XNAS:FCAP First Capital Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 0-25023

 

 

First Capital, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Indiana   35-2056949

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

220 Federal Drive NW, Corydon, Indiana 47112

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number including area code 1-812-738-2198

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-accelerated Filer   ¨    Smaller Reporting Company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2,785,693 shares of common stock were outstanding as of April 30, 2012.

 

 

 


Table of Contents

FIRST CAPITAL, INC.

INDEX

 

         Page  
Part I  

Financial Information

  
 

Item 1. Consolidated Financial Statements

  
 

Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 (unaudited)

     3   
 

Consolidated Statements of Income for the three months ended March 31, 2012 and 2011 (unaudited)

     4   
 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011 (unaudited)

     5   
 

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2012 and 2011 (unaudited)

     6   
 

Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited)

     7   
 

Notes to Consolidated Financial Statements (unaudited)

     8-32   
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     33-36   
 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     38   
 

Item 4. Controls and Procedures

     38   
Part II  

Other Information

  
 

Item 1. Legal Proceedings

     39   
 

Item 1A. Risk Factors

     39   
 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     39   
 

Item 3. Defaults Upon Senior Securities

     40   
 

Item 4. Mine Safety Disclosures

     40   
 

Item 5. Other Information

     40   
 

Item 6. Exhibits

     40   
Signatures        41   

 

-2-


Table of Contents

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     March 31,     December 31,  
     2012     2011  
     (In thousands)  

ASSETS

    

Cash and due from banks

   $ 7,014      $ 10,794   

Interest bearing deposits with banks

     933        525   

Federal funds sold

     22,219        7,604   
  

 

 

   

 

 

 

Total cash and cash equivalents

     30,166        18,923   

Securities available for sale, at fair value

     108,633        111,440   

Securities-held to maturity

     15        16   

Loans, net

     271,939        276,047   

Loans held for sale

     1,693        2,909   

Federal Home Loan Bank stock, at cost

     2,820        2,820   

Foreclosed real estate

     541        661   

Premises and equipment

     10,618        10,721   

Accrued interest receivable

     1,727        1,801   

Cash value of life insurance

     6,039        5,991   

Goodwill

     5,386        5,386   

Core deposit intangibles

     17        32   

Other assets

     1,779        2,139   
  

 

 

   

 

 

 

Total Assets

   $ 441,373      $ 438,886   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Noninterest-bearing

   $ 54,731      $ 47,313   

Interest-bearing

     313,713        317,061   
  

 

 

   

 

 

 

Total deposits

     368,444        364,374   

Retail repurchase agreements

     9,095        9,125   

Advances from Federal Home Loan Bank

     10,925        12,350   

Accrued interest payable

     419        413   

Accrued expenses and other liabilities

     1,385        1,571   
  

 

 

   

 

 

 

Total liabilities

     390,268        387,833   
  

 

 

   

 

 

 

EQUITY

    

First Capital, Inc. stockholders’ equity:

    

Preferred stock of $.01 par value per share Authorized 1,000,000 shares; none issued

     0        0   

Common stock of $.01 par value per share Authorized 5,000,000 shares; issued 3,164,420 shares

     32        32   

Additional paid-in capital

     24,313        24,313   

Retained earnings-substantially restricted

     32,686        32,297   

Accumulated other comprehensive income

     1,272        1,612   

Less treasury stock, at cost - 378,727 shares

     (7,312     (7,312
  

 

 

   

 

 

 

Total First Capital, Inc. stockholders’ equity

     50,991        50,942   
  

 

 

   

 

 

 

Noncontrolling interest in subsidiary

     114        111   
  

 

 

   

 

 

 

Total equity

     51,105        51,053   
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 441,373      $ 438,886   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

-3-


Table of Contents

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 
     2012      2011  
     (In thousands, except per share data)  

INTEREST INCOME

  

Loans, including fees

   $ 4,023       $ 4,339   

Securities:

     

Taxable

     434         453   

Tax-exempt

     233         271   

Federal Home Loan Bank dividends

     23         27   

Federal funds sold and interest bearing deposits with banks

     8         9   
  

 

 

    

 

 

 

Total interest income

     4,721         5,099   
  

 

 

    

 

 

 

INTEREST EXPENSE

     

Deposits

     586         878   

Retail repurchase agreements

     12         16   

Advances from Federal Home Loan Bank

     105         158   
  

 

 

    

 

 

 

Total interest expense

     703         1,052   
  

 

 

    

 

 

 

Net interest income

     4,018         4,047   

Provision for loan losses

     475         500   
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     3,543         3,547   
  

 

 

    

 

 

 

NONINTEREST INCOME

     

Service charges on deposit accounts

     687         674   

Commission income

     44         30   

Gain on sale of loans

     258         125   

Mortgage brokerage fees

     13         14   

Increase in cash value of life insurance

     48         53   

Other income

     25         27   
  

 

 

    

 

 

 

Total noninterest income

     1,075         923   
  

 

 

    

 

 

 

NONINTEREST EXPENSE

     

Compensation and benefits

     1,886         1,830   

Occupancy and equipment

     306         329   

Data processing

     324         290   

Professional fees

     153         149   

Advertising

     47         30   

Other expenses

     617         624   
  

 

 

    

 

 

 

Total noninterest expense

     3,333         3,252   
  

 

 

    

 

 

 

Income before income taxes

     1,285         1,218   

Income tax expense

     363         319   
  

 

 

    

 

 

 

Net Income

     922         899   

Less: net income attributable to the noncontrolling interest in subsidiary

     3         3   
  

 

 

    

 

 

 

Net Income Attributable to First Capital, Inc.

   $ 919       $ 896   
  

 

 

    

 

 

 

Earnings per common share attributable to First Capital, Inc.:

     

Basic

   $ 0.33       $ 0.32   
  

 

 

    

 

 

 

Diluted

   $ 0.33       $ 0.32   
  

 

 

    

 

 

 

Dividends per share on common shares

   $ 0.19       $ 0.19   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

-4-


Table of Contents

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 
     2012     2011  
     (In thousands)  

Net Income

   $ 922      $ 899   

OTHER COMPREHENSIVE LOSS

    

Unrealized losses on securities available for sale:

    

Unrealized holding losses arising during the period

     (564     (34

Income tax benefit

     224        13   
  

 

 

   

 

 

 

Net of tax amount

     (340     (21
  

 

 

   

 

 

 

Other Comprehensive Loss, net of tax

     (340     (21
  

 

 

   

 

 

 

Comprehensive Income

   $ 582      $ 878   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

-5-


Table of Contents

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

(In thousands, except share and per share data)    Common
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Treasury
Stock
    Noncontrolling
Interest
     Total  

Balances at January 1, 2011

   $ 32       $ 24,313       $ 30,442      $ 391      $ (7,285   $ 111       $ 48,004   

Net income

     0         0         896        0        0        3         899   

Change in unrealized gain on securities available for sale, net of reclassification adjustments and tax effect

     0         0         0        (21     0        0         (21

Cash dividends

     0         0         (529     0        0        0         (529
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balances at March 31, 2011

   $ 32       $ 24,313       $ 30,809      $ 370      $ (7,285   $ 114       $ 48,353   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balances at January 1, 2012

   $ 32       $ 24,313       $ 32,297      $ 1,612      $ (7,312   $ 111         51,053   

Net income

     0         0         919        0        0        3         922   

Change in unrealized gain on securities available for sale,net of reclassification adjustments and tax effect

     0         0         0        (340     0        0         (340

Cash dividends

     0         0         (530     0        0        0         (530
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balances at March 31, 2012

   $ 32       $ 24,313       $ 32,686      $ 1,272      $ (7,312   $ 114       $ 51,105   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

See accompanying notes to consolidated financial statements.

