First Capital, Inc. — 2018 Second-Quarter Form 10-Q
Reporting period: Three and six months ended June 30, 2018. First Capital is a bank holding company whose principal subsidiary is First Harrison Bank. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $6.668 | $6.232 | $13.090 | $12.216 |
| Provision for loan losses | $0.316 | $0.256 | $0.513 | $0.467 |
| Noninterest income | $1.736 | $1.856 | $3.262 | $3.309 |
| Noninterest expense | $5.697 | $4.803 | $10.951 | $9.958 |
| Income before taxes | $2.391 | $3.029 | $4.888 | $5.100 |
| Net income attributable to First Capital | $2.100 | $2.190 | $4.233 | $3.743 |
| Diluted earnings per share | $0.63 | $0.66 | $1.27 | $1.12 |
- Net interest income rose 7% in Q2 and 7% for the first half. Management attributed the increase to growth in interest-earning assets and improved yields/spread. Tax-equivalent spread was 3.65% in Q2 versus 3.56%; for the first half it was 3.63% versus 3.50%. The filing does not provide a clear net interest margin value.
- Q2 net income fell about 4%, while first-half net income increased about 13%. The first-half effective tax rate declined to 13.3% from 26.5%; Q2 was 12.0% versus 27.6%.
- At June 30, assets were $788.1 million, loans net of allowance were $419.4 million, and available-for-sale securities were $251.4 million. Total deposits were $701.8 million and stockholders’ equity attributable to First Capital was $80.3 million.
- Cash and cash equivalents were $61.9 million, up from $25.9 million at year-end. Six-month operating cash flow was $6.3 million versus $7.4 million in 2017. Investing activities provided $4.0 million versus using $31.2 million; financing activities provided $25.7 million versus $14.3 million.
- The Bank repaid all $10.0 million of FHLB advances outstanding at year-end; none remained at June 30. Deposits increased $37.3 million during the first half.
- The Bank reported regulatory capital ratios of 9.6% Tier 1 leverage, 14.0% common equity Tier 1, 14.0% Tier 1 risk-based, and 14.7% total risk-based, and was considered well-capitalized.
Material changes and notable items
- Loans net of allowance grew $9.8 million from year-end, led by commercial real estate, land, and home equity/second-mortgage lending. Total deposits grew 5.6%.
- Available-for-sale securities fell $19.8 million. First-half other comprehensive loss was $3.4 million, primarily reflecting interest-rate-related unrealized losses; accumulated other comprehensive loss was $5.5 million at June 30, compared with $2.1 million at year-end.
- Q2 noninterest expense increased $0.9 million year over year, including higher foreclosed-real-estate losses, compensation, and data-processing costs. The income statement reports a $0.4 million net loss on foreclosed real estate for the quarter; the fair-value note reports $0.419 million of write-down losses for the quarter and first half.
- Q2 noninterest income declined $0.1 million. The quarter included a $96,000 loss on securities sales; first-half securities-sale results were also weaker than the prior year.
- The allowance for loan losses was $3.9 million, up from $3.6 million at year-end. Nonperforming loans declined to $2.4 million from $2.8 million; net charge-offs were $280,000 for the first half, compared with $327,000 in 2017.
Outlook, risks, and contingencies
- The filing provides no specific earnings or growth guidance. Management’s forward-looking statements are subject to economic and interest-rate conditions, loan and securities credit quality, deposit flows, competition, regulation, and execution risks.
- Management said the lower tax expense reflected the Tax Cuts and Jobs Act, increased nontaxable income, and a tax-credit investment. The Bank’s affordable-housing investment was $3.8 million at June 30, with an additional unfunded commitment of $3.3 million expected to be funded through 2029.
- Management considers the allowance adequate but notes estimates may change and actual losses may exceed estimates. Credit exposure is concentrated in the Louisville, Kentucky metropolitan area; the filing identifies local real-estate and economic conditions as important to borrowers’ repayment capacity.
- Management’s interest-rate simulation projected one-year net interest income declines of 0.41%, 1.08%, and 0.53% under immediate sustained rate increases of 100, 200, and 300 basis points, respectively; a 100-basis-point decline projected a 0.22% increase. These are model estimates, not forecasts.
- The company is preparing for the expected-credit-loss standard (CECL); management expects a one-time allowance adjustment on adoption, but its amount is unknown. No material off-balance-sheet transactions were reported for the period; legal proceedings were reported as none.
Important facts for investors to verify
- Whether higher foreclosed-property write-downs and securities-sale losses persist, and how they affect quarterly earnings.
- Loan growth, delinquency and nonperforming-loan trends, allowance adequacy, and local real-estate credit concentration.
- How deposit costs and asset yields respond to interest-rate changes, including the assumptions behind the company’s sensitivity models.
- The extent and timing of available-for-sale securities losses, and the effect of the affordable-housing commitment and future CECL adoption on earnings and capital.
- Capital ratios, liquidity, and the sustainability of dividends; the first-half dividend was $0.46 per share.