First Capital, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. First Capital is the holding company for First Harrison Bank. Unless noted otherwise, financial amounts below are in millions; the interim statements are unaudited.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net interest income | $8.312 | $7.631 | $17.503 | $14.583 |
| Provision for credit losses | $0.350 | $0.200 | $0.543 | $0.375 |
| Noninterest income | $1.863 | $1.965 | $3.854 | $4.112 |
| Noninterest expense | $6.666 | $6.235 | $13.067 | $12.229 |
| Net income attributable to First Capital | $2.726 | $2.710 | $6.542 | $5.237 |
| Diluted EPS | $0.82 | $0.81 | $1.95 | $1.56 |
- For the first half, net interest income after provision rose to $16.960 million from $14.208 million. Management attributed stronger interest income to higher asset yields; funding costs also rose. The tax-equivalent net interest spread was 2.99%, versus 2.64% a year earlier. For Q2, the spread was 2.76%, versus 2.73%.
- First-half operating cash flow was $7.663 million, compared with $7.101 million. Investing used $19.207 million and financing used $7.283 million; cash and cash equivalents fell $18.827 million to $47.471 million.
- At June 30, total assets were $1.155 billion, loans net of allowance were $582.944 million, deposits were $1.042 billion, and total equity was $92.351 million. Net loans grew $24.9 million from year-end 2022; deposits declined $18.0 million.
- Borrowings were $13.0 million at June 30, versus none at year-end. The one-year Federal Reserve Bank Term Funding Program borrowing carried a fixed 4.99% rate and was secured by pledged agency securities. The filing reports a 9.56% Community Bank Leverage Ratio; the Bank was considered well-capitalized.
- The allowance for credit losses on loans was $7.515 million. Nonperforming loans were $1.525 million, versus $1.490 million at year-end; first-half net charge-offs were $0.361 million, versus $0.064 million.
Material changes and notable items
- Interest income increased, but interest expense rose sharply: first-half interest expense was $3.284 million versus $0.520 million. Deposit competition and higher-rate alternatives increased the cost of deposits, according to management.
- Noninterest income fell $0.258 million year over year for the first half, mainly reflecting lower loan-sale gains and commission and fee income. Noninterest expense increased $0.838 million, including higher compensation, data processing, fraud losses, FDIC insurance premiums, and loan-promotion costs.
- Available-for-sale securities had a fair value of $455.742 million against amortized cost of $498.156 million, with $42.607 million of gross unrealized losses. Management attributed the declines principally to market factors, reported no credit-loss provision, and said it did not intend to sell and did not expect to be required to sell the securities.
- The Company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $0.561 million, established a $0.131 million allowance for unfunded commitments, and reduced opening retained earnings by $0.529 million after tax. Prior-year credit-loss figures use the prior incurred-loss methodology.
- First-half equity increased to $92.351 million from $85.270 million at year-end, reflecting retained earnings and improved unrealized gains on available-for-sale securities. A $3.244 million after-tax other comprehensive gain was recorded for the first half.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management identifies deposit flows, competition, interest rates, loan demand, economic conditions, and the quality of the loan and securities portfolios as important uncertainties. A substantial portion of loans is tied to the Louisville metropolitan area and its real estate and economic conditions.
- Interest-rate modeling estimates that a parallel +300 basis-point shock would increase one-year net interest income by 3.16%, while a -300 basis-point shock would reduce it by 1.65%. Under the -300 basis-point scenario, modeled economic value of equity would fall 32.58%. The filing cautions that models rely on assumptions and are not forecasts or guarantees.
- The IRS issued proposed regulations that could cause the Company’s captive insurance subsidiary to be treated as a listed transaction and could result in material tax expense if finalized as proposed. Management could not estimate the potential liability and expected the captive to wind down after its policy period ends in August 2023, with closure anticipated by December 2023.
- The Bank had a $2.0 million standby letter of credit supporting a solar tax-credit investment; the related unfunded investment commitment was $1.9 million at quarter-end. The filing reports no material legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Track deposit balances, deposit pricing, liquidity, and reliance on Federal Reserve or other wholesale funding.
- Monitor loan growth, delinquencies, nonperforming loans, net charge-offs, and allowance adequacy, noting the CECL methodology change.
- Assess the securities portfolio’s unrealized losses, rate sensitivity, and the Company’s capacity to hold securities if liquidity needs increase.
- Follow the final IRS captive-insurance regulations, the planned captive wind-down, and any resulting tax exposure.
- Review the assumptions behind interest-rate sensitivity models and the status and funding requirements of tax-credit investments and commitments.