,426 | $ | 56 | $ | 87 | $ | 24,395 | ||||
Mortgage-backed securities | 9,066 | 14 | 164 | 8,916 | ||||||||
Tax-exempt municipal bonds | 1,009 | — | 6 | 1,003 | ||||||||
| $ | 34,501 | $ | 70 | $ | 257 | $ | 34,314 | |||||
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 September 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:
September 30, 2007 | December 31, 2006 | |||||
| Amount | Amount | |||||
| (Dollars in thousands) | ||||||
Commercial | $ | 38,365 | $ | 22,619 | ||
Real estate—residential | 62,228 | 62,166 | ||||
Real estate—commercial | 72,120 | 63,062 | ||||
Real estate—construction | 78,488 | 51,450 | ||||
Consumer | 3,040 | 2,387 | ||||
Total loans | $ | 254,241 | $ | 201,684 | ||
Less: | ||||||
Allowance for loan losses | 2,248 | 1,834 | ||||
Net deferred fees | 130 | 99 | ||||
Loans, net | $ | 251,863 | $ | 199,751 | ||
9
A summary of the transactions affecting the allowance for loan losses follows:
Analysis of Allowance for Loan Losses
(Dollars in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Beginning balance | $ | 2,062 | $ | 1,678 | $ | 1,834 | $ | 1,460 | ||||||||
Provision for loan losses | 186 | 55 | 438 | 284 | ||||||||||||
Charge-offs | — | — | (24 | ) | (11 | ) | ||||||||||
Recoveries | — | — | — | — | ||||||||||||
Ending balance | $ | 2,248 | $ | 1,733 | $ | 2,248 | $ | 1,733 | ||||||||
Ratio of allowance for loan losses as a percent of loans outstanding at the end of the period. | 0.88 | % | 0.95 | % | 0.88 | % | 0.95 | % | ||||||||
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
10
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.
| 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 First Capital Bancorp, Inc. (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 an investment in its wholly-owned subsidiary, First Capital Bank (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, knowledgeable relationships with its 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 the Bank 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.
11
The following discussion represents management’s discussion and analysis of the financial condition and results of operations for the Company as of September 30, 2007 and December 31, 2006 and for the three months and nine months ended September 30, 2007 and 2006. It should be read in conjunction with the financial statements included elsewhere herein.
SUMMARY OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Financial Condition Summary
September 30, 2007 as Compared to December 31, 2006
Total assets increased $53.8 million for the first nine months of 2007 to $311.0 million compared with $257.2 million at December 31, 2006. The 20.9% increase in total assets during the nine months ended September 30, 2007 resulted from the growth of our business and customer base and the closing of a public offering in which the Company issued 1,172,900 shares at $15.75. The Company increased its net worth by $17.1 million due to the stock offering. Net loans increased $52.1 million to $251.9 million at September 30, 2007, an increase of 26.0% over net loans of $199.8 million at December 31, 2006. Deposits increased $29.6 million to $223.9 million or 15.2% for the first nine months of 2007. Federal Home Loan Bank (“FHLB”) advances totaled $35.0 million at September 30, 2007, an increase of $5.0 million from year end 2006. Federal funds purchased increased $1.1 million from December 31, 2006 to $7.1 million at September 30, 2007.
