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

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

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

• Changes in interest rates could reduce income.

• Competitive pressures among financial institutions may increase.

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

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

• Adverse changes may occur in the securities market.

OVERVIEW

The net loss for the second quarter of 2012 was $7.8 million, and net loss allocable to common shareholders was $7.9 million, or $0.99 per fully diluted share compared to a net loss of $1.3 million, and a net loss allocable to common shareholders of $1.5 million or $0.51 per fully diluted share, in the second quarter of 2011.

From a revenue and cost perspective, income before excluded items, which is a non-GAAP measurement, increased from $721 thousand for the second quarter of 2011 to $1.0 million for the second quarter of 2012. Contributing to the increase was an increase in net interest income of $43 thousand due to a reduction in interest expense and interest bearing liabilities and a $178 thousand benefit in Virginia franchise tax resulting from returns amended to correct an error in a previous filing. The following chart reconciles the above to the net income for the periods presented.

                                                Three Months Ended              Six Months Ended
                                                     June 30,                       June 30,
                                               2012            2011           2012            2011
Income Before Excluded Items (non-GAAP
measurement)                                 $   1,049       $    721       $   2,023       $  2,057
Gain on Sale of Securities                          -            (623 )           (27 )         (644 )
Provision                                        8,310          3,147           8,875          3,847
FHLB Prepayment Penalty                          2,755             -            2,755             -
Losses and Chargeoffs                            1,519            293           1,643            320
Additional Accrual                                 300             -              300             -

Income Before Taxes                            (11,835 )       (2,096 )       (11,523 )       (1,466 )
Taxes                                           (4,056 )         (755 )        (4,048 )         (577 )

Net Income                                   $  (7,779 )     $ (1,341 )     $  (7,475 )     $   (889 )

The three months ended June 30, 2012 was one of the most active and exciting quarters in the Company's history. In addition to operating its core business during the quarter, the company successfully closed its $17.8 million rights offering, participated in the United States Treasury's auction of its TARP securities, was the successful bidder for $5 million of the those securities, implemented the Asset Resolution Plan required in our Standby Purchase Agreement with our standby purchaser and now majority shareholder, Kenneth R. Lehman, and retired $40 million of the Company's long term debt with the Federal Home Bank of Atlanta.

On May 11, 2012, the Company completed its rights offering and its offering of shares to a standby investor. Stockholders exercised subscription rights to purchase 4.0 million shares offered at a subscription price of $2.00 per share, and Kenneth R. Lehman, a private investor from Arlington, Virginia, purchased 4.9 million shares at the subscription price of $2.00 per share. In total, the Company raised gross proceeds of $17.8 million before expenses. The proceeds from the rights offering and the standby purchase were used to invest in the Company's subsidiary, First Capital Bank, to bolster its regulatory capital ratios and for general corporate purposes.

Under the Standby Purchase Agreement with Lehman, the Company was required to use all or a portion of the capital raised in the rights offering to significantly change our strategy with respect to up to $50 million of our assets, consisting primarily of other real estate owned, nonperforming loans and performing loans graded substandard or lower. During the quarter, the Company and Lehman identified $33.5 million of nonperforming and performing loans and $5.9 million of other real estate owned as targets under the agreement. We have changed our strategy to accelerate the resolution of these assets prior to December 31, 2013 in accordance with the Standby Purchase Agreement and the Asset Resolution Plan. As a result of this change in strategy, during the second quarter of 2012 nonperforming and performing loans were written down by $7.4 million and other real estate owned was written down $1.2 million. Company management feels that with the actions taken in the second quarter to accelerate the resolution of the identified assets, further significant losses in these portfolios are not expected and the Company is better positioned to be profitable in the future.

These actions had significant positive effects on the Company's credit statistics. The Bank's nonperforming assets dropped to $14.6 million or 3.95% of total loans at the end of the second quarter of 2012 compared to $22.8 million or 6.07% of total loans at the end of the first quarter of 2012 and $29.4 million or 7.69% of total loans at the end of the second quarter of 2011. Total adversely classified loans as a percent of Tier One Capital plus the Allowance for Loan Losses fell to 45.2% at the end of the second quarter compared to 72.0% at the end of the first quarter of 2012 and 105.3% at the end of the second quarter of 2011.

On June 13, 2012, the United States Department of the Treasury announced that it priced the secondary public offering of 10,958 shares of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the "Preferred Stock") it held in First Capital Bancorp, Inc. at $920.11 per share. The Company was notified that it was the successful bidder for the purchase of 5,434 shares of the Preferred Stock for a total purchase price of $4,999,877.74, plus accrued and unpaid dividends on the Preferred Stock. The closing of the offering occurred on June 19, 2012. As a result of its successful bid in the offering, the Company retired 5,434 of its original 10,958 of shares of Preferred Stock. The remaining preferred shares of the Preferred Stock were purchased by one or more third parties.

