The following discussion provides information about the results of operations and financial condition, liquidity and capital resources. This discussion should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements.

Overview

We are headquartered in Glen Allen, Virginia and conduct our primary operations through our wholly owned subsidiary, First Capital Bank (the "Bank"). Through its seven full service branch offices and courier service, the bank serves the greater Richmond metropolitan area which includes the counties of Henrico, Chesterfield and Hanover, the Town of Ashland and the City of Richmond, Virginia. We target small to medium-sized businesses and consumers in our market area and emerging suburbs outside of the greater Richmond metropolitan area. In addition, we strive to develop personal, knowledgeable relationships with our customers, while at the same time offering products comparable to statewide regional banks located in its market area. We believe that the marketing of customized banking services has enabled us to establish a niche in the financial services marketplace in the Richmond Metropolitan Area.

Nationwide in 2008, concerns over asset quality, precipitated by issues related to slowing real estate activity, declining real estate values, turbulence in the financial sector, decline in interest rates, the current regulatory environment and general economic conditions resulted in significant declines in financial results. The impact of these concerns is reflected in the economic markets in which the Company operates, principally through slowing real estate activity, declining real estate values and asset quality concerns. Residential acquisition and development lending and builder/construction lending have been significantly scaled back as housing activity across our markets has declined. As a result, the Company significantly increased its provision for loan losses to $2.9 million for the year ended December 31, 2008 compared to $676 thousand for the same period in 2007. The allowance for loan losses increased to $5.1 million as of December 31, 2008 or 1.36 % of total loans compared to .84% at the end of the same period last year. Net charge-offs increased significantly from $20 thousand for the year 2007 to $353 thousand for the year ended December 31, 2008. Nonperforming assets also increased drastically from $50 thousand as of December 31, 2007 or .02% of assets to $6.6 million as of December 31, 2008 or 1.52% of assets.

For the year ended December 31, 2008, assets grew $79.7 million to $431.6 million or 22.6% from $351.9 million at December 31, 2007. 85% of the asset growth occurred in the first nine months of 2008. For the years ended December 31, 2007 and 2006, our total assets increased $94.6 million or 36.8% to $351.9 million at December 31, 2007 from $257.2 million at December 31, 2006.

Total net loans at December 31, 2008 were $367.4 million, an increase of $73.2 million, or 24.9%, from the December 31, 2007 amount of $294.2 million. Total net loans at December 31, 2007 were $294.2 million, an increase of $94.5 million, or 47.3%, from the December 31, 2006 amount of $199.8 million.

Deposits increased $79.2 million to $334.3 million at December 31, 2008 from $255.1 million at December 31, 2007. Certificates of deposit increased $93.2 million or 58.6% to $252.1 million and represented 75.4% of deposits, up from 62.3% at December 31, 2007. Money market accounts and NOW accounts decreased $12.0 million or 20.1% during 2008 and represented 14.3% of deposits down from 23.4% at December 31, 2007. Deposits increased $60.8 million to $255.1 million at December 31, 2007

from the balance at December 31, 2006. Certificates of deposit increased $37.4 million or 30.8% and represent 62.3% of deposits with maturities ranging from six months to five years. Money market accounts and NOW accounts increased $19.7 million or 49.4% with the continued success of the Capital Reserve Account which has a variable rate tied to the stated Fed funds rate. Low cost demand deposits increased 11.1% or $3.7 million to $36.5 million at December 31, 2007.

Net interest margin decreased in 2008 from 3.54% for the year ended December 31, 2007 to 2.89% at December 31, 2008. The net interest margin was 3.41% for the same period in 2006. The decrease in the net interest margin is attributed to steady reduction in interest rates over the last two years. Over the twenty-four months ended December 31, 2008, the Federal Reserve Bank's Federal Open Market Committee (FOMC) cut the federal funds targeted rate and the associated prime rate on interest ten times or 500 basis points from 8.25% on January 1, 2007 to 3.25% on December 31, 2008. For the period January 1, 2008 to December 31, 2008, the FOMC cut the targeted federal funds rate and the associated prime rate seven times or 400 basis points from 7.25% on January 1, 2008 to 3.25% on December 31, 2008.

