Business context and reporting period
First Capital, Inc. is a bank holding company for First Harrison Bank, serving primarily the Louisville, Kentucky metropolitan area. This unaudited Form 10-Q covers the three months ended March 31, 2020; income and cash-flow figures are compared with Q1 2019, and balance-sheet figures with December 31, 2019. Amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $7.674 | $7.658 in Q1 2019 |
| Net interest income | $7.206 | $7.202 in Q1 2019 |
| Provision for loan losses | $0.351 | $0.450 in Q1 2019 |
| Noninterest income | $1.456 | $1.505 in Q1 2019 |
| Noninterest expense | $5.825 | $5.665 in Q1 2019 |
| Net income attributable to First Capital | $2.094; $0.63 diluted EPS | $2.147; $0.64 diluted EPS in Q1 2019 |
| Operating cash flow | $4.532 | $4.931 in Q1 2019 |
| Total assets | $831.2 | $827.5 at December 31, 2019 |
| Loans, net | $465.3 | $466.5 at December 31, 2019 |
| Deposits | $722.6 | $722.2 at December 31, 2019 |
| Cash and cash equivalents | $59.7 | $51.4 at December 31, 2019 |
| Stockholders’ equity attributable to the Company | $102.8 | $98.8 at December 31, 2019 |
- Q1 2020 tax-equivalent interest-rate spread was 3.77%, down from 3.86% in Q1 2019. The average tax-equivalent yield on interest-earning assets declined to 4.10% from 4.19%.
- The allowance for loan losses was $5.307 million, up from $5.061 million at year-end; nonperforming loans were $1.733 million, down from $1.778 million.
- Cash flows were $4.200 million provided by investing activities and $0.370 million used in financing activities. The filing reports deposits as the principal funding source; it does not present a separate outstanding debt balance. The Bank reported additional FHLB borrowing capacity.
- The Bank’s Community Bank Leverage Ratio was 10.45% at March 31, 2020, and it was considered well-capitalized. The quarterly dividend was $0.24 per share, versus $0.23 in Q1 2019.
Material changes versus the prior comparable period
- Net income attributable to First Capital declined by $53,000, while diluted EPS fell by $0.01. Higher net interest income after provision was offset by lower noninterest income and higher noninterest expense.
- Noninterest income included a $394,000 unrealized loss on an equity investment, compared with a $131,000 gain in Q1 2019. Higher loan-sale gains and ATM/debit-card fees partly offset the change.
- Compensation and benefits expense rose $460,000; total noninterest expense increased $160,000. The 2019 period included a $195,000 net loss on foreclosed real estate; Q1 2020 had no foreclosed real estate at quarter-end.
- Net loans declined $1.2 million from year-end, with commercial real estate loans up $7.6 million and residential mortgage loans down $3.9 million. Cash increased $8.4 million, primarily reflecting excess liquidity from loan and investment paydowns.
- Equity increased primarily from a $2.6 million after-tax rise in unrealized gains on available-for-sale securities and retained earnings. The separate equity investment fell in fair value to $1.352 million from $1.746 million at year-end.
Outlook, management commentary, risks and unusual items
- Management stated the full financial impact of COVID-19 was unknown and warned that economic conditions could materially affect estimates, including expected credit losses. The loan-loss provision included higher qualitative factors associated largely with COVID-19 uncertainty.
- As of May 6, 2020, the Bank had approved COVID-related payment extensions on approximately 11.7% of loan-portfolio balances, mainly commercial real estate relationships. Extensions generally ran one to three months and could extend to six months; additional modifications were expected in Q2.
- As of May 6, the Bank had received SBA authorizations for approximately $44.6 million in Paycheck Protection Program loans and had disbursed approximately $41.9 million. Management expected related fee income to benefit results as recognized over the loan terms. These are post-quarter developments.
- Interest rates fell sharply in March 2020. The filing warns that pandemic-related economic disruption, borrower repayment capacity, collateral values, market volatility, deposit flows, and lower rates may affect results. The Bank’s rate-sensitivity simulations are estimates, not guarantees of actual outcomes.
- The Company reported no material off-balance-sheet transactions during the quarter and no legal proceedings. It did not provide earnings or other numerical financial guidance.
- The Company does not intend to early-adopt CECL; as a smaller reporting company, its stated adoption date is fiscal years beginning after December 15, 2022. Management expects adoption to increase the allowance through a one-time retained-earnings adjustment, but the amount is not yet clear.
Important facts for investors to verify
- Subsequent-quarter loan deferrals, borrower performance after relief periods, and any resulting changes in delinquencies, criticized loans, charge-offs, or allowance needs.
- PPP loan disbursements, forgiveness, fee recognition, and related funding or operational risks.
- Whether the COVID-related credit assumptions and the $5.307 million allowance adequately reflect portfolio concentration in local real estate and commercial lending.
- Effects of continued low interest rates on net interest income, deposit pricing, securities values, and the rate-sensitivity estimates.
- Liquidity and capital trends, including actual FHLB borrowing capacity and any constraints on Bank dividends to the parent.