First Capital, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. First Capital is a bank holding company whose principal subsidiary is First Harrison Bank, serving primarily the Louisville, Kentucky area. This unaudited filing covers the three and six months ended June 30, 2020; balance-sheet comparisons are with December 31, 2019. Dollar figures are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $6.970 | $7.728 | $14.176 | $14.930 |
| Provision for loan losses | $0.825 | $0.300 | $1.176 | $0.750 |
| Noninterest income | $2.320 | $1.768 | $3.776 | $3.273 |
| Noninterest expense | $5.618 | $5.764 | $11.443 | $11.429 |
| Net income attributable to First Capital | $2.438 | $2.860 | $4.532 | $5.007 |
| Diluted EPS | $0.73 | $0.86 | $1.35 | $1.50 |
- Balance sheet: Total assets were $919.6 million, up $92.1 million (11.1%) from year-end. Net loans were $498.8 million, up $32.3 million; deposits were $807.6 million, up $85.5 million. Cash and cash equivalents rose to $106.4 million from $51.4 million. Available-for-sale securities were $257.1 million.
- Credit quality: The allowance for loan losses was $6.1 million, versus $5.1 million at year-end. Nonperforming loans rose to $2.35 million from $1.78 million. Six-month net charge-offs were $173,000.
- Cash flow: For the six months, operating activities provided $4.2 million, investing activities used $33.0 million, and financing activities provided $83.8 million. Cash and cash equivalents increased $55.1 million.
- Liquidity and capital: Management cited $105.8 million of Bank cash and $257.1 million of available-for-sale securities, plus additional FHLB borrowing capacity and collateral eligible for repurchase agreements. The Bank’s Community Bank Leverage Ratio was 9.66% at June 30 and it was considered well-capitalized. The balance sheet lists deposits and other liabilities; a funded debt balance is not separately reported.
- Margins and taxes: Tax-equivalent interest-rate spread was 3.34% for Q2, versus 4.01% a year earlier, and 3.52% for the six months, versus 3.94%. Effective tax rates were 14.2% for Q2 and 14.9% for the six months, down from 16.6% and 16.8%, respectively.
Material changes versus comparable periods
- Net income attributable to First Capital declined to $2.44 million in Q2 and $4.53 million for the half-year, from $2.86 million and $5.01 million, respectively. Management attributed the declines mainly to lower net interest income after loan-loss provisions.
- Net interest income fell $758,000 in Q2 and $754,000 for the six months. Lower market rates and 1% PPP loans reduced asset yields; lower deposit costs partly offset that pressure.
- Noninterest income increased $552,000 in Q2 and $503,000 for the six months, supported by gains on loan sales and higher ATM/debit-card fees. Deposit service charges fell. Six-month results also included a $171,000 unrealized equity-security loss, while Q2 included a $223,000 unrealized gain.
- Loan-loss provisions increased year over year, reflecting higher qualitative reserves for pandemic-related economic uncertainty. Net interest income after provision was $6.15 million in Q2 versus $7.43 million, and $13.00 million for the half-year versus $14.18 million.
- Six-month noninterest expense was nearly unchanged; Q2 expense declined $146,000 year over year. Compensation and benefits increased in both comparisons.
Outlook, risks, and unusual items
- COVID-19: Management said the pandemic’s duration and financial effects were uncertain and could adversely affect borrowers, collateral values, credit quality, interest rates, operations, and results. It considered the allowance adequate at June 30 but cautioned that additional losses or reserve adjustments may be required.
- Loan relief and PPP: By June 30, the Bank had approved payment extensions on $68.1 million of loans, primarily commercial real estate; $33.2 million had resumed normal payments. The Bank had originated approximately $45.5 million of PPP loans through July 16, including $45.1 million outstanding at June 30. These SBA-guaranteed loans carry a 1% rate; $1.5 million of net deferred fees remained to be recognized over the loan lives and as forgiveness is granted.
- Concentrations: Hotel and restaurant commercial loan exposure was approximately $14.3 million and $4.1 million, respectively, or about 3.5% of the total loan portfolio. A substantial portion of the broader portfolio is tied to real estate and the local Louisville-area economy.
- Interest-rate sensitivity: Modeling projected higher one-year net interest income under immediate rate increases and lower income under a 100-basis-point decline. These are model estimates, not forecasts; management noted assumptions and customer behavior can differ from modeled outcomes.
- Other matters: The Company did not intend to early-adopt CECL and expected adoption to increase the allowance through a one-time retained-earnings adjustment; the amount was not yet known. Management reported effective disclosure controls and no material change in internal control over financial reporting. No legal proceedings or material off-balance-sheet transactions were reported.
Important facts for investors to verify
- Whether deferred PPP fees and loan forgiveness produce the expected income, and how PPP balances change.
- How many deferred-payment loans resume regular payments, particularly in commercial real estate, and whether delinquencies or nonperforming loans rise.
- Whether COVID-related borrower stress requires further provision increases beyond the $6.1 million allowance.
- Whether lower rates and spread compression continue to pressure net interest income, and how deposit costs and balances respond.
- The eventual CECL adoption impact and any changes to the Bank’s 9.66% leverage ratio or regulatory capital status.