First Capital, Inc. — Q2 2012 Form 10-Q
Business context and period. First Capital is the savings and loan holding company for First Harrison Bank. This unaudited report covers the quarter and six months ended June 30, 2012; balance-sheet comparisons are with December 31, 2011. Dollar amounts below are in millions unless otherwise stated.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Interest income | $4.676 | $5.150 | $9.397 | $10.249 |
| Net interest income | $4.026 | $4.144 | $8.044 | $8.191 |
| Provision for loan losses | $0.300 | $0.425 | $0.775 | $0.925 |
| Noninterest income | $1.100 | $0.955 | $2.175 | $1.878 |
| Noninterest expense | $3.360 | $3.371 | $6.693 | $6.623 |
| Net income attributable to First Capital | $1.035 | $0.941 | $1.954 | $1.837 |
| Diluted earnings per share | $0.37 | $0.34 | $0.70 | $0.66 |
- Margins and rates: Tax-equivalent net interest spread was 3.78% in Q2 2012 versus 3.92% a year earlier; for the first half it was 3.90% versus 3.91%. Tax-equivalent yield on interest-earning assets was 4.53% in Q2 and 4.69% for the first half, down from 5.05% and 5.08%, respectively, in 2011. The filing does not provide a clear net interest margin value.
- Balance sheet at June 30: Total assets were $453.8, deposits $380.1, net loans $274.3, available-for-sale securities $125.0, and total equity $52.0. Cash and cash equivalents were $23.7.
- Debt and liquidity: FHLB advances were $10.7 and retail repurchase agreements $9.3. The Bank reported $23.7 in cash and cash equivalents and $125.0 in available-for-sale securities, and stated it had additional FHLB borrowing capacity and collateral eligible for repurchase agreements. The parent company separately had $0.269 in liquid assets.
- Cash flows, first half: Operating activities provided $4.930, investing activities used $13.234, and financing activities provided $13.051; cash increased $4.747 to $23.670. Operating cash flow was $7.358 in the comparable 2011 period.
- Credit quality: Allowance for loan losses was $4.432, up from $4.182 at year-end. Nonperforming loans were $7.573 versus $7.764 at year-end; nonaccrual loans were approximately $7.5. Net charge-offs were $0.525 for the first half, compared with $0.837 in 2011.
Material changes versus comparable periods
- First-half net income attributable to the Company rose to $1.954 from $1.837; Q2 rose to $1.035 from $0.941. Management attributed the improvement mainly to higher noninterest income and lower loan-loss provisions, partly offset by lower net interest income.
- First-half noninterest income increased $0.297, chiefly because gains on loan sales increased $0.280. First-half net interest income declined $0.147 as asset yields fell; lower funding costs partly offset the decline.
- Assets increased 3.4% from year-end. Deposits rose 4.3% to $380.1, while net loans fell $1.7. Residential mortgage loans decreased $4.6 as payoffs were not replaced by portfolio originations and fixed-rate mortgages continued to be sold; commercial real estate and consumer loans increased $2.4 and $1.1, respectively.
- Available-for-sale securities increased $13.6 to $125.0. The Company purchased $45.0 of securities in the first half, primarily agency securities, CMOs and municipal bonds.
- First-half dividends were $0.38 per share, unchanged from 2011. The Company repurchased 692 shares during the first half for $14,000.
Outlook, risks and unusual items
- The filing gives no specific earnings or financial guidance. Management noted that results may be affected by economic conditions, interest rates and monetary or fiscal policy, regulation, loan demand, deposit flows, competition, and loan and securities portfolio quality.
- Management cited weaker local economic conditions, including reduced home construction, higher unemployment, elevated past-due loan levels, depreciating collateral values and household budget pressures. It also noted that commercial and second-mortgage lending generally carry greater credit risk than first-lien residential mortgages.
- Management considered the $4.432 allowance adequate but cautioned that future additions may be needed and actual losses may exceed estimates. The allowance assessment is inherently judgmental.
- One privately issued CMO was in a continuous loss position for more than 12 months, with $0.243 amortized cost and $0.194 fair value. It had previously been downgraded; management’s third-party analysis identified no other-than-temporary impairment in Q2, while noting future deterioration could affect credit quality.
- Two loans totaling $0.112 were restructured in the first half through interest-rate reductions following borrower bankruptcy filings; no principal charge-offs resulted. Total TDRs were $4.680, of which $4.094 were nonaccrual.
- The Bank reported that it was “well-capitalized” and compliant with regulatory capital requirements: tangible, core and risk-based capital ratios were 9.9%, 9.9% and 15.7%, respectively. Management reported no material change in market risk since year-end. The Company reported no material off-balance-sheet transactions during the period, no material legal proceedings, and no material changes to the previously disclosed risk factors.
Most important facts for investors to verify
- Whether lower asset yields and the shift in mix from loans toward securities continue to pressure net interest income and spread.
- Trends in nonperforming, past-due and restructured loans, especially commercial real estate, commercial business and second-mortgage exposures, and whether the allowance remains adequate.
- Whether deposit growth is sustainable and how time-deposit outflows, funding costs and available borrowing capacity affect liquidity.
- The credit and valuation performance of the privately issued CMO and the broader securities portfolio.
- Whether loan-sale gains, which supported noninterest income, persist, and whether operating cash flow recovers from the year-earlier level.