First Capital, Inc. — 2015 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. First Capital is the savings and loan holding company for First Harrison Bank; reported results primarily reflect the Bank’s operations. Financial figures below are in millions except per-share data and percentages.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $4.333 | $4.366 | $12.902 | $12.936 |
| Provision for loan losses | $0 | $0.075 | $0.050 | $0.190 |
| Noninterest income | $1.226 | $1.438 | $3.804 | $3.704 |
| Noninterest expense | $3.651 | $3.591 | $11.091 | $10.239 |
| Net income attributable to First Capital | $1.398 | $1.524 | $4.092 | $4.339 |
| Diluted earnings per share | $0.51 | $0.56 | $1.49 | $1.57 |
Q3 net income fell about 8% year over year; nine-month net income declined about 6%. The nine-month decrease primarily reflected higher noninterest expense, partly offset by lower loan-loss provisions and higher noninterest income. Q3 results also reflected lower noninterest income and higher acquisition-related professional fees. Dividends were $0.21 per share in Q3 and $0.63 for the first nine months, unchanged from 2014.
Tax-equivalent net interest rate spread was 4.08% in Q3 versus 4.10% a year earlier, and 4.01% year to date versus 4.10%. Management attributed pressure principally to lower yields in the low-rate environment. Nine-month total interest income decreased $0.207 million while interest expense decreased $0.173 million.
Financial position, liquidity and credit
- At September 30, 2015, total assets were $465.2 million, down 1.6% from year-end 2014. Net loans were $305.1 million, up $4.5 million; available-for-sale securities were $95.2 million, down $5.0 million.
- Cash and cash equivalents were $24.4 million, down from $33.2 million at year-end. Deposits were $402.6 million, down 2.4%; time deposits declined $10.9 million as customers avoided longer-term commitments in the low-rate environment.
- Total equity was $59.6 million, versus $57.2 million at year-end. The Bank reported regulatory capital ratios of 11.2% Tier 1 capital to average assets, 15.1% common equity Tier 1 and Tier 1 capital to risk-weighted assets, and 16.2% total capital to risk-weighted assets; it met “well-capitalized” thresholds.
- Nine-month operating cash flow was $6.7 million, investing cash outflow $3.7 million, and financing cash outflow $11.8 million. The financing outflow principally reflected a $10.1 million net decline in deposits and $1.7 million of dividends paid.
- Nonperforming loans declined to $1.65 million from $3.22 million at year-end. The allowance for loan losses fell to $3.49 million from $4.85 million; the allowance was about 2.8% of principal loan balance. Nine-month net charge-offs were $1.40 million, including a $1.2 million commercial-loan charge-off that had been fully reserved in prior periods.
- Foreclosed real estate increased to $0.52 million from $0.08 million. The Bank had $0.593 million of residential loans in formal foreclosure proceedings. Management stated the allowance was adequate, while noting estimates may require future adjustment.
The balance sheet reports no FHLB advances or retail repurchase agreements at September 30, 2015. The Bank said it also had additional FHLB borrowing capacity and collateral eligible for repurchase agreements. The Company itself had $0.135 million in liquid assets on a stand-alone basis.
Material developments, outlook and risks
- On June 4, 2015, First Capital agreed to acquire Peoples Bancorp, Inc. of Bullitt County. Peoples shareholders may elect 382.83 First Capital shares or $9,475 cash per Peoples share, subject to proration targeting an aggregate 50% stock/50% cash mix and specified adjustment provisions. Completion was anticipated in Q4 2015, subject to shareholder and regulatory approvals and other closing conditions.
- Peoples-related professional fees were $0.353 million for the first nine months and $0.086 million in Q3. Management cited acquisition costs as a principal factor in higher expenses and lower quarterly earnings.
- No earnings or financial guidance was provided. Management’s forward-looking statements were subject to risks including interest rates, economic conditions, loan and deposit trends, regulatory changes, merger approvals, integration, and realization of expected merger benefits.
- Interest-rate simulations indicated that, over one year, a 100-basis-point rate increase would raise modeled net interest income 1.99%, while a 100-basis-point decrease would reduce it 2.50%. Economic value of equity was modeled to decline 5.37% under a 200-basis-point increase and 5.39% under a 100-basis-point decrease. Management cautioned that model results are not guarantees.
- The loan portfolio is concentrated substantially in southern Indiana, making borrower repayment sensitive to local real estate and economic conditions. The filing reported no material change to previously disclosed risk factors, no legal proceedings believed likely to have a material adverse effect, and no off-balance-sheet transactions reasonably likely to materially affect results or cash flows.
Important facts for investors to verify
- Whether the Peoples merger received required approvals and closed as anticipated, including final consideration mix, adjustments, costs, and realized benefits.
- Whether deposit contraction and lower cash balances persist, and how available liquidity and borrowing capacity compare with funding needs.
- Whether the lower allowance remains adequate given $1.40 million in nine-month net charge-offs, collateral values, and the loan portfolio’s geographic concentration.
- Whether operating expenses, especially professional fees and compensation, normalize after merger-related costs and staffing changes.
- How changes in rates affect net interest income and economic value of equity relative to the filing’s simulations and assumptions.