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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2012 OR
For the transition period from to Commission File No. 0-25023
First Capital, Inc. (Exact name of registrant as specified in its charter)
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.
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: 2,785,001 shares of common stock were outstanding as of July 31, 2012.
Table of ContentsFIRST CAPITAL, INC.
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Table of ContentsPART I—FINANCIAL INFORMATION FIRST CAPITAL, INC. AND SUBSIDIARY (Unaudited)
See accompanying notes to consolidated financial statements.
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Table of ContentsPART I—FINANCIAL INFORMATION FIRST CAPITAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
See accompanying notes to consolidated financial statements.
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Table of ContentsPART I—FINANCIAL INFORMATION FIRST CAPITAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
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Table of ContentsPART I—FINANCIAL INFORMATION FIRST CAPITAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
See accompanying notes to consolidated financial statements.
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Table of ContentsPART I—FINANCIAL INFORMATION FIRST CAPITAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
See accompanying notes to consolidated financial statements.
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 June 30, 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 June 30, 2012, and the results of operations for the three and six months ended June 30, 2012 and cash flows for the six months ended June 30, 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.
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent. Investment securities at June 30, 2012 and December 31, 2011 are summarized as follows:
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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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 June 30, 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.
Information pertaining to investment securities available for sale with gross unrealized losses at June 30, 2012, aggregated by investment category and the length of time that individual investment securities have been in a continuous position, follows:
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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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 June 30, 2012, the 21 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 0.5% 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 June 30, 2012, the privately-issued CMO in a loss position had depreciated approximately 20.1% 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 June 30, 2012, the privately-issued CMO in a loss position had an amortized cost of $243,000 and a fair value of $194,000, 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 June 2012, the Company did not recognize an other-than-temporary impairment loss during the quarter ended June 30, 2012. While management did not anticipate a credit-related impairment loss at June 30, 2012, any future deterioration in market and economic conditions may have an adverse impact on the credit quality in future periods.
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.
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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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 June 30, 2012, the Company had seven loans on which partial charge-offs of $377,000 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.
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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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.
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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The following table provides the components of the Company’s recorded investment in loans for each portfolio segment at June 30, 2012:
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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The following table provides the components of the Company’s recorded investment in loans for each portfolio segment at December 31, 2011:
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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An analysis of the allowance for loan losses as of June 30, 2012 is as follows:
An analysis of the allowance for loan losses as of December 31, 2011 is as follows:
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Table of ContentsFIRST 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 and six months ended June 30, 2012 is as follows:
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Table of ContentsFIRST 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 and six months ended June 30, 2011 is as follows:
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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At June 30, 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:
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 June 30, 2012 and December 31, 2011. The effect of the overall qualitative factor was to increase the estimated allowance for loan losses by $305,000 and $317,000 at June 30, 2012 and December 31, 2011, respectively.
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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The following table summarizes the Company’s impaired loans by class of loans as of June 30, 2012 and for the three months and six months ended June 30, 2012:
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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The following table summarizes the Company’s impaired loans by class of loans for the three months and six months ended June 30, 2011:
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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The following table summarizes the Company’s impaired loans by class of loans as of December 31, 2011:
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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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 June 30, 2012 and December 31, 2011:
The following table presents the aging of the recorded investment loans by class of loans at June 30, 2012:
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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The following table presents the aging of the recorded investment in loans by class of loans at December 31, 2011:
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.
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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The following table presents the recorded investment in loans by risk category and class of loans as of the date indicated:
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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The following table summarizes the Company’s troubled debt restructurings (TDRs) by class of loan and accrual status as of June 30, 2012 and December 31, 2011:
At June 30, 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 $87,000 and $192,000, respectively. These commitments represent the undisbursed portion of construction loans to borrowers that have outstanding loans classified as TDRs.
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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The following table summarizes information in regard to TDRs that were restructured during the six months ended June 30, 2012. There were no TDRs restructured during the three months ended June 30, 2012.
For the TDRs listed above, the terms of modification were a reduction of the stated interest rate due to a bankruptcy filing by the borrower. There were no principal charge-offs recorded as a result of TDRs during the six months ended June 30, 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 six months ended June 30, 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.
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the six month periods ended June 30, 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 June 30, 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.
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Table of ContentsFIRST CAPITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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.
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