As of September 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 September 30, 2007 and 2006
Net income for the three months ended September 30, 2007 increased to $501 thousand, or $0.17 per diluted share compared to $404 thousand for the three months ended September 30, 2006, or $0.21 per diluted share. The increase in net income was due primarily to growth and increases in the net interest margin of the Company. In addition, the Company closed a public offering in June of 1,020,000 shares at $15.75 and closed on the underwriters’ exercise of the over-allotment option consisting of an additional 152,900 shares at $15.75 in July, resulting in increases in the net worth of the Company totaling of $17.1 million
Net interest income increased by $712 thousand, or 36.8%, from $1.9 million in the third quarter of 2006 to $2.6 million in the third 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 September 30, 2007 increased $57.4 million over the average net loans outstanding for the quarter ended September 30, 2006. Over the same period, average deposits increased $20.9 million. During the third quarter of 2007, the financial markets experienced significant turmoil, primarily resulting from the problems in the sub prime mortgage market. The Company has no exposure to the sub prime market as it neither owns nor originates any sub prime mortgage instruments. The turmoil resulted in the Federal Reserve’s decision to lower the federal funds target rate by 50 basis points during September. Although the Company has not realized the full impact of the rate cut, it was able to benefit from lower costs in funding opportunities during the quarter. Lower funding cost opportunities, significant loan growth and the closing of the Company’s public offering in June, including the exercise of the over-allotment option in July, contributed to continued improvement in the Company’s net interest margin during the third quarter, resulting in a net interest margin of 3.73% for the three ended September 30, 2007. The net interest margin increased 41 basis points for the three months ended September 30, 2007 as compared to 3.32% for the three months ended September 30, 2006. The yield on interest earning assets increased from 6.93% for the quarter ended September 30, 2006 to 7.44% for the quarter ended September 30, 2007. The cost of interest bearing liabilities increased 37 basis points from 4.35% for the quarter ended September 30, 2006 to 4.72% for the quarter ended September 30, 2007. Cost of deposits increased from 4.39% for the quarter ended September 30, 2006 to 4.71% for the quarter ended September 30, 2007. Money market accounts had the largest increase in interest expense. Money market accounts increased 86 basis points with the introduction of the Capital Reserve Account which is tied to federal funds rate less 25 basis points.
Noninterest income was $175 thousand for the third quarter, compared to $118 thousand for the third quarter of 2006. Fees on mortgage loans originated for others were $40 thousand for the third quarter of 2007. This is a new product
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which the Company did not offer during the three months ended September 30, 2006. Fees on deposits continue to increase as deposits grow and additional services are added. Fees on deposits accordingly increased 16.3% for the quarter to $58 thousand as compared $50 thousand for the third quarter of 2006.
Noninterest expense increased $480 thousand or 34.6% for the three months ended September 30, 2007 to $1.9 million as compared to $1.4 million for the same period in 2006. The majority of the increase is attributable to the expanded branch franchise and the key additions to the lending team in the first quarter of 2007. Consequently, the largest increases in noninterest expense occurred in salaries and employee benefits of $234 thousand for the three months ended September 30, 2007 as compared to the comparable periods in 2006. With the addition of two new branches since September 30, 2006, occupancy expense increased $39 thousand for the quarter ended September 30, 2007. The Virginia capital stock tax increased 150.6% to $99 thousand for the three months ended September 30, 2007 due to the infusion of capital into the Bank.
Provision for loan losses increased from $55 thousand for the third quarter of 2006 to $186 thousand for the three months ended September 30, 2007 primarily due to volume increases. Loan quality continues to remain strong. Delinquent loans at September 30, 2007, more than 30 days but less than 89 days, totaled $162 thousand. One relationship totaling $1.1 million was more than 90 days contractually delinquent but was not on nonaccrual status. The collateral properties were under contract with a nonrefundable $100 thousand deposit held by the Company. The related sales transaction subsequently settled in October 2007 and the Company was paid-off in full. The allowance for loan losses totaled $2.2 million at September 30, 2007.
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, FHLB advances and other borrowings. During September 2007, the Board of Governors of the Federal Reserve decreased short-term interest rates by .50% after increasing short-term rates 3.00% in twelve 25 basis point increases starting in January 1, 2005.
The following table illustrates average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders’ equity and related income, expense and corresponding weighted-average yields and rates. The average balances used in these tables were calculated using daily average balances.
