Company Quick10K Filing
Quick10K
First Capital
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$56.73 3 $191
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-09-05 Regulation FD, Exhibits
8-K 2019-07-24 Earnings, Exhibits
8-K 2019-05-22 Shareholder Vote
8-K 2019-04-24 Earnings, Exhibits
8-K 2019-02-21 Other Events, Exhibits
8-K 2019-01-23 Earnings, Exhibits
8-K 2019-01-23 Earnings, Exhibits
8-K 2018-10-19 Earnings, Exhibits
8-K 2018-09-06 Regulation FD, Exhibits
8-K 2018-07-27 Earnings, Exhibits
8-K 2018-07-16 Officers
8-K 2018-05-23 Shareholder Vote
8-K 2018-04-27 Earnings, Exhibits
8-K 2018-02-21 Other Events, Exhibits
8-K 2018-01-29 Earnings, Exhibits
LTXB LegacyTexas Financial 1,922
KRNY Kearny Financial 1,142
OCFC Oceanfirst Financial 1,067
OFED Oconee Federal Financial 135
MSBF MSB Financial 89
CFBI Community First Bancshares 83
FFBW FFBW 66
HFBL Home Federal Bancorp of Louisiana 60
CFBK Central Federal 53
CARV Carver Bancorp 18
FCAP 2019-06-30
Part I - Financial Information
Part I - Item 2
Part I - Item 3
Part I - Item 4
Part II
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Part II
Item 6.Exhibits
EX-10.1 exh_101.htm
EX-31.1 exh_311.htm
EX-31.2 exh_312.htm
EX-32.1 exh_321.htm
EX-32.2 exh_322.htm

First Capital Earnings 2019-06-30

FCAP 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 f10q_080919p.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

OR

 

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from_____________________ to__________________

 

Commission File No. 0-25023

 

First Capital, Inc.

(Exact name of registrant as specified in its charter)

 

  Indiana 35-2056949  
  (State or other jurisdiction of (I.R.S. Employer  
  incorporation or organization) Identification Number)  
     
  220 Federal Drive NW, Corydon, Indiana 47112 1-812-738-2198  
  (Address of principal executive offices, zip code, telephone number)  

 

  Not applicable  
  (Former name, former address and former fiscal year, if changed since last report)  

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes _X_ No ____

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes _X_ No ____

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

  Large accelerated filer [   ] Accelerated filer [X]
  Non-accelerated filer [   ] Smaller reporting company [X]
     Emerging growth company [   ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No _X_

 

Securities registered pursuant to Section 12(b) of the Act:  
       
  Title of each class Trading Symbol(s) Name of each exhange on which registered
  Common stock, par value $0.01 per share FCAP The NASDAQ Stock Market LLC

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 3,363,632 shares of common stock were outstanding as of July 26, 2019.

 

 

FIRST CAPITAL, INC.

 

 

INDEX

 

 

Part I   Financial Information   Page
         
    Item 1. Consolidated Financial Statements    
         
    Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (unaudited)   3
         
    Consolidated Statements of Income for the three months and six months ended June 30, 2019 and 2018 (unaudited)   4
         
    Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018 (unaudited)   5
         
    Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2019 and 2018 (unaudited)   6
         
    Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited)   7
         
    Notes to Consolidated Financial Statements (unaudited)   8-40
         
    Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   41-46
         
    Item 3. Quantitative and Qualitative Disclosures About Market Risk   47-50
         
    Item 4. Controls and Procedures   50
         
Part II   Other Information    
         
    Item 1. Legal Proceedings   51
         
    Item 1A .Risk Factors   51
         
    Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   51
         
    Item 3. Defaults Upon Senior Securities   51
         
    Item 4. Mine Safety Disclosures   51
         
    Item 5. Other Information   51
         
    Item 6. Exhibits   52
         
         
         
Signatures    

 

 

 

 - 2 - 

 

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

       

 

   June 30,  December 31,
   2019  2018
   (In thousands)
ASSETS      
Cash and due from banks  $21,825   $17,394 
Interest bearing deposits with banks   3,730    1,717 
Federal funds sold   34,971    22,001 
Total cash and cash equivalents   60,526    41,112 
           
