First Capital, Inc. — Q2 2021 Form 10-Q
Unaudited results for the quarter and six months ended June 30, 2021. First Capital is a bank holding company whose principal subsidiary is First Harrison Bank. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net interest income | $6.844 | $6.970 | $13.848 | $14.176 |
| Provision for loan losses | $0 | $0.825 | $0.075 | $1.176 |
| Noninterest income | $2.552 | $2.320 | $4.990 | $3.776 |
| Noninterest expense | $6.165 | $5.618 | $11.972 | $11.443 |
| Net income attributable to First Capital | $2.730 | $2.438 | $5.669 | $4.532 |
| Diluted earnings per share | $0.82 | $0.73 | $1.69 | $1.35 |
| Dividends per share | $0.26 | $0.24 | $0.52 | $0.48 |
- Q2 income before taxes was $3.231 million; income tax expense was $0.497 million, a 15.4% effective rate. For the first half, the effective tax rate was 16.4%, versus 14.9% in 2020.
- Tax-equivalent net interest spread narrowed to 2.71% in Q2 and 2.84% for the first half, versus 3.34% and 3.52%, respectively, in 2020. Management attributed the decline principally to lower asset yields following 2020 rate cuts.
- First-half net cash from operating activities was $9.436 million, versus $4.242 million in 2020. Investing activities used $60.639 million; financing activities provided $59.311 million. Cash and cash equivalents ended the period at $183.996 million.
Financial position and liquidity
- Total assets were $1.079 billion, up $61.1 million (6.0%) from December 31, 2020. Deposits rose $61.1 million to $961.6 million.
- Net loans declined $15.6 million to $484.8 million; securities available for sale increased $70.0 million to $353.5 million. Management cited securities purchases and deposit growth as key uses and sources of funds, respectively.
- The allowance for loan losses was $6.6 million, essentially unchanged from year-end; net charge-offs were $63,000 for the first half. Nonperforming loans increased to $1.8 million from $1.5 million at year-end.
- Equity totaled $112.5 million, including $112.4 million attributable to First Capital. The decline in unrealized gains on available-for-sale securities reduced equity by $2.3 million during the first half.
- The balance sheet shows no borrowings as a liability line item. Management says the Bank has additional FHLB borrowing capacity and collateral eligible for repurchase agreements. The Bank’s Community Bank Leverage Ratio was 8.79%, above the 2021 minimum of 8.5%; it was considered well-capitalized.
Changes, outlook, and risks
- Net income attributable to First Capital rose to $2.7 million in Q2 and $5.7 million for the first half. Lower loan-loss provisions and higher noninterest income drove the improvement, partly offset by higher expenses.
- First-half noninterest income increased $1.2 million, supported by a $427,000 unrealized equity-security gain versus a $171,000 loss in 2020, higher ATM/debit fees, and increased gains on loan sales. Noninterest expense rose $529,000, including higher compensation, professional fees, and data-processing costs.
- COVID-19 remains a material uncertainty. The Bank had approved payment extensions on $68.1 million of loans; $58.5 million remained outstanding at June 30 and all had resumed payments. PPP authorizations totaled approximately $62.4 million; as of July 23, the Bank had received $41.7 million of SBA payoffs.
- Hotel and restaurant commercial loan exposure was approximately $11.9 million and $5.0 million, respectively, or about 3.5% of the total loan portfolio. The loan book is substantially tied to the Louisville, Kentucky area, making local real-estate and economic conditions relevant credit risks.
- Management considered the allowance adequate but warned that further losses could emerge as pandemic effects evolve. The company also cited interest-rate, credit, liquidity, economic, competitive, regulatory, and deposit-flow risks. Interest-rate simulations show higher modeled net interest income under rising-rate scenarios and lower income under falling-rate scenarios; management cautions that model results are not guarantees.
- No earnings or financial guidance was provided. Management said CECL adoption is expected to increase the allowance through a one-time retained-earnings adjustment, but the amount is not yet known; the company does not currently intend early adoption and, as a smaller reporting company, expects adoption after December 15, 2022.
Important facts for investors to verify
- Whether credit quality, criticized loans, nonperformers, and pandemic-related borrower performance change after June 30, particularly in commercial real estate and exposed industries.
- How deposit growth, liquidity deployment into securities, and the narrower interest-rate spread affect future net interest income and margins.
- The assumptions and eventual quantified impact of CECL implementation on reserves, earnings, and retained capital.
- Whether the Bank continues to meet capital requirements and maintain its 8.79% Community Bank Leverage Ratio as balance-sheet conditions change.
- Whether the equity-security valuation gains and loan-sale income are repeatable; both contributed to noninterest income comparisons.