 

-6-


Table of Contents

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended
March 31,
 
     2012     2011  
     (In thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES

  

Net income

   $ 922      $ 899   

Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:

    

Amortization of premiums and accretion of discounts on securities, net

     239        242   

Depreciation and amortization expense

     208        211   

Deferred income taxes

     48        7   

Increase in cash value of life insurance

     (48     (53

Provision for loan losses

     475        500   

Proceeds from sales of loans

     10,125        6,927   

Loans originated for sale

     (8,651     (3,159

Gain on sale of loans

     (258     (125

(Increase) decrease in accrued interest receivable

     74        (7

Increase (decrease) in accrued interest payable

     6        (100

Net change in other assets/liabilities

     323        212   
  

 

 

   

 

 

 

Net Cash Provided By Operating Activities

     3,463        5,554   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Purchase of securities available for sale

     (16,516     (5,838

Proceeds from maturities of securities available for sale

     13,547        1,075   

Proceeds from maturities of securities held to maturity

     0        14   

Proceeds from sales of securities available for sale

     1,004        0   

Principal collected on mortgage-backed obligations

     3,997        3,039   

Net decrease in loans receivable

     3,358        6,691   

Proceeds from sale of foreclosed real estate

     395        55   

Purchase of premises and equipment

     (90     (68
  

 

 

   

 

 

 

Net Cash Provided By Investing Activities

     5,695        4,968   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net increase (decrease) in deposits

     4,070        (3,370

Net decrease in advances from Federal Home Loan Bank

     (1,425     (200

Net increase (decrease) in retail repurchase agreements

     (30     29   

Dividends paid

     (530     (529
  

 

 

   

 

 

 

Net Cash Provided By (Used In) Financing Activities

     2,085        (4,070
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     11,243        6,452   

Cash and cash equivalents at beginning of period

     18,923        21,575   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 30,166      $ 28,027   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

-7-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Presentation of Interim Information

First Capital, Inc. (“Company”) is the savings and loan holding company for First Harrison Bank (“Bank”). The information presented in this report relates primarily to the Bank’s operations. First Harrison Investments, Inc. and First Harrison Holdings, Inc. are wholly-owned Nevada corporate subsidiaries of the Bank that jointly own First Harrison, LLC, a Nevada limited liability corporation that holds and manages an investment portfolio. First Harrison REIT, Inc. (“REIT”) was incorporated as a wholly-owned subsidiary of First Harrison Holdings, Inc. to hold a portion of the Bank’s real estate mortgage loan portfolio. On January 21, 2009, the REIT issued 105 shares of 12.5% redeemable cumulative preferred stock with an aggregate liquidation value of $105,000 in a private placement offering in order to satisfy certain ownership requirements to qualify as a real estate investment trust. At March 31, 2012, this noncontrolling interest represented 0.2% ownership of the REIT.

In the opinion of management, the unaudited consolidated financial statements include all normal adjustments considered necessary to present fairly the financial position as of March 31, 2012, and the results of operations and cash flows for the three months ended March 31, 2012 and 2011. All of these adjustments are of a normal, recurring nature. Such adjustments are the only adjustments included in the unaudited consolidated financial statements. Interim results are not necessarily indicative of results for a full year.

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and are presented as permitted by the instructions to Form 10-Q. Accordingly, they do not contain certain information included in the Company’s annual audited consolidated financial statements and related footnotes for the year ended December 31, 2011 included in the Form 10-K.

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

 

-8-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2. Investment Securities

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent. Investment securities at March 31, 2012 and December 31, 2011 are summarized as follows:

 

(In thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    

Fair

Value

 

March 31, 2012

           

Securities available for sale:

           

Agency mortgage-backed securities

   $ 12,754       $ 520       $ 19       $ 13,255   

Agency CMO

     23,449         179         33         23,595   

Privately-issued CMO

     816         19         50         785   

Other debt securities:

           

Agency notes and bonds

     42,006         231         148         42,089   

Municipal obligations

     24,771         1,262         2         26,031   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal - debt securities

     103,796         2,211         252         105,755   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mutual Funds

     2,854         47         23         2,878   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities available for sale

   $ 106,650       $ 2,258       $ 275       $ 108,633   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities held to maturity:

           

Agency mortgage-backed securities

   $ 15       $ 0       $ 0       $ 15   

Municipal obligations

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 15       $ 0       $ 0       $ 15   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Securities available for sale:

           

Agency mortgage-backed securities

   $ 11,689       $ 542       $ 11       $ 12,220   

Agency CMO

     23,196         152         60         23,288   

Privately-issued CMO

     896         16         32         880   

Other debt securities:

           

Agency notes and bonds

     41,971         395         3         42,363   

Municipal obligations

     25,800         1,501         0         27,301   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal - debt securities

     103,552         2,606         106         106,052   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mutual Funds

     5,369         52         33         5,388   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities available for sale

   $ 108,921       $ 2,658       $ 139       $ 111,440   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities held to maturity:

           

Agency mortgage-backed securities

   $ 16       $ 0       $ 0       $ 16   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 16       $ 0       $ 0       $ 16   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-9-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(2 – continued)

 

Agency notes and bonds, agency mortgage-backed securities and agency collateralized mortgage obligations (CMO) include securities issued by the Government National Mortgage Association (GNMA), a U.S. government agency, and the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Bank (FHLB), which are government-sponsored enterprises. Privately-issued CMOs are issued by special-purpose entities that are generally collateralized by first position residential mortgage loans and first position residential home equity loans.

The amortized cost and fair value of debt securities as of March 31, 2012, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.

 

     Securities Available for Sale      Securities Held to Maturity  
     Amortized
Cost
    

Fair

Value

     Amortized
Cost
     Fair
Value
 
(In thousands)                            

Due in one year or less

   $ 641       $ 647       $ 0       $ 0   

Due after one year through five years

     8,497         8,575         0         0   

Due after five years through ten years

     15,599         15,966         

Due after ten years

     42,040         42,932         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
     66,777         68,120         0         0   

Mortgage-backed securities and CMO

     37,019         37,635         15         15   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 103,796       $ 105,755       $ 15       $ 15   
  

 

 

    

 

 

    

 

 

    

 

 

 

Information pertaining to investment securities available for sale with gross unrealized losses at March 31, 2012, aggregated by investment category and the length of time that individual investment securities have been in a continuous position, follows:

 

     Number of
Investment
Positions
     Fair
Value
     Gross
Unrealized
Losses
 
(Dollars in thousands)                     

Continuous loss position less than twelve months:

        

Agency notes and bonds

     12       $ 13,428       $ 147   

Agency CMO

     9         8,613         33   

Agency mortgage-backed securities

     3         3,044         19   

Municipal obligations

     1         327         2   
  

 

 

    

 

 

    

 

 

 

Total less than twelve months

     25         25,412         201   
  

 

 

    

 

 

    

 

 

 

Continuous loss position more than twelve months:

        

Privately-issued CMO

     1         208         50   

Agency notes and bonds

     1         1,054         1   

Mutual fund

     1         361         23   
  

 

 

    

 

 

    

 

 

 

Total more than twelve months

     3         1,623         74   
  

 

 

    

 

 

    

 

 

 

Total securities available for sale

     28       $ 27,035       $ 275   
  

 

 

    

 

 

    

 

 

 

 

-10-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(2 – continued)

 

Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recover in fair value.