Interest-bearing time deposits   6,245    7,710 
Securities available for sale, at fair value   259,445    261,841 
Loans, net   459,928    434,260 
Loans held for sale   3,962    2,849 
Federal Home Loan Bank and other stock, at cost   1,988    1,988 
Foreclosed real estate   2,909    3,142 
Premises and equipment   14,546    14,364 
Accrued interest receivable   2,987    2,828 
Cash value of life insurance   8,177    8,059 
Goodwill   6,472    6,472 
Core deposit intangible   892    966 
Other assets   6,841    8,571 
           
Total Assets  $834,918   $794,162 
           
LIABILITIES          
Deposits:          
Noninterest-bearing  $158,591   $143,249 
Interest-bearing   576,036    558,397 
Total deposits   734,627    701,646 
           
Accrued interest payable   172    150 
Accrued expenses and other liabilities   5,689    6,410 
Total liabilities   740,488    708,206 
           
EQUITY          
Preferred stock of $.01 par value per share Authorized 1,000,000 shares; none issued   -    - 
Common stock of $.01 par value per share Authorized 7,500,000 shares; issued 3,791,283 shares (3,781,533 in 2018); outstanding 3,364,460 shares (3,354,744 in 2018)   38    38 
Additional paid-in capital   40,723    40,215 
Retained earnings-substantially restricted   61,563    58,137 
Unearned stock compensation   (1,110)   (720)
Accumulated other comprehensive income (loss)   1,462    (3,477)
Less treasury stock, at cost - 426,823 shares (426,789 in 2018)   (8,351)   (8,349)
Total First Capital, Inc. stockholders' equity   94,325    85,844 
           
Noncontrolling interest in subsidiary   105    112 
Total equity   94,430    85,956 
           
Total Liabilities and Equity  $834,918   $794,162 

 

See accompanying notes to consolidated financial statements.      

 

 - 3 - 

 

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

   Three Months Ended  Six Months Ended
   June 30,  June 30,
   2019  2018  2019  2018
INTEREST INCOME  (In thousands, except per share data)
Loans, including fees  $6,555   $5,558   $12,612   $10,859 
Securities:                    
Taxable   964    945    1,948    1,897 
Tax-exempt   421    361    812    739 
Dividends   30    21    56    54 
Other interest income   249    178    449    278 
Total interest income   8,219    7,063    15,877    13,827 
INTEREST EXPENSE                    
Deposits   491    395    947    716 
Advances from Federal Home Loan Bank   -    -    -    21 
Total interest expense   491    395    947    737 
Net interest income   7,728    6,668    14,930    13,090 
Provision for loan losses   300    316    750    513 
Net interest income after provision for loan losses   7,428    6,352    14,180    12,577 
NONINTEREST INCOME                    
Service charges on deposit accounts   516    545    977    1,054 
ATM and debit card fees   729    643    1,376    1,243 
Commission and fee income   146    130    244    218 
Loss on sale of securities available for sale and time deposits   -    (96)   (97)   (95)
Unrealized gain (loss) on equity securities   (14)   -    117    - 
Gain on sale of loans   260    290    418    530 
Increase in cash surrender value of life insurance   70    85    118    128 
Other income   61    139    120    184 
Total noninterest income   1,768    1,736    3,273    3,262 
NONINTEREST EXPENSE                    
Compensation and benefits   3,208    2,942    6,250    5,836 
Occupancy and equipment   395    414    792    827 
Data processing   869    764    1,707    1,508 
Professional fees   177    181    406    359 
Advertising   159    103    248    188 
Net loss on foreclosed real estate   93    400    288    521 
Other expenses   863    893    1,738    1,712 
Total noninterest expense   5,764    5,697    11,429    10,951 
Income before income taxes   3,432    2,391    6,024    4,888 
Income tax expense   568    287    1,010    648 
Net Income   2,864    2,104    5,014    4,240 
Less: net income attributable to noncontrolling interest in subsidiary   4    4    7    7 
Net Income Attributable to First Capital, Inc.  $2,860   $2,100   $5,007   $4,233 
                     
Earnings per common share attributable to First Capital, Inc.:                    
Basic  $0.86   $0.63   $1.50   $1.27 
Diluted  $0.86   $0.63   $1.50   $1.27 
                     
Dividends per share  $0.24   $0.23   $0.47   $0.46 

 

See accompanying notes to consolidated financial statements.

