First Capital, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are against December 31, 2014. First Capital is the savings and loan holding company for First Harrison Bank, whose operations account for most of the reported results. Financial amounts below are in millions unless otherwise noted.
Key financial results
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Interest income | $4.496 | $4.502 |
| Net interest income | $4.253 | $4.204 |
| Provision for loan losses | $0 | $0.025 |
| Noninterest income | $1.364 | $0.979 |
| Noninterest expense | $3.679 | $3.299 |
| Net income attributable to First Capital | $1.466; $0.53 per share | $1.297; $0.47 per share |
| Operating cash flow | $4.138 | $2.878 |
Net income attributable to First Capital rose about 13% year over year. Combined net interest and noninterest income was $5.617 million, versus $5.183 million. The tax-equivalent interest rate spread was 4.02%, down from 4.08%; the filing does not provide a net interest margin figure. The effective tax rate fell to 24.2% from 30.1%.
Financial position, liquidity and capital
- Total assets were $472.9 million, essentially unchanged from year-end. Net loans were $297.0 million, down $3.6 million; available-for-sale securities were $99.4 million, down $0.8 million.
- Cash and cash equivalents increased to $38.6 million from $33.2 million. Deposits declined 0.3% to $411.2 million. At quarter-end the balance sheet shows no FHLB advances or retail repurchase agreements outstanding.
- Stockholders’ equity attributable to First Capital increased to $58.3 million from $57.1 million. Bank regulatory capital ratios were 11.0% Tier 1 leverage, 14.9% common equity Tier 1, 14.9% Tier 1 risk-based and 16.0% total risk-based; the Bank was considered well-capitalized.
- Cash flow from investing activities was $3.171 million; financing activities used $1.982 million, including $1.406 million of net deposit outflows and $0.576 million of dividends paid. The Bank reported $38.6 million of cash and $99.4 million of available-for-sale securities as liquidity sources, plus potential FHLB and repurchase-agreement borrowing capacity.
Material changes and credit quality
- Noninterest income increased $0.385 million, primarily from higher gains on loan sales ($0.308 million versus $0.107 million) and other income. The loan-sale increase reflected greater commercial Small Business Administration loan sales; other income included a $0.110 million life-insurance gain.
- Noninterest expense increased $0.380 million, including higher compensation and benefits, data processing and other expenses. Management attributed compensation growth to additional commercial and residential lending staff and normal salary and benefit increases.
- Nonperforming loans declined to $1.741 million from $3.224 million. The Bank recorded $1.2 million of net charge-offs, versus a $0.064 million net recovery in Q1 2014; most of the 2015 charge-offs related to a commercial loan fully reserved in prior periods.
- The allowance for loan losses fell to $3.634 million from $4.846 million, with no provision recorded for the quarter. Management considered the allowance adequate, but noted future additions may be needed and actual losses may exceed estimates. Foreclosed real estate increased to $0.541 million from $0.078 million; $0.480 million was transferred from loans during the quarter.
- Loans are concentrated in southern Indiana, particularly real estate lending, exposing credit quality to local real-estate and economic conditions. Loans past due totaled $6.073 million at March 31, compared with $4.871 million at year-end.
Outlook, risks and other items
The filing provides no quantified earnings or growth guidance. Management cited persistently low interest rates as a factor behind lower asset yields and discussed managing interest-rate exposure through asset and liability repricing and maturity strategies. Its simulation estimated that a 100-basis-point rate increase would raise one-year net interest income by 1.58%, while a 100-basis-point decrease would reduce it by 2.25%; these model results are not guarantees. The filing identifies economic conditions, interest rates, regulation, competition, loan demand, deposit flows and portfolio credit quality as risks.
No material legal proceedings, material changes to previously disclosed risk factors, or material off-balance-sheet transactions during the quarter were reported. Disclosure controls were deemed effective, with no material change in internal control over financial reporting. The company granted 19,500 restricted shares in February; the $0.478 million grant-date value vests over five years. Management said adoption of the accounting updates discussed in the filing had no material impact, and it did not expect the new revenue-recognition standard to have a material impact.
Important facts for investors to verify
- Whether the lower allowance and zero quarterly provision remain appropriate given $1.2 million of net charge-offs, past-due loans and the increase in foreclosed real estate.
- The sustainability of earnings growth, including the contribution from increased SBA loan-sale gains and the one-time $0.110 million life-insurance gain.
- Loan and deposit trends, local real-estate exposure, and the Bank’s sensitivity to changing interest rates.
- Liquidity and capital adequacy, including the availability and terms of contingent FHLB or repurchase-agreement funding.
- The filing’s stated share count: 2,760,002 common shares outstanding as of April 30, 2015.