First Capital, Inc. Earnings Show Resilience Amid Rising Costs

First Capital, Inc. (NASDAQ: FCAP), the parent company of First Harrison Bank, reported a solid quarter in its latest earnings release, with net income rising 6.7% to $3.2 million and diluted EPS improving to $0.97. While the results reflect steady progress, the bank’s margin gains were tempered by rising operational costs and shifting market conditions. Below is a deep dive into the numbers and what they mean for investors.

Net Interest Income: The Engine of Growth

The star of the quarter was the net interest income after provision for credit losses, which surged $923,000 (or 10.8%) year-over-year to $9.24 million. This expansion was driven by two key factors:
1. Higher interest income: A $1.5 million increase due to a rise in the average tax-equivalent yield on interest-earning assets (from 4.29% to 4.63%) and a modest 4.5% growth in average asset balances to $1.17 billion.
2. Improved net interest margin: The tax-equivalent margin expanded to 3.34%, up from 3.14%, marking a clear win for the bank’s ability to price loans and manage deposit costs.

The margin improvement is critical. For a bank, this metric reflects the efficiency of deploying assets versus funding costs. While interest expense also rose (due to higher rates and liability balances), the yield on loans outpaced costs, a trend that could continue if the Federal Reserve maintains its stance on rates.

Credit Metrics: Caution in a Tightening Economy

The provision for credit losses increased to $338,000 from $280,000 a year ago, reflecting both loan growth and macroeconomic uncertainty. Net charge-offs rose to $84,000 from $55,000, though nonperforming assets dipped to $4.1 million from $4.5 million in late 2024.

The allowance for credit losses as a percentage of loans (1.46%) remains conservative, suggesting the bank isn’t taking excessive risks. However, with economic headwinds looming, investors should watch whether charge-offs trend upward in future quarters.

The Elephant in the Room: Rising Expenses

While the top line looked healthy, the bottom line faced pressure from a $424,000 jump in noninterest expenses to $7.18 million. Two factors stood out:
1. Compensation costs: Up $259,000 due to annual salary adjustments, performance bonuses, and rising health insurance premiums.
2. Occupancy/equipment costs: A $160,000 increase, largely driven by snow removal expenses and losses from disposing of premises.

These costs highlight a challenge for smaller banks: scaling operations without sacrificing efficiency. The efficiency ratio (noninterest expenses as a percentage of revenue) worsened slightly, with net overhead costs as a percentage of average assets rising to 2.40% from 2.35%.

Balance Sheet Strength and Capital Position

Total assets grew to $1.21 billion, with deposits up $17.5 million to $1.08 billion—a positive sign for funding stability. The Community Bank Leverage Ratio (CBLR) of 10.61% (up from 10.57%) underscores robust capital adequacy, far exceeding the 9% threshold required for “well capitalized” status.

Tax Headwinds and EPS Impact

The effective tax rate rose to 17.2% from 14.6%, costing the bank an extra $165,000 in taxes. This is a reminder that even small tax changes can impact profitability, especially for smaller institutions.

The Bottom Line: A Strong Foundation, But Watch the Costs

First Capital’s quarter shows it can grow its core lending business and improve margins in a rising-rate environment. The balance sheet is solid, and credit metrics remain manageable. However, the expense pressures—particularly compensation and one-time operational costs—highlight execution risks.

For investors, the stock’s valuation is key. At current prices, FCAP trades at roughly 1.2x book value, which is reasonable for a bank with its capital strength. But to justify a higher multiple, management needs to rein in noninterest expenses and demonstrate margin resilience in 2025.

Conclusion

First Capital’s Q1 results are a mixed bag: strong on the top line and balance sheet, but with red flags on the cost front. The margin expansion suggests the bank is navigating rate hikes effectively, but rising expenses could eat into returns if not addressed.

The key data points to watch are:
- Net interest margin trends: If it stays above 3.3% amid higher rates, that’s a win.
- Noninterest expense growth: A slowdown to below 5% year-over-year would be encouraging.
- Loan quality: Keep an eye on net charge-offs and allowance ratios as economic risks rise.

For now, FCAP looks like a stable, if unexciting, holding for investors focused on regional banks. But unless expenses stabilize, its growth story may remain constrained.