 

 - 4 - 

 

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

   Three Months Ended  Six Months Ended
   June 30,  June 30,
   2019  2018  2019  2018
   (In thousands)   
             
Net Income  $2,864   $2,104   $5,014   $4,240 
                     
OTHER COMPREHENSIVE INCOME (LOSS)                    
Unrealized gains (losses) on securities available for sale:                    
Unrealized holding gains (losses) arising during the period   4,126    (636)   6,473    (4,651)
Income tax (expense) benefit   (1,026)   158    (1,610)   1,157 
Net of tax amount   3,100    (478)   4,863    (3,494)
                     
Less:reclassification adjustment for realized losses included in net income   -    96    97    95 
Income tax benefit   -    (23)   (21)   (23)
Net of tax amount   -    73    76    72 
                     
Other Comprehensive Income (Loss), net of tax   3,100    (405)   4,939    (3,422)
                     
Comprehensive Income   5,964    1,699    9,953    818 
Less:comprehensive income attributable to the noncontrolling interest in subsidiary   4    4    7    7 
                     
Comprehensive Income Attributable to First Capital, Inc.  $5,960   $1,695   $9,946   $811 

 

See accompanying notes to consolidated financial statements.              

 

 - 5 - 

 

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

                               

 

            Accumulated            
      Additional     Other  Unearned         
   Common  Paid-in  Retained  Comprehensive  Stock  Treasury  Noncontrolling   
(In thousands, except share and per share data)  Stock  Capital  Earnings  Income (Loss)  Compensation  Stock  Interest  Total
                         
Balances at January 1, 2018  $38   $39,515   $51,972   $(2,060)  $(212)  $(8,315)  $112   $81,050 
                                         
Net income   -    -    4,233    -    -    -    7    4,240 
                                         
Other comprehensive loss   -    -    -    (3,422)   -    -    -    (3,422)
                                         
Cash dividends   -    -    (1,544)   -    -    -    (14)   (1,558)
                                         
Restricted stock grants   -    748    -    -    (748)   -    -    - 
                                         
Stock compensation expense   -    -    -    -    106    -    -    106 
                                         
Balances at June 30, 2018  $38   $40,263   $54,661   $(5,482)  $(854)  $(8,315)  $105   $80,416 
                                         
                                         
Balances at January 1, 2019  $38   $40,215   $58,137   $(3,477)  $(720)  $(8,349)  $112   $85,956 
                                         
Net income   -    -    5,007    -    -    -    7    5,014 
                                         
Other comprehensive income   -    -    -    4,939    -    -    -    4,939 
                                         
Cash dividends   -    -    (1,581)   -    -    -    (14)   (1,595)
                                         
Restricted stock grants   -    508    -    -    (508)   -    -    - 
                                         
Stock compensation expense   -    -    -    -    118    -    -    118 
                                         
Purchase of 34 treasury shares   -    -    -    -    -    (2)   -    (2)
                                         
Balances at June 30, 2019  $38   $40,723   $61,563   $1,462   $(1,110)  $(8,351)  $105   $94,430 

 

See accompanying notes to consolidated financial statements.

 

 - 6 - 

 

