First Capital, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. First Capital is a savings and loan holding company whose principal subsidiary is First Harrison Bank. This unaudited filing covers the quarter and nine months ended September 30, 2017; comparative results are for the corresponding 2016 periods. Amounts below are in millions except per-share data and ratios.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $6.385 | $5.801 | $18.601 | $17.480 |
| Provision for loan losses | $0.150 | $0.200 | $0.617 | $0.425 |
| Noninterest income | $1.748 | $1.750 | $5.057 | $4.733 |
| Noninterest expense | $5.046 | $4.924 | $15.004 | $14.758 |
| Net income attributable to First Capital | $2.109 | $1.758 | $5.852 | $5.123 |
| Diluted EPS | $0.63 | $0.53 | $1.76 | $1.53 |
| Dividends per share | $0.22 | $0.21 | $0.64 | $0.63 |
- Net interest income after provision was $6.235 million for Q3 and $17.984 million for the nine months. Tax-equivalent interest-rate spread was 3.65% for Q3 2017 versus 3.41% a year earlier, and 3.54% for the nine months versus 3.43%. The filing does not provide a clear net interest margin value in the supplied text.
- At September 30, assets were $754.2 million, up 1.4% from year-end 2016. Net loans were $400.8 million, up $19.6 million; available-for-sale securities were $276.9 million, up $21.1 million.
- Cash and cash equivalents were $24.8 million, down from $45.8 million at December 31, 2016, primarily as excess federal funds were invested in securities. Nine-month operating cash flow was $11.7 million; investing cash use was $35.4 million and financing cash provided was $2.7 million.
- Deposits totaled $665.5 million, slightly above year-end. Noninterest-bearing deposits rose $11.7 million while time deposits declined $8.9 million. FHLB advances were $4.0 million, compared with none at year-end; this was the reported borrowing balance.
- Company stockholders’ equity was $81.3 million, versus $75.7 million at year-end. The Bank reported regulatory capital ratios of 9.5% Tier 1 leverage, 14.0% common equity Tier 1, 14.0% Tier 1 risk-based, and 14.7% total risk-based, and was considered well-capitalized.
Material changes versus comparable periods
- Q3 net income attributable to First Capital increased about 20% year over year; nine-month net income increased about 14%. Management attributed the nine-month improvement mainly to higher net interest income after provision and noninterest income, partly offset by higher expenses.
- For the nine months, net interest income rose $1.1 million, supported by growth in interest-earning assets and a wider spread. Average interest-earning assets increased to $708.8 million from $682.3 million; their tax-equivalent yield was 3.80% versus 3.78%. Average cost of interest-bearing liabilities fell to 0.26% from 0.35%.
- Nine-month noninterest income increased $0.3 million, mainly from deposit service charges and loan-sale gains; securities-sale gains were lower. Noninterest expense increased $0.2 million, primarily due to compensation and data processing.
- Loan growth was stronger than in the prior-year period: loans increased $19.6 million in the first nine months of 2017 versus $6.9 million in the same 2016 period. The nine-month loan-loss provision increased to $0.6 million, while net charge-offs decreased to $0.466 million from $0.520 million.
- Nonperforming loans declined to $2.7 million from $3.0 million at year-end 2016. The allowance for loan losses was $3.5 million, compared with $3.4 million at year-end.
Outlook, commentary, risks, and unusual items
- No specific earnings or financial guidance is provided. Management describes the Bank’s primary funding sources as deposits, loan repayments, maturing securities, and FHLB advances; additional FHLB borrowing capacity and collateral for repurchase agreements are available.
- Key exposures include interest-rate changes, deposit flows, competition, loan demand and credit quality, and the local economy. A substantial portion of the loan portfolio consists of mortgage loans in the Louisville, Kentucky metropolitan area. Interest-rate simulations use June 30, 2017 data, not September 30 data; management said it believed market risk had not materially changed since June 30. The simulations are not guarantees of actual outcomes.
- Management said available-for-sale securities with $2.382 million of gross unrealized losses were not considered other-than-temporarily impaired, citing the ability to hold the securities and attributing losses principally to prevailing interest rates. Management cautioned that deteriorating market and economic conditions could adversely affect credit quality.
- Foreclosed real estate totaled $3.9 million. The Company recorded $0.228 million of write-down losses on foreclosed real estate during the nine months. Nonaccrual loans were $2.7 million; loans 90 days or more past due and still accruing were $13,000.
- The Company is assessing the expected-credit-loss standard (CECL), effective for it in fiscal years beginning after December 15, 2019; management expects a one-time cumulative-effect adjustment to the allowance at adoption but does not quantify it. Other listed accounting updates were generally not expected to have a material impact.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. The Company reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether continued loan growth, especially in commercial business, home equity, construction, and local real estate lending, is matched by stable credit performance and adequate reserves.
- The causes and durability of the lower funding costs and wider interest-rate spread, and how deposit repricing or a changing rate environment could affect earnings.
- Liquidity following the decline in cash balances, including the use of securities and FHLB borrowing to support funding needs; confirm current borrowing capacity and deposit trends.
- Credit quality and collateral assumptions for impaired loans and foreclosed properties, including appraisal discounts and the elevated foreclosure pipeline versus year-end 2016.
- The eventual CECL transition effect and any material changes in accounting estimates, securities valuations, or regulatory capital.