First Capital, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. First Capital is the thrift holding company for First Harrison Bank; financial amounts below are in millions unless noted. Unaudited interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $4.144 | $4.150 | $8.191 | $8.120 |
| Provision for loan losses | $0.425 | $0.420 | $0.925 | $0.880 |
| Noninterest income | $0.955 | $1.003 | $1.878 | $1.826 |
| Noninterest expense | $3.371 | $3.395 | $6.623 | $6.285 |
| Net income attributable to First Capital | $0.941 | $0.988 | $1.837 | $1.989 |
| Diluted earnings per share | $0.34 | $0.35 | $0.66 | $0.71 |
- Margins and interest: Tax-equivalent net interest rate spread improved to 3.92% in Q2 from 3.84%; for the six months it rose to 3.91% from 3.74%. Six-month average earning-asset yield declined to 5.08% from 5.31%, while average interest-bearing liability cost fell to 1.17% from 1.57%. The filing does not provide a clear net interest margin value.
- Balance sheet at June 30: Assets were $445.0 million, down 1.6% from year-end 2010. Net loans were $289.4 million, down $5.2 million; available-for-sale securities were $111.2 million, up $10.3 million. Deposits were $369.2 million, down 2.3%. Cash and cash equivalents were $14.1 million, versus $21.6 million at year-end.
- Cash flow: Six-month operating cash flow was $7.4 million, versus $2.6 million a year earlier. Investing used $5.0 million and financing used $9.8 million; cash and equivalents decreased $7.5 million to $14.1 million.
- Credit and capital: The allowance for loan losses was $4.6 million, compared with $4.5 million at year-end. Nonperforming loans rose to $8.2 million from $7.9 million; nonaccrual loans were $7.7 million. Troubled debt restructurings totaled $3.7 million, all on nonaccrual status. Bank regulatory tangible, core, and risk-based capital ratios were 9.7%, 9.7%, and 16.1%, respectively; the Bank was classified as well-capitalized.
- Debt and liquidity: FHLB advances were $15.3 million and retail repurchase agreements $9.3 million. Management cited additional FHLB borrowing capacity and collateral available for repurchase agreements. The parent company separately reported liquid assets of $298,000.
Material changes versus comparable periods
- Six-month attributable net income fell 7.6% to $1.84 million; Q2 fell 4.8% to $0.94 million. Management attributed the six-month decline chiefly to higher noninterest expense, partly offset by higher noninterest income. Q2 earnings reflected lower noninterest income, partly offset by lower expenses.
- For the six months, net interest income increased modestly despite lower interest income, as interest expense declined more. Management cited low market rates and reinvestment of maturing assets at lower yields.
- Noninterest expense increased $338,000 year over year for the first half, including a $337,000 increase in data-processing expense. The comparison was affected by a $278,000 refund of disputed ATM charges received in the first half of 2010. Excluding that refund net of tax, management said 2010 six-month net income would have been about $1.8 million, or $0.65 per diluted share.
- Loan portfolio composition shifted: residential mortgage loans declined $6.8 million while commercial business loans increased $4.8 million. Deposits declined, mainly due to normal withdrawals from public-fund accounts; noninterest-bearing deposits increased $5.4 million.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or financial guidance. Management described continued weak local economic conditions, including lower home construction, higher unemployment, collateral-value pressure, job losses, and household budget strain, as factors in estimating credit losses.
- Management reported elevated past-due loan ratios relative to historical levels and warned that future allowance additions may be needed and actual losses may exceed estimates. Commercial and second-mortgage lending generally carry greater risk than first-lien residential mortgages.
- Interest-rate risk modeling indicated that a 100–300 basis-point rate increase would reduce modeled net portfolio value by 2%–14%; a 100-basis-point decrease would increase it by 1%–2%. The filing notes these estimates rely on assumptions and that June 30, 2011 model results were unavailable; the latest figures were as of March 31, 2011.
- A privately issued collateralized mortgage obligation with $398,000 amortized cost and $369,000 fair value had been downgraded to substandard. Management reported no other-than-temporary impairment, based on an independent analysis expecting contractual cash flows to be collected, but noted further economic deterioration could adversely affect credit quality.
- The Company reported no material change to previously disclosed risk factors, no material pending legal proceedings, and no off-balance-sheet transactions during the period reasonably likely to materially affect financial condition, results, or cash flows. Disclosure controls were considered effective.
Important facts for investors to verify
- Whether nonperforming loans, delinquencies, and troubled debt restructurings stabilize or worsen, particularly in commercial real estate, commercial business, and residential lending.
- Whether the allowance remains adequate as local economic and collateral conditions evolve, and how charge-offs and provisions trend.
- Deposit retention and liquidity trends, including the effect of declining deposits and the Bank’s reliance on FHLB advances or repurchase funding.
- Whether spread improvement can offset lower asset yields, expense growth, and weaker mortgage origination and sale activity.
- Changes in interest-rate exposure and securities values, including developments affecting the privately issued CMO.