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Average Balance Sheets
(Dollars in thousands)
| Three Months Ended September 30, 2007 | Three Months Ended September 30, 2006 | |||||||||||||||||||
| Average Balance | Interest Income/ Expense | Annualized Rate | Average Balance | Interest Income/ Expense | Annualized Rate | |||||||||||||||
Earning Assets: | ||||||||||||||||||||
Loans, net of unearned income | $ | 239,731 | $ | 4,800 | 7.94 | % | $ | 182,370 | $ | 3,488 | 7.59 | % | ||||||||
Investment securities: | ||||||||||||||||||||
U.S. Agencies | 25,140 | 282 | 4.45 | % | 25,017 | 274 | 4.35 | % | ||||||||||||
Mortgage backed securities | 9,434 | 102 | 4.30 | % | 12,280 | 128 | 4.14 | % | ||||||||||||
Municipal securities | 1,010 | 10 | 3.97 | % | 1,012 | 10 | 3.96 | % | ||||||||||||
Other investments | 2,365 | 35 | 5.95 | % | 1,940 | 28 | 5.81 | % | ||||||||||||
Total investment securities | 37,949 | 429 | 4.50 | % | 40,249 | 440 | 4.34 | % | ||||||||||||
Federal funds sold | 3,967 | 50 | 4.96 | % | 8,740 | 115 | 5.21 | % | ||||||||||||
Total interest earning assets | 281,647 | $ | 5,279 | 7.44 | % | 231,359 | $ | 4,043 | 6.93 | % | ||||||||||
Cash and cash equivalents | 5,914 | 5,480 | ||||||||||||||||||
Allowance for loan losses | (2,168 | ) | (1,726 | ) | ||||||||||||||||
Other assets | 4,294 | 2,903 | ||||||||||||||||||
Total assets | $ | 289,687 | $ | 238,016 | ||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||
Interest checking | $ | 8,689 | $ | 30 | 1.37 | % | $ | 6,617 | $ | 9 | 0.51 | % | ||||||||
Money market deposit accounts | 49,229 | 527 | 4.25 | % | 24,577 | 210 | 3.39 | % | ||||||||||||
Statement savings | 834 | 3 | 1.52 | % | 697 | 3 | 1.54 | % | ||||||||||||
Certificates | 125,837 | 1,629 | 5.14 | % | 131,822 | 1,590 | 4.79 | % | ||||||||||||
Total deposits | 184,589 | 2,189 | 4.71 | % | 163,713 | 1,812 | 4.39 | % | ||||||||||||
Federal funds purchased | 438 | 5 | 4.62 | % | — | — | — | |||||||||||||
Repo agreements | 2,029 | 22 | 4.24 | % | 919 | 10 | 4.32 | % | ||||||||||||
Subordinate debt | 7,155 | 125 | 6.95 | % | 2,560 | 41 | 6.35 | % | ||||||||||||
FHLB Advances | 27,065 | 290 | 4.25 | % | 25,000 | 244 | 3.88 | % | ||||||||||||
Total interest bearing liabilities | 221,276 | $ | 2,631 | 4.72 | % | 192,192 | $ | 2,107 | 4.35 | % | ||||||||||
Noninterest-bearing sources: | ||||||||||||||||||||
Noninterest-bearing deposits | 32,072 | 28,540 | ||||||||||||||||||
Other liabilities | 2,843 | 2,585 | ||||||||||||||||||
Shareholders’ equity | 33,496 | 14,699 | ||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 289,687 | $ | 238,016 | ||||||||||||||||
Net interest income | $ | 2,648 | $ | 1,936 | ||||||||||||||||
Interest spread—average yield on interest earning assets, less average rate on interest bearing liabilities | 2.72 | % | 2.58 | % | ||||||||||||||||
Annualized net interest margin (net interest income expressed as percentage of average earning assets) | 3.73 | % | 3.32 | % | ||||||||||||||||
Ratio of average interest earning assets to average interest-bearing liabilities | 127.28 | % | 120.38 | % | ||||||||||||||||
Results of Operations
Comparison of the Nine Months Ended September 30, 2007 and 2006
Net income for the nine months ended September 30, 2007 increased $31 thousand to $1.2 million, or $0.53 per diluted share. Net income for the nine months ended September 30, 2007 was negatively impacted by 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.
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Net interest income increased by $1.4 million, or 24.2%, from $5.6 million for the nine months ended September 30, 2006 to $6.9 million for the same period in 2007. This increase in net interest income is a direct result of our growth in loans and deposits and the Company’s public stock offering which netted $17.1 million in cash. Average net loans outstanding for the nine months ended September 30, 2007 increased $48.9 million over the average net loans outstanding for the comparable period in 2006. Over the same period, average deposits increased $33.6 million and Trust Preferred Securities as subordinated debt increased $5.0 million. The net interest margin increased 7 basis points for the nine months ended September 30, 2007 to 3.49% as compared to 3.42% for the comparable period in 2006. The yield on interest earning assets increased from 6.77% for the nine months ended September 30, 2006 to 7.36% for the nine months ended September 30, 2007. The cost of interest bearing liabilities increased 66 basis points from 4.06% for 2006 period to 4.72% for the comparable period in 2007. Cost of deposits increased from 4.03% for the three quarters ended September 30, 2006 to 4.70% for the three quarters ended September 30, 2007. Money market accounts had the largest increase in interest expense as they increased 142 basis points with the introduction of the Bank’s Capital Reserve Account which is tied to federal funds rate less 25 basis points.