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Six Months Ended
   June 30,
   2019  2018
CASH FLOWS FROM OPERATING ACTIVITIES  (In thousands)
Net income  $5,014   $4,240 
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:          
Amortization of premiums and accretion of discounts on securities, net   804    850 
Depreciation and amortization expense   526    620 
Deferred income taxes   (240)   (327)
Stock compensation expense   118    106 
Increase in cash value of life insurance   (118)   (128)
Gain on life insurance   -    (94)
Loss on sale of securities and time deposits   97    95 
Provision for loan losses   750    513 
Proceeds from sales of loans   22,264    26,679 
Loans originated for sale   (22,959)   (25,575)
Gain on sale of loans   (418)   (530)
Amortization of tax credit investment   169    164 
Unrealized gain on equity securities   (117)   - 
Net realized and unrealized loss on foreclosed real estate   273    466 
(Increase) decrease in accrued interest receivable   (159)   18 
Increase in accrued interest payable   22    6 
Net change in other assets/liabilities   73    (799)
Net Cash Provided By Operating Activities   6,099    6,304 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Proceeds from maturities of interest-bearing time deposits   1,180    1,488 
Proceeds from sales of interest-bearing time deposits   1,460    - 
Purchase of interest-bearing time deposits   (1,185)   - 
Purchase of securities available for sale   (31,956)   (13,657)
Proceeds from maturities of securities available for sale   22,645    870 
Proceeds from sales of securities available for sale   5,437    14,345 
Principal collected on mortgage-backed obligations   11,835    12,742 
Investment in cash value of life insurance   -    (1,000)
Net increase in loans receivable   (26,535)   (10,355)
Investment in tax credit entities   (392)   (691)
Proceeds from sale of foreclosed real estate   77    214 
Purchase of Federal Home Loan Bank stock   -    (9)
Purchase of premises and equipment   (635)   (123)
Proceeds from settlement of bank-owned life insurance policies   -    127 
Net Cash Provided By (Used In) Investing Activities   (18,069)   3,951 
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net increase in deposits   32,981    37,274 
Repayment of advances from Federal Home Loan Bank   -    (10,000)
Purchase of treasury stock   (2)   - 
Dividends paid   (1,595)   (1,558)
Net Cash Provided By Financing Activities   31,384    25,716 
           
Net Increase in Cash and Cash Equivalents   19,414    35,971 
Cash and cash equivalents at beginning of period   41,112    25,915 
Cash and Cash Equivalents at End of Period  $60,526   $61,886 

 

See accompanying notes to consolidated financial statements.    

 

 - 7 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.Presentation of Interim Information

 

First Capital, Inc. (“Company”) is the financial holding company for First Harrison Bank (“Bank”), an Indiana chartered commercial bank and wholly owned subsidiary. First Harrison Investments, Inc. and First Harrison Holdings, Inc. are wholly-owned Nevada corporate subsidiaries of the Bank that jointly own First Harrison, LLC, a Nevada limited liability corporation that holds and manages an investment portfolio. First Harrison REIT, Inc. (“REIT”) is a wholly-owned subsidiary of First Harrison Holdings, Inc. that holds a portion of the Bank’s real estate mortgage loan portfolio. FHB Risk Mitigation Services, Inc. (“Captive”) is a wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company, the Bank and the Bank’s subsidiaries, and reinsurance to eight other third party insurance captives for which insurance may not be currently available or economically feasible in the insurance marketplace. Heritage Hill, LLC is a wholly-owned subsidiary of the Bank that holds and manages certain foreclosed real estate properties.

 

In the opinion of management, the unaudited consolidated financial statements include all adjustments considered necessary to present fairly the financial position as of June 30, 2019, and the results of operations for the three months and six months ended June 30, 2019 and 2018 and the cash flows for the six months ended June 30, 2019 and 2018. All of these adjustments are of a normal, recurring nature. Such adjustments are the only adjustments included in the unaudited consolidated financial statements. Interim results are not necessarily indicative of results for a full year or any other period.

 

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and are presented as permitted by the instructions to Form 10-Q. Accordingly, they do not contain certain information included in the Company’s annual audited consolidated financial statements and related footnotes for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K.

 

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current period presentation. The reclassifications had no effect on net income or stockholders’ equity.

 

 - 8 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.Investment Securities

 

Investment securities have been classified in the consolidated balance sheets according to management’s intent. Investment securities at June 30, 2019 and December 31, 2018 are summarized as follows:

 

      Gross  Gross   
   Amortized  Unrealized  Unrealized  Fair
(In thousands)  Cost  Gains  Losses  Value
             
June 30, 2019                    
Securities available for sale:                    
Agency mortgage-backed securities  $85,363   $85   $790   $84,658 
Agency CMO   40,181    212    167    40,226 
Other debt securities:                    
Agency notes and bonds   64,219    480    240    64,459 
Municipal obligations   67,823    2,285    6    70,102 
                     
Total securities available for sale  $257,586   $3,062   $1,203   $259,445 
                     
December 31, 2018                    
Securities available for sale:                    
Agency mortgage-backed securities  $94,746   $-   $3,489   $91,257 
Agency CMO   33,222    152    382    32,992 
Other debt securities:                    
Agency notes and bonds   75,461    59    1,016    74,504 
Municipal obligations   63,008    651    571    63,088 
                     
Total securities available for sale  $266,437   $862   $5,458   $261,841 

 

Agency notes and bonds, agency mortgage-backed securities and agency collateralized mortgage obligations (“CMO”) include securities issued by the Government National Mortgage Association (“GNMA”), a U.S. government agency, and the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal Home Loan Bank (“FHLB”), which are government-sponsored enterprises.

