First Capital, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2021; comparisons are with the three and nine months ended September 30, 2020, and balance-sheet comparisons are with December 31, 2020. First Capital is the holding company for First Harrison Bank, an Indiana-chartered commercial bank. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $7.467 | $6.869 | $21.315 | $21.045 |
| Provision for loan losses | $0 | $0.400 | $0.075 | $1.576 |
| Noninterest income | $2.270 | $2.616 | $7.260 | $6.392 |
| Noninterest expense | $6.202 | $5.923 | $18.174 | $17.366 |
| Net income attributable to First Capital | $2.936 | $2.746 | $8.605 | $7.278 |
| Diluted earnings per share | $0.88 | $0.82 | $2.57 | $2.17 |
- Third-quarter net income increased about 7%; nine-month net income increased about 18%. Management attributed the year-to-date improvement mainly to lower loan-loss provision and higher noninterest income.
- Nine-month total interest income declined $0.118 million, while interest expense fell $0.388 million. Tax-equivalent interest-rate spread narrowed to 2.85% from 3.40% for the nine-month comparison; the third-quarter spread was 2.89% versus 3.16%.
- For the nine months, net interest income rose $0.270 million. Average interest-earning assets increased to $1.01 billion from $822.3 million, while their tax-equivalent yield declined to 3.01% from 3.68%.
- Nine-month noninterest income rose $0.868 million, helped by ATM/debit-card fee growth and a swing in unrealized equity-security results. Third-quarter noninterest income declined $0.346 million, largely reflecting lower loan-sale gains and a $0.067 million unrealized equity loss versus a gain in the prior-year quarter.
- Nine-month noninterest expense increased $0.808 million, including higher compensation, professional fees, and data-processing expense. The effective tax rate was 16.6% for the nine months versus 14.2%; management cited increased pretax income and a Kentucky tax-law change.
Financial position, cash flow, and capital
- Total assets were $1.123 billion, up $105.2 million (10.3%) from year-end 2020. Deposits rose $101.8 million to $1.002 billion. Noninterest-bearing deposits were $248.4 million; interest-bearing deposits were $753.9 million.
- Cash and cash equivalents were $164.3 million, down from $175.9 million. Available-for-sale securities increased to $418.9 million from $283.5 million, reflecting substantial purchases. Net loans declined to $485.5 million from $500.3 million; commercial-business loan contraction was primarily associated with PPP forgiveness, while construction lending grew.
- For the nine months, operating cash flow was $15.7 million, investing cash flow was negative $126.4 million, and financing cash flow was positive $99.1 million. Cash and cash equivalents decreased $11.6 million.
- The balance sheet reports deposits and other liabilities but no borrowings outstanding. Management said the Bank also has borrowing capacity with the Federal Home Loan Bank of Indianapolis and collateral eligible for repurchase agreements.
- Total equity was $114.5 million, compared with $110.8 million at year-end. The $2.5 million decline in accumulated unrealized gains on available-for-sale securities partly offset retained earnings growth. The Bank reported an 8.90% Community Bank Leverage Ratio and was considered well-capitalized under applicable guidelines.
- The allowance for loan losses was $6.6 million, essentially unchanged from year-end; nonperforming loans were $1.4 million versus $1.5 million. The nine-month provision fell to $0.075 million from $1.576 million in 2020, and net charge-offs were $0.133 million versus $0.233 million.
Changes, outlook, and risks
- COVID-19 remains a material source of uncertainty. The Bank had approved one-to-three-month payment extensions on $68.1 million of loan balances; $53.0 million remained outstanding at September 30, and all had resumed payments. Management maintained qualitative allowance adjustments, with $6.1 million of the $6.6 million allowance attributed to those adjustments.
- The Bank originated approximately $62.4 million of PPP loans, including $16.5 million in second-draw loans. By October 19, 2021, it had received SBA payoffs on $49.7 million; $13.2 million of PPP loans remained in commercial-business loans at September 30.
- Commercial exposure to hotels and restaurants was approximately $12.9 million and $8.2 million, respectively, about 4.3% of the total loan portfolio. The filing warns that further pandemic-related credit losses could occur. A substantial portion of lending is tied to the Louisville, Kentucky area, exposing the portfolio to local real-estate and economic conditions.
- There is no specific earnings or financial guidance. Management’s outlook is subject to pandemic duration and effects, economic conditions, interest rates, loan demand and credit quality, deposit flows, competition, and regulatory or accounting changes. The filing says no material changes were made to previously disclosed risk factors.
- Interest-rate simulations at September 30 projected one-year net interest income up 3.51% under an immediate, sustained 100-basis-point increase and down 3.38% under a 100-basis-point decrease. The modeled economic value of equity rose 13.61% under the +100-basis-point scenario and fell 19.45% under the -100-basis-point scenario. Management cautions that these model results are not guarantees of actual outcomes.
- Other items: available-for-sale securities had $1.427 million of gross unrealized losses, which management attributed principally to interest rates and did not consider other-than-temporary. The quarter recorded a $0.193 million after-tax other-comprehensive loss. The company expects CECL adoption to increase the allowance through a one-time retained-earnings adjustment, but the amount was not yet determined; it did not intend early adoption and was subject to the delayed effective date for smaller reporting companies.
- The filing reports no legal proceedings, no material changes in risk factors, and effective disclosure controls and procedures.
Important facts for investors to verify
- Whether loan growth and credit quality remain stable as PPP balances run off and pandemic-related uncertainty continues, particularly in commercial real estate, hotels, and restaurants.
- Whether the allowance remains adequate as qualitative factors account for most of its balance, and how management’s estimates change with economic conditions.
- Whether growth in securities and deposits sustains earnings despite a narrower interest-rate spread, and how actual results compare with the filing’s rate-sensitivity simulations.
- The timing and magnitude of the expected CECL transition adjustment, which the filing does not quantify.
- Whether unrealized securities losses and related accumulated other comprehensive income change materially as market interest rates move.