First Capital, Inc. — Q1 2019 Form 10-Q
Business and period: First Capital is a bank holding company whose principal subsidiary is First Harrison Bank. This unaudited filing covers the three months ended March 31, 2019; comparisons are with Q1 2018 for operating results and December 31, 2018 for balance-sheet changes. Amounts below are in millions unless otherwise stated.
Financial results and condition
- Earnings: Net income attributable to First Capital was $2.147 million, versus $2.133 million; diluted EPS was $0.64 in both periods. Income before taxes was $2.592 million versus $2.497 million.
- Interest income and margin: Net interest income rose to $7.202 million from $6.422 million. Management attributed the increase primarily to higher average interest-earning asset balances and yields. The tax-equivalent interest-rate spread increased to 3.86% from 3.62%; average asset yield was 4.19% versus 3.87%, while the average cost of interest-bearing liabilities increased to 0.33% from 0.25%.
- Credit costs: Provision for loan losses increased to $0.450 million from $0.197 million, which management attributed primarily to loan growth. Net charge-offs were $0.176 million, versus $0.200 million. The allowance was $4.339 million, up from $4.065 million.
- Other income and expenses: Noninterest income declined to $1.505 million from $1.526 million. Noninterest expense increased to $5.665 million from $5.254 million, including higher compensation, data-processing costs and foreclosed-real-estate losses. Income tax expense rose to $0.442 million from $0.361 million; the effective tax rate was 17.1% versus 14.5%.
- Cash flow: Operating cash flow was $4.931 million, compared with $3.358 million. Investing activities used $6.612 million, versus providing $3.975 million; financing activities provided $16.112 million, versus $6.237 million. Cash and cash equivalents increased $14.431 million to $55.543 million.
- Balance sheet and liquidity: Total assets rose 2.5% to $813.861 million. Net loans increased to $449.781 million from $434.260 million; deposits increased to $718.531 million from $701.646 million. Available-for-sale securities were $255.035 million, down from $261.841 million. The Bank also reported $2.9 million in liquid assets at the holding-company level.
- Capital and dividends: Company stockholders’ equity increased to $89.113 million from $85.844 million, in part due to improved unrealized gains on available-for-sale securities. The Bank was reported well-capitalized: Tier 1 leverage 9.7%, common equity Tier 1 and Tier 1 risk-based capital 13.8%, and total risk-based capital 14.6%. Quarterly dividends were $0.23 per common share.
Material changes and notable items
- Loan growth included increases in construction, residential mortgage and commercial business lending. Total principal loan balance rose to $453.014 million from $437.230 million.
- Nonperforming loans increased to $3.433 million from $3.057 million. Loans 90 days or more past due and still accruing were $62,000, compared with $2,000; nonaccrual loans were $3.371 million, compared with $3.055 million.
- Available-for-sale securities generated $1.839 million of other comprehensive income, versus a $3.017 million loss in Q1 2018, largely reflecting changes in market interest rates. Gross unrealized losses on these securities were $3.611 million at quarter-end; management said it did not consider the declines other-than-temporary.
- The Company recorded a $131,000 unrealized gain on an equity investment; the investment’s fair value was $1.845 million at March 31, 2019. It also reported a $97,000 loss on sales of securities and time deposits, compared with a $1,000 gain in Q1 2018.
- Foreclosed-real-estate losses were $195,000 in the income statement. The fair-value note separately reports $137,000 of write-down losses for the quarter.
- No FHLB advances were reported on the quarter-end balance sheet. The filing says the Bank has additional FHLB borrowing capacity and collateral eligible for repurchase agreements.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management identified interest-rate and market risk, economic conditions, loan quality, loan demand, deposit flows, competition, regulation and accounting changes among factors that could cause actual results to differ from forward-looking statements. The loan portfolio has substantial exposure to mortgage customers in the Louisville, Kentucky metropolitan area.
- Interest-rate simulations at March 31, 2019 projected higher one-year net interest income under immediate rate increases of 100–300 basis points and lower income under decreases of 100–200 basis points. These are model estimates, not forecasts; the filing discusses limitations tied to repricing, deposit behavior and prepayments.
- The Company expected to adopt the current expected credit loss standard (CECL) for fiscal years beginning after December 15, 2019. Management anticipated a one-time opening allowance adjustment but said its magnitude was unknown; implementation work was underway.
- The Bank had a $2.8 million unfunded affordable-housing investment commitment at quarter-end, expected to be funded through capital calls through 2029. The filing reports no material off-balance-sheet transactions during the quarter, no legal proceedings, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth and the higher provision are accompanied by further deterioration in nonperforming, past-due or classified loans, particularly in the local real-estate portfolio.
- How management’s allowance assumptions and CECL implementation affect future credit-loss provisions and capital.
- Whether deposit growth and liquidity remain sufficient to support lending, and how funding costs respond to changing rates.
- The assumptions and sensitivity of the interest-rate risk models, including the significant change in reported EVE sensitivity from year-end.
- The performance and valuation of the equity investment, available-for-sale securities, foreclosed real estate and affordable-housing commitment.