During the second quarter of 2012 the Company retired $40 million of Federal Home Loan Bank of Atlanta advances. The advances had an average interest rate of 3.08% representing an annual cost of approximately $1.2 million. The Company incurred prepayment penalties of approximately $2.8 million during the quarter to retire this debt; however we believe the Company's earnings and net interest margin will see significant improvement in future periods due to the repayment of this debt.

Financial Condition

Total assets at June 30, 2012 were $520.5 million, down $21.2 million from $541.7 million at December 31, 2011. Net loans outstanding were $361.7 million at June 30, 2012, an increase of $743 thousand compared to the 2011 year-end balance. Deposits decreased by $1.8 million to $438.4 million, down 0.4% from December 31, 2011. Our deposit strategy was focused on decreasing noncore funding sources and single service CD relationships and increasing noninterest-bearing deposit accounts, which were consistent compared to December 31, 2011.

At June 30, 2012, the Company's investment portfolio totaled $96.0 million, an increase of $9.1 million from $86.9 million at December 31, 2011. Most of the funds that are invested in the Company's investment portfolio are part of management's effort to balance interest rate risk, and to provide liquidity and income to the Company. Bank owned life insurance of $8.2 million was purchased during the second quarter of 2011 as an additional investment for the Company and to provide life insurance benefits for senior executives.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income represents a principal source of earnings for the Company. Net interest income during 2012 to date compared to net interest income for the comparable period of 2011 remains steady at approximately $8 million resulting from the reduction of the loan portfolio being offset by the decline in interest bearing liabilities.

Net interest margin increased 6 basis points for the three months ended June 30, 2012 to 3.29% as compared to 3.23% for the second quarter of 2011, reflecting a decrease in average rate paid on interest-bearing liabilities of 29 basis points from 1.95% for the second quarter of 2011 to 1.67% for the second quarter of 2012. This was offset by a 19 basis point decrease in the average yield on earning assets. The yield on loans, net of discount, was 5.44% and 5.52% for the second quarters of 2012 and 2011, respectively, with the decrease due primarily to decreases in loans outstanding and lower rates during the period. The average yield on investments decreased from 3.56% for the second quarter of 2011 to 2.76% for the second quarter of 2012 while average balances in investments increased from $84.1 million for the second quarter of 2011 to $99.6 million for the

second quarter of 2012. Average fed funds sold, which were earning 0.23% for the second quarters of 2011 and 2012, decreased from $26.0 million at the end of the second quarter of 2011 to $19.0 million at the end of the second quarter 2012. The average balance of interest bearing deposits increased from $372.1 million at the end of the second quarter of 2011 to $378.5 million at the end of the second quarter of 2012.

For the three months ended June 30, 2012, net interest income was up $43 thousand from $3.9 million for the second quarter of 2011 to $4.0 million for the second quarter of 2012. This increase was due to the disproportionate reduction in rates on interest bearing liabilities compared to the rate on earning assets.

Total interest and fees on loans, the largest component of net interest income, decreased $247 thousand or 4.6 % to $5.1 million during the second quarter of 2012 compared to $5.4 million for the same period in 2011 primarily due to decreases in loans outstanding since June 30, 2011.

Interest expense on deposits decreased $293 thousand to $1.4 million, or 17.5% for the second quarter of 2012 compared to the same period of 2011. The decrease in deposit expense was due to the restructuring of the deposit mix and a decrease in overall rates paid on deposits as interest rates paid on interest bearing deposits decreased 34 basis points to 1.46% for the second quarter of 2012 from 1.80% for the second quarter of 2011.

For the six months ended June 30, 2012, the net interest margin remained constant at 3.28%. The stability in the margin is attributable to a balanced approach in the management of the asset and liability mix.

Net interest income decreased $139 thousand for the first six months of 2012 compared to the first six months of 2011.