Noninterest income increased by $232 thousand, or 77.5%, from $299 thousand for the nine months ended September 30, 2006 to $531 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 $1.4 million, or 35.6%, from $3.8 million for the nine months ended September 30, 2006 to $5.2 million in the comparable period in 2007. This increase in noninterest expense is primarily attributable to the growth and expansion of the Company, with the addition of two new branches, staffing for those branches and the hiring of two key lending personnel in the first quarter of 2007. Accordingly, the largest increases in noninterest income occurred in salaries and employee benefits of $853 thousand, $111 thousand in occupancy and $75 thousand in Virginia capital stock tax. The increase in Virginia capital stock tax is the result of additional equity in the Bank.
The provision for loan losses increased 54.0% from $284 thousand for the first nine months of 2006 to $438 thousand for the comparable period in 2007. This increase reflects the growth of the loans outstanding at September 30, 2007 as compared to September 30, 2006.
Net interest income
Net interest income represents the Company’s principal source of earnings. Net interest income is the amount by which interest generated from earning assets exceeds the expense of funding those assets. Changes in volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income
Earning assets consist primarily of loans, investment securities and other investments. Interest-bearing liabilities consist principally of deposits, FHLB advances and other borrowings
The following table illustrates average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders’ equity and related income, expense and corresponding weighted-average yields and rates. The average balances used in these tables were calculated using daily average balances.
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Average Balance Sheets
(Dollars in thousands)
| Nine Months Ended September 30, 2007 | Nine Months Ended September 30, 2006 | |||||||||||||||||||
| Average Balance | Interest Income/ Expense | Annualized Yield Rate | Average Balance | Interest Income/ Expense | Annualized Yield Rate | |||||||||||||||
Earning Assets: | ||||||||||||||||||||
Loans, net of unearned income: | $ | 221,400 | $ | 13,056 | 7.88 | % | $ | 172,539 | $ | 9,540 | 7.39 | % | ||||||||
Investment securities: | ||||||||||||||||||||
U.S. Agencies | 23,950 | 835 | 4.66 | % | 25,089 | 825 | 4.40 | % | ||||||||||||
Mortgage backed securities | 10,201 | 326 | 4.27 | % | 13,080 | 399 | 4.08 | % | ||||||||||||
Municipal securities | 1,010 | 31 | 4.05 | % | 1,013 | 31 | 4.06 | % | ||||||||||||
Other investments | 2,195 | 98 | 5.98 | % | 1,932 | 82 | 5.67 | % | ||||||||||||
Total investment securities | 37,356 | 1,290 | 4.62 | % | 41,114 | 1,337 | 4.35 | % | ||||||||||||
Federal funds sold | 6,685 | 258 | 5.16 | % | 4,203 | 159 | 5.06 | % | ||||||||||||
Total earning assets | 265,441 | $ | 14,604 | 7.36 | % | 217,856 | $ | 11,036 | 6.77 | % | ||||||||||
Cash and cash equivalents | 5,625 | 5,745 | ||||||||||||||||||
Allowance for loan losses | (2,046 | ) | (1,632 | ) | ||||||||||||||||
Other assets | 4,142 | 2,709 | ||||||||||||||||||
Total assets | $ | 273,162 | $ | 224,678 | ||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||
Interest checking | $ | 8,205 | $ | 63 | 1.03 | % | $ | 6,445 | $ | 24 | 0.51 | % | ||||||||
Money market deposit accounts | 43,263 | 1,348 | 4.17 | % | 23,076 | 474 | 2.75 | % | ||||||||||||
Statement Savings | 900 | 10 | 1.53 | % | 620 | 7 | 1.54 | % | ||||||||||||
Certificates | 130,088 | 4,998 | 5.14 | % | 118,762 | 3,984 | 4.48 | % | ||||||||||||
Total deposits | 182,456 | 6,419 | 4.70 | % | 148,903 | 4,489 | 4.03 | % | ||||||||||||
Federal funds purchased | 325 | 12 | 4.99 | % | 2,095 | 77 | 4.91 | % | ||||||||||||
