First Capital, Inc. — Q1 2017 Form 10-Q
Period and business: Unaudited results for the three months ended March 31, 2017, compared with Q1 2016; balance sheet comparisons are to December 31, 2016. First Capital is a savings and loan holding company whose principal subsidiary is First Harrison Bank. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Key financial results
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior date |
|---|---|---|
| Interest income | $6.343 million | $6.346 million in Q1 2016 |
| Net interest income | $5.984 million | $5.846 million in Q1 2016 |
| Net interest income after loan-loss provision | $5.773 million | $5.771 million in Q1 2016 |
| Noninterest income | $1.453 million | $1.368 million in Q1 2016 |
| Noninterest expense | $5.155 million | $4.990 million in Q1 2016 |
| Net income attributable to First Capital | $1.553 million; $0.46 per share | $1.582 million; $0.47 per share |
| Cash flow from operations | $4.825 million | $2.893 million in Q1 2016 |
| Total assets | $761.9 million | $743.7 million at Dec. 31, 2016 |
| Net loans | $385.1 million | $381.2 million at Dec. 31, 2016 |
| Total deposits | $681.7 million | $664.7 million at Dec. 31, 2016 |
| Cash and cash equivalents | $47.7 million | $45.8 million at Dec. 31, 2016 |
| Available-for-sale securities | $272.2 million | $255.8 million at Dec. 31, 2016 |
| Stockholders’ equity attributable to First Capital | $77.1 million | $75.7 million at Dec. 31, 2016 |
Performance, changes, and financial condition
- Net income attributable to First Capital declined about 1.8% year over year. Net interest income rose $138,000, primarily from a larger average balance of interest-earning assets, partly offset by a lower interest-rate spread.
- The reported interest-rate spread was 3.44%, versus 3.49% in Q1 2016. Average interest-earning assets were $704.4 million with a 3.70% tax-equivalent yield, compared with $671.3 million and 3.88%. The filing does not provide a clear net interest margin value.
- Interest expense fell $141,000 as the average cost of interest-bearing liabilities declined from 0.39% to 0.26%; the average balance of those liabilities increased from $514.2 million to $546.7 million. Acquired-loan accretion income fell to $35,000 from $284,000.
- Noninterest income increased $85,000, mainly from higher deposit service charges. Noninterest expense rose $165,000, principally due to a $161,000 increase in net losses on foreclosed real estate and a $111,000 increase in data-processing costs.
- The provision for loan losses increased to $211,000 from $75,000, which management attributed primarily to loan growth. Net charge-offs were $179,000 versus $171,000. The allowance was $3.418 million, compared with $3.386 million at year-end.
- Nonperforming loans rose to $3.210 million from $3.024 million at year-end; this included $143,000 of loans at least 90 days past due that continued to accrue interest. Foreclosed real estate was $4.417 million. Foreclosed-property write-downs were $228,000 in Q1 2017 versus $83,000 in Q1 2016.
- Deposits increased 2.6%. Noninterest-bearing deposits rose $16.9 million; interest-bearing demand and savings balances increased $2.7 million, while time deposits decreased $2.5 million. Management cited new accounts and customers shifting away from longer-term deposits in the low-rate environment.
- Operating cash flow was $4.825 million; investing activities used $19.311 million, and financing activities provided $16.308 million, including a $17.009 million net increase in deposits. Cash and cash equivalents increased $1.822 million during the quarter.
- The balance sheet reports deposits and other accrued liabilities but no separate borrowing balance; a total debt figure is not clearly provided. Management says the Bank can access additional borrowing capacity from the Federal Home Loan Bank of Indianapolis and collateral for repurchase agreements.
- The Bank was reported well-capitalized and compliant with regulatory requirements: Tier 1 leverage 9.3%, Tier 1 risk-based 14.1%, common equity Tier 1 risk-based 14.1%, and total risk-based capital 14.8%.
Outlook, risks, and unusual items
- The filing gives no specific earnings, revenue, or growth guidance. Management cautions that interim results are not necessarily indicative of full-year performance.
- Management describes interest-rate risk as a key exposure. Its one-year net-interest-income simulation estimated a 7.11% increase under an immediate, sustained 300-basis-point rate rise and a 3.55% decline under a 100-basis-point fall. These are model outputs, not forecasts or guarantees.
- Economic-value-of-equity modeling estimated a 0.99% decline under a 300-basis-point rate rise and a 0.77% increase under a 100-basis-point decline at March 31, 2017. Changes versus year-end primarily reflected updated deposit-duration assumptions and the yield curve.
- Credit risk is concentrated in real-estate lending, with a substantial portion of mortgage loans in the Louisville, Kentucky metropolitan area. Management warns that economic or collateral deterioration could require additional loan-loss provisions; actual losses may exceed estimates.
- Available-for-sale securities had $3.882 million of gross unrealized losses. Management attributed these mainly to interest rates and did not consider them other-than-temporary, while noting that further market or economic deterioration could adversely affect credit quality.
- The expected-credit-loss accounting standard (CECL) was not yet effective; management was assessing its impact and expected a one-time cumulative adjustment to the allowance when adopted.
- The Company reported no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet transactions during the quarter reasonably likely to materially affect its financial condition, results, or cash flows. Ordinary-course loan commitments and letters of credit remain.
Important facts for investors to verify
- Whether the increase in nonperforming loans and foreclosed-property losses continues, and how collateral values and allowance assumptions evolve.
- Whether loan growth and deposit mix sustain net interest income as the spread narrows and acquired-loan accretion declines.
- The level and composition of classified loans, including the increase in doubtful balances, and the effect on future provisions and charge-offs.
- How rate movements, deposit behavior, and the assumptions underlying the company’s interest-rate models affect earnings and economic value.
- The eventual CECL adoption impact, including the size of any opening allowance adjustment.