 

 

 

 - 9 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(2 – continued)

 

The amortized cost and fair value of debt securities as of June 30, 2019, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities and CMO may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.

 

       
   Securities Available for Sale
   Amortized  Fair
   Cost  Value
(In thousands)      
       
Due in one year or less  $22,421   $22,316 
Due after one year through five years   50,972    51,415 
Due after five years through ten years   32,877    33,809 
Due after ten years   25,772    27,021 
    132,042    134,561 
Mortgage-backed securities and CMO   125,544    124,884 
           
   $257,586   $259,445 

 

Information pertaining to investment securities available for sale with gross unrealized losses at June 30, 2019, aggregated by investment category and the length of time that individual investment securities have been in a continuous position, follows.

 

   Number of     Gross
   Investment  Fair  Unrealized
   Positions  Value  Losses
(Dollars in thousands)         
          
Continuous loss position less than twelve months:               
Agency CMO   3   $3,792   $33 
                
Total less than twelve months   3    3,792    33 
                
Continuous loss position more than twelve months:               
Agency mortgage-backed securities   74    72,485    790 
Agency CMO   20    10,939    134 
Agency notes and bonds   13    45,138    240 
Municipal obligations   5    1,864    6 
                
Total more than twelve months   112    130,426    1,170 
                
Total securities available for sale   115   $134,218   $1,203 

 

 - 10 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(2 – continued)

 

Information pertaining to investment securities available for sale with gross unrealized losses at December 31, 2018, aggregated by investment category and the length of time that individual investment securities have been in a continuous position, follows.

 

   Number of     Gross
   Investment  Fair  Unrealized
   Positions  Value  Losses
(Dollars in thousands)         
          
Continuous loss position less than twelve months:               
Agency mortgage-backed securities   1   $1,563   $13 
Agency CMO   4    2,870    1 
Agency notes and bonds   1    499    1 
Municipal obligations   11    3,552    12 
                
Total less than twelve months   17    8,484    27 
                
Continuous loss position more than twelve months:               
Agency mortgage-backed securities   97    89,680    3,476 
Agency CMO   24    12,168    381 
Agency notes and bonds   22    67,927    1,015 
Municipal obligations   49    25,316    559 
                
Total more than twelve months   192    195,091    5,431 
                
Total securities available for sale   209   $203,575   $5,458 

 

Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recover in fair value.

 

At June 30, 2019, the U.S. government agency debt securities, including agency notes and bonds, mortgage-backed securities and CMO, and municipal obligations in a loss position had depreciated approximately 0.9% from the amortized cost basis. All of the U.S. government agency securities and municipal obligations are issued by U.S. government agencies, government-sponsored enterprises and municipal governments, or are secured by first mortgage loans and municipal project revenues. These unrealized losses related principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As the Company has the ability to hold the debt securities until maturity, or the foreseeable future if classified as available for sale, no declines are deemed to be other-than-temporary.

 

While management does not anticipate any credit-related impairment losses at June 30, 2019, additional deterioration in market and economic conditions may have an adverse impact on credit quality in the future.

 

 - 11 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(2 – continued)

 

During the six months ended June 30, 2019, the Company realized gross losses of $86,000 on sales of available for sale securities and gross losses of $11,000 on sales of time deposits. There were no sales during the three months ended June 30, 2019. During the three months ended June 30, 2018, the Company realized gross gains of $211,000 and gross losses of $307,000 on sales of available for sale securities. During the six months ended June 30, 2018, the Company realized gross gains of $218,000 and gross losses of $313,000 on sales of available for sale securities.

 

Certain available for sale debt securities were pledged to secure public fund deposits at June 30, 2019 and December 31, 2018.