Total non-interest expense increased 17.9% or $1.3 million for the year ended December 31, 2008. Additions to staff to support business development and retail branching contributed to the increase in salaries and employee benefits. Occupancy and depreciation expense increased as the result of the opening of the new Bon Air branch in the second quarter of 2008. The FDIC assessment increase as the result of a revised premium structure but primarily from the increase in deposits during the period. The Virginia capital stock tax increased as the result of increased investment in First Capital Bank by First Capital Bancorp, Inc. during 2008.

We remain well capitalized with capital ratios above the regulatory minimums. As we enter 2009 however, the financial sector remains in turmoil. Pressure continues on the net interest margin and asset quality continues to deteriorate.

Critical Accounting Policies

The financial condition and results of operations presented in the consolidated financial statements, the accompanying notes to the consolidated financial statements and this section are, to a large degree, dependent upon our accounting policies. The selection and applications of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.

First Capital Bank'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 loss in the Bank'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 Bank's allowance for loan losses could result in material changes in its financial condition and results of operations. The Bank'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 Bank's Board of Directors.

The Bank evaluates various loans individually for impairment as required by Statement of Financial Accounting Standard ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS

No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. Loans evaluated individually for impairment include non-performing loans, loans past due by 30 days or more, and other loans selected by management. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment. If a loan evaluated individually is not impaired, then the loan is assessed for impairment under SFAS No. 5, Accounting for Contingencies, with a group of loans that have similar characteristics.

For loans without individual measures of impairment, the Bank makes estimates of losses for groups of loans as required by SFAS No. 5. Loans are grouped by similar characteristics, including the type of loan and general collateral type. A loss rate range reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given collateral type, terms of the loan, borrower and industry concentrations, levels and trends in delinquencies and charge-off and recovery experience.

The amount of estimated impairment of individually evaluated loans and the range of estimated losses for groups of loans are added together for a total range of estimated loan losses. This range of estimated losses is compared to the allowance for loan losses of the Bank as of the evaluation date and, if the range of estimated losses is greater than the allowance, an additional provision to the allowance would be made. If the range of estimated losses is less than the allowance, the degree to which the allowance exceeds the range of estimated losses is evaluated to determine whether a reduction to the allowance would be necessary. If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which amount may be material to the consolidated financial statements.

Results of Operations

Net Income

Net income for the year ended December 31, 2008 decreased to $170 thousand from $1.7 million for the year ended December 31, 2007. Returns on equity and assets for the year ended December 31, 2008 were 0.49% and 0.04%, respectively, compared to 6.8% and 0.61% for the year ended December 31, 2007. Loan growth resulted in an increase in interest income as interest on loans increased $3.8 million to $22.2 million for the year ended December 31, 2008, down from a $5.1 million increase in 2007. Total interest expense was $13.0 million for the year ended December 31, 2008, compared to $10.6 million for the year ended December 31, 2007.

For 2008, earnings per diluted share were $0.06 compared to $0.71 and $0.83 for 2007 and 2006, respectively.

The following table reflects an analysis of our net interest income using the daily average balance of our assets and liabilities as of the periods indicated.

                                                               Year Ended December 31,
                                                      2008                                2007
                                          Average      Income/    Yield/      Average      Income/    Yield/
                                          Balance      Expense     Rate       Balance      Expense     Rate
                                                               (Dollars in thousands)
Assets:
Loans, net of unearned income            $ 337,168     $ 22,161     6.57 %   $ 233,808     $ 18,362     7.85 %
Investment securities:
U.S. Agencies                               19,067          944     4.95 %      23,902        1,108     4.64 %
Mortgage backed securities                   7,342          322     4.39 %       9,863          422     4.28 %
Municipal securities                         1,695           64     3.75 %       1,010           41     4.03 %
Corporate bonds                              3,198          183     5.72 %         226           13     5.64 %
Other investments                            3,648          156     4.28 %       2,379          144     6.08 %