At March 31, 2012, the 26 U.S. government agency debt securities, including agency notes and bonds, mortgage-backed securities and CMO, and municipal obligations in a loss position had depreciated approximately 0.8% from the amortized cost basis. All of the U.S. government agency securities and municipal obligations are issued by U.S. government agencies, government-sponsored enterprises and municipal governments, or are secured by first mortgage loans and municipal project revenues. These unrealized losses related principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As the Company has the ability to hold the debt securities until maturity, or the foreseeable future if classified as available for sale, no declines are deemed to be other-than-temporary.

At March 31, 2012, the privately-issued CMO in a loss position had depreciated approximately 19.2% from the amortized cost basis. The Company evaluates the existence of a potential credit loss component related to the decline in fair values of the privately-issued CMO portfolio each quarter using an independent third party analysis. At March 31, 2012, the privately-issued CMO in a loss position had an amortized cost of $258,000 and a fair value of $208,000, and had been downgraded to a substandard regulatory classification in 2009 due to a downgrade of the security’s credit quality by various rating agencies. Based on the independent third party analysis performed in March 2012, the Company did not recognize an other-than-temporary impairment loss during the quarter ended March 31, 2012. While management did not anticipate a credit-related impairment loss at March 31, 2012, any future deterioration in market and economic conditions may have an adverse impact on the credit quality in future periods.

 

3. Loans and Allowance for Loan Losses

The Company’s loan and allowance for loan loss policies are as follows:

Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses. The Company grants real estate mortgage, commercial business and consumer loans. A substantial portion of the loan portfolio is represented by mortgage loans to customers in southern Indiana. The ability of the Company’s customers to honor their loan agreements is dependent upon the real estate and general economic conditions in this area.

Loan origination and commitment fees, as well as certain direct costs of underwriting and closing loans, are deferred and amortized as a yield adjustment to interest income over the lives of the related loans using the interest method. Amortization of net deferred loan fees is discontinued when a loan is placed on nonaccrual status.

 

-11-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The recognition of income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments become ninety (90) days past due unless, in the opinion of management, the outstanding interest remains collectible. Past due status is determined based on contractual terms. Generally, by applying the cash receipts method, interest income is subsequently recognized only as received until the loan is returned to accrual status. The cash receipts method is used when the likelihood of further loss on the loan is remote. Otherwise, the Company applies the cost recovery method and applies all payments as a reduction of the unpaid principal balance until the loan qualifies for return to accrual status. Interest income on impaired loans is recognized using the cost recovery method, unless the likelihood of further loss on the loan is remote.

A loan is restored to accrual status when all principal and interest payments are brought current and the borrower has demonstrated the ability to make future payments of principal and interest as scheduled, which generally requires that the borrower demonstrate a period of performance of at least six consecutive months.

The Company’s practice is to charge-off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or for other reasons. A partial charge-off is recorded on a loan when the uncollectibility of a portion of the loan has been confirmed, such as when a loan is discharged in bankruptcy, the collateral is liquidated, a loan is restructured at a reduced principal balance, or other identifiable events that lead management to determine the full principal balance of the loan will not be repaid. A specific reserve is recognized as a component of the allowance for estimated losses on loans individually evaluated for impairment. Partial charge-offs on nonperforming and impaired loans are included in the Company’s historical loss experience used to estimate the general component of the allowance for loan losses as discussed below. Specific reserves are not considered charge-offs in management’s analysis of the allowance for loan losses because they are estimates and the outcome of the loan relationship is undetermined. At March 31, 2012, the Company had nine loans on which partial charge-offs of $543,000 had been recorded.

Installment loans are typically charged off at 90 days past due, or earlier if deemed uncollectible, unless the loans are in the process of collection. Overdrafts are charged off after 45 days past due. Charge-offs are typically recorded on loans secured by real estate when the property is foreclosed upon.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

-12-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors, as discussed below.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Values for collateral dependent loans are generally based on appraisals obtained from independent licensed real estate appraisers, with adjustments applied for estimated costs to sell the property, costs to complete unfinished or repair damaged property and other known defects. New appraisals are generally obtained for all significant properties when a loan is identified as impaired. Generally, a property is considered significant if the value of the property is estimated to exceed $200,000. Subsequent appraisals are obtained as needed or if management believes there has been a significant change in the market value of the property. In instances where it is not deemed necessary to obtain a new appraisal, management would base its impairment and allowance for loan loss analysis on the original appraisal with adjustments for current conditions based on management’s assessment of market factors and management’s inspection of the property.

 

-13-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The following table provides the components of the Company’s recorded investment in loans for each portfolio segment at March 31, 2012:

 

   

Residential

Real Estate

    Land     Construction     Commercial
Real Estate
    Commercial
Business
    Home Equity &
2nd Mtg
    Other
Consumer
    Total  
    (In thousands)  

Recorded Investment in Loans:

               

Principal loan balance

  $ 113,427      $ 9,987      $ 6,315      $ 58,143      $ 20,795      $ 37,831      $ 29,539      $ 276,037   

Accrued interest receivable

    418        46        14        154        65        143        144        984   

Net deferred loan origination fees and costs

    71        1        (1     (6     (10     75        0        130   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recorded investment in loans

  $ 113,916      $ 10,034      $ 6,328      $ 58,291      $ 20,850      $ 38,049      $ 29,683      $ 277,151   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recorded Investment in Loans as Evaluated for Impairment:

  

       

Individually evaluated for impairment

  $ 2,068      $ 41      $ 266      $ 2,761      $ 1,927      $ 273      $ 0      $ 7,336   

Collectively evaluated for impairment

    111,848        9,993        6,062        55,530        18,923        37,776        29,683        269,815   

Acquired with deteriorated credit quality

    0        0        0        0        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 113,916      $ 10,034      $ 6,328      $ 58,291      $ 20,850      $ 38,049      $ 29,683      $ 277,151   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

-14-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The following table provides the components of the Company’s recorded investment in loans for each portfolio segment at December 31, 2011:

 

     Residential                    Commercial      Commercial     Home Equity &      Other         
     Real Estate      Land      Construction      Real Estate      Business     2nd Mtg      Consumer      Total  
                          (In thousands)                      

Recorded Investment in Loans:

                      

Principal loan balance

   $ 116,338       $ 9,910       $ 6,963       $ 57,680       $ 20,722      $ 38,641       $ 29,832       $ 280,086   

Accrued interest receivable

     463         60         16         160         64        162         202         1,127   

Net deferred loan origination fees and costs

     67         2         0         0         (10     84         0         143   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Recorded investment in loans

   $ 116,868       $ 9,972       $ 6,979       $ 57,840       $ 20,776      $ 38,887       $ 30,034       $ 281,356   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Recorded Investment in Loans as Evaluated for Impairment:

                      

Individually evaluated for impairment

   $ 2,281       $ 5       $ 247       $ 2,853       $ 1,928      $ 87       $ 0       $ 7,401   

Collectively evaluated for impairment

     114,587         9,967         6,732         54,987         18,848        38,800         30,034         273,955   

Acquired with deteriorated credit quality

     0         0         0         0         0        0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance

   $ 116,868       $ 9,972       $ 6,979       $ 57,840       $ 20,776      $ 38,887       $ 30,034       $ 281,356   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

-15-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

An analysis of the allowance for loan losses as of March 31, 2012 is as follows:

 