Repo agreements | 1,895 | 63 | 4.45 | % | 1,026 | 33 | 4.26 | % | ||||||||||||
Subordinated debt | 7,155 | 373 | 6.96 | % | 2,189 | 104 | 6.38 | % | ||||||||||||
FHLB Advances | 25,685 | 810 | 4.22 | % | 25,597 | 757 | 3.95 | % | ||||||||||||
Total interest bearing liabilities | 217,516 | $ | 7,677 | 4.72 | % | 179,810 | $ | 5,460 | 4.06 | % | ||||||||||
Noninterest-bearing sources: | ||||||||||||||||||||
Noninterest-bearing deposits | 30,268 | 29,183 | ||||||||||||||||||
Other liabilities | 2,722 | 1,295 | ||||||||||||||||||
Shareholders’ equity | 22,656 | 14,390 | ||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 273,162 | $ | 224,678 | ||||||||||||||||
Net interest income | $ | 6,927 | $ | 5,576 | ||||||||||||||||
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities | 2.64 | % | 2.71 | % | ||||||||||||||||
Annualized net interest margin (net interest income expressed as percentage of average earning assets) | 3.49 | % | 3.42 | % | ||||||||||||||||
Ratio of average interest earning assets to average interest-bearing liabilities | 122.03 | % | 121.16 | % | ||||||||||||||||
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Loan Portfolio
The following table presents the composition of the loan portfolio at the dates indicated:
September 30, 2007 | December 31, 2006 | |||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||
| (Dollars in thousands) | ||||||||||||
Commercial | $ | 38,365 | 15.09 | % | $ | 22,619 | 11.22 | % | ||||
Real estate - residential | 62,228 | 24.48 | % | 62,166 | 30.82 | % | ||||||
Real estate - commercial | 72,120 | 28.37 | % | 63,062 | 31.27 | % | ||||||
Real estate - construction | 78,488 | 30.87 | % | 51,450 | 25.51 | % | ||||||
Consumer | 3,040 | 1.20 | % | 2,387 | 1.18 | % | ||||||
Total loans | $ | 254,241 | 100.00 | % | $ | 201,684 | 100.00 | % | ||||
Less: | ||||||||||||
Allowance for loan losses | 2,248 | 1,834 | ||||||||||
Net deferred fees | 130 | 99 | ||||||||||
Loans, net | $ | 251,863 | $ | 199,751 | ||||||||
Allowance for loan losses
The allowance for loan losses at September 30, 2007 was $2.2 million, compared to $1.7 million at September 30, 2006. The ratio of the allowance for loan losses to gross portfolio loans was 0.88% at September 30, 2007 as compared to 0.95% at September 30, 2006. At September 30, 2007, the Company had one foreclosed single family real estate property non-performing asset valued at $154 thousand. Delinquent loans at September 30, 2007, more than 30 days but less than 89 days, totaled $162 thousand. One relationship totaling $1.1 million was more than 90 days contractually delinquent but was not on nonaccrual status. The collateral properties were under contract with a nonrefundable $100 thousand deposit held by the Company. The related sales transaction subsequently settled in October 2007 and the Company was paid-off in full. At September 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)
| Nine Months Ended September 30, | ||||||||
| 2007 | 2006 | |||||||
Beginning balance | $ | 1,834 | $ | 1,460 | ||||
Provision for loan losses | 438 | 284 | ||||||
Charge-offs | (24 | ) | (11 | ) | ||||
Recoveries | — | — | ||||||
Ending balance | $ | 2,248 | $ | 1,733 | ||||
Ratio of allowance for loan losses as a percent of loans outstanding at the end of the period. | 0.88 | % | 0.95 | % | ||||
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Deposits
Total deposits increased by $29.6 million, or 15.2% for the first nine months of 2007 as compared to an increase of $35.7 million, or 22.0%, for the first nine months of 2006. During the first nine months of 2007, the increase in deposits occurred primarily in interest-bearing accounts which increased by $27.2 million, or 16.8%. Certificates of deposit increased by $8.8 million, money market and savings increased by $15.8 million and NOW accounts increased by $2.5 million and noninterest-bearing demand deposits increased by $2.4 million.