Total investment securities                 34,950        1,669     4.78 %      37,380        1,728     4.62 %
Federal funds sold                          10,444          214     2.05 %       5,084          266     5.24 %

Total earning assets                     $ 382,562     $ 24,044     6.29 %   $ 276,272     $ 20,356     7.37 %

Cash and cash equivalents                   10,954                               6,356
Allowance for loan losses                   (3,393 )                            (2,128 )
Other assets                                 7,831                               4,326


Total assets                             $ 397,954                           $ 284,826

Liabilities and Stockholders' Equity:
Interest bearing liabilities:
Interest checking                        $   9,213     $     45     0.49 %   $   9,063     $     96     1.06 %
Money market deposit accounts               38,586          711     1.84 %      44,698        1,798     4.02 %
Statement savings                              792            5     0.57 %         883           13     1.53 %
Certificates of deposit                    219,480        9,910     4.52 %     131,912        6,783     5.14 %

Total interest-bearing deposits            268,071       10,671     3.98 %     186,556        8,690     4.66 %

Fed funds purchased                            952           35     3.66 %       1,624           79     4.86 %
Repurchase agreements                        2,482           32     1.31 %       1,932           81     4.19 %
Subordinated debt                            7,155          386     5.38 %       7,155          500     6.99 %
FHLB advances                               49,385        1,872     3.79 %      28,348        1,213     4.28 %

Total interest-bearing liabilities         328,045       12,996     3.96 %     225,615       10,563     4.68 %


Noninterest-bearing liabilities:
Noninterest-bearing deposits                32,672                              32,119
Other liabilities                            2,180                               1,476

Total liabilities                           34,852                              33,595
Shareholders' equity                        35,057                              25,616

Total liabilities and shareholders'
equity                                   $ 397,954                           $ 284,826


Net interest income                                    $ 11,048                            $  9,793


Interest rate spread                                                2.32 %                              2.69 %


Net interest margin                                                 2.89 %                              3.54 %


Ratio of average interest earning
assets to average interest-bearing
liabilities                                                       116.62 %                            122.45 %

(1) For purposes of these computations, nonaccrual loans are included in average loans.

Net Interest Income

We generate a significant amount of our income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest-earning assets outstanding during the period and the interest rates earned thereon. Interest expense is a function of the average amount of deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on non-accrual loans and the amount of additions to the allowance for loan losses.

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.

Year ended December 31, 2008 compared to year ended December 31, 2007

Net interest income for the year ended December 31, 2008 increased 12.8% to $11.0 million from $9.8 million for the year ended December 31, 2007. Net interest income increased despite a 65 basis point decrease in the net interest margin from 3.54% for the year ended December 31, 2007 to 2.89% for the comparable period of 2008.

Average earning assets increased 38.5% to $382.6 million for 2008 from $276.3 million for 2007. Average loans, net of unearned income increased $103.4 million, or 44.2% for 2008 to $337.2 million. The average rate earned on net loans, decreased 128 basis points to 6.57% from 7.85% for the year ended December 31, 2007. The decrease in the average rate earned on net loans was the result of a 400 basis point decrease in the prime rate and other rates that track prime in 2008, to which approximately 40% of our loans are tied. The average balance in our securities portfolio decreased by $3.7 million primarily due to maturities and calls of securities of $24.0 million and repayments on mortgage backed securities of $2.1 million, offset by purchases of $24.9 million. The yield on the investment portfolio increased 31 basis points from 4.52% for the year ended December 31, 2007 to 4.83% for the year ended December 31, 2008. Other investments, which include FHLB Stock and Federal Reserve Stock increased on average $1.3 million while the yield decreased from 6.08% to 4.28% for the year ended December 31, 2008. As the result of these changes, total interest income increased $3.7 million, or 18.1% to $24.0 million for the year ended December 31, 2008 as compared to $20.4 million for the comparable period of 2007.

