First Capital, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. First Capital is the thrift holding company for First Harrison Bank; the filing primarily reflects the Bank’s operations. This unaudited report covers the three and nine months ended September 30, 2011, with comparisons to 2010 income and cash-flow periods and to December 31, 2010 balance-sheet amounts. Dollars below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Interest income | $5.101 | $5.483 | $15.350 | $16.545 |
| Net interest income | $4.204 | $4.157 | $12.395 | $12.277 |
| Provision for loan losses | $0.400 | $0.590 | $1.325 | $1.470 |
| Noninterest income | $1.074 | $1.020 | $2.952 | $2.846 |
| Noninterest expense | $3.331 | $3.315 | $9.954 | $9.600 |
| Net income attributable to First Capital | $1.093 | $0.910 | $2.930 | $2.899 |
| Diluted earnings per share | $0.39 | $0.33 | $1.05 | $1.04 |
- Margins: Management reported tax-equivalent net interest rate spread of 4.07% for Q3 2011 versus 3.98% in Q3 2010, and 3.96% for the first nine months versus 3.82%. Net interest margin itself is not clearly provided in the filing text.
- Balance sheet at September 30: Total assets were $437.3, down 3.3% from year-end 2010. Net loans were $285.5, down from $294.6; available-for-sale securities were $106.9, up from $100.9. Total deposits were $362.1, down from $378.0. Cash and cash equivalents were $14.8, down from $21.6.
- Borrowings and equity: FHLB advances were $13.4, down from $15.7; retail repurchase agreements were $9.2, up from $8.7. Company stockholders’ equity was $50.5, compared with $47.9 at year-end, reflecting retained earnings and higher unrealized securities gains.
- Cash flow, first nine months: Operating activities provided $9.3, investing activities provided $3.3, and financing activities used $19.4. Cash and cash equivalents declined $6.7 to $14.8. Financing outflows included a $15.9 net decrease in deposits and $1.6 in dividends paid.
- Credit quality: The allowance for loan losses was $4.7, versus $4.5 at year-end. Nonperforming loans were $8.4, up from $7.9; nonaccrual loans were $6.7, down from $7.5. Nine-month net charge-offs were $1.1, compared with $2.2 in 2010. Troubled debt restructurings totaled $4.9, of which $3.4 were on nonaccrual status.
- Capital and liquidity: The Bank reported tangible, core and risk-based capital ratios of 10.0%, 10.0% and 16.6%, respectively, above stated requirements of 1.5%, 3.0% and 8.0%; it was considered well-capitalized. It also reported $14.8 of cash and $106.9 of available-for-sale securities, plus additional FHLB borrowing capacity and collateral eligible for repurchase agreements.
Changes versus comparable periods
- Q3 net income attributable to First Capital rose $0.183, or about 20%, year over year, supported by higher net interest and noninterest income and a lower loan-loss provision. Nine-month attributed net income was nearly flat year over year.
- Interest income fell in both comparison periods, but interest expense declined more, supporting modest net interest income growth. Management attributed lower asset yields and funding costs to the persistently low-rate environment; average funding cost for the first nine months fell to 1.13% from 1.54%.
- Nine-month provision expense decreased to $1.325 from $1.470, alongside lower charge-offs and lower nonaccrual loans; however, total nonperforming loans increased modestly from year-end.
- Loans contracted, primarily as residential mortgage payoffs were not replaced and the Bank continued selling fixed-rate residential mortgages. Commercial business loans increased $2.5 during the nine months.
- Deposits declined, mainly from withdrawals in interest-bearing public-fund accounts; noninterest-bearing checking deposits increased $6.9.
- Nine-month noninterest expense increased $0.354, mainly due to data-processing costs and compensation. The 2010 comparison included a $0.278 pretax refund of disputed ATM charges; management said excluding its after-tax effect would reduce 2010 nine-month net income to $2.7 and diluted EPS to $0.98.
Outlook, risks and unusual items
- The filing gives no quantitative earnings or financial guidance. Management’s stated focus includes shifting the loan mix toward commercial business and real estate lending and managing interest-rate exposure. Interim results are not necessarily indicative of full-year results.
- Key risks include local economic and real-estate conditions, elevated delinquency levels, borrower repayment capacity, deposit flows, competition, interest-rate changes, and regulatory or accounting changes. Management noted that allowance estimates are subjective and future additions or losses above estimates may occur.
- The Bank’s interest-rate sensitivity analysis, based on June 30, 2011 data, indicated net portfolio value would decline 10% under an immediate 300-basis-point rate increase and rise only slightly under a 100-basis-point decrease. September 30 sensitivity data were unavailable. The analysis is assumption-dependent, and approximately 48% of loans were fixed-rate.
- One privately issued CMO had fair value of $0.286 versus amortized cost of $0.323 and was downgraded to substandard in 2009. Management recognized no other-than-temporary impairment, based on third-party analysis expecting contractual cash flows, but cautioned that further deterioration could affect credit quality.
- Seven TDRs totaling $1.720 were modified during the nine months. Modifications included temporary interest-only periods, rate reductions, payment deferrals and loan consolidations. No recent TDR payment defaults were reported for the periods shown.
- Management reported no material subsequent events, no material changes to risk factors, no material off-balance-sheet transactions during the period, and no material legal proceedings. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Key facts for investors to verify
- Whether the rise in nonperforming loans and the $4.9 TDR balance signals further deterioration, particularly in commercial real estate and commercial business exposures.
- Whether deposit contraction continues and how available liquidity, securities, and borrowing capacity compare with funding needs.
- How loan yields, funding costs and the interest-rate spread respond to changes in rates, including the limitations of the Bank’s sensitivity assumptions.
- Whether the allowance remains adequate as loan mix shifts toward commercial and second-lien lending and local economic conditions remain weak.
- The sustainability of earnings after considering the one-time 2010 ATM-fee refund, lower loan balances, expense growth and continuing securities-related gains in other comprehensive income.