     Residential                    Commercial      Commercial      Home Equity &      Other         
     Real Estate      Land      Construction      Real Estate      Business      2nd Mtg      Consumer      Total  
                          (In thousands)                       

Ending allowance balance attributable to loans:

                       

Individually evaluated for impairment

   $ 140       $ 0       $ 0       $ 422       $ 936       $ 168       $ 0       $ 1,666   

Collectively evaluated for impairment

     920         99         35         502         239         483         284         2,562   

Acquired with deteriorated credit quality

     0         0         0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 1,060       $ 99       $ 35       $ 924       $ 1,175       $ 651       $ 284       $ 4,228   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

An analysis of the allowance for loan losses as of December 31, 2011 is as follows:

 

     Residential                    Commercial      Commercial      Home Equity &      Other         
     Real Estate      Land      Construction      Real Estate      Business      2nd Mtg      Consumer      Total  
                          (In thousands)                       

Ending allowance balance attributable to loans:

                       

Individually evaluated for impairment

   $ 183       $ 0       $ 0       $ 539       $ 936       $ 0       $ 0       $ 1,658   

Collectively evaluated for impairment

     645         93         33         730         224         400         399         2,524   

Acquired with deteriorated credit quality

     0         0         0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 828       $ 93       $ 33       $ 1,269       $ 1,160       $ 400       $ 399       $ 4,182   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-16-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

An analysis of the changes in the allowance for loan losses for the three months ended March 31, 2012 is as follows:

 

     Residential                  Commercial     Commercial      Home Equity &     Other        
     Real Estate     Land     Construction      Real Estate     Business      2nd Mtg     Consumer     Total  
                        (In thousands)                     

Allowance for loan losses:

                  

Beginning balance

   $ 828      $ 93      $ 33       $ 1,269      $ 1,160       $ 400      $ 399      $ 4,182   

Provisions for loan losses

     498        10        2         (345     12         361        (63     475   

Charge-offs

     (276     (4     0         0        0         (114     (91     (485

Recoveries

     10        0        0         0        3         4        39        56   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,060      $ 99      $ 35       $ 924      $ 1,175       $ 651      $ 284      $ 4,228   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

An analysis of the changes in the allowance for loan losses for the three months ended March 31, 2011 is as follows:

 

     Residential                   Commercial      Commercial     Home Equity &     Other        
     Real Estate     Land      Construction      Real Estate      Business     2nd Mtg     Consumer     Total  
                         (In thousands)                    

Allowance for loan losses:

                   

Beginning balance

   $ 1,024      $ 55       $ 21       $ 1,051       $ 1,251      $ 606      $ 465      $ 4,473   

Provisions for loan losses

     232        24         18         197         (42     87        (16     500   

Charge-offs

     (265     0         0         0         0        (157     (64     (486

Recoveries

     1        0         0         0         2        26        61        90   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 992      $ 79       $ 39       $ 1,248       $ 1,211      $ 562      $ 446      $ 4,577   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

-17-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

At March 31, 2012 and December 31, 2011, for each loan portfolio segment management applied an overall qualitative factor of 1.15 to the Company’s historical loss factors based on the most recent calendar quarters. The overall qualitative factor is derived from management’s analysis of changes and trends in the following qualitative factors:

 

   

Underwriting Standards – Management reviews the findings of periodic internal audit loan reviews, independent outsourced loan reviews and loan reviews performed by the banking regulators to evaluate the risk associated with changes in underwriting standards. At March 31, 2012 and December 31, 2011, management assessed the risk associated with this component as neutral, requiring no adjustment to the historical loss factors.

 

   

Economic Conditions – Management analyzes trends in housing and unemployment data in the Harrison, Floyd and Clark counties of Indiana, the Company’s primary market area, to evaluate the risk associated with economic conditions. Due to a decrease in new home construction and an increase in unemployment in the Company’s primary market area, management assigned a risk factor of 1.20 for this component at March 31, 2012 and December 31, 2011.

 

   

Past Due Loans – Management analyzes trends in past due loans for the Company to evaluate the risk associated with delinquent loans. In general, past due loan ratios have remained at elevated levels compared to historical amounts since 2007, and management assigned a risk factor of 1.20 for this component at March 31, 2012 and December 31, 2011.

 

   

Other Internal and External Factors – This component includes management’s consideration of other qualitative factors such as loan portfolio composition. The Company has focused on the origination of commercial business and real estate loans in an effort to convert the Company’s balance sheet from that of a traditional thrift institution to a commercial bank. In addition, the Company has increased its investment in mortgage loans in which it does not hold a first lien position. Commercial loans and second mortgage loans generally entail greater credit risk than residential mortgage loans secured by a first lien. As a result of changes in the loan portfolio composition, management assigned a risk factor of 1.20 for this component at March 31, 2012 and December 31, 2011.

Each of the four factors above was assigned an equal weight to arrive at an average for the overall qualitative factor of 1.15 at March 31, 2012 and December 31, 2011. The effect of the overall qualitative factor was to increase the estimated allowance for loan losses by $322,000 and $317,000 at March 31, 2012 and December 31, 2011, respectively.

 

-18-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The following table summarizes the Company’s impaired loans by class of loans as of March 31, 2012 and for the three months ended March 31, 2012 and 2011:

 

     At March 31, 2012      Three Months Ended March 31, 2012      Three Months Ended March 31, 2011  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Recognized -
Cash Method
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Recognized -
Cash Method
 
     (In thousands)  

Loans with no related allowance recorded:

  

Residential

   $ 1,359       $ 1,792       $ 0       $ 1,254       $ 1       $ 1       $ 1,173       $ 4       $ 2   

Land

     41         41         0         23         0         0         3         0         0   

Construction

     266         270         0         257         0         0         155         0         0   

Commercial real estate

     1,251         1,530         0         1,233         0         0         436         0         0   

Commercial business

     0         0         0         0         0         0         15         0         0   

Home Equity/2nd mortgage

     85         91         0         86         1         0         30         0         0   

Other consumer

     0         0         0         0         0         0         17         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     3,002         3,724         0         2,853         2         1         1,829         4         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with an allowance recorded:

  

Residential

     709         782         140         921         0         0         2,040         0         0   

Land

     0         0         0         0         0         0         0         0         0   

Construction

     0         0         0         0         0         0         140         0         0   

Commercial real estate

     1,510         1,595         422         1,574         0         0         1,198         0         0   

Commercial business

     1,927         2,023         936         1,928         0         0         2,146         0         0   

Home Equity/2nd mortgage

     188         188         168         94         0         1         439         0         0   

Other consumer

     0         0         0         0         0         0         12         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     4,334         4,588         1,666         4,517         0         1         5,975         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

  

Residential

     2,068         2,574         140         2,175         1         1         3,213         4         2   

Land

     41         41         0         23         0         0         3         0         0   

Construction

     266         270         0         257         0         0         295         0         0   

Commercial real estate

     2,761         3,125         422         2,807         0         0         1,634         0         0   

Commercial business

     1,927         2,023         936         1,928         0         0         2,161         0         0   

Home Equity/2nd mortgage

     273         279         168         180         1         1         469         0         0   

Other consumer

     0         0         0         0         0         0         29         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,336       $ 8,312       $ 1,666       $ 7,370       $ 2       $ 2       $ 7,804       $ 4       $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-19-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The following table summarizes the Company’s impaired loans by class of loans as of December 31, 2011:

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 
     (In thousands)  

Loans with no related allowance recorded:

        