Total interest expense on deposits increased $2.4 million to $13.0 million for the year ended December 31, 2008 from $10.6 million for the same period of 2007. The average balance of interest-bearing deposits increased $81.5 million as the cost of deposits decreased 68 basis points. Average balance of certificates of deposit increased $87.6 million as the cost of certificates decreased 63 basis points to 4.52% for the year ended December 31, 2008. The FOMC cut the federal funds targeted rate and the associated prime rate on interest 400 basis points in 2008. A total of 175 basis points occurred in the fourth quarter of 2008 with a 75 basis point decreased occurring December 16, 2008. Although the vast majority of our time deposits are set to reprice in the next six to twelve months and will lower funding costs, this rapid reduction in rates put pressure on our net interest margin. The average money market deposit accounts decreased $6.1 million during 2008 to $38.6 million as the average rate decreased 218 basis points to 1.84% from 4.02% for the year 2007. The popularity of the Capital Reserve Account with a variable rate tied to fed funds, resulted in the decrease in deposits and interest rates decreased and customers looked to more attractive rates. Targeted fed funds rates decreased from an average of 5.24%

in 2007 to 2.05% for 2008 as the FOMC cut rates in 2008. The percentage of certificates of deposits to total deposits increased during 2008 to 75.4% at December 31, 2998 from 62.3% at December 31, 2007. Average advances from the Federal Home Loan Bank of Atlanta ("FHLB") increased $21.0 million during 2008. Average cost of those advances decreased 49 basis points. Advances from the FHLB were used to augment deposits in supporting the loan growth of the Bank at attractive rates in comparison to deposit rates available during the same time frame. Interest expense of FHLB advances increased $659 thousand or 54.3% over 2007 to $1.9 million for the year ended December 31, 2008.

Average subordinated debt and other borrowed money decreased $121 thousand during 2008. The average cost decreased 188 basis points from 6.16% for the year ended December 31, 2007 to 4.27% for the year ended December 31, 2008. The primary reason for the decrease in cost was the reduction of the cost of Trust Preferred Capital Notes issued a LIBOR-indexed floating rate of interest (three-Month LIBOR plus 1.70%) which adjusts quarterly. The rate was 3.70% at December 31, 2008, down from 6.69% at December 31, 2007. Subordinated debt of $2.0 million was outstanding all of 2008 and 2007 at a fixed rate of 6.33%.

Year ended December 31, 2007 compared to year ended December 31, 2006

Net interest income for the year ended December 31, 2007 increased 29.3% to $9.8 million from $7.6 million for the year ended December 31, 2006. The increase in net interest income resulted from a 13 basis point increase in the net interest margin from 3.41% for the year ended December 31, 2006 to 3.54% for the comparable period of 2007.

Average earning assets increased 24.5% to $276.3 million for 2007 from $221.9 million for 2006. Average loans, net of unearned income increased 32.1% for 2007 to $233.8 million. The average rate earned on net loans, increased 36 basis points to 7.85% from 7.49% for the year ended December 31, 2006. Loan growth was more pronounced in the third and fourth quarters of 2007 as $67.7 million, or 71.6%, of the $94.5 million in net new loans were originated during those quarters. The average balance in our securities portfolio decreased by $3.6 million primarily due to repayments on mortgage backed securities of $2.8 million and $1.4 million reduction in U.S. Agencies, while the yield increased 23 basis points to 4.62% from 4.40%. As the result of these changes, total interest income increased $5.1 million, or 33.4% to $20.4 million for the year ended December 31, 2007 as compared to $15.3 million for the comparable period of 2006.

Total interest expense on deposits increased $2.4 million to $8.7 million for the year ended December 31, 2007 from $6.3 million for the same period of 2006. The average balance of interest-bearing deposits increased $34.5 million as the cost of deposits increased 51 basis points. The average money market deposit accounts increased $19.9 million during 2007 to $44.7 million as the average rate increased 99 basis points to 4.02%. The popularity of the Capital Reserve Account with a variable rate tied to fed funds, resulted in the increase in deposits and costs. Targeted fed funds were high most of 2007 until the decreases beginning in September 2007. Average balance of certificates of deposit increased $12.1 million as the cost of certificates increased 55 basis points to 5.14% for the year ended December 31, 2007. During to higher rates during most of 2007 as compared to 2006, deposits were rolling up in rate at maturity through the first three quarters of 2007. The percentage of certificates of deposits to total deposits increased slightly during 2007 to 62.3%.

