First Capital, Inc. — Q1 2016 Form 10-Q
Business context and period. First Capital is the savings and loan holding company for First Harrison Bank. This unaudited filing covers the three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. The results include Peoples Bancorp, acquired in December 2015, so year-over-year comparisons reflect the enlarged business. Amounts below are in millions unless otherwise stated.
Key financial results
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total interest income | $6.346 | $4.496 |
| Net interest income | $5.846 | $4.253 |
| Provision for loan losses | $0.075 | $0 |
| Noninterest income | $1.368 | $1.364 |
| Noninterest expense | $4.990 | $3.679 |
| Net income attributable to First Capital | $1.582 | $1.466 |
| Basic and diluted EPS | $0.47 | $0.53 |
| Dividend per share | $0.21 | $0.21 |
| Operating cash flow | $2.792 | $4.138 |
- Interest-rate spread was 3.49%, down from 4.02%; average earning-asset yield was 3.88% versus 4.31%, while the average rate paid on interest-bearing liabilities rose to 0.39% from 0.29%.
- At March 31, assets were $735.7, up $19.9 from year-end; net loans were $357.4, down $1.8; available-for-sale securities were $210.7, up $23.9.
- Deposits rose 3.0% to $656.2. Cash and cash equivalents were $108.8, compared with $109.2 at year-end. Total equity was $76.1, versus $74.5.
- Investing cash flow was negative $21.5, principally reflecting $62.1 of securities purchases, partly offset by maturities and repayments. Financing cash flow was positive $18.3, primarily from deposit growth and reduced by $0.7 of dividends paid.
- The filing reports no net interest margin figure. No borrowing balance is separately presented in the supplied balance sheet; management cites additional FHLB borrowing capacity and collateral available for repurchase agreements.
Material changes and credit quality
- Net income increased about 8%, but EPS declined from $0.53 to $0.47. The company attributed the per-share decline to the 580,017 shares issued for the Peoples acquisition.
- Higher net interest income, mainly from a larger earning-asset base after the acquisition, was partly offset by a lower asset yield and a $1.3 increase in noninterest expense. Management cited acquired offices and personnel as principal expense drivers.
- Nonperforming loans declined to $3.8 from $4.6 at year-end; loans 90 days or more past due and still accruing were $0.015. The allowance for loan losses was $3.3, down from $3.4, or approximately 0.92% of reported gross loans.
- Net charge-offs were $0.171, versus $1.2 in Q1 2015; the prior-year amount primarily reflected a fully reserved commercial loan charge-off. The filing notes nine loans with partial charge-offs totaling $0.388 at March 31.
- Foreclosed real estate was $4.6. The company recognized $0.083 of write-down losses on foreclosed real estate in Q1 2016. Securities available for sale had $0.358 of gross unrealized losses; management did not consider these other-than-temporary.
Outlook, risks and unusual items
- No specific earnings or financial guidance is provided. Management said the Peoples acquisition was expected to bring growth in the expanded market and cost savings from scale and operational consolidation; these are expectations, not guarantees.
- The Bank was reported as well-capitalized at March 31, with Tier 1 leverage of 9.2%, Tier 1 risk-based capital of 15.2%, common equity Tier 1 of 15.2%, and total risk-based capital of 15.9%.
- Interest-rate sensitivity is material: the company’s model projected that an immediate, sustained 100-basis-point rate decrease would reduce one-year net interest income by 2.75%; a 300-basis-point increase would reduce modeled economic value of equity by 17.48%. Management cautions that model outcomes are not guarantees.
- Key risks cited include local economic and real-estate conditions, loan quality, interest rates, deposit flows, competition, regulation, and the ability to execute the business plan. A substantial portion of lending is in the Louisville, Kentucky metropolitan area.
- The Peoples acquisition included potential additional cash consideration tied to sale proceeds from certain acquired foreclosed properties. At March 31, no sale contract existed and no contingent consideration was anticipated. The company reported no material pending legal proceeding and no material change to previously disclosed risk factors.
- Noninterest income was broadly flat, but Q1 2015 included a $0.110 life-insurance gain; 2016 had no such gain. The company also reported no material off-balance-sheet transaction during the quarter.
Important facts for investors to verify
- How much of the increase in interest income and expense reflects the Peoples acquisition, and whether expected acquisition cost savings are being realized.
- Trends in loan delinquencies, nonperforming loans, charge-offs, foreclosed assets, and the allowance—especially given the portfolio’s local real-estate concentration.
- Whether deposit growth and funding costs remain favorable, and how interest-rate movements affect net interest income and economic value of equity.
- How securities valuation changes affect accumulated other comprehensive income and equity; Q1 included $0.658 of after-tax unrealized securities gains.
- The effect of the higher share count on future EPS and any subsequent developments regarding the contingent assets acquired with Peoples.