Average Balances, Income and Expenses, Yields and Rates

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

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

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

                                                                 Three Months Ended June 30,
                                                       2012                                      2011
                                        Average       Income/       Yield/        Average       Income/        Yield/
                                        Balance       Expense        Rate         Balance       Expense         Rate
                                                                   (Dollars in thousands)
Assets:
Loans, net of unearned income (1)      $ 378,860      $  5,121         5.44 %    $ 390,106      $  5,368          5.52 %
Bank owned life insurance (2)              9,044           128         5.68 %        5,265            64          4.87 %
Investment securities:
U.S. Agencies                              1,955            18         3.63 %        2,085            14          2.60 %
Mortgage backed securities                14,252            73         2.06 %       13,605           105          3.08 %
CMO                                       43,759           248         2.28 %       31,420           219          2.80 %
Municipal securities (2)                   6,272            99         6.39 %       13,876           219          6.34 %
Corporate bonds                           16,454           101         2.47 %        4,691            46          3.90 %
Taxable municipal securities              10,954           107         3.92 %       11,090           126          4.55 %
SBA                                        1,464             4         1.09 %        2,717           (13 )       -1.88 %
Other investments                          4,459            34         3.07 %        4,591            31          2.73 %

Total investment securities               99,569           684         2.76 %       84,075           747          3.56 %
Interest bearing deposits                 19,015            11         0.23 %       26,000            15          0.23 %

Total earning assets                   $ 506,488      $  5,944         4.72 %    $ 505,446      $  6,194          4.91 %

Cash and cash equivalents                  8,366                                     7,133
Allowance for loan losses                 (7,498 )                                 (10,739 )
Other assets                              29,032                                    23,065


Total assets                           $ 536,388                                 $ 524,905


Liabilities & Stockholders' Equity:
Interest checking                      $  11,158      $      8         0.28 %    $  10,153      $      9          0.37 %
Money market deposit accounts            138,507           172         0.50 %      141,803           287          0.81 %
Statement savings                          1,280             1         0.42 %          947             1          0.42 %
Certificates of deposit                  227,542         1,196         2.11 %      219,235         1,373          2.51 %

Total interest-bearing deposits          378,487         1,377         1.46 %      372,138         1,670          1.80 %

Fed funds purchased                            0            -          0.00 %           -              0          0.00 %
Repurchase agreements                        962             1         0.40 %        1,093             1          0.50 %
Subordinated debt                          7,155            38         2.13 %        7,155            35          1.93 %
FHLB advances                             48,736           388         3.20 %       55,000           413          3.01 %

Total interest-bearing liabilities       435,340         1,804         1.67 %      435,386         2,119          1.95 %


Noninterest-bearing liabilities:
Noninterest-bearing deposits              48,818                                    43,268
Other liabilities                          1,763                                     1,670

Total liabilities                         50,581                                    41,489
Shareholders' equity                      50,467                                    44,581

Total liabilities and shareholders'
equity                                 $ 536,388                                 $ 524,905


Net interest income                                   $  4,140                                  $  4,075

Interest rate spread                                                   3.05 %                                     2.96 %


Net interest margin                                                    3.29 %                                     3.23 %

Ratio of average interest earning
assets to average interest-bearing
liabilities                                                          116.34 %                                   116.09 %

(1) Includes nonaccrual loans

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

                                                                 Six Months Ended June 30,
                                                      2012                                      2011
                                       Average       Income/       Yield/        Average       Income/        Yield/
                                       Balance       Expense        Rate         Balance       Expense         Rate
                                                                  (Dollars in thousands)
Assets:
Loans, net of unearned income (1)     $ 377,455      $ 10,269         5.48 %    $ 392,331      $ 10,893          5.60 %
Bank owned life insurance (2)             9,003           253         5.66 %        2,871            70          4.93 %
Investment securities:
U.S. Agencies                             1,977            35         3.61 %        2,969            49          3.32 %
Mortgage backed securities               14,524           154         2.13 %       14,244           216          3.05 %
CMO                                      43,470           501         2.32 %       31,268           433          2.79 %
Municipal securities (2)                  6,618           212         6.45 %       14,400           457          6.40 %
Corporate bonds                          16,386           200         2.45 %        5,290           110          4.20 %
Taxable municipal securities             10,242           201         3.94 %       11,897           272          4.62 %
SBA                                       1,521            13         1.69 %        3,128           (11 )        0.72 %
Other investments                         4,484            67         2.99 %        4,584            56          2.48 %

Total investment securities              99,222         1,383         2.80 %       87,780         1,582          3.63 %
Interest bearing deposits                19,600            23         0.24 %       25,727            30          0.23 %

Total earning assets                  $ 505,280      $ 11,928         4.75 %    $ 508,709      $ 12,575          4.98 %

Cash and cash equivalents                 8,223                                     7,217
Allowance for loan losses                (8,322 )                                 (10,997 )
Other assets                             29,138                                    22,988


Total assets                          $ 534,319                                 $ 527,917


