First Capital, Inc. — Q1 2022 Form 10-Q
Business context and period. First Capital is a financial holding company for First Harrison Bank, an Indiana-chartered community bank. This unaudited report covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise stated. Amounts below are in millions except per-share data and ratios.
Key financial results
| Metric | Q1 2022 / Mar. 31, 2022 | Comparable / prior period |
|---|---|---|
| Net interest income | $6.95 | $7.00 in Q1 2021 |
| Provision for loan losses | $0.18 | $0.08 in Q1 2021 |
| Noninterest income | $2.15 | $2.44 in Q1 2021 |
| Noninterest expense | $5.99 | $5.81 in Q1 2021 |
| Income before taxes | $2.93 | $3.56 in Q1 2021 |
| Net income attributable to First Capital | $2.53; $0.75 per diluted share | $2.94; $0.88 per diluted share |
| Dividends per common share | $0.26 | $0.26 in Q1 2021 |
| Operating cash flow | $3.30 | $7.56 in Q1 2021 |
| Cash and cash equivalents | $167.69 | $172.51 at Dec. 31, 2021 |
| Total assets | $1,174.54 | $1,156.60 at Dec. 31, 2021 |
| Net loans | $505.95 | $483.29 at Dec. 31, 2021 |
| Total deposits | $1,072.08 | $1,035.56 at Dec. 31, 2021 |
| Total equity | $96.52 | $113.94 at Dec. 31, 2021 |
| Allowance for loan losses | $6.25 | $6.08 at Dec. 31, 2021 |
Performance, liquidity and capital
- Net income attributable to the Company fell about 14% year over year. Management attributed the decline mainly to lower net interest income after provision, lower noninterest income, and higher noninterest expense.
- Net interest income declined $0.05 million. The tax-equivalent interest-rate spread narrowed to 2.55% from 2.96%; the average yield on interest-earning assets fell to 2.68% from 3.13%. Lower PPP fee recognition was a significant factor: $0.03 million in Q1 2022 versus $0.63 million in Q1 2021. The filing does not provide a clear net interest margin figure.
- Noninterest income decreased $0.29 million, primarily reflecting lower gains on loan sales and lower unrealized equity-security gains, partly offset by higher deposit service charges. Noninterest expense rose $0.19 million, including higher other, data-processing and professional costs. The effective tax rate was 13.7%, versus 17.4%.
- Loans grew $22.7 million, led by commercial real estate, residential mortgage and commercial business lending. Nonperforming loans were $1.20 million, down from $1.33 million at year-end; net charge-offs were $0.01 million versus $0.07 million in Q1 2021. Management considered the allowance adequate, but $5.8 million of the $6.2 million allowance reflected qualitative-factor adjustments.
- Available-for-sale securities declined to $438.2 million from $447.3 million. Rising market rates generated a $24.9 million pretax unrealized loss and a $19.2 million after-tax other-comprehensive loss, reducing Company stockholders’ equity to $96.4 million. Management said it did not consider the securities’ declines other-than-temporary.
- Deposits increased $36.5 million in the quarter. The Bank reported $167.1 million of cash and cash equivalents and $437.6 million of available-for-sale securities at quarter-end; additional borrowing capacity was available from the FHLB and through eligible collateral for repurchase agreements. The balance sheet reports no borrowing balance; deposits are the primary funding source.
- Cash flow from investing was negative $43.8 million, principally reflecting loan growth and securities purchases; financing cash flow was positive $35.6 million, mainly from deposit growth. Cash and equivalents declined $4.8 million during the quarter.
- The Bank’s Community Bank Leverage Ratio was 8.73%, below the 9% minimum effective in 2022, but it remained “well-capitalized” under applicable guidelines. Management said the Bank had a two-quarter grace period to restore compliance or would opt out of the framework beginning with the quarter ending September 30, 2022. No specific debt balance is reported in the balance sheet.
Outlook, risks and notable items
- No earnings or financial guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Risk factors include interest-rate and market volatility, credit quality, deposit flows, loan demand, local economic conditions, competition, and continuing COVID-19 effects. The loan portfolio is substantially concentrated in the Louisville, Kentucky area. Hotel and restaurant exposures were approximately $13.9 million and $11.0 million, respectively, or 4.9% of total loans.
- The company described rate sensitivity as favorable to modeled net interest income under parallel rate increases, but warned that model assumptions and customer behavior can differ from actual outcomes. A modeled 200-basis-point rate decrease reduced economic value of equity by 35.2% at March 31, 2022.
- CECL adoption was expected for fiscal years beginning after December 15, 2022; management anticipated an increase to the allowance through a one-time retained-earnings adjustment, with the amount not yet determined. The filing says there were no material changes to previously disclosed risk factors, no legal proceedings, and no material off-balance-sheet transactions during the quarter.
Important facts for investors to verify
- How the securities portfolio’s unrealized losses, further rate changes and any securities sales may affect equity, liquidity and earnings.
- Whether the Bank’s capital ratio reaches 9% within the grace period or whether it exits the CBLR framework as described.
- Loan growth, classified and nonperforming loan trends, and whether the allowance remains adequate as economic conditions change.
- The impact of CECL implementation on reserves, retained earnings and capital when the company completes its assessment.
- Whether reduced PPP income, changing deposit costs and loan yields alter net interest income and profitability in subsequent quarters.