First Capital, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; financial statements are unaudited. First Capital is the holding company for First Harrison Bank, serving primarily the Louisville, Kentucky metropolitan area. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $6.869 | $7.717 | $21.045 | $22.647 |
| Provision for loan losses | $0.400 | $0.225 | $1.576 | $0.975 |
| Noninterest income | $2.616 | $1.833 | $6.392 | $5.106 |
| Noninterest expense | $5.923 | $5.870 | $17.366 | $17.299 |
| Net income attributable to First Capital | $2.746 | $2.915 | $7.278 | $7.922 |
| Diluted EPS | $0.82 | $0.87 | $2.17 | $2.37 |
- Revenue and earnings: Q3 net income attributable to First Capital declined about 6%; nine-month income declined about 8%. Q3 noninterest income rose $0.783 million, principally from loan-sale gains and higher ATM/debit card fees, partly offsetting lower net interest income after provision.
- Interest spreads: Tax-equivalent net interest spread was 3.16% in Q3 versus 4.00% a year earlier, and 3.40% for the nine months versus 3.96%. Lower market rates and 1% PPP loans reduced asset yields; lower deposit costs provided a partial offset. The filing does not provide a clear net interest margin value in the supplied text.
- Balance sheet at September 30: Assets were $948.2 million, up 14.6% from year-end 2019; net loans were $492.1 million, securities available for sale $264.0 million, and cash and cash equivalents $134.2 million. Deposits were $833.4 million, up $111.2 million since year-end; total equity was $108.1 million.
- Credit: Allowance for loan losses was $6.4 million versus $5.1 million at year-end. Nonperforming loans increased to $2.2 million from $1.8 million. Nine-month net charge-offs were $0.233 million, compared with $0.301 million in 2019.
- Cash flow and liquidity: Nine-month operating cash flow was $9.2 million, investing cash flow was negative $34.9 million, and financing cash flow was positive $108.6 million; cash and cash equivalents increased $82.9 million. Management reported the Bank had $132.8 million in cash and cash equivalents and $264.0 million in available-for-sale securities, plus potential FHLB borrowing and repurchase-agreement capacity.
- Debt and capital: The balance sheet reports deposits and other liabilities but no conventional borrowings. The Bank opted into the Community Bank Leverage Ratio framework; its CBLR was 9.53% and it was considered well-capitalized.
- Shareholder returns: Quarterly dividends were $0.24 per share. The company repurchased 1,911 shares during the quarter at an average $70.09 per share.
Material changes versus comparable periods
- Loan-sale gains were $0.980 million in Q3 2020 versus $0.353 million in Q3 2019. The nine-month increase in gains on loans sold was $1.3 million; it included a $0.214 million gain on sale of the Bank’s $1.5 million credit-card portfolio.
- Commercial business loans increased $34.5 million from year-end, mainly reflecting $45.9 million of PPP originations. Commercial real estate loans rose $6.6 million; residential mortgage and construction loans fell $4.8 million and $2.9 million, respectively.
- Allowance expense rose to $1.576 million for the first nine months, with management citing COVID-related economic uncertainty and higher qualitative loss factors. The allowance’s qualitative-factor component increased to about $5.4 million from $3.8 million.
- Deposits grew sharply, while cash increased substantially, primarily reflecting deposit inflows, stimulus and PPP-related funds, and reduced consumer spending.
Outlook, commentary, risks and unusual items
- COVID-19: Management said the pandemic’s duration and financial effect were uncertain and that credit estimates could be materially affected. The Bank approved one-to-six-month payment extensions on $68.1 million of loans, primarily commercial real estate; $58.1 million had resumed normal payments by September 30. Management considered the allowance adequate at that date but warned further losses or reserve increases could occur.
- PPP: The Bank originated approximately $45.9 million of SBA-guaranteed PPP loans. Net deferred PPP loan fees were $1.3 million, to be recognized over loan terms and as forgiveness occurs. The filing identifies possible compliance, credit, litigation and SBA-guaranty risks, including uncertainty around forgiveness requirements.
- Industry exposures: Commercial loans to hotels and restaurants were approximately $12.1 million and $5.2 million, respectively, or 3.3% of the total loan portfolio combined.
- Interest-rate risk: Management’s one-year simulation projected higher net interest income under immediate rate increases and lower income under a 100-basis-point decrease. These are model estimates, not guarantees; actual results depend on customer behavior, repricing and other assumptions.
- Accounting: The company expected CECL adoption to increase the allowance through a one-time retained-earnings adjustment, but had not quantified the amount. As a smaller reporting company, it did not intend to adopt early; the disclosed delayed effective date was fiscal years beginning after December 15, 2022.
- Guidance: The filing provides no numerical earnings or revenue guidance. Management said it would continue monitoring the pandemic and adjust its response as conditions evolve.
- Other: No legal proceedings were reported. The company stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether PPP borrowers receive forgiveness as expected, and the timing of recognition of the $1.3 million deferred fee balance.
- Subsequent performance of deferred-payment borrowers, particularly commercial real estate, and trends in nonperforming loans, charge-offs and the allowance.
- Deposit stability and the sustainability of unusually high cash balances and deposit growth.
- Whether loan-sale gains, including the credit-card portfolio sale, are repeatable, and how recurring fee income and net interest spread develop.
- The eventual CECL impact and any changes in the company’s COVID-19, hotel/restaurant or PPP-related exposures.