First Capital, Inc. — 2013 Second-Quarter Form 10-Q
Business context and reporting period
First Capital is the savings and loan holding company for First Harrison Bank; results primarily reflect the Bank’s operations. This unaudited filing covers the three and six months ended June 30, 2013, with comparisons to 2012. Balance-sheet comparisons are to December 31, 2012. Amounts are in millions of dollars unless otherwise noted.
Financial performance and position
- Second-quarter earnings: Net income attributable to First Capital was $1.21 million, or $0.43 per diluted share, versus $1.04 million, or $0.37, a year earlier. Six-month attributable net income was $2.40 million ($0.86 per diluted share), compared with $1.95 million ($0.70).
- Income and expenses: Second-quarter net interest income was $4.11 million, up from $4.03 million; the provision for loan losses was $225,000 versus $300,000. Six-month net interest income was $8.23 million versus $8.04 million, while the provision was $475,000 versus $775,000. Six-month noninterest income rose to $2.35 million from $2.18 million, and noninterest expense declined to $6.63 million from $6.69 million.
- Interest margins: The tax-equivalent net interest rate spread was 3.93% for the quarter, versus 3.78% in 2012; for the six months it was 3.92%, versus 3.90%. Six-month earning-asset yield decreased to 4.44% from 4.69%, while the average cost of interest-bearing liabilities fell to 0.52% from 0.79%.
- Assets and funding: Total assets were $460.6 million, up 0.3% from year-end. Net loans were $283.2 million, compared with $280.4 million; deposits were $389.6 million, up from $384.3 million. Cash and cash equivalents rose to $33.7 million from $23.2 million. Available-for-sale securities fell to $113.7 million from $123.0 million.
- Debt and liquidity: FHLB advances were $5.0 million and retail repurchase agreements were $11.4 million at June 30. The remaining FHLB advances mature in October 2013. Management reported additional FHLB borrowing capacity and collateral eligible for repurchase agreements. The parent company separately reported $201,000 of liquid assets.
- Cash flow: Six-month operating cash flow was $6.49 million, compared with $4.93 million in 2012. Investing activities provided $2.61 million, versus using $13.23 million; financing activities provided $1.39 million, versus $13.05 million. Cash increased $10.49 million during the period.
- Capital and distributions: The Bank was classified as well-capitalized. Tangible capital to adjusted assets, Tier 1 capital to risk-weighted assets, and risk-based capital to risk-weighted assets were 10.3%, 14.7%, and 15.9%, respectively. Dividends were $0.20 per share for the quarter and $0.40 for the six months.
Material changes versus comparable periods
- Higher earnings reflected improved net interest income after provisions, stronger noninterest income, and lower noninterest expense. Lower funding costs offset reduced yields on earning assets.
- Management continued shifting the lending mix toward commercial business and commercial real estate loans. Commercial business loans rose $2.8 million and commercial mortgage loans rose $1.6 million in the first half; home equity and second mortgage loans declined $3.1 million.
- Nonperforming loans declined to $5.9 million from $7.9 million at year-end; nonaccrual loans were $5.4 million, down from $7.6 million. The allowance for loan losses was $4.84 million, versus $4.74 million.
- Unrealized losses on available-for-sale securities reduced other comprehensive income by $1.71 million after tax for the first half. Second-quarter comprehensive income attributable to First Capital was a loss of $201,000, despite positive net income, principally reflecting securities valuation changes.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management attributed the lower securities values primarily to changes in long-term interest-rate forecasts. It reported that unrealized losses were principally related to market interest rates and did not consider them other-than-temporary, citing the ability to hold the securities.
- Credit risks include the concentration of lending in southern Indiana and the increased commercial and second-lien loan mix, which management says generally carries greater credit risk. Management raised its overall qualitative allowance factor to 1.18 from 1.15, citing portfolio composition and other factors; economic conditions and past-due loan levels remained risk considerations.
- At June 30, total loans past due were $9.66 million. The allowance reflects management estimates and may require future adjustments; actual losses could exceed estimates. The filing also reports $489,000 of partial charge-offs on ten loans.
- Interest-rate modeling estimated that an immediate, sustained 300-basis-point increase would reduce one-year net interest income by 4.09% and economic value of equity by 24.14%. The filing cautions that model assumptions and customer behavior make these estimates uncertain.
- A voluntary early-retirement program reduced compensation expense; management reported $260,000 of pretax savings. The first-half effective tax rate increased to 30.7% from 28.7%, mainly because tax-exempt income was a smaller share of pretax income.
- No material legal proceedings, material changes to previously disclosed risk factors, or material off-balance-sheet transactions were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the decline in nonperforming loans is sustained, and how past-due, nonaccrual, restructured, and classified loans evolve.
- Whether commercial and second-lien loan growth changes the portfolio’s loss experience or requires higher provisions and reserves.
- How interest-rate movements affect securities values, accumulated other comprehensive income, net interest income, and economic value of equity.
- Deposit mix and funding stability, available borrowing capacity, and repayment of the $5.0 million FHLB advance maturing in October 2013.
- Whether lower credit provisions and early-retirement savings persist, and how much earnings depend on mortgage-loan sale gains and other fee income.