Residential

   $ 1,149       $ 1,507       $ 0   

Land

     5         6         0   

Construction

     247         249         0   

Commercial real estate

     1,215         1,280         0   

Commercial business

     0         0         0   

HE/2nd mortgage

     87         94         0   

Other consumer

     0         0         0   
  

 

 

    

 

 

    

 

 

 
     2,703         3,136         0   
  

 

 

    

 

 

    

 

 

 

Loans with an allowance recorded:

        

Residential

     1,132         1,233         183   

Land

     0         0         0   

Construction

     0         0         0   

Commercial real estate

     1,638         1,933         539   

Commercial business

     1,928         2,023         936   

HE/2nd mortgage

     0         0         0   

Other consumer

     0         0         0   
  

 

 

    

 

 

    

 

 

 
     4,698         5,189         1,658   
  

 

 

    

 

 

    

 

 

 

Total:

        

Residential

     2,281         2,740         183   

Land

     5         6         0   

Construction

     247         249         0   

Commercial real estate

     2,853         3,213         539   

Commercial business

     1,928         2,023         936   

Home Equity/2nd mortgage

     87         94         0   

Other consumer

     0         0         0   
  

 

 

    

 

 

    

 

 

 
   $ 7,401       $ 8,325       $ 1,658   
  

 

 

    

 

 

    

 

 

 

 

-20-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

Nonperforming loans consists of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans by class of loans at March 31, 2012 and December 31, 2011:

 

     March 31, 2012      December 31, 2011  
     Nonaccrual
Loans
     Loans 90+ Days
Past Due
Still Accruing
     Total
Nonperforming
Loans
     Nonaccrual
Loans
     Loans 90+ Days
Past Due
Still Accruing
     Total
Nonperforming
Loans
 
     (In thousands)  

Residential

   $ 2,068       $ 66       $ 2,134       $ 2,281       $ 143       $ 2,424   

Land

     41         0         41         5         38         43   

Construction

     266         0         266         247         0         247   

Commercial real estate

     2,761         3         2,764         2,853         0         2,853   

Commercial business

     1,927         0         1,927         1,928         0         1,928   

Home Equity/2nd mortgage

     273         42         315         87         159         246   

Other consumer

     0         12         12         0         23         23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,336       $ 123       $ 7,459       $ 7,401       $ 363       $ 7,764   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the aging of the recorded investment loans by class of loans at March 31, 2012:

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     Over 90 Days
Past Due
     Total
Past Due
     Current     

Total

Loans

 
     (In thousands)  

Residential

   $ 3,956       $ 1,215       $ 865       $ 6,036       $ 107,880       $ 113,916   

Land

     102         42         41         185         9,849         10,034   

Construction

     0         0         266         266         6,062         6,328   

Commercial real estate

     585         175         1,254         2,014         56,277         58,291   

Commercial business

     58         10         0         68         20,782         20,850   

Home Equity/2nd mortgage

     353         141         167         661         37,388         38,049   

Other consumer

     179         10         12         201         29,482         29,683   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,233       $ 1,593       $ 2,605       $ 9,431       $ 267,720       $ 277,151   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-21-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The following table presents the aging of the recorded investment in loans by class of loans at December 31, 2011:

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     Over 90 Days
Past Due
     Total
Past Due
     Current      Total
Loans
 
     (In thousands)  

Residential

   $ 5,205       $ 1,068       $ 1,035       $ 7,308       $ 109,560       $ 116,868   

Land

     442         43         43         528         9,444         9,972   

Construction

     0         0         247         247         6,732         6,979   

Commercial real estate

     676         0         1,258         1,934         55,906         57,840   

Commercial business

     256         0         0         256         20,520         20,776   

Home Equity/2nd mortgage

     558         72         246         876         38,011         38,887   

Other consumer

     306         37         23         366         29,668         30,034   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,443       $ 1,220       $ 2,852       $ 11,515       $ 269,841       $ 281,356   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the institution’s books as an asset, without establishment of a specific valuation allowance or charge-off, is not warranted.

Loans not meeting the criteria above that are analyzed individually as part of the described process are considered to be pass rated loans.

 

-22-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The following table presents the recorded investment in loans by risk category and class of loans as of the date indicated:

 

     Residential
Real Estate
     Land      Construction      Commercial
Real Estate
     Commercial
Business
     Home Equity &
2nd Mtg
     Other
Consumer
     Total  
                          (In thousands)                       

March 31, 2012

                       

Pass

   $ 109,374       $ 7,578       $ 5,552       $ 47,532       $ 16,913       $ 37,457       $ 29,588       $ 253,994   

Special Mention

     859         253         257         5,368         1,622         30         37         8,426   

Substandard

     1,615         2,162         253         2,630         388         289         58         7,395   

Doubtful

     2,068         41         266         2,761         1,927         273         0         7,336   

Loss

     0         0         0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 113,916       $ 10,034       $ 6,328       $ 58,291       $ 20,850       $ 38,049       $ 29,683       $ 277,151   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                       

Pass

   $ 113,037       $ 7,578       $ 6,217       $ 46,544       $ 16,961       $ 38,513       $ 29,976       $ 258,826   

Special Mention

     862         255         307         5,392         1,462         63         44         8,385   

Substandard

     688         2,134         208         3,051         425         224         14         6,744   

Doubtful

     2,281         5         247         2,853         1,928         87         0         7,401   

Loss

     0         0         0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 116,868       $ 9,972       $ 6,979       $ 57,840       $ 20,776       $ 38,887       $ 30,034       $ 281,356   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

-23-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The following table summarizes the Company’s troubled debt restructurings (TDRs) by class of loan and accrual status as of March 31, 2012 and December 31, 2011:

 

     March 31, 2012      December 31, 2011  
     Accruing      Nonaccrual      Total      Related Allowance
for Loan Losses
     Accruing      Nonaccrual      Total      Related Allowance
for Loan Losses
 
                          (In thousands)                       

Troubled debt restructurings:

  

                    

Residential real estate

   $ 319       $ 344       $ 663       $ 5       $ 112       $ 516       $ 628       $ 11   

Land

     136         0         136         0         135         0         135         0   

Construction

     252         266         518         0         207         247         454         0   

Commercial real estate

     0         1,593         1,593         107         0         1,603         1,603         211   

Commercial business

     0         1,843         1,843         914         0         1,843         1,843         914   

Home equity and 2nd mortgage

     8         25         33         25         8         0         8         0   

Consumer

     0         0         0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 715       $ 4,071       $ 4,786       $ 1,051       $ 462       $ 4,209       $ 4,671       $ 1,136   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012 and December 31, 2011, commitments to lend additional funds to debtors whose loan terms have been modified in a TDR (both accruing and nonaccruing) totaled $145,000 and $192,000, respectively. These commitments represent the undisbursed portion of construction loans to borrowers that have outstanding loans classified as TDRs.

 

-24-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The following table summarizes information in regard to TDRs that were restructured during the three months ended March 31, 2012:

 

     Number of
Contracts
     Pre-Modification
Outstanding
Balance
     Post-Modification
Outstanding
Balance
 
     (Dollars in thousands)  

Troubled debt restructurings:

        

Residential real estate

     1       $ 88       $ 88   

Home equity & 2nd mortgage

     1         25         25   

Construction

     0         0         0   

Commercial real estate

     0         0         0   

Commercial business

     0         0         0   

Construction

     0         0         0   

Consumer

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

     2       $ 113       $ 113   
  

 

 

    

 

 

    

 

 

 

For the TDRs listed above, the terms of modification included temporary interest-only payment periods, reduction of the stated interest rate and the deferral of past due principal and interest until maturity, or the consolidation of outstanding loans at a reduced interest rate. There were no principal charge-offs recorded as a result of TDRs during the three months ended March 31, 2012.

