First Capital, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. First Capital is the holding company for First Harrison Bank. Unaudited consolidated results are compared with the corresponding 2021 periods; balance-sheet changes are compared with December 31, 2021.
Financial results
Amounts are in millions except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $7.631 | $6.844 | $14.583 | $13.848 |
| Provision for loan losses | $0.200 | $0 | $0.375 | $0.075 |
| Noninterest income | $1.965 | $2.552 | $4.112 | $4.990 |
| Noninterest expense | $6.235 | $6.165 | $12.229 | $11.972 |
| Net income attributable to First Capital | $2.710 | $2.730 | $5.237 | $5.669 |
| Diluted earnings per share | $0.81 | $0.82 | $1.56 | $1.69 |
| Dividend per share | $0.26 | $0.26 | $0.52 | $0.52 |
- Q2 net interest income rose 11.5%, largely on higher interest-earning assets. The tax-equivalent interest-rate spread was 2.73%, versus 2.71%; for the first half it was 2.64%, versus 2.84%.
- First-half net income attributable to First Capital declined 7.6%. Management attributed the decrease mainly to lower noninterest income and higher noninterest expense, partly offset by higher net interest income after provision.
- Q2 and first-half effective tax rates were 14.1% and 13.9%, respectively, compared with 15.4% and 16.4% in 2021.
Financial position, liquidity and capital
- Total assets were $1.175 billion, up 1.6% from year-end 2021. Net loans rose $44.0 million to $527.3 million; growth included commercial real estate, residential mortgage and construction lending.
- Deposits increased $49.1 million to $1.085 billion. Cash and cash equivalents fell $48.4 million to $124.1 million as excess liquidity was used to fund loan growth and securities purchases. Six-month operating cash flow was $7.1 million; investing activities used $102.9 million and financing activities provided $47.3 million.
- Available-for-sale securities were $458.6 million at fair value. The portfolio recorded a $41.5 million pretax unrealized loss in the first half, primarily from rising market rates; the after-tax other comprehensive loss was $32.0 million. First Capital stockholders’ equity fell to $85.5 million, mainly due to this securities-related loss, partly offset by retained earnings.
- The allowance for loan losses was $6.4 million, up from $6.1 million at year-end; management said it was adequate. Nonperforming loans were $1.3 million, approximately unchanged from year-end. The allowance included $6.0 million attributed to qualitative factor adjustments.
- The Bank reported a Community Bank Leverage Ratio of 8.69%, below the 9% minimum for a second consecutive quarter. It planned to exit the CBLR framework beginning with the quarter ending September 30, 2022, and resume calculating required capital ratios under other regulatory guidance. The Bank was still considered well-capitalized under applicable guidelines at June 30.
- The filing lists no debt borrowings on the balance sheet; deposits are the principal funding liability. The Bank cited additional FHLB borrowing capacity and collateral eligible for repurchase agreements. The holding company reported $1.8 million of standalone liquid assets.
Changes, outlook and risks
- First-half noninterest income declined $878,000, primarily because gains on loans sold fell $747,000 as higher rates slowed residential mortgage lending. Equity securities shifted from a $427,000 gain in first-half 2021 to a $36,000 loss in first-half 2022. Higher deposit service charges partly offset these declines.
- First-half noninterest expense increased $257,000, including increases in data processing and other expenses, partly offset by lower professional fees. PPP fee income also fell sharply: $27,000 in first-half 2022 versus $961,000 in 2021.
- The filing provides no earnings or revenue guidance. Management said interim results are not necessarily indicative of full-year results. It expects CECL adoption, effective for the Company in 2023, to increase the allowance through a one-time retained-earnings adjustment; the amount was not yet known.
- Interest-rate risk is material. Management’s model projected that a 100-basis-point rate increase would raise one-year net interest income by 3.95% versus its base case, while a 100-basis-point decrease would lower it by 1.39%. These are model scenarios, not forecasts. Rising rates also drove the substantial unrealized securities loss.
- Credit risks include economic and COVID-19 uncertainty and geographic concentration in the Louisville, Kentucky area. Hotel and restaurant commercial loan exposure was approximately $13.8 million and $10.8 million, respectively, or 4.7% of total loans combined. Management warned further losses could occur.
- No material changes to previously disclosed risk factors, no legal proceedings, and no material off-balance-sheet transactions during the quarter were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the Bank’s exit from the CBLR framework and subsequent regulatory capital ratios affect its capital position or flexibility.
- Loan quality, criticized and classified loan trends, allowance assumptions, and whether losses exceed management’s estimates as economic conditions change.
- How rising rates affect deposit costs, the interest-rate spread, loan demand, and the market value of the securities portfolio.
- Whether mortgage-sale gains and other noninterest income recover, and how expense growth and lower PPP-related fees affect earnings.
- The eventual CECL adoption impact and the size of any adjustment to retained earnings.