First Capital, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. First Capital is a savings and loan holding company for First Harrison Bank; reported operations primarily reflect the Bank. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net interest income | $5.80 (2015: $4.33) | $17.48 (2015: $12.90) |
| Provision for loan losses | $0.20 (2015: $0) | $0.43 (2015: $0.05) |
| Noninterest income | $1.75 (2015: $1.23) | $4.73 (2015: $3.80) |
| Noninterest expense | $4.92 (2015: $3.65) | $14.76 (2015: $11.09) |
| Net income attributable to First Capital | $1.76 (2015: $1.40) | $5.12 (2015: $4.09) |
| EPS, basic and diluted | $0.53 (2015: $0.51) | $1.53 (2015: $1.49) |
| Dividends per share | $0.21 (2015: $0.21) | $0.63 (2015: $0.63) |
- Net interest income grew approximately 34% for the quarter and 35% year to date; attributable net income increased approximately 26% in both comparisons.
- Interest-rate spread narrowed: tax-equivalent spread was 3.41% for Q3 2016 versus 4.08% a year earlier, and 3.43% for the first nine months versus 4.01%. Management attributed higher interest income mainly to the Peoples acquisition, while acquired lower-yielding liquid assets and higher funding costs reduced yields and spread.
- For the first nine months, average interest-earning assets were $682.3 million at a 3.78% tax-equivalent yield, versus $437.6 million at 4.29% in 2015. Average interest-bearing liabilities were $527.6 million versus $339.6 million; average rates paid were 0.35% versus 0.28%.
- The filing does not provide a clear net interest margin value. Income tax expense was $1.90 million year to date, with a 27.0% effective tax rate (2015: 26.3%).
Financial position, cash flow and liquidity
- At September 30, 2016, total assets were $742.1 million, up 3.7% from December 31, 2015. Net loans were $366.4 million, up $7.2 million; available-for-sale securities were $247.3 million, up $60.5 million.
- Cash and cash equivalents were $70.4 million, down from $109.2 million at year-end, largely as excess funds were invested in securities. Deposits rose 3.4% to $658.7 million. Equity attributable to First Capital was $78.6 million, versus $74.4 million.
- For the nine months, operating cash flow was $8.3 million (2015: $6.7 million); investing activities used $66.6 million (2015: $3.7 million), largely reflecting $159.3 million of securities purchases; financing provided $19.4 million (2015 used $11.8 million). Cash and equivalents declined by $38.8 million.
- The balance sheet lists deposits and other liabilities but no borrowings. The Bank reported $70.4 million of cash and $247.3 million of available-for-sale securities, plus access to FHLB borrowing and repurchase-agreement capacity. The parent company separately had $0.6 million of liquid assets.
- The Bank was reported well-capitalized at quarter-end: Tier 1 leverage 9.3%, common equity Tier 1 and Tier 1 risk-based capital each 14.6%, and total risk-based capital 15.3%.
Material changes and notable items
- The December 2015 acquisition of Peoples Bancorp contributed significantly to year-over-year growth and makes comparisons less like-for-like. It added five offices and expanded the company into Bullitt County, Kentucky; management cited expected market growth and cost savings, but provided no quantified savings guidance.
- Noninterest expense increased $3.7 million year to date, principally from acquired operations, including higher compensation, data processing, occupancy and other operating costs. Q3 expense rose $1.3 million year over year.
- Year-to-date noninterest income included a $176,000 gain on securities sales and a $145,000 gain from selling an investment in another financial institution. Q3 loan-sale gains were $371,000 versus $131,000 a year earlier.
- The allowance for loan losses was $3.32 million, down from $3.42 million at year-end. Nonperforming loans declined to $3.58 million from $4.58 million; net charge-offs were $0.52 million year to date versus $1.4 million in 2015. Management considered the allowance adequate but cautioned that future additions or losses above estimates remain possible.
- Available-for-sale securities had $2.62 million of net unrealized gains at quarter-end. Management said unrealized losses were principally interest-rate-related and not other-than-temporary, but warned that further market or economic deterioration could affect credit quality.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided. Management’s forward-looking statements include expected acquisition benefits and cost savings, subject to execution, economic, regulatory and competitive risks.
- Interest-rate modeling estimated that a 100-basis-point rate increase would raise one-year net interest income by 1.86%, while a 100-basis-point decrease would reduce it by 5.44%. Separately, a 100-basis-point increase was modeled to reduce economic value of equity by 3.79%; a 300-basis-point increase by 19.29%. The filing cautions that these model estimates are not guarantees of actual results.
- Credit risk is concentrated in loans tied substantially to the Louisville, Kentucky area and local real estate conditions. At quarter-end, $5.17 million of recorded loans were individually evaluated for impairment; $3.58 million were nonperforming, and $799,000 of residential real estate loans were in formal foreclosure proceedings.
- Under the Peoples merger terms, former shareholders may receive 50% of sale proceeds above $3.75 million for specified acquired foreclosed properties, subject to timing conditions. No sale contract existed and the company did not anticipate contingent consideration.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet transactions reasonably likely to have a material effect.
Important facts for investors to verify
- How much of revenue and earnings growth reflects the Peoples acquisition, and whether integration-related costs or anticipated savings evolve as expected.
- Whether net interest spread stabilizes as deposit costs, asset mix and reinvestment yields change.
- Trends in classified and nonperforming loans, charge-offs, collateral valuations and the adequacy of the allowance, especially in commercial real estate and construction lending.
- The valuation and interest-rate sensitivity of the expanded securities portfolio, along with liquidity and deposit stability.
- Whether the contingent acquired-property payment becomes relevant and whether any material legal, regulatory or accounting developments arise.