The mix of our deposits continues to be weighted toward certificates of deposit which represent 58.2% of our total deposits as of September 30, 2007. Certificates of deposit as a percentage of total deposits were 62.5% at December 31, 2006 and 65.1% at September 30, 2006. Recent efforts to lessen the dependency on high cost certificates of deposit have resulted in the decrease in the percentage of certificates of deposits to total deposits. Money market accounts, with a lower 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 nine months ended September 30, 2007 and 2006 was 4.70% and 4.03%, 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 two quarters of 2007 continued to roll up to current market rates. As rates have been steady for most of the last quarter, it is anticipated that the increase in average interest-bearing deposits will continue to abate. The Federal Reserve lower the federal funds target rate by 50 basis points during September 2007 which will positively impacted the Company’s cost of deposits.
Borrowings
The Company uses 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 September 30, 2007 and 2006. $5.2 million in subordinated debt was issued as Trust Preferred Capital Notes in September 2006. The Trust Preferred Capital Notes issued in September 2006 may be included in Tier 1 capital for regulatory adequacy determination purposes; however the Trust Preferred Capital Notes may not constitute more than 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 September 30, 2007, the Company had borrowed $35.0 million from the FHLB of Atlanta, an increase of $5.0 million from December 31, 2006. The advances have an average interest rate of 4.22% and are callable in one to five years with a final maturity of five to 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 $1.9 million outstanding under securities sold under repurchase agreements as of September 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. On July 11, 2007 the underwriters exercised the over-allotment option for an additional 152,900 shares at $15.75 per share. After expenses, the Company increased its net worth by $17.1 million as a result of these two transactions.
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; however, the Trust Preferred Capital Notes may not constitute more than 25% of Tier 1 capital after its inclusion.
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Stockholders’ equity at September 30, 2007 was $34.2 million, compared to $15.7 million at December 31, 2006. The $18.5 million increase in equity during the first nine months of 2007 was due to net income of $1.2 million, the sale of 1,172,900 shares of stock which increased stockholders’ equity by $17.1 million after expenses and an $188 thousand decrease in net unrealized losses on securities available-for-sale.
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:
Capital Ratios
| September 30, 2007 | December 31, 2006 | Well Capitalized Requirement | |||||||
Capital ratios | |||||||||
Tier 1 risk-based capital ratio | 13.12 | % | 10.39 | % | 6.00 | % | |||
Total risk-based capital ratio | 14.72 | % | 12.28 | % | 10.00 | % | |||
Leverage ratio | 12.00 | % | 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 September 30, 2007 and December 31, 2006, pre-approved but unused lines of credit for loans totaled approximately $120.3 million and $118.4 million, respectively. In addition, we had $6.9 million and $3.5 million in financial and performance standby letters of credit at September 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 September 30, 2007, cash and cash equivalents totaled $17.0 million. Investment securities available for sale and not pledged totaled $19.1 million, for a total of 11.6% 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 FHLB and correspondent banks.
Interest Rate Sensitivity
The most important element of asset/liability management is the monitoring of the Company’s sensitivity to interest rate movements. The Company’s income stream is subject to risk resulting from interest rate fluctuations to the extent there is a difference between the amount of the Company’s interest earning assets and the amount of interest bearing liabilities that are prepaid, mature or reprice in specific periods. The Company’s 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.