There were no TDRS modified within the previous 12 months for which there was a subsequent payment default (defined as the loan becoming more than 90 days past due, being moved to nonaccrual status, or the collateral being foreclosed upon) during the three months ended March 31, 2012. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan.

 

-25-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4. Supplemental Disclosure for Earnings Per Share

 

     Three Months Ended
March 31,
 
     2012      2011  
(Dollars in thousands, except per share data)  

Basic

     

Earnings:

     

Net income attributable to First Capital, Inc.

   $ 919       $ 896   
  

 

 

    

 

 

 

Shares:

     

Weighted average common shares outstanding

     2,785,693         2,787,272   
  

 

 

    

 

 

 

Net income attributable to First Capital, Inc. per common share, basic

   $ 0.33       $ 0.32   
  

 

 

    

 

 

 

Diluted

     

Earnings:

     

Net income attributable to First Capital, Inc.

   $ 919       $ 896   
  

 

 

    

 

 

 

Shares:

     

Weighted average common shares outstanding

     2,785,693         2,787,272   

Add: Dilutive effect of outstanding options

     0         0   

Add: Dilutive effect of restricted stock

     0         0   
  

 

 

    

 

 

 

Weighted average common shares outstanding, as adjusted

     2,785,693         2,787,272   
  

 

 

    

 

 

 

Net income attributable to First Capital, Inc. per common share, diluted

   $ 0.33       $ 0.32   
  

 

 

    

 

 

 

 

5. Stock Option Plan

For the three month periods ended March 31, 2012 and 2011, the Company did not recognize any compensation expense related to its stock option plans. Expense is recognized ratably over the five-year vesting period of the options. At March 31, 2012, there was no unrecognized compensation expense related to nonvested stock options to be recognized over the remaining vesting period. The Black-Scholes option pricing model was used to determine the fair value of the options granted in prior periods.

 

6. Supplemental Disclosures of Cash Flow Information

 

     Three Months Ended
March 31,
 
     2012      2011  
     (In thousands)  

Cash payments for:

     

Interest

   $ 696       $ 1,152   

Taxes

     0         0   

Noncash investing activities:

     

Transfers from loans to real estate acquired through foreclosure

     358         315   

 

-26-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7. Fair Value Measurements

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are described as follows.

 

Level 1:   Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted market price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
Level 2:   Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.
Level 3:   Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

-27-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial and nonfinancial assets carried at fair value or the lower of cost or fair value. The table below presents the balances of assets measured at fair value on a recurring and nonrecurring basis as of March 31, 2012 and December 31, 2011. The Company had no liabilities measured at fair value as of March 31, 2012 or December 31, 2011.

 

     Carrying Value  
     Level 1      Level 2      Level 3      Total  
     (In thousands)  

March 31, 2012

           

Assets Measured on a Recurring Basis

           

Securities available for sale:

           

Agency mortgage-backed securities

   $ 0       $ 13,255       $ 0       $ 13,255   

Agency CMO

     0         23,595         0         23,595   

Privately-issued CMO

     0         785         0         785   

Agency notes and bonds

     0         42,089         0         42,089   

Municipal obligations

     0         26,031         0         26,031   

Mutual funds

     2,878         0         0         2,878   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 2,878       $ 105,755       $ 0       $ 108,633   
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets Measured on a Nonrecurring Basis

           

Impaired loans

   $ 0       $ 0       $ 5,793       $ 5,793   

Loans held for sale

     0         1,693         0         1,693   

Foreclosed real estate

     0         0         541         541   

December 31, 2011

           

Assets Measured on a Recurring Basis

           

Securities available for sale:

           

Agency mortgage-backed securities

   $ 0       $ 12,220       $ 0       $ 12,220   

Agency CMO

     0         23,288         0         23,288   

Privately-issued CMO

     0         880         0         880   

Agency notes and bonds

     0         42,363         0         42,363   

Municipal obligations

     0         27,301         0         27,301   

Mutual funds

     5,388         0         0         5,388   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 5,388       $ 106,052       $ 0       $ 111,440   
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets Measured on a Nonrecurring Basis

           

Impaired loans

   $ 0       $ 0       $ 6,107       $ 6,107   

Loans held for sale

     0         2,909         0         2,909   

Foreclosed real estate

     0         0         661         661   

 

-28-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair value is based upon quoted market prices, where available. If quoted market prices are not available, fair value is based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available for Sale. Securities classified as available for sale are reported at fair value on a recurring basis. These securities are classified as Level 1 of the valuation hierarchy where quoted market prices from reputable third-party brokers are available in an active market. If quoted market prices are not available, the Company obtains fair value measurements from an independent pricing service. These securities are reported using Level 2 inputs and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. Changes in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect.

Impaired Loans. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if the loan is collateral dependent. Impaired loans are evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value. For collateral dependent impaired loans, market value is measured based on the value of the collateral securing these loans. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and its fair value is generally determined based on real estate appraisals or other independent evaluations by qualified professionals. The appraisals are then discounted to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. Fair value of impaired loans is classified as Level 3 in the fair value hierarchy.

Loans Held for Sale. Loans held for sale are carried at the lower of cost or market value. The portfolio is comprised of residential real estate loans and fair value is based on specific prices of underlying contracts for sales to investors. These measurements are classified as Level 2.

Foreclosed Real Estate. Foreclosed real estate held for sale is reported at fair value less estimated costs to dispose of the property. The fair values are determined by real estate appraisals which are then discounted to reflect management’s estimate of the fair value of the property given current market conditions. Fair value of foreclosed real estate held for sale is classified as Level 3 in the fair value hierarchy.

There were no transfers into or out of the Company’s Level 3 financial assets for the three months ended March 31, 2012. In addition, there were no transfers into or out of Levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2012.

 

-29-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

GAAP requires disclosure of the fair value of financial assets and financial liabilities, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The estimated fair values of the Company’s financial instruments are as follows:

 

     March 31, 2012      December 31, 2011  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 
            (In thousands)         

Financial assets:

           

Cash and cash equivalents

   $ 30,166       $ 30,166       $ 18,923       $ 18,923   

Securities available for sale

     108,633         108,633         111,440         111,440   

Securities held to maturity

     15         15         16         16   

Loans held for sale

     1,693         1,729         2,906         2,966   

Loans, net

     271,939         283,344         276,047         287,624   

Federal Home Loan Bank stock

     2,820         2,820         2,820         2,820   

Accrued interest receivable

     1,727         1,727         1,801         1,801   

Financial liabilities:

           

Deposits

     368,444         371,462         364,374         367,359   

Retail repurchase agreements

     9,095         9,095         9,125         9,125   

Advances from Federal Home Loan Bank

     10,925         11,358         12,350         12,840   

Accrued interest payable

     419         419         413         413   

Off-balance-sheet financial instruments:

           

Asset related to commitments to extend credit

     0         20         0         48   

The carrying amounts in the preceding table are included in the consolidated balances sheets under the applicable captions. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

Cash and Cash Equivalents

For cash and cash equivalents, including cash and due from banks, interest-bearing deposits with banks, and federal funds sold, the carrying amount is a reasonable estimate of fair value.

 

-30-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Debt and Equity Securities

For marketable equity securities, the fair values are based on quoted market prices. For debt securities, the Company obtains fair value measurements from an independent pricing service and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. For Federal Home Loan Bank stock, a restricted equity security, the carrying amount is a reasonable estimate of fair value because it is not marketable.