 

Equity Securities

 

In September 2018, the Company acquired 90,000 shares of common stock in another bank holding company, representing approximately 5% of the outstanding common stock of the entity, for a total investment of $1.9 million. During the three months ended June 30, 2019, the Company recognized an unrealized loss of $14,000 on this equity investment. During the six months ended June 30, 2019, the Company recognized an unrealized gain of $117,000 on this equity investment. At June 30, 2019 and December 31, 2018, the equity investment had a fair value of $1.8 million and $1.7 million, respectively, and is included in other assets on the consolidated balance sheets.

 

3.Loans and Allowance for Loan Losses

 

The Company’s loan and allowance for loan loss policies are as follows:

 

Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses. The Company originates real estate mortgage, commercial business and consumer loans. A substantial portion of the loan portfolio is represented by mortgage loans to customers in the Louisville, Kentucky metropolitan statistical area (MSA). The ability of the Company’s customers to honor their loan agreements is largely dependent upon the real estate and general economic conditions in this area.

 

Loan origination and commitment fees, as well as certain direct costs of underwriting and closing loans, are deferred and amortized as a yield adjustment to interest income over the lives of the related loans using the interest method. Amortization of net deferred loan fees is discontinued when a loan is placed on nonaccrual status.

 

The recognition of income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments become 90 days past due unless, in the opinion of management, the outstanding interest remains collectible. Past due status is determined based on contractual terms. Generally, by applying the cash receipts method, interest income is subsequently recognized only as received until the loan is returned to accrual status. The cash receipts method is used when the likelihood of further loss on the loan is remote. Otherwise, the Company applies the cost recovery method and applies all payments as a reduction of the unpaid principal balance until the loan qualifies for return to accrual status. Interest income on impaired loans is recognized using the cost recovery method, unless the likelihood of further loss on the loan is remote.

 

 - 12 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

A loan is restored to accrual status when all principal and interest payments are brought current and the borrower has demonstrated the ability to make future payments of principal and interest as scheduled, which generally requires that the borrower demonstrate a period of performance of at least six consecutive months.

 

For portfolio segments other than consumer loans, the Company’s practice is to charge-off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or for other reasons. A partial charge-off is recorded on a loan when the uncollectibility of a portion of the loan has been confirmed, such as when a loan is discharged in bankruptcy, the collateral is liquidated, a loan is restructured at a reduced principal balance, or other identifiable events that lead management to determine the full principal balance of the loan will not be repaid. A specific reserve is recognized as a component of the allowance for estimated losses on loans individually evaluated for impairment. Partial charge-offs on nonperforming and impaired loans are included in the Company’s historical loss experience used to estimate the general component of the allowance for loan losses as discussed below. Specific reserves are not considered charge-offs in management’s analysis of the allowance for loan losses because they are estimates and the outcome of the loan relationship is undetermined.

 

Consumer loans not secured by real estate are typically charged off at 90 days past due, or earlier if deemed uncollectible, unless the loans are in the process of collection. Overdrafts are charged off after 45 days past due. Charge-offs are typically recorded on loans secured by real estate when the property is foreclosed upon.

 

The allowance for loan losses reflects management’s judgment of probable loan losses inherent in the loan portfolio at the balance sheet date. Additions to the allowance for loan losses are made by the provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The Company uses a disciplined process and methodology to evaluate the allowance for loan losses on at least a quarterly basis that is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated for impairment or loans otherwise classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the underlying discounted collateral value (or present value of estimated future cash flows) of the impaired loan is lower than the carrying value of that loan.

 

 

 - 13 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The general component covers loans not considered to be impaired. Such loans are pooled by segment and losses are modeled using annualized historical loss experience adjusted for qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior five years. The Company’s historical loss experience is then adjusted for qualitative factors that are reviewed on a quarterly basis based on the risks present for each portfolio segment. Management considers changes and trends in the following qualitative loss factors: underwriting standards, economic conditions, changes and trends in past due and classified loans, collateral valuations, loan concentrations and other internal and external factors.

 

Management also applies additional loss factor multiples to loans classified as watch, special mention and substandard that are not individually evaluated for impairment. The loss factor multiples for classified loans are based on management’s assessment of historical trends regarding losses experienced on classified loans in prior periods. See below for additional discussion of the qualitative factors utilized in management’s allowance for loan loss methodology at June 30, 2019 and December 31, 2018.