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The data in the following table reflects repricing or expected maturities of various assets and liabilities at September 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.
| September 30, | |||||||||||||||||||||||
| 1 to 90 Days | 90 Days to 1 Year | 1 to 3 Years | 3 to 5 Years | Over 5 Years | Total | ||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
Earning Assets: | |||||||||||||||||||||||
Gross loans | $ | 108,783 | $ | 17,599 | $ | 43,728 | $ | 54,981 | $ | 29,149 | $ | 254,240 | |||||||||||
Investment securities | 14,074 | 5,636 | 14,704 | 3,010 | 6,887 | 44,311 | |||||||||||||||||
Total rate sensitive assets | $ | 122,857 | $ | 23,235 | $ | 58,432 | $ | 57,991 | $ | 36,036 | $ | 298,551 | |||||||||||
Cumulative totals | $ | 122,857 | $ | 146,092 | $ | 204,524 | $ | 262,515 | $ | 298,551 | |||||||||||||
Interest-Bearing Liabilities: | |||||||||||||||||||||||
Interest checking | $ | — | $ | — | $ | 4,500 | $ | 4,441 | $ | — | $ | 8,941 | |||||||||||
Money market accounts | 36,653 | 8,200 | 3,679 | — | — | 48,532 | |||||||||||||||||
Savings deposits | — | — | 828 | — | — | 828 | |||||||||||||||||
Certificates of deposit | 26,316 | 63,876 | 25,222 | 14,890 | — | 130,304 | |||||||||||||||||
Federal funds purchased | 7,088 | — | — | — | — | 7,088 | |||||||||||||||||
FHLB borrowing and subordinated debt | 5,155 | 15,000 | 20,000 | 2,000 | — | 42,155 | |||||||||||||||||
Other liabilities | 1,922 | — | — | — | — | 1,922 | |||||||||||||||||
Total rate sensitive liabilities | $ | 77,134 | $ | 87,076 | $ | 54,229 | $ | 21,331 | $ | — | $ | 239,770 | |||||||||||
Cumulative totals | $ | 77,134 | $ | 164,210 | $ | 218,439 | $ | 239,770 | $ | 239,770 | |||||||||||||
Interest sensitivity gap | $ | 45,723 | $ | (63,841 | ) | $ | 4,203 | $ | 36,660 | $ | 36,036 | ||||||||||||
Cumulative interest sensitivity gap | $ | 45,723 | $ | (18,118 | ) | $ | (13,915 | ) | $ | 22,745 | $ | 58,781 | |||||||||||
Cumulative interest sensitive gap as a percentage of earning assets | 15.3 | % | -6.1 | % | -4.7 | % | 7.6 | % | 19.7 | % | |||||||||||||
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.
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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
The Bank held its 2007 Annual Meeting of Stockholders on Wednesday, August 15, 2007 at 10:00 a.m. at the Virginia Bankers Association, 4490 Cox Road, Glen Allen, Virginia.
There were 2,153,454 shares represented in person or by proxy, which represented 76.5% of the outstanding shares. There was a quorum for all purposes.
The shareholders were asked to vote on the election of four directors of the Company to serve until the 2010 Annual Meeting of Stockholders, to approve amendments to the First Capital Bancorp 2000 Stock Option Plan to (a) increase the authorized number of shares reserved for issuance by 105,000 shares and (b) provide that employees of any subsidiaries of First Capital Bancorp, Inc. are eligible for grants under the plan, and to ratify the appointment of Cherry, Bekaert & Holland, L.L.P. as the independent registered public accountant for the Company for the year ended December 31, 2007.
The votes cast for or withheld for the election of directors were as follows:
Name | For | Withheld | ||
P. C. Amin | 2,091,650 | 61,804 | ||
Yancey S. Jones | 2,091,050 | 62,404 | ||
Joseph C. Stiles | 2,091,650 | 61,804 | ||
Richard W. Wright | 2,092,400 | 61,054 |
The votes cast for the approval of amendments to the First Capital Bancorp 2000 Stock Option Plan were as follows:
| For | Against | Abstained | Broker Non Votes | |||||
Votes | 1,540,666 | 128,368 | 13,637 | 470,783 | ||||
The votes cast for to ratify the appointment of Cherry, Bekaert & Holland, and L.L.P. as the independent registered public accountant were as follows:
| ||||||||
| For | Against | Abstained | ||||||
Votes | 2,140,742 | 2,900 | 9,812 | |||||
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Item 5. Other Information – None to report
Exhibit No. | Description of Exhibits | |
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 November 9, 2007. | |
31.2 | Certification of William W. Ranson Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 9, 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 November 9, 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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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| First Capital Bancorp, Inc. | ||||
| Date: November 9, 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 Exhibits | |
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 November 9, 2007. | |
31.2 | Certification of William W. Ranson Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 9, 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 November 9, 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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