Average advances from the Federal Home Loan Bank of Atlanta ("FHLB") increased $2.9 million during 2007. Average cost of those advances increased 27 basis points. Advances from the FHLB were used to augment deposits in supporting the loan growth of the Bank. Interest expense of FHLB advances increased $193 thousand or 18.9% over 2006 to $1.2 million for the year ended December 31, 2007.

Average subordinated debt and other borrowed money increased $3.7 million during 2007. During September 2006, $5.2 million of Trust Preferred Capital Notes were issued at a LIBOR-indexed floating rate of interest (three-Month LIBOR plus 1.70%) which adjusts quarterly. The rate was 6.69% at December 31, 2007, down from 7.06% at December 31, 2006 and 7.09% upon issuance in September 2006. Subordinated debt of $2.0 million was outstanding all of 2007 and 2006 at a fixed rate of 6.33%. Total subordinated debt and other borrowed money increased $307 thousand during 2007 to $581 thousand for the year ended December 331, 2007.

The following table analysis changes in net interest income attributable to changes in the volume of interest-earning assets and interest bearing liabilities compared to changes in interest rates.

                                                      2008 vs. 2007                        2007 vs. 2006
                                                   Increase (Decrease)                  Increase (Decrease)
                                                   Due to Changes in:                   Due to Changes in:
                                            Volume        Rate        Total       Volume       Rate        Total
                                                                   (Dollars in thousands)
Earning Assets:
Loans, net of unearned income               $ 8,117     $ (4,328 )   $  3,789     $ 4,252     $   847     $ 5,099
Investment securities:                          (59 )         -           (59 )      (154 )        80         (74 )
Federal funds sold                              281         (333 )        (52 )        61           7          68

Total earning assets                          8,339       (4,661 )   $  3,678       4,159         934     $ 5,093


Interest-Bearing Liabilities:
Interest checking                                 2          (52 )        (50 )        12          50          62
Money market deposit accounts                  (246 )       (841 )     (1,087 )       603         441       1,044
Statement savings                                (1 )         (8 )         (9 )         2           0           2
Certificates of deposit                       4,503       (1,375 )      3,128         555         723       1,278
Fed funds purchased                             (33 )        (11 )        (44 )        (7 )        (8 )       (15 )
Repurchase agreements                            23          (72 )        (49 )        39          (4 )        35
Subordinated debt                                -          (115 )       (115 )       245          28         273
FHLB advances                                   900         (241 )        659         116          77         193

Total interest-bearing liabilities            5,148       (2,715 )      2,433       1,565       1,307       2,872


Change in net interest income               $ 3,191     $ (1,946 )   $  1,245     $ 2,594     $  (373 )   $ 2,221

Provision for Loan Losses

The provision for loan losses for the year ended December 31, 2008 was $2.9 million compared to $676 thousand for the year ended December 31, 2007. We are committed to making loan loss provisions that maintain an allowance that adequately reflects the risk inherent in our loan portfolio. This commitment is more fully discussed in the "Asset Quality" section below.

Non-Interest Income

Year ended December 31, 2008 compared to year ended December 31, 2007

Non-interest income has been and will continue to be an important factor for increasing profitability. Management continues to consider areas where non-interest income can be increased.

Non-interest income decreased 8.0% to $744 thousand for the year ended December 31, 2008 compared to $809 thousand for the same period in 2007.

Fees on deposits increased $27 thousand or 12.3% to $248 thousand for the year ended December 31, 2008. Returned Check fees decreased $4 thousand and Service Charges on Checking increased $31 thousand. Other noninterest income decreased $92 thousand from $588 thousand in 2007 to $496 thousand in 2008. Income associated with our Mortgage operation decreased 35.5% from $159 thousand in 2007 to $102 thousand in 2008 as the mortgage industry froze during the turmoil . . .