First Capital, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. First Capital is the holding company for First Harrison Bank. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial results and position
| Metric | Q1 2024 / March 31, 2024 | Prior comparable / December 31, 2023 |
|---|---|---|
| Net income attributable to First Capital | $2.952 million; diluted EPS $0.88 | $3.816 million; diluted EPS $1.14 in Q1 2023 |
| Total interest income | $11.837 million | $10.187 million in Q1 2023 |
| Net interest income | $8.600 million | $9.191 million in Q1 2023 |
| Net interest margin, tax-equivalent | 3.14% | 3.38% in Q1 2023 |
| Provision for credit losses | $0.280 million | $0.193 million in Q1 2023 |
| Noninterest income / expense | $1.899 million / $6.757 million | $1.991 million / $6.401 million in Q1 2023 |
| Total assets | $1,156.6 million | $1,157.9 million at year-end 2023 |
| Net loans, excluding loans held for sale | $621.4 million | $614.4 million at year-end 2023 |
| Deposits | $1,010.1 million | $1,025.2 million at year-end 2023 |
| Borrowings | $33.6 million under the BTFP | $21.5 million at year-end 2023 |
| Cash and cash equivalents | $42.1 million | $38.7 million at year-end 2023 |
| Company stockholders’ equity | $105.7 million | $105.2 million at year-end 2023 |
Cash flow, liquidity, and capital
- Operating cash flow was $7.2 million, investing cash flow was $0.1 million, and financing cash flow was negative $3.9 million. Cash and cash equivalents increased $3.4 million during the quarter.
- Deposits fell $15.1 million; interest-bearing checking accounts declined $29.4 million, partly offset by growth in time deposits, noninterest-bearing accounts, and savings.
- The Bank reported $42.1 million in cash and $428.1 million in available-for-sale securities. Management cited additional FHLB borrowing capacity, repurchase-agreement collateral, and unsecured federal funds lines as potential liquidity sources.
- The Bank’s Community Bank Leverage Ratio was 10.29%, above the 9% minimum; management said the Bank met applicable capital requirements and was “well-capitalized.”
- The quarterly dividend was $0.27 per share, unchanged from Q1 2023.
Material changes and operating drivers
- Net income attributable to First Capital fell about 23% year over year. Higher interest income was more than offset by sharply higher funding costs: interest expense rose to $3.237 million from $0.996 million.
- Management reported that the average cost of interest-bearing liabilities rose to 1.55% from 0.51%, while the average tax-equivalent yield on earning assets increased to 4.29% from 3.73%. Average earning assets were approximately $1.12 billion in both periods.
- Noninterest expense increased $0.356 million, principally from other expenses, professional fees, compensation, and data processing. Management attributed part of the increase in other expenses to higher FDIC premiums, consumer fraud losses, and cable and internet costs.
- Income tax expense declined to $0.507 million from $0.769 million; the effective tax rate was 14.6% versus 16.8%, primarily reflecting increased tax-credit investment benefits.
- Loans grew $7.0 million, with growth in commercial real estate, multifamily residential, and other construction, development and land lending. Deposits declined despite loan growth, and the Bank used short-term FHLB advances and BTFP funding for liquidity and earning-asset growth.
- Available-for-sale securities fell $9.1 million in carrying value. The company purchased $27.0 million, sold $19.2 million, and recorded a $2.1 million pretax unrealized loss, primarily attributed to higher market rates.
Risks, contingencies, and outlook
- Interest-rate and securities risk: Available-for-sale securities had $33.6 million of gross unrealized losses at quarter-end; held-to-maturity securities had $2.6 million. Management attributed losses to interest rates and other market factors and recorded no securities credit-loss provision. It stated it did not intend, and did not expect to be required, to sell loss-position available-for-sale securities. Further deterioration in market or economic conditions could affect credit quality.
- Credit: The loan allowance for credit losses was $8.23 million, versus $8.01 million at year-end. Nonperforming loans were $1.68 million, down from $1.75 million at year-end; net charge-offs were $55,000, compared with $203,000 in Q1 2023. Commercial real estate loans totaled $175.0 million. The filing identifies economic, collateral-value, and property cash-flow conditions as relevant credit risks.
- Funding: Deposit competition and high-rate alternatives are affecting deposit flows and increasing deposit costs. The $33.6 million BTFP borrowing carried a fixed 4.85% rate for one year; the BTFP stopped making new loans on March 11, 2024. The Bank also had a $49.3 million FHLB borrowing capacity based on pledged collateral and a separate $10 million FHLB overdraft line, unused at quarter-end.
- Tax contingency: The captive insurance subsidiary was dissolved at year-end 2023. Proposed IRS regulations could result in material tax expense if finalized in their current form; management said the potential liability could not be reasonably estimated. The filing reports no material change in previously disclosed risk factors.
- Management provided no specific earnings or financial guidance. Its forward-looking statements are subject to economic, interest-rate, deposit-flow, credit-quality, competitive, regulatory, and execution risks. Interest-rate simulation results are estimates, not guarantees.
- The company reported no legal proceedings, no material off-balance-sheet transactions during the quarter, and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether deposit outflows and higher deposit pricing continue to pressure funding costs and net interest margin.
- How the $33.6 million BTFP borrowing and other contingent liquidity sources will be managed, particularly after the program stopped issuing new loans.
- Changes in credit quality, including commercial real estate exposures, criticized loans, delinquencies, and the adequacy of the allowance.
- Whether unrealized securities losses change, and whether liquidity needs could require sales or otherwise affect capital.
- Developments in the proposed IRS captive-insurance regulations and any resulting tax exposure.