First Capital, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. First Capital is the holding company for First Harrison Bank and related subsidiaries. Financial amounts below are in millions unless otherwise noted; interim statements are unaudited.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $8.219 | $7.063 | $15.877 | $13.827 |
| Net interest income | $7.728 | $6.668 | $14.930 | $13.090 |
| Provision for loan losses | $0.300 | $0.316 | $0.750 | $0.513 |
| Noninterest income | $1.768 | $1.736 | $3.273 | $3.262 |
| Noninterest expense | $5.764 | $5.697 | $11.429 | $10.951 |
| Net income attributable to First Capital | $2.860 | $2.100 | $5.007 | $4.233 |
| Diluted EPS | $0.86 | $0.63 | $1.50 | $1.27 |
- At June 30, total assets were $834.9, up from $794.2 at year-end 2018. Net loans were $459.9, up from $434.3; deposits were $734.6, up from $701.6.
- Cash and cash equivalents were $60.5, versus $41.1 at December 31, 2018; available-for-sale securities were $259.4, versus $261.8.
- Six-month operating cash flow was $6.1, compared with $6.3 in 2018. Investing activities used $18.1, while financing activities provided $31.4. Cash increased $19.4 during the period.
- Total liabilities were $740.5 and total equity was $94.4. Deposits were the principal reported funding liability; the balance sheet shows no FHLB advances outstanding at June 30, 2019.
- For the six-month period, the tax-equivalent interest-rate spread rose to 3.94% from 3.63%; average interest-earning asset yield increased to 4.27% from 3.90%. The filing does not provide a clear net interest margin value.
- Bank capital ratios at June 30 were 9.6% Tier 1 leverage, 13.9% common equity Tier 1, 13.9% Tier 1 risk-based and 14.7% total risk-based; the Bank reported compliance with requirements and “well-capitalized” status.
Material changes versus comparable periods
- Q2 net income attributable to First Capital increased to $2.86 from $2.10; first-half net income rose to $5.01 from $4.23. Management attributed the improvement mainly to higher net interest income after provision.
- Net interest income rose $1.1 in Q2 and $1.8 in the first half, reflecting growth in interest-earning assets and improved yields/spread. Higher-yielding loan growth partly replaced lower-yielding securities.
- First-half loan-loss provision increased to $0.75 from $0.51, primarily with faster loan growth. Net charge-offs declined to $0.206 from $0.280. Nonperforming loans fell to $2.56 from $3.06 at year-end 2018.
- First-half noninterest expense increased $0.48, mainly from compensation and data processing, partly offset by lower foreclosed-real-estate losses. Income tax expense increased to $1.01 from $0.65; the effective rate was 16.8% versus 13.3%.
- Equity increased to $94.4 from $86.0, mainly reflecting a $4.9 after-tax increase in unrealized gains on available-for-sale securities and retained earnings. This securities valuation change also materially lifted comprehensive income.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management notes that interim results are not necessarily indicative of full-year results.
- Key exposures include interest-rate and market risk, loan quality, deposit flows, competition, regulatory and accounting changes, and general economic conditions. A substantial portion of the loan portfolio is tied to the Louisville, Kentucky area, making repayment ability sensitive to local real-estate and economic conditions.
- At June 30, the interest-rate model projected higher one-year net interest income under immediate rate increases of 100–300 basis points, and lower income under decreases of 100–200 basis points. Management cautions that model estimates depend on assumptions and are not guarantees.
- The allowance for loan losses was $4.61, up from $4.07 at year-end. Management considered it adequate but warned that future conditions could require additions and actual losses could exceed estimates.
- The company was preparing for the expected-credit-loss standard (CECL); management anticipated a one-time cumulative adjustment to the allowance upon adoption, but its size was unknown. A proposed effective-date delay for smaller reporting companies was not yet final in the filing.
- Foreclosed real estate included a commercial property written down to net realizable value and sold on July 19, 2019, for $2.8 net of selling costs. First-half foreclosed-real-estate write-downs were $0.354.
- The Bank had $2.5 of unfunded affordable-housing investment commitments, expected to be funded through 2029 as capital calls occur. The company reported no material off-balance-sheet transactions during the period and no legal proceedings.
- Available-for-sale securities had $1.20 of gross unrealized losses at quarter-end; management attributed them principally to interest rates and did not consider them other-than-temporary. Management cautioned that further market or economic deterioration could affect credit quality.
Important facts for investors to verify
- Whether loan growth continues alongside stable credit quality; monitor nonperforming loans, charge-offs, classified loans and allowance adequacy.
- Whether the wider interest spread is sustained as deposit costs and market rates change, including actual results versus the disclosed sensitivity models.
- Whether deposit growth and available liquidity remain sufficient to support lending and funding needs.
- The eventual CECL adoption date and size of any opening allowance adjustment.
- The completed sale proceeds and any additional costs or accounting effects related to the $2.8 foreclosed commercial property.
- Capital ratios and dividend capacity, including restrictions on Bank dividends to the holding company.