First Capital, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. First Capital is the savings and loan holding company for First Harrison Bank; reported operations primarily reflect the Bank. Amounts below are in thousands of dollars unless noted.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Interest income | $4,646 | $4,649 | $13,811 | $13,779 |
| Net interest income | $4,366 | $4,241 | $12,936 | $12,473 |
| Provision for loan losses | $75 | $100 | $190 | $575 |
| Noninterest income | $1,438 | $1,211 | $3,704 | $3,561 |
| Noninterest expense | $3,591 | $3,270 | $10,239 | $9,898 |
| Net income attributable to First Capital | $1,524 | $1,426 | $4,339 | $3,830 |
| Basic and diluted EPS | $0.56 | $0.51 | $1.57 | $1.38 |
| Dividends per share | $0.21 | $0.20 | $0.63 | $0.60 |
- Management attributed higher nine-month earnings mainly to improved net interest income after provisions and higher noninterest income, partly offset by increased expenses. Q3 earnings improved for similar reasons.
- Net interest income rose $463 for the first nine months as lower funding costs and a higher ratio of interest-earning assets to interest-bearing liabilities more than offset a slightly lower asset yield. The tax-equivalent interest-rate spread increased to 4.10% from 3.96% year over year for the nine-month period; Q3 spread was 4.10% versus 4.02%.
- Loan-loss provision fell to $190 from $575 for the nine months; net charge-offs were $57 versus $407. Noninterest expense increased, particularly compensation and benefits, which rose $396 for the nine months.
- Noninterest income benefited from a $129 gain on life insurance recognized in Q3 and higher commission income. Gain on sale of loans fell $176 year over year for the nine-month period amid slower mortgage activity.
Financial position, liquidity and capital
- Total assets were $460.3 million at September 30, up 3.6% from year-end 2013. Net loans were $302.3 million, up $13.8 million; commercial business and commercial real estate lending grew while residential mortgage loans declined.
- Deposits increased 7.3% to $401.0 million. Cash and cash equivalents rose to $20.2 million from $11.1 million. Available-for-sale securities totaled $100.5 million, down from $108.8 million.
- FHLB advances and retail repurchase agreements were both zero at quarter-end, compared with $5.5 million and $9.3 million, respectively, at year-end. Management said repurchase agreements were restructured into interest-bearing demand deposits, including $10.6 million associated with local municipalities.
- Nine-month cash flows were $5.8 million provided by operations, $6.5 million used in investing, and $9.8 million provided by financing. Cash and cash equivalents increased $9.0 million.
- Stockholders’ equity attributable to First Capital was $56.2 million, versus $53.2 million at year-end, reflecting retained earnings and higher unrealized securities gains, partly offset by $908 of share repurchases. The Bank reported regulatory capital ratios of 10.8% tangible capital to adjusted assets, 14.6% Tier 1 risk-based capital and 15.8% total risk-based capital, and was considered well-capitalized.
- The Bank reported $20.2 million of cash and $100.5 million of available-for-sale securities, as well as additional FHLB borrowing capacity and collateral eligible for repurchase agreements. The holding company separately had $435 of liquid assets.
Credit, risks and outlook
- The allowance for loan losses was $5.1 million, compared with $4.9 million at year-end. Nonperforming loans declined to $3.5 million from $5.5 million; nonaccrual loans were $3.4 million. Past-due loans totaled $4.5 million at quarter-end, compared with $6.8 million at year-end.
- Management identified elevated past-due loan levels relative to historical experience, local economic conditions, and the shift toward commercial and second-lien lending as allowance considerations. The loan portfolio is concentrated in southern Indiana, exposing repayment capacity to local real estate and economic conditions.
- The Bank formed a wholly owned insurance subsidiary in September 2014 to provide property and casualty coverage to the company and affiliates and reinsurance to other captives.
- No earnings guidance or specific forward outlook was provided. Management cited general economic conditions, interest rates and government policy, regulation, loan quality and composition, loan demand, deposit flows and competition as factors that could affect results.
- Interest-rate simulations estimated that a parallel 100-basis-point rise would increase one-year net interest income by 1.71% at September 30, while a 100-basis-point decline would reduce it by 2.12%. A 300-basis-point rise was modeled to reduce economic value of equity by 22.33%. Management cautioned that model assumptions and customer behavior make these estimates uncertain.
- Unrealized gains on available-for-sale securities contributed $1.260 million to nine-month other comprehensive income. Management reported no securities impairment deemed other-than-temporary. No material legal proceedings, material changes to previously disclosed risk factors, or materially impactful off-balance-sheet transactions were reported.
Investor verification points
- Review the growth and credit quality of commercial business and commercial real estate loans, including classified, past-due and nonperforming exposures.
- Assess the adequacy of the $5.1 million loan-loss allowance given portfolio mix, local economic conditions and management’s qualitative assumptions.
- Verify the sustainability of earnings improvements, including lower credit provisions, the life-insurance gain and the decline in mortgage-loan sale gains.
- Monitor deposit growth and mix, including the conversion of municipal repurchase agreements to deposits, and the effect of interest rates on funding costs and liquidity.
- Evaluate the interest-rate sensitivity scenarios and the potential effect of rate changes on earnings and economic value of equity.