First Capital, Inc. — Q3 2018 Form 10-Q
Business context and period. First Capital is the financial holding company for First Harrison Bank, an Indiana-chartered commercial bank. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods, or December 31, 2017 for balance-sheet figures. Amounts below are in millions unless otherwise noted.
Financial results and position
| Metric | Q3 2018 / Sept. 30, 2018 | Comparable period / date |
|---|---|---|
| Net income attributable to First Capital | $2.524; $0.76 per share | Q3 2017: $2.109; $0.63 per share |
| Nine-month net income attributable to First Capital | $6.757; $2.03 per share | Nine months 2017: $5.852; $1.76 per share |
| Net interest income | Q3: $7.009; nine months: $20.099 | Q3 2017: $6.385; nine months 2017: $18.601 |
| Provision for loan losses | Q3: $0.455; nine months: $0.968 | Q3 2017: $0.150; nine months 2017: $0.617 |
| Noninterest income / expense | Q3: $1.698 / $5.195; nine months: $4.960 / $16.146 | Q3 2017: $1.748 / $5.046; nine months 2017: $5.057 / $15.004 |
| Total assets | $790.5 | Dec. 31, 2017: $759.0 |
| Net loans / allowance for loan losses | $428.4 / $4.2 | Dec. 31, 2017: $409.6 / $3.6 |
| Deposits / FHLB advances | $702.1 / $0 | Dec. 31, 2017: $664.6 / $10.0 |
| Cash and cash equivalents / available-for-sale securities | $50.2 / $253.2 | Dec. 31, 2017: $25.9 / $271.2 |
| Company stockholders’ equity | $81.2 | Dec. 31, 2017: $80.9 |
- Profitability and margins: Net income attributable to the Company rose about 20% in Q3 and 15% for the nine months. Tax-equivalent net interest spread increased to 3.77% for Q3 from 3.65%, and to 3.68% for nine months from 3.54%. The filing does not provide a clear net interest margin figure.
- Cash flow, nine months: Operating activities provided $10.4, investing activities used $11.4, and financing activities provided $25.2. Cash increased $24.2 to $50.2. Financing inflows primarily reflected $37.5 of deposit growth, partly offset by repayment of $10.0 of FHLB advances and $2.3 of dividends paid.
- Liquidity and capital: Management reported $50.2 of cash and $253.2 of available-for-sale securities, plus additional FHLB borrowing capacity and collateral eligible for repurchase agreements. The Bank was “well-capitalized”; Tier 1 leverage, CET1, Tier 1 risk-based, and total risk-based capital ratios were 9.5%, 13.7%, 13.7%, and 14.5%, respectively.
Material changes and management commentary
- Net loans grew $18.8 from year-end, including $13.1 of loans acquired from another financial institution in September. Deposits grew 5.7%; cash rose primarily with deposit growth and securities sales and repayments.
- Interest income increased as average earning assets and their tax-equivalent yield rose; management attributed this to loan growth and higher short-term rates. Interest expense also increased, including a rise in the average rate paid on interest-bearing liabilities.
- Provision for loan losses increased year over year, while nine-month net charge-offs were $0.423 versus $0.466 in 2017. Nonperforming loans were $2.6, down from $2.8 at year-end; nonaccrual loans were $2.4.
- Nine-month noninterest income declined $0.1, mainly from lower gains on loan and securities sales; 2018 included $0.096 of losses on municipal securities sales. Noninterest expense increased $1.1, principally from compensation, data processing, and foreclosed-real-estate losses.
- The effective tax rate fell to 14.8% for nine months from 27.1% and to 17.3% in Q3 from 28.1%, primarily due to the Tax Cuts and Jobs Act and a 2018 tax-credit investment.
- Unrealized losses on available-for-sale securities reduced equity through other comprehensive loss: nine-month net OCI was a loss of $4.3, versus income of $1.8 in 2017. Management attributed the increase in unrealized losses mainly to long-term interest-rate changes and did not consider the declines other-than-temporary.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Key stated risks include changes in interest rates and economic conditions, loan and securities credit quality, deposit flows, loan demand, competition, regulatory or legislative changes, and execution of the business plan. A substantial part of the loan portfolio is tied to the Louisville, Kentucky area.
- Interest-rate simulations at September 30 projected higher one-year net interest income under the modeled immediate parallel rate shifts of +100, +200, +300, and -100 basis points. Results are model estimates, not guarantees, and depend on behavioral and balance-sheet assumptions.
- The Bank invested $3.7 in qualified affordable housing projects and had a further $3.3 unfunded commitment, expected to be funded through 2029 as capital is called. It also purchased approximately 5% of another bank holding company for $1.9 in September.
- Management was assessing the expected-credit-loss standard (CECL); the amount of any transition adjustment was unknown. The Bank’s conversion to an Indiana-chartered commercial bank and the Company’s financial-holding-company status were completed in 2018.
- The Company reported no material off-balance-sheet transactions during the nine-month period, no legal proceedings, and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether loan growth, acquired balances, and deposit growth continue, and how funding costs affect the improving interest spread.
- Whether the higher loan-loss provision and allowance adequately reflect portfolio risk; review the reported credit ratings, past-due loans, nonperformers, and foreclosed real estate.
- How available-for-sale securities’ unrealized losses and interest-rate movements affect equity and future earnings.
- The future economics, tax benefits, and funding obligations of the affordable-housing investment, as well as the valuation and performance of the new equity investment.
- Any CECL implementation impact, and whether modeled interest-rate sensitivity remains consistent with actual asset and deposit repricing behavior.