First Capital, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. First Capital is the holding company for First Harrison Bank, an Indiana-chartered commercial bank. Financial amounts below are in U.S. dollars; income-statement and cash-flow amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $8.66 | $7.47 | $23.24 | $21.32 |
| Provision for loan losses | $0.18 | $0.00 | $0.55 | $0.08 |
| Noninterest income | $1.87 | $2.27 | $5.99 | $7.26 |
| Noninterest expense | $6.56 | $6.20 | $18.79 | $18.17 |
| Net income attributable to First Capital | $3.13 | $2.94 | $8.36 | $8.61 |
| Diluted earnings per share | $0.93 | $0.88 | $2.49 | $2.57 |
| Dividends per share | $0.26 | $0.26 | $0.78 | $0.78 |
- Q3 tax-equivalent interest-rate spread increased to 3.07% from 2.89%; the nine-month spread declined to 2.79% from 2.85%. The nine-month average yield on interest-earning assets was 2.94%, versus 3.01% a year earlier.
- At September 30, total assets were $1.147 billion, down 0.8% from year-end 2021. Net loans were $541.6 million, up $58.3 million; deposits were $1.063 billion, up $27.5 million.
- Cash and cash equivalents fell to $83.8 million from $172.5 million, as management used liquidity for loan growth and securities purchases. The Bank separately reported $82.9 million in cash and cash equivalents and $453.4 million in available-for-sale securities at quarter-end.
- Operating cash flow was $12.4 million for the first nine months, compared with $15.7 million in 2021. Investing activities used $126.0 million; financing activities provided $24.9 million. Cash declined $88.7 million over the period.
- There was no borrowing balance listed on the consolidated balance sheet; deposits were the primary reported funding liability. The filing notes additional FHLB borrowing capacity and collateral eligible for repurchase agreements.
Changes versus comparable periods
- Q3 net income rose 6.4% year over year, while nine-month net income fell 2.8%. Higher net interest income supported results; lower noninterest income and higher expenses weighed on nine-month earnings.
- Nine-month noninterest income fell $1.3 million, mainly from a $1.2 million decline in gains on loans sold and a swing in equity-security valuation from a $360,000 gain to a $265,000 loss. Deposit service charges increased $322,000.
- Nine-month noninterest expense rose $614,000, including increases in data processing and other expenses, partly offset by lower professional fees. For Q3, expense increased $357,000, mainly from other, data processing, and compensation costs.
- Net loans grew while loans held for sale declined to $1.3 million from $2.4 million. Nonperforming loans were $1.2 million, compared with $1.3 million at December 31, 2021; net charge-offs for the nine months were $67,000.
Outlook, risks, and unusual items
- Unrealized securities losses: Available-for-sale securities had a $52.7 million gross unrealized loss at September 30, 2022. The nine-month after-tax loss in other comprehensive income was $42.2 million, primarily reflecting rising market rates; company stockholders’ equity declined to $77.7 million from $113.8 million. Management stated it could hold the securities and did not consider the declines other-than-temporary, while noting future economic deterioration could affect credit quality.
- Credit and geographic exposure: The allowance for loan losses was $6.6 million, including $6.2 million attributed to qualitative adjustments. Management said the allowance was adequate but acknowledged estimates may change with economic conditions. A substantial portion of loans is concentrated in the Louisville, Kentucky metropolitan area.
- Capital: The Bank’s Community Bank Leverage Ratio was 8.69% at June 30, below the 9% minimum for a second consecutive quarter. It elected out of that framework beginning in Q3 and reported compliance with applicable capital requirements at September 30; it was considered well-capitalized.
- Interest-rate sensitivity: Management’s model estimated one-year net interest income would rise 10.55% under an immediate, sustained 300-basis-point increase and fall 9.95% under a 300-basis-point decrease. Its economic value of equity model estimated an 8.73% increase and a 24.31% decrease, respectively. Management cautioned that modeling assumptions and actual customer behavior can differ.
- Accounting and operating risks: COVID-19, economic conditions, interest-rate changes, credit quality, deposit flows, loan demand, competition, and regulation are identified risks. The company expected CECL adoption to increase the allowance through a one-time retained-earnings adjustment; the amount was not yet known. It did not intend early adoption and, as a smaller reporting company, was subject to the delayed effective date for fiscal years beginning after December 15, 2022.
- No specific earnings guidance was provided. Management said interim results are not necessarily indicative of full-year results. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether net interest income growth can continue as deposit costs reprice and the rate environment changes.
- The scale and duration of unrealized securities losses, related capital effects, and management’s ability and intent to hold the portfolio.
- Loan growth, credit trends, allowance assumptions, and real-estate concentration in the Louisville area.
- The Bank’s capital ratios after exiting the CBLR framework, and any implications for dividends or growth.
- CECL adoption timing and the eventual allowance and retained-earnings impact.