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amount of accrued interest receivable approximates its fair value.

Deposits

The fair value of demand deposits, savings accounts, money market deposit accounts and other transaction accounts is the amount payable on demand at the balance sheet date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

Borrowed Funds

The carrying amounts of retail repurchase agreements approximate their fair value. The fair value of advances from Federal Home Loan Bank is estimated by discounting the future cash flows using the current rates at which similar loans with the same remaining maturities could be obtained.

Commitments to Extend Credit

The majority of commitments to extend credit would result in loans with a market rate of interest if funded. The fair value of these commitments are the fees that would be charged to customers to enter into similar agreements. For fixed rate loan commitments, the fair value also considers the difference between current levels of interest rates and the committed rates.

 

-31-


Table of Contents

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8. Recent Accounting Pronouncements

The following are summaries of recently issued accounting pronouncements that impact the accounting and reporting practices of the Company:

In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements by U.S. GAAP and IFRSs. The amendments in this ASU generally represent clarifications of FASB ASC Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The adoption of this ASU did not have any impact on the Company’s consolidated financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, Amendments to Topic 220, Comprehensive Income. Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. The adoption of this ASU did not have a material impact on the Company’s consolidated financial position or results of operations. ASU No. 2011-12 issued in December 2011 deferred the effective date of ASU No. 2011-05 related to the presentation of reclassifications of items out of accumulated other comprehensive income. All other requirements of ASU No. 2011-05 were not affected by ASU No. 2011-12.

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210). The update requires an entity to disclose information about offsetting and related arrangements to enable users of the financial statements to understand the effect of netting arrangements on the entity’s financial position. The scope includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments in the update are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods, with disclosures required by the amendments provided retrospectively for all comparative periods presented. The adoption of this update is not expected to have any impact on the Company’s consolidated financial position or results of operations.

 

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Table of Contents

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

Safe Harbor Statement for Forward-Looking Statements

This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; rather they are statements based on the Company’s current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed in Part II of the Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2011 under “Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

Critical Accounting Policies

During the three months ended March 31, 2012, there was no significant change in the Company’s critical accounting policies or the application of critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Financial Condition

Total assets increased from $438.9 million at December 31, 2011 to $441.4 million at March 31, 2012, an increase of 0.6%.

Net loans receivable (excluding loans held for sale) decreased $4.1 million from $276.0 million at December 31, 2011 to $271.9 million at March 31, 2012. Residential mortgage loans decreased $3.0 million during the three months ended March 31, 2012 primarily due to loan payoffs that have not been replaced by new originations for the Bank’s portfolio as the Bank has continued to sell fixed rate residential mortgage loans in the secondary market. Home equity loans and second mortgages also declined by $838,000 during the three months ended March 31, 2012.

Securities available for sale decreased $2.8 million from $111.4 million at December 31, 2011 to $108.6 million at March 31, 2012. Purchases of $16.5 million of securities classified as available for sale were made during the three months ended March 31, 2012 and consisted primarily of U.S. government agency notes and bonds and CMOs. Maturities, principal repayments and sales of available for sale securities totaled $13.5 million, $4.0 million and $1.0 million, respectively, during the three months ended March 31, 2012.

 

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

 

Cash and cash equivalents increased from $18.9 million at December 31, 2011 to $30.2 million at March 31, 2012, primarily due to an increase of $14.6 million in federal funds sold.

Total deposits increased 1.1% from $364.4 million at December 31, 2011 to $368.4 million at March 31, 2012. Time accounts decreased $2.4 million during the three months ended March 31, 2012, primarily due to customers not wanting to lock in to longer terms in the current low-rate environment. Noninterest-bearing checking accounts increased by $7.4 million during the period due to a combination of growth in existing accounts and new accounts.

Federal Home Loan Bank borrowings decreased from $12.4 million at December 31, 2011 to $10.9 million at March 31, 2012 due to repayments of $1.4 million during the quarter.

Retail repurchase agreements, which represent overnight borrowings from deposit customers, including businesses and local municipalities, totaled $9.1 million at both December 31, 2011 and March 31, 2012.

Total stockholders’ equity attributable to the Company increased from $50.9 million at December 31, 2011 to $51.0 million at March 31, 2012 primarily due to retained net income of $389,000, offset by a decrease of $340,000 in the net unrealized gain on securities available for sale.

Results of Operations

Net Income for the three-month periods ended March 31, 2012 and 2011. Net income attributable to the Company was $919,000 ($0.33 per share diluted) for the three months ended March 31, 2012 compared to $896,000 ($0.32 per share diluted) for the same period in 2011. The increase is primarily due to an increase in noninterest income, partially offset by an increase in noninterest expenses.

Net interest income for the three-month periods ended March 31, 2012 and 2011. Net interest income decreased $29,000 for the three months ended March 31, 2012 compared to the same period in 2011 primarily due to a decrease in the average balance of interest-earning assets.

Total interest income decreased $378,000 for the three months ended March 31, 2012 compared to the same period in 2011. For the quarter ended March 31, 2012, the average balance of interest-earning assets and their tax-equivalent yield were $400.0 million and 4.85%, respectively. During the same period in 2011, the average balance of those assets was $410.2 million and the tax-equivalent yield was 5.11%. The decrease in the tax-equivalent yield was due to a decrease in yields across all asset types because the Federal Open Market Committee (FOMC) has kept interest rates near historic low levels. The change in asset mix also contributed to the lower yields as the average balance of loans receivable, which generally have higher yields than investment securities, decreased from $296.7 million for the quarter ended March 31, 2011 to $277.6 million for the same period in 2012, while the average balance of investment securities increased from $103.7 million for 2011 to $108.6 million for 2012.

 

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

 

Total interest expense decreased $349,000 for the three months ended March 31, 2012 compared to the same period in 2011. The average balance of interest-bearing liabilities decreased from $349.2 million for 2011 to $333.1 million for 2012. The average rate paid on those liabilities decreased from 1.20% for the quarter ended March 31, 2011 to 0.84% for the same period in 2012 primarily as a result of the FOMC maintaining the low rate environment previously discussed. As a result, the tax-equivalent interest rate spread increased from 3.91% for the three-month period ended March 31, 2011 to 4.01% for the same period in 2012.

Provision for loan losses. The provision for loan losses decreased from $500,000 for the three-month period ended March 31, 2011 to $475,000 for the same period in 2012. Net charge offs amounted to $429,000 and $396,000 for the three-month periods ended March 31, 2012 and 2011, respectively. During the three-month period ended March 31, 2012, gross loans receivable decreased $4.1 million. As stated earlier in this report, residential mortgage loans and home equity loans and second mortgages decreased $3.0 million and $838,000, respectively, during the three months ended March 31, 2012. The decrease in the provision reflects the decrease in overall loan balances partially offset by continued efforts to offset current period charge-offs and to provide for inherent loss exposure due to weakened general economic conditions such as depreciating collateral values, job losses and continued pressures on household budgets in the Bank’s market area.

Provisions for loan losses are charges to earnings to maintain the total allowance for loan losses at a level considered adequate by management to provide for probable known and inherent loan losses based on management’s evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specified impaired loans and economic conditions. Although management uses the best information available, future adjustments to the allowance may be necessary due to changes in economic, operating, regulatory and other conditions that may be beyond the Bank’s control. While the Bank maintains the allowance for loan losses at a level that it considers adequate to provide for estimated losses, there can be no assurance that further additions will not be made to the allowance for loan losses and that actual losses will not exceed the estimated amounts.

