First Capital, Inc. — Q1 2023 Form 10-Q
Business and period: First Capital is the holding company for First Harrison Bank, an Indiana-chartered commercial bank. This unaudited report covers the three months ended March 31, 2023; income and cash-flow comparisons are with Q1 2022, while balance-sheet comparisons are with December 31, 2022. Amounts below are in millions except per-share data and percentages.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $10.187 | $7.205, Q1 2022 |
| Net interest income | $9.191 | $6.952, Q1 2022 |
| Provision for credit losses | $0.193 | $0.175, Q1 2022 |
| Net interest income after provision | $8.998 | $6.777, Q1 2022 |
| Noninterest income / expense | $1.991 / $6.401 | $2.147 / $5.994, Q1 2022 |
| Net income attributable to First Capital | $3.816; diluted EPS $1.14 | $2.527; diluted EPS $0.75, Q1 2022 |
| Total assets | $1,135.2 | $1,151.4 at Dec. 31, 2022 |
| Net loans; total deposits | $565.6; $1,035.5 | $558.0; $1,060.4 at Dec. 31, 2022 |
| Cash and cash equivalents | $35.9 | $66.3 at Dec. 31, 2022 |
| Total equity | $94.2 | $85.3 at Dec. 31, 2022 |
- Earnings and spread: Net income attributable to the company rose about 51% year over year. Management attributed stronger net interest income mainly to higher yields on earning assets: average tax-equivalent asset yield was 3.73%, versus 2.68%; interest-rate spread was 3.22%, versus 2.55%. Average cost of interest-bearing liabilities increased to 0.51% from 0.13%.
- Cash flow: Operating activities provided $5.3 million; investing activities used $9.5 million; financing activities used $26.2 million. Cash and cash equivalents fell $30.4 million to $35.9 million, primarily as loan growth was funded and deposits flowed out.
- Credit: The allowance for credit losses on loans was $7.3 million, or 1.29% of loans, at quarter-end. Net charge-offs were $0.203 million, compared with $0.013 million in Q1 2022. Nonperforming loans were $1.3 million, down from $1.4 million at year-end.
- Debt and liquidity: The balance sheet reports deposits and other liabilities but no outstanding borrowing balance. Management cited FHLB borrowing capacity, collateral for repurchase agreements, and unsecured federal funds lines as additional potential funding sources. The bank’s CBLR was 9.46%; management said it met capital requirements and was well-capitalized.
Material changes versus comparable periods
- Net interest income after provision increased $2.2 million year over year, reflecting stronger interest income, partly offset by higher deposit interest expense.
- Noninterest income declined $0.156 million year over year, mainly due to lower loan-sale gains and commission and fee income. Noninterest expense rose $0.407 million, primarily from compensation and data-processing costs.
- Deposits fell $24.9 million from year-end, including decreases in checking and savings balances; time deposits increased $5.8 million. Management noted heightened competition from higher-rate alternatives was affecting deposit flows and increasing deposit costs.
- Available-for-sale securities increased in fair value to $470.1 million. Their gross unrealized losses were $38.3 million at quarter-end, down from $46.8 million at year-end; the quarter included $6.7 million of after-tax other comprehensive income from securities valuation changes.
Outlook, risks, and unusual items
- The filing provides no specific earnings or financial guidance. Management’s forward-looking statements are subject to economic, interest-rate, liquidity, deposit-flow, credit, competition, regulatory, and other risks.
- First Capital adopted CECL on January 1, 2023. Adoption increased the beginning loan allowance by $0.561 million, established a $0.131 million allowance for unfunded commitments, and reduced retained earnings by $0.529 million after tax. Q1 2023 credit-loss results use the new method; prior periods use the former incurred-loss method.
- Management reported no provision for credit losses on investment securities in Q1, attributing unrealized security losses to market and interest-rate factors and stating it did not intend, and did not expect to be required, to sell the securities before recovery.
- The loan portfolio has significant exposure to mortgage lending in the Louisville, Kentucky area. Management cautioned that economic and real-estate conditions could affect borrowers and collateral values. Interest-rate sensitivity models are estimates, not guarantees; modeled EVE fell 31.2% under an immediate, sustained 300-basis-point rate decrease at March 31, 2023.
- No material loans to financially distressed borrowers were modified in Q1. The filing reports no legal proceedings and no material changes to previously disclosed risk factors; it also reports no off-balance-sheet transactions reasonably likely to have a material effect.
Investor verification points
- Review deposit trends, account mix, deposit pricing, and the bank’s ability to maintain liquidity as cash balances decline.
- Assess loan-quality trends, charge-offs, delinquency and risk ratings, and the adequacy of the CECL allowance, particularly for real-estate exposures.
- Examine the securities portfolio’s remaining unrealized losses, interest-rate exposure, and potential effects on capital and liquidity if securities must be sold.
- Confirm the assumptions behind interest-rate sensitivity models and the bank’s CBLR and other capital measures.
- Track whether higher asset yields continue to exceed rising funding costs and whether the increase in quarterly earnings is sustainable.