Liabilities & Stockholders' Equity:
Interest checking                     $  11,285      $     16         0.29 %    $   9,736      $     18          0.37 %
Money market deposit accounts           145,474           361         0.50 %      143,011           590          0.83 %
Statement savings                         1,214             3         0.42 %          919             2          0.43 %
Certificates of deposit                 224,781         2,440         2.18 %      222,847         2,800          2.53 %

Total interest-bearing deposits         382,754         2,820         1.48 %      376,513         3,410          1.83 %

Fed funds purchased                           0            -          0.00 %           -              0          0.00 %
Repurchase agreements                       991             2         0.40 %          970             2          0.50 %
Subordinated debt                         7,155            80         2.24 %        7,155            69          1.94 %
FHLB advances                            49,368           790         3.22 %       55,000           820          3.01 %

Total interest-bearing liabilities      440,268         3,692         1.69 %      439,638         4,301          1.97 %


Noninterest-bearing liabilities:
Noninterest-bearing deposits             46,572                                    42,288
Other liabilities                         1,744                                     1,795

Total liabilities                        48,316                                    41,489
Shareholders' equity                     45,735                                    44,196

Total liabilities and shareholders'
equity                                $ 534,319                                 $ 527,917


Net interest income                                  $  8,236                                  $  8,274

Interest rate spread                                                  3.06 %                                     3.01 %


Net interest margin                                                   3.28 %                                     3.28 %

Ratio of average interest earning
assets to average interest-bearing
liabilities                                                         114.77 %                                   115.71 %

(1) Includes nonaccrual loans

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

Noninterest Income

Total noninterest income was $388 thousand for the second quarter of 2012, compared to $840 thousand for the same period of 2011. Fees on deposits increased 20.73% to $99 thousand for the second quarter of 2012 compared to $82 thousand for the comparable period in 2011. Gain on sale of securities decreased $623 thousand to zero for the three months ended June 30, 2012 as no security sales were transacted during the second quarter of 2012. Other noninterest income increased $154 thousand for the second quarter of 2012 to $289 thousand compared to $135 thousand for the same period of 2011. This increase was due primarily to increases in bank owned life insurance cash surrender value of life insurance.

For the six months ended June 30, 2012, noninterest income decreased $333 thousand from $1.1 million for the first six months of 2011 to $727 thousand for the comparable period in 2012, attributable to fewer security sales in the first six months of 2012 compared to 2011 being offset partially by the increase in bank owned life insurance cash surrender value.

Noninterest Expense

This category includes all expenses other than interest paid on deposits and borrowings. Total noninterest expenses for the second quarter of 2012 totaled $7.9 million, an increase of $4.2 million, compared to $3.7 million for the same period in 2011. The primary cause of the increase was the implementation of the Asset Resolution Plan in accordance with the Standby Purchase Agreement as part of the Right Offering that closed May 19, 2012 and the restructuring of the Federal Home Loan Bank of Atlanta (FHLB) advances. Write-downs and losses on OREO expense increased $1.2 million to $1.5 million for the three months ended June 30, 2012, from $293 thousand for the three months ended June 30, 2011. A prepayment penalty of $2.8 million was incurred in the second quarter of 2012 as part of the FHLB restructuring that was designed to reduce interest expense and better match the maturity of the Company's current asset portfolio.

For the six months ended June 30, 2012, total noninterest expense increased $4.6 million, or 67.7% to $11.3 million from $6.7 million for the comparable period in 2011. The primary factor in the year to date variance in results is consistent with that of the activity previously presented in the second quarter analysis.

Income Taxes

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

The effective tax rate for the six months ended June 30, 2012 and 2011 was 35.1% and 39.4%, respectively.

ASSET QUALITY

The Company's allowance for loan losses is an estimate of the amount needed to provide for probable losses inherent in the loan portfolio. In determining adequacy of the allowance, management considers a number of factors, including, the Company's historical loss experience, the size and composition of the loan portfolio, specific impaired loans, the overall level of nonperforming loans, the value and adequacy of collateral and guarantors, experience and depth of lending staff, effects of credit concentrations and economic conditions. Because the risk of loan loss includes general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses can only be an estimate.

Total nonperforming assets, which consist of nonaccrual loans, loans past due 90 days and still accruing interest, and OREO, were $14.6 million at June 30, 2012, down from $29.4 million at June 30, 2011. This decrease reflects the implementation of the Asset Resolution Plan in accordance with the Standby Purchase Agreement of the Rights offering that closed May 19, 2012. At December 31, 2011, nonperforming assets totaled $25.3 million. Nonperforming assets are composed largely of loans secured by real estate and repossessed properties in our OREO portfolio. At the end of the first quarter, OREO was $4.8 . . .