First Capital, Inc. — Q2 2016 Form 10-Q
Business context and reporting period
First Capital is the savings and loan holding company for First Harrison Bank. This unaudited filing covers the three and six months ended June 30, 2016, with balance-sheet comparisons to December 31, 2015. Results include Peoples Bancorp, acquired December 4, 2015; consequently, comparisons with 2015 are not on a like-for-like basis. Amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $5.83 | $4.32 | $11.68 | $8.57 |
| Provision for loan losses | $0.15 | $0.05 | $0.23 | $0.05 |
| Noninterest income | $1.62 | $1.21 | $2.98 | $2.58 |
| Noninterest expense | $4.84 | $3.76 | $9.83 | $7.44 |
| Net income attributable to First Capital | $1.78 | $1.23 | $3.37 | $2.69 |
| Diluted EPS | $0.53 | $0.45 | $1.01 | $0.98 |
- Six-month net income attributable to First Capital rose about 25%; Q2 rose about 45%. Management attributed the increases mainly to higher net interest income and noninterest income, partly offset by higher expenses.
- Six-month tax-equivalent interest-rate spread narrowed to 3.44% from 3.98%; Q2 spread was 3.40% versus 3.94%. Management attributed higher interest income and expense, and lower spread, primarily to the Peoples acquisition and its mix of acquired assets and deposits. Net interest margin is not clearly provided.
- At June 30, total assets were $739.3, net loans $362.1, available-for-sale securities $249.6, deposits $657.5, total equity $78.0, and cash and cash equivalents $70.5. Compared with year-end, assets increased 3.3%, deposits 3.2%, and net loans approximately $3.0. Securities increased $62.8 as the Bank invested excess acquisition liquidity; cash declined $38.6, principally as federal funds were shifted into securities.
- Six-month operating cash flow was $6.0; investing cash outflow was $63.5, mainly reflecting net securities purchases; financing cash flow was $18.8, including a $20.3 increase in deposits and $1.4 of dividends paid. Cash and cash equivalents fell from $109.2 to $70.5.
- The filing reports no separate funded-debt balance in the presented balance sheet. Deposits are the primary funding source; the Bank also cites available FHLB borrowing capacity and collateral eligible for repurchase agreements. The Company itself had $0.62 of liquid assets.
- The Bank was “well-capitalized” at June 30: Tier 1 leverage 9.0%, common equity Tier 1 and Tier 1 risk-based capital each 14.6%, and total risk-based capital 15.3%, all above disclosed well-capitalized thresholds.
Material changes, outlook, and risks
- Peoples expanded the Bank’s presence into Bullitt County, Kentucky, and the greater Louisville market. Management expects market growth, expanded customer services, and cost savings from scale and consolidation; the filing gives no quantified savings target or forward earnings guidance.
- Noninterest expense increased $2.4 for the first half, primarily from the acquired offices and retained employees. Compensation and benefits rose $1.4; other operating and data-processing expenses also increased. No acquisition-related costs were recorded in the 2016 periods.
- Credit indicators included $3.7 of nonperforming loans at June 30, down from $4.6 at year-end; the allowance for loan losses was $3.2, down from $3.4. First-half net charge-offs were $0.45 versus $1.3 in 2015, when a previously reserved $1.2 commercial-loan charge-off drove most of the amount. Loans are concentrated in the Louisville area, making repayment sensitive to local real-estate and economic conditions. Management said the allowance was adequate but noted estimates may require revision.
- Available-for-sale securities generated a $0.18 realized gain in the first half; unrealized gains also lifted equity through other comprehensive income. Management said existing security losses were not other-than-temporary, but warned that further market or economic deterioration could affect credit quality.
- Foreclosed real estate was written down by $0.08 in the first half. The Company recorded $4.3 of foreclosed real estate at June 30. A $0.71 cost-method investment was sold in July 2016 for $0.86; the resulting $0.15 gain was expected to be recognized in Q3.
- Interest-rate modeling showed that a sustained 100-basis-point rate increase was projected to reduce one-year net interest income by 0.23% at June 30; a 100-basis-point decrease was projected to reduce it by 2.75%. A 100-basis-point increase was also projected to reduce economic value of equity by 3.96%. Management cautions that model outputs are not guarantees of actual results.
- The filing reports no material change to annual-report risk factors, no legal proceedings believed to have a material adverse effect, and no off-balance-sheet transactions reasonably likely to have a material effect. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported year-over-year growth reflects the Peoples acquisition versus organic growth, and whether expected integration savings are being realized.
- Trends in loan delinquencies, classified and nonperforming loans, charge-offs, foreclosed assets, and allowance adequacy—particularly in commercial real estate and the Louisville-area portfolio.
- Whether the larger securities portfolio and interest-rate exposure affect future spread, earnings, liquidity, or equity; assess the sensitivity assumptions behind management’s models.
- The timing and final accounting for the July investment sale gain, and the durability of gains on securities and loan sales.
- Share-count figures differ slightly within the filing: the June 30 balance sheet reports 3,337,612 shares outstanding, while the cover reports 3,337,552 as of July 29; verify the applicable count when assessing per-share measures.