The methodology used in determining the allowance for loan losses includes segmenting the loan portfolio by identifying risk characteristics common to groups of loans, determining and measuring impairment of individual loans based on the present value of expected future cash flows or the fair value of collateral, and determining and measuring impairment for groups of loans with similar characteristics by applying loss factors that consider the qualitative factors which may affect the loss rates.

The allowance for loan losses was $4.2 million at both March 31, 2012 and December 31, 2011. Management has deemed this amount as adequate on both dates based on its best estimate of probable known and inherent loan losses at each date. At March 31, 2012, nonperforming loans amounted to $7.5 million compared to $7.8 million at December 31, 2011. Included in nonperforming loans are loans over 90 days past due and still accruing interest which are secured by residential mortgages of $66,000, home equity loans and second mortgages of $42,000, consumer loans of $12,000 and commercial real estate loans of $3,000. These loans are accruing interest because the estimated value of the collateral and collection efforts are deemed sufficient to ensure full recovery. At March 31, 2012 and December 31, 2011, nonaccrual loans amounted to $7.3 million and $7.4 million, respectively.

 

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

 

Noninterest income for the three-month periods ended March 31, 2012 and 2011. Noninterest income for the quarter ended March 31, 2012 increased to $1.1 million compared to $923,000 for the quarter ended March 31, 2011. Gains on the sale of loans, including residential mortgage and Small Business Administration (SBA) loans, increased $133,000 when comparing the two periods.

Noninterest expense for the three-month periods ended March 31, 2012 and 2011. Noninterest expense for the quarter ended March 31, 2012 increased $81,000 compared to the quarter ended March 31, 2011. This increase was primarily due to a $56,000 increase in compensation and benefit expense and a $34,000 increase in data processing expenses. The compensation and benefit expense increase was primarily due to normal salary increases and an increase in the cost of health insurance. An increase in the number of customers using alternative delivery channels and an increase in ATM processing fees caused the increase in data processing expenses.

Income tax expense. Income tax expense for the three-month period ended March 31, 2012 was $363,000, compared to $319,000 for the same period in 2011. The effective tax rate increased from 26.2% in 2011 to 28.2% in 2012. The increase in the effective tax rate for 2012 compared to 2011 was primarily the result of a decrease in tax-exempt income as a percent of income before income taxes for 2012.

Liquidity and Capital Resources

The Bank’s primary sources of funds are customer deposits, proceeds from loan repayments, maturing securities and FHLB advances. While loan repayments and maturities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. At March 31, 2012, the Bank had cash and cash equivalents of $30.2 million and securities available-for-sale with a fair value of $108.6 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB of Indianapolis and additional collateral eligible for repurchase agreements.

The Bank’s primary investing activity is the origination of one-to-four family mortgage loans and, to a lesser extent, consumer, multi-family, commercial real estate and residential construction loans. The Bank also invests in U.S. Government and agency securities and mortgage-backed securities issued by U.S. Government agencies.

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

 

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

The Bank is required to maintain specific amounts of capital pursuant to regulatory requirements. As of March 31, 2012, the Bank was in compliance with all regulatory capital requirements that were effective as of such date with tangible, core and risk-based capital ratios of 10.1%, 10.1% and 15.9%, respectively. The regulatory requirements at that date were 1.5%, 3.0% and 8.0%, respectively. At March 31, 2012, the Bank was considered “well-capitalized” under applicable regulatory guidelines.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company, on a stand-alone basis, is responsible for paying any dividends declared to its shareholders. The Company also has repurchased shares of its common stock. The Company’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the Office of the Comptroller of the Currency (“OCC”) but with prior notice to the OCC, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. On a stand-alone basis, the Company had liquid assets of $239,000 at March 31, 2012.

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded on the Company’s financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are primarily used to manage customers’ requests for funding and take the form of loan commitments and letters of credit. A further presentation of the Company’s off-balance sheet arrangements is presented in the Company’s 2011 Annual Report on Form 10-K for the year ended December 31, 2011.

For the three months ended March 31, 2012, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.

 

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Table of Contents

PART I - ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

FIRST CAPITAL, INC.

For a discussion of the Company’s asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Company’s portfolio equity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations -Market Risk Analysis” in the Company’s 2011 Annual Report Form 10-K for the year ended December 31, 2011. Management periodically reviews the impact of interest rate changes upon net interest income and the market value of the Company’s portfolio equity. Based on such reviews, management believes that there have been no material changes in the market risk of the Company’s asset and liability position since December 31, 2011.

PART I - ITEM 4

CONTROLS AND PROCEDURES

FIRST CAPITAL, INC.

Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

PART II

OTHER INFORMATION

FIRST CAPITAL, INC.

 

Item 1. Legal Proceedings

The Company is not a party to any legal proceedings. Periodically, there have been various claims and lawsuits involving the Bank, mainly as a plaintiff, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank’s business. The Bank is not a party to any pending legal proceedings that it believes would have a material adverse affect on its financial condition or operations.

 

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors described in our Annual Report on Form 10-K, however these are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

 

Period    (a) Total
Number
of Shares
Purchased
    

(b) Average
Price

Paid

Per Share

    

(c) Total
Number

of Shares
as Part of
Publicly
Announced
Plans or
Programs

    

(d) Maximum
Number

of Shares

Yet Be
Purchased
Under the
Plans or
Programs

 

January 1 through January 31, 2012

     0         N/A         0         190,274   

February 1 through February 28, 2012

     0         N/A         0         190,274   

March 1 through March 31, 2012

     0         N/A         0         190,274   
  

 

 

       

 

 

    

Total

     0         N/A         0      
  

 

 

       

 

 

    

On August 19, 2008, the board of directors authorized the repurchase of up to 240,467 shares of the Company’s outstanding common stock. The stock repurchase program will expire upon the purchase of the maximum number of shares authorized under the program, unless the board of directors terminates the program earlier.

 

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PART II

OTHER INFORMATION

FIRST CAPITAL, INC.

 

Item 3. Defaults upon Senior Securities

Not applicable.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

    3.1   Articles of Incorporation of First Capital, Inc. (1)
    3.2   Fourth Amended and Restated Bylaws of First Capital, Inc. (2)
  10.1   *Employment Agreement with Samuel E. Uhl (4)
  10.2   *Employment Agreement with M. Chris Frederick (4)
  10.3   *Employee Severance Compensation Plan (3)
  10.4   *Employment Agreement with William W. Harrod (4)
  10.5   * First Capital, Inc. 2009 Equity Incentive Plan (5)
  10.6   Statement Re: Computation of Per Share Earnings (incorporated by reference to Note 3 of the Unaudited Consolidated Financial Statements contained herein)
  31.1   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
  31.2   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
  32.1   Section 1350 Certification of Chief Executive Officer
  32.2   Section 1350 Certification of Chief Financial Officer
101.0**   The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows and (iv) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

 

* Management contract or compensatory plan, contract or arrangement.
** Furnished, not filed.
(1) Incorporated by reference from the Exhibits filed with the Registration Statement on Form SB-2, and any amendments thereto, Registration No. 333-63515.
(2) Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 22, 2007.
(3) Incorporated by reference to the Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998.
(4) Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 1999.
(5) Incorporated by reference to the appendix to the Company’s definitive proxy materials on Schedule 14A filed with the Securities and Exchange Commission on April 9, 2009.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    FIRST CAPITAL, INC.
    (Registrant)

Dated May 10, 2012