First Capital, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. First Capital is the bank holding company for First Harrison Bank, serving primarily the Louisville, Kentucky metropolitan area. This unaudited filing covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are with December 31, 2022. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $11.18 | $9.05 | $31.97 | $24.15 |
| Interest expense | $2.64 | $0.39 | $5.93 | $0.91 |
| Net interest income | $8.54 | $8.66 | $26.04 | $23.24 |
| Provision for credit losses | $0.29 | $0.18 | $0.83 | $0.55 |
| Net income attributable to First Capital | $3.14 | $3.13 | $9.68 | $8.36 |
| Diluted earnings per share | $0.94 | $0.93 | $2.89 | $2.49 |
| Noninterest income | $1.95 | $1.87 | $5.80 | $5.99 |
| Noninterest expense | $6.48 | $6.56 | $19.55 | $18.79 |
- Margins and funding costs: Q3 tax-equivalent yield on earning assets rose to 4.04% from 3.27%, but the average cost of interest-bearing liabilities increased to 1.30% from 0.20%. The tax-equivalent interest-rate spread narrowed to 2.74% from 3.07%. For the nine-month periods, the spread increased to 2.91% from 2.79%. The filing does not provide a clear net interest margin value.
- Balance sheet at September 30: Total assets were $1,142.7, net loans $602.3, deposits $1,017.5, cash and cash equivalents $31.4, available-for-sale securities at fair value $440.1, and total equity $89.3. Loans held for sale were $1.4.
- Borrowings and liquidity: Borrowings totaled $28.0: $15.0 of FHLB advances and $13.0 borrowed under the Federal Reserve Bank Term Funding Program (BTFP). The company had no borrowings at year-end 2022. The BTFP borrowing carries a fixed 4.99% rate for one year; FHLB advances were short-term, with end-of-period rates of 5.59%–5.73% by advance type. Management reported $31.4 of cash and $440.1 of available-for-sale securities, and cited additional borrowing capacity subject to eligible collateral and other facilities.
- Cash flow, nine months: Operating activities provided $13.2; investing activities used $29.9; financing activities used $18.2. Cash and cash equivalents declined $34.9 to $31.4.
- Credit quality: The allowance for credit losses on loans was $7.8, or approximately 1.28% of principal loan balance. Nonperforming loans were $1.6 versus $1.5 at year-end 2022. Nine-month net charge-offs were $0.38 versus $0.07 in 2022. The filing reports $3.2 of loans past due and $1.6 nonaccrual; no interest income was recognized on nonaccrual loans in the period.
- Capital and shareholder returns: The Bank’s Community Bank Leverage Ratio was 9.68%, above the 9% minimum; management said the Bank met applicable capital requirements and was well-capitalized. Dividends were $0.27 per share for Q3 and $0.81 for the nine-month period.
Material changes versus comparable periods
- Q3 net income was nearly flat year over year, while net interest income after provision declined to $8.25 from $8.48. Higher asset yields were more than offset by rising deposit and borrowing costs and a higher credit-loss provision.
- Nine-month net income increased to $9.68 from $8.36, and net interest income after provision rose to $25.21 from $22.69. Growth in interest income exceeded the increase in interest expense.
- Net loans rose $44.3 from December 2022, led by growth in residential mortgage, construction/development/land, and commercial real estate loans. Total deposits fell $42.9; noninterest-bearing deposits declined $20.5, while time deposits increased $69.0, including $7.8 of brokered deposits.
- Cash and cash equivalents fell from $66.3 to $31.4 as liquidity funded loan growth and deposit outflows. New FHLB and BTFP borrowings supported liquidity and earning-asset growth.
- Available-for-sale securities declined $20.7 in carrying value. The portfolio had $49.1 of gross unrealized losses at September 30, versus $46.8 at December 31, 2022; the filing attributes market-value declines principally to interest rates and says no credit-loss provision was required. Accumulated other comprehensive loss was $37.9.
- The company adopted CECL on January 1, 2023, recording a $0.56 increase in the opening loan allowance and a $0.53 after-tax reduction to retained earnings. Comparisons of credit-loss provisions with 2022 reflect different accounting methods.
Outlook, commentary, risks and unusual items
- No specific earnings or balance-sheet guidance was provided. Management described deposit competition and high-rate alternatives as increasing deposit-cost pressure; deposit flows also depend on rates, competition, economic conditions, and customer liquidity needs.
- Interest-rate risk remains material. Management’s September 30 modeling estimated one-year net interest income increases of 0.21%–0.51% under immediate rate increases of 100–300 basis points, and 0.61%–1.43% under equivalent decreases. These are model outputs, not forecasts; the filing cautions that assumptions and actual customer behavior may differ.
- The Captive insurance subsidiary did not renew policies as they matured in August 2023 following proposed IRS regulations that could classify it as a listed transaction. Management said the proposed rules could result in material tax expense, but it could not reasonably estimate potential liability; it expected the Captive to wind down and close in December 2023, subject to final regulations.
- The Bank’s solar tax-credit investment had a $1.0 carrying value and a further $1.9 commitment expected to be funded by December 31, 2023. A $2.0 standby letter of credit supports the project financing and expires April 30, 2024. The investment generated $1.1 of tax credits and other tax benefits in the nine-month period, alongside $1.0 of amortization expense.
- Q3 securities sales generated a $0.094 net loss, offset by a $0.157 gain on sale of VISA Class B shares. Management said the sales were part of a strategy to enhance long-term earnings. Nine-month securities sales also included a $0.108 net loss before the VISA gain.
- Other risks include local real-estate and economic conditions, loan and securities portfolio quality, deposit outflows, funding costs, and interest-rate movements. Management reported no material changes to previously disclosed risk factors, no legal proceedings, and effective disclosure controls.
Key facts for investors to verify
- Whether deposit trends, deposit pricing, brokered-deposit usage, and reliance on short-term FHLB/BTFP funding changed after quarter-end.
- Loan delinquencies, nonaccruals, charge-offs, construction and commercial-real-estate exposures, and adequacy of the CECL allowance as conditions evolve.
- The size and duration of unrealized securities losses, collateral availability, and whether liquidity needs could require securities sales.
- Final IRS regulations, the Captive’s wind-down, and any resulting tax liability or other costs.
- Funding and performance of the solar tax-credit investment, including the remaining commitment and standby letter of credit.
- Net interest margin and updated sensitivity to rates and deposit betas; a net interest margin figure is not clearly provided in this filing.