First Capital, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. First Capital is a financial holding company whose principal subsidiary is First Harrison Bank, an Indiana-chartered commercial bank. This unaudited filing covers the three and nine months ended September 30, 2019; balance-sheet comparisons are to December 31, 2018. Dollar amounts below are in millions unless noted.
Financial results and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $8.22 | $7.43 | $24.10 | $21.26 |
| Net interest income | $7.72 | $7.01 | $22.65 | $20.10 |
| Provision for loan losses | $0.23 | $0.46 | $0.98 | $0.97 |
| Noninterest income | $1.83 | $1.70 | $5.11 | $4.96 |
| Noninterest expense | $5.87 | $5.20 | $17.30 | $16.15 |
| Net income attributable to First Capital | $2.92 | $2.52 | $7.92 | $6.76 |
| Diluted earnings per share | $0.87 | $0.76 | $2.37 | $2.03 |
| Dividends per share | $0.24 | $0.23 | $0.71 | $0.69 |
- Margins and earnings drivers: Tax-equivalent net interest rate spread was 4.00% for Q3 2019 versus 3.77% a year earlier, and 3.96% for the nine months versus 3.68%. Management attributed higher net interest income chiefly to growth in interest-earning assets, improved yields, and a shift toward higher-yielding loans. The filing does not provide a clear net interest margin value.
- Balance sheet at September 30: Total assets were $823.3, up 3.7% from year-end 2018. Net loans were $467.7, up $33.4; available-for-sale securities were $255.0, down $6.8. Deposits were $719.4, up $17.7, and cash and cash equivalents were $43.5. Company stockholders’ equity was $96.9, compared with $85.8 at year-end, supported by retained earnings and higher unrealized securities gains.
- Cash flow, liquidity, and debt: For the nine months, operating cash flow was $8.1, investing cash outflow was $21.1, and financing cash inflow was $15.3; cash and cash equivalents increased $2.3. The Bank reported $255.0 of available-for-sale securities and additional FHLB borrowing capacity. No FHLB advances were outstanding at September 30, 2019; the filing does not report other interest-bearing debt.
- Credit and capital: The allowance for loan losses was $4.7, or about 1.0% of principal loan balances; nonperforming loans were $1.8 versus $3.1 at year-end 2018. Net charge-offs for the nine months were $0.30. The Bank was designated well-capitalized, with Tier 1 leverage of 9.9%, CET1 and Tier 1 risk-based capital ratios of 14.1%, and total risk-based capital of 14.9%.
Material changes versus prior periods
- Nine-month net income attributable to First Capital rose $1.2, while diluted EPS increased from $2.03 to $2.37. Q3 net income rose $0.4 and diluted EPS increased from $0.76 to $0.87.
- Nine-month net interest income increased $2.5. Tax-equivalent yield on average interest-earning assets rose to 4.30% from 3.96%; the average cost of interest-bearing liabilities increased to 0.34% from 0.28%.
- Nine-month noninterest expense increased $1.2, mainly from compensation and benefits (+$0.9) and data processing (+$0.3). Q3 expense increased $0.7, including higher compensation and a year-over-year swing in foreclosed-real-estate results.
- Unrealized gains on available-for-sale securities improved other comprehensive income by $5.4 for the nine months, compared with a $4.3 loss in the prior-year period; management linked the change primarily to long-term interest rates.
- Loans grew faster than deposits during the period. The loan portfolio is concentrated in real estate lending, with a substantial portion tied to the Louisville, Kentucky metropolitan area.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or growth guidance. Management noted interim results are not necessarily indicative of full-year results.
- Management said the allowance was adequate based on its estimates but cautioned that future provisions may be needed and actual loan losses could exceed estimates. Allowance estimates depend on borrower condition, collateral values, economic conditions, and other judgmental factors.
- The company is preparing for the expected-credit-loss standard (CECL). As a smaller reporting company, it cited the October 2019 effective-date delay to fiscal years beginning after December 15, 2022; management expects a one-time cumulative adjustment, but its size is unknown.
- Interest-rate sensitivity modeling at September 30 projected one-year net interest income increases of 5.0%, 8.8%, and 12.2% under immediate +100, +200, and +300 basis-point scenarios, respectively; modeled decreases under -100 and -200 basis points were 5.3% and 10.7%. Management cautioned that model results are not guarantees and depend on assumptions, including deposit behavior and prepayments.
- Unusual items included $0.36 of foreclosed-real-estate write-downs for the nine months and a Q3 $0.19 year-over-year adverse swing in foreclosed-real-estate results. The company also recorded $0.13 of net losses on sales of securities and time deposits for the nine months.
- The filing reports no legal proceedings, no material changes to previously disclosed risk factors, and no material changes in internal control over financial reporting. Disclosure controls were concluded effective.
Important facts for investors to verify
- Whether loan growth and deposit growth remain balanced, and how the bank funds continued loan expansion.
- Credit quality trends, especially real-estate concentration, past-due loans, criticized classifications, and adequacy of the $4.7 allowance.
- The eventual CECL transition impact and the assumptions behind management’s allowance estimates.
- Whether deposit costs, interest-rate exposure, and modeled sensitivity remain consistent with actual results.
- Recurring versus nonrecurring contributions to earnings, including securities transactions, foreclosed-property losses, and equity-security valuation changes.