First Capital, Inc. — 2011 Form 10-K
Business context and reporting period. First Capital is the holding company for First Harrison Bank, a community bank operating through 13 locations in southern Indiana. Its principal business is gathering deposits and making residential, commercial real estate, commercial business and consumer loans. This annual report covers the fiscal year ended December 31, 2011; financial comparisons are primarily with fiscal 2010. Unaudited fourth-quarter results are also disclosed.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Net interest income | $16.5 million | $16.3 million |
| Provision for loan losses | $1.8 million | $2.0 million |
| Noninterest income | $4.1 million | $3.9 million |
| Noninterest expense | $13.2 million | $12.8 million |
| Net income attributable to First Capital | $4.0 million; $1.43 diluted EPS | $3.9 million; $1.39 diluted EPS |
| Net interest margin | 4.14% | 3.96% |
| Return on assets / average equity | 0.90% / 8.04% | 0.84% / 8.10% |
Balance sheet at December 31, 2011: Total assets were $438.9 million, down 3.0%; net loans were $276.0 million, down 6.3%; deposits were $364.4 million, down 3.6%; and First Capital stockholders’ equity was $50.9 million, up from $47.9 million. Available-for-sale securities were $111.4 million and cash and cash equivalents were $18.9 million.
Funding and capital: Federal Home Loan Bank advances were $12.4 million and retail repurchase agreements were $9.1 million, versus $15.7 million and $8.7 million, respectively, in 2010. The Bank was reported well capitalized: Tier 1 leverage ratio 10.06%, Tier 1 risk-based ratio 16.11%, and total risk-based capital ratio 17.05%. Bank liquidity included $18.9 million of cash and $111.4 million of available-for-sale securities. The parent company separately had $278,000 of liquid assets.
Cash flow: Operating activities provided $9.3 million and investing activities provided $6.8 million; financing activities used $18.7 million. Cash and cash equivalents declined $2.7 million to $18.9 million. The filing reports consolidated cash flow; it does not provide a conventional industrial-company free-cash-flow measure.
Material changes versus 2010
- Net income attributable to First Capital increased about 2.8%, while net interest income rose 1.1%. Lower funding costs more than offset reduced interest income: interest expense fell $1.7 million, while interest income declined $1.6 million.
- Net interest margin improved to 4.14% from 3.96%, as the average cost of interest-bearing liabilities fell to 1.08% from 1.50%. Average interest-earning assets and average loan balances also declined.
- Loan-loss provision decreased to $1.8 million from $2.0 million, and net charge-offs fell to $2.1 million from $2.5 million. The allowance ended the year at $4.2 million, or 1.47% of gross loans, compared with $4.5 million, or 1.48%, in 2010.
- Nonperforming assets edged down to $8.4 million from $8.5 million, but nonperforming loans rose to 2.81% of net loans from 2.69%. Commercial real estate nonaccrual loans increased while residential and commercial business nonaccrual balances declined.
- Assets contracted as net loans fell; available-for-sale securities increased $10.6 million. Deposits declined, including a $13.2 million reduction in time deposits, while noninterest-bearing demand deposits increased 16.0% to $47.3 million.
- Noninterest expense rose 3.5%, mainly from higher compensation and data-processing costs. The filing attributes part of the data-processing increase to ATM processing fees and a $278,000 pre-tax refund received in 2010 related to a disputed charge paid in 2009.
- Fourth-quarter 2011 net income attributable to First Capital was $1.045 million, or $0.38 per diluted share, compared with $966,000, or $0.35, in fourth-quarter 2010.
Outlook, risks, contingencies and unusual items
- No formal earnings or financial guidance is provided. Management describes priorities including controlling credit and interest-rate risk, growing commercial and consumer lending and demand deposits, expanding secondary-market mortgage activity, improving efficiency, and considering acquisitions or branch opportunities.
- Management identifies sensitivity to interest rates, local economic conditions, competition, credit quality, regulation and operating costs. The Bank held $135.8 million, or 47.7% of loans, in fixed-rate loans for investment at year-end; prolonged rate increases could pressure net interest income. The filing’s modeled net portfolio value declined 4% under a 100-basis-point rate decrease and increased 1% to 2% under modeled increases of 100 to 300 basis points.
- Credit exposure remains material: nonperforming assets were $8.4 million; troubled debt restructurings totaled $4.7 million, including $4.2 million on nonaccrual; and $8.4 million of loans were classified as special mention or watch. The allowance depends on estimates of collateral, borrower cash flows and local economic conditions. Management cited weak local construction and elevated past-due loans in its allowance assessment.
- The Bank had $42.6 million in commitments to extend credit and $1.7 million in standby letters of credit. These are not necessarily future cash outflows because commitments may expire undrawn. The Bank also had $50.1 million of time deposits scheduled to mature within one year.
- A $36,000 other-than-temporary impairment loss was recognized on a privately issued collateralized mortgage obligation; its year-end amortized cost was $269,000 and fair value was $237,000. Management said it did not anticipate further credit-related impairment at year-end but warned that deterioration could affect the security.
- Management reported no material pending legal proceedings and effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the consolidated financial statements; the auditor did not attest to internal-control effectiveness.
- Regulatory changes under the Dodd-Frank Act may increase compliance costs and affect operations. The filing also notes potential for higher deposit-insurance assessments and restrictions if regulatory capital or supervisory conditions worsen.
Most important facts for investors to verify
- Whether deposit levels and funding costs remain favorable, and how the $50.1 million of time deposits maturing within a year are retained or replaced.
- Trends in nonperforming loans, TDR performance, charge-offs and collateral values, particularly in commercial real estate and construction lending.
- Whether the allowance remains adequate as the loan portfolio shrinks and its mix shifts toward commercial and consumer credit.
- How lower-yielding replacement loans and securities, interest-rate movements and fixed-rate loan exposure affect future net interest margin.
- Whether reported capital strength and liquidity are maintained while the company pays dividends and considers share repurchases or growth opportunities.
- The effect of regulatory changes and deposit-insurance costs, and any subsequent developments involving the impaired private CMO.