First Capital, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited consolidated results. First Capital is the savings and loan holding company for First Harrison Bank, with a significant share of lending in the Louisville, Kentucky area.
Financial performance and position
- Q2 earnings: Net income attributable to First Capital was $2.19 million, or $0.66 per diluted share, versus $1.78 million, or $0.53 per share, in Q2 2016.
- First-half earnings: Net income attributable to First Capital was $3.74 million, or $1.12 per diluted share, versus $3.37 million, or $1.01 per share, in the first half of 2016.
- Interest and other income: First-half net interest income rose to $12.22 million from $11.68 million; noninterest income increased to $3.31 million from $2.98 million. Q2 net interest income was $6.23 million, compared with $5.83 million, and noninterest income was $1.86 million, compared with $1.62 million.
- Credit costs and expenses: First-half provision for loan losses increased to $467,000 from $225,000. Noninterest expense rose to $9.96 million from $9.83 million. The effective tax rate was 26.5% for the first half, versus 26.7% a year earlier.
- Interest-rate spread: The tax-equivalent spread was 3.50% for the first half, versus 3.44% in 2016; for Q2 it was 3.56%, versus 3.40%. The filing does not provide a clear net interest margin value in the supplied text.
- Balance sheet at June 30: Assets were $763.2 million, up 2.6% from year-end 2016; net loans were $394.5 million, up $13.3 million; available-for-sale securities were $277.2 million, up $21.4 million. Deposits totaled $680.4 million, up 2.4%. Equity was $80.3 million, including noncontrolling interest.
- Liquidity and cash flow: Cash and cash equivalents were $36.4 million, down from $45.8 million at year-end, largely as excess liquidity was invested in securities. First-half operating cash flow was $7.4 million; investing activities used $31.2 million and financing activities provided $14.3 million. The Bank also reported $277.2 million of available-for-sale securities and additional FHLB borrowing capacity.
- Debt and capital: The balance sheet lists deposits and other liabilities but no outstanding borrowings line; the filing describes available borrowing capacity. The Bank was “well-capitalized,” with Tier 1 leverage of 9.3%, common equity Tier 1 and Tier 1 risk-based ratios of 13.9%, and total risk-based capital of 14.6%.
Changes, commentary, and risks
- Earnings improved year over year, driven by higher net interest income and noninterest income, partly offset by higher loan-loss provision and operating expense. Management attributed the stronger spread to lower funding costs and changes in interest-earning assets.
- Deposit growth was concentrated in noninterest-bearing accounts. Management noted transfers from time deposits to non-maturity deposits as customers avoided locking in longer terms in the low-rate environment.
- Nonperforming loans declined to $2.7 million from $3.0 million at year-end; there were no loans 90 days past due and still accruing at June 30. Net charge-offs were $327,000 for the first half, versus $451,000 a year earlier. The allowance for loan losses was $3.5 million, versus $3.4 million at year-end.
- Available-for-sale securities generated $2.03 million of first-half after-tax other comprehensive income, improving accumulated other comprehensive loss. Management said the unrealized losses were principally interest-rate-related and did not consider them other-than-temporary; further market or economic deterioration could affect credit quality.
- Interest-rate models projected higher one-year net interest income under +100 to +300 basis-point shocks and lower income under a 100-basis-point decline. Management cautioned that model outputs depend on assumptions, including deposit behavior and prepayments, and are not guarantees. Updated deposit-duration assumptions materially changed the reported economic-value-of-equity sensitivity versus year-end.
- Management provided no specific earnings or revenue guidance. It cited general economic conditions, interest rates and government policy, loan and securities credit quality, loan demand, deposit flows, competition, regulation, and accounting changes as risks. The company expects the forthcoming credit-loss standard to require a one-time cumulative adjustment to the allowance when adopted; the amount is not stated.
- The company reported no material changes to its stated risk factors, no material pending legal proceedings, and no material off-balance-sheet transactions during the first half. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether loan growth and the improved spread persist as deposit costs and interest rates change.
- Loan portfolio quality, especially localized real estate exposure, classified loans, charge-offs, and allowance adequacy.
- Valuation and interest-rate sensitivity of the securities portfolio, including the assumptions behind deposit-duration and EVE models.
- Liquidity and funding resilience if deposit flows change, including the extent and terms of available FHLB borrowing capacity.
- The eventual financial impact and timing of adoption of the expected-credit-loss accounting standard.