 

Management exercises significant judgment in evaluating the relevant historical loss experience and the qualitative factors. Management also monitors the differences between estimated and actual incurred loan losses for loans considered impaired in order to evaluate the effectiveness of the estimation process and make any changes in the methodology as necessary.

 

Management utilizes the following portfolio segments in its analysis of the allowance for loan losses: residential real estate, land, construction, commercial real estate, commercial business, home equity and second mortgage, and other consumer loans. Additional discussion of the portfolio segments and the risks associated with each segment can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

 - 14 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

Values for collateral dependent loans are generally based on appraisals obtained from independent licensed real estate appraisers, with adjustments applied for estimated costs to sell the property, costs to complete unfinished or repair damaged property and other factors. New appraisals are generally obtained for all significant properties when a loan is identified as impaired, and a property is considered significant if the value of the property is estimated to exceed $200,000. Subsequent appraisals are obtained as needed or if management believes there has been a significant change in the market value of the property. In instances where it is not deemed necessary to obtain a new appraisal, management bases its impairment and allowance for loan loss analysis on the original appraisal with adjustments for current conditions based on management’s assessment of market factors and management’s inspection of the property.

 

At June 30, 2019 and December 31, 2018, the balance of foreclosed real estate includes $84,000 and $33,000, respectively, of residential real estate properties where physical possession has been obtained. At June 30, 2019 and December 31, 2018, the recorded investment in loans secured by residential real estate properties for which formal foreclosure proceedings are in process was $329,000 and $365,000, respectively.

 

Loans at June 30, 2019 and December 31, 2018 consisted of the following:

 

   June 30,  December 31,
(In thousands)  2019  2018
       
Real estate mortgage loans:          
Residential  $140,035   $136,445 
Land   22,584    22,607 
Residential construction   32,639    31,459 
Commercial real estate   111,862    107,445 
Commercial real estate construction   20,797    20,591 
Commercial business loans   41,621    36,297 
Consumer loans:          
Home equity and second mortgage loans   54,220    51,731 
Automobile loans   44,870    42,124 
Loans secured by savings accounts   1,354    1,399 
Unsecured loans   3,598    3,638 
Other consumer loans   10,473    10,169 
Gross loans   484,053    463,905 
Less undisbursed portion of loans in process   (20,644)   (26,675)
           
Principal loan balance   463,409    437,230 
           
Deferred loan origination fees, net   1,128    1,095 
Allowance for loan losses   (4,609)   (4,065)
           
Loans, net  $459,928   $434,260 

 

 - 15 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The following table provides the components of the Company’s recorded investment in loans at June 30, 2019:

 

 

   Residential        Commercial  Commercial  Home Equity  &  Other   
   Real Estate  Land  Construction  Real Estate  Business  2nd Mtg  Consumer  Total
   (In thousands)
Recorded Investment in Loans:                                        
Principal loan balance  $140,035   $22,584   $32,792   $111,862   $41,621   $54,220   $60,295   $463,409 
                                         
Accrued interest receivable   488    97    108    264    137    263    257    1,614 
                                         
Net deferred loan origination fees and costs   118    18    (7)   (44)   -    1,043    -    1,128 
                                         
Recorded investment in loans  $140,641   $22,699   $32,893   $112,082   $41,758   $55,526   $60,552   $466,151 
                                         
                                         
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment  $1,870   $192   $-   $882   $400   $28   $4   $3,376 
Collectively evaluated for impairment   138,488    22,507    32,893    111,157    41,358    55,498    60,548    462,449 
Acquired with deteriorated credit quality   283    -    -    43    -    -    -    326 
                                         
Ending balance  $140,641   $22,699   $32,893   $112,082   $41,758   $55,526   $60,552   $466,151 

 

 

 - 16 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

 

The following table provides the components of the Company’s recorded investment in loans at December 31, 2018:

 

   Residential        Commercial  Commercial  Home Equity  &  Other   
   Real Estate  Land  Construction  Real Estate  Business  2nd Mtg  Consumer  Total
   (In thousands)
Recorded Investment in Loans:                                        
Principal loan balance  $136,445   $22,607   $25,375   $107,445   $36,297   $51,731   $57,330   $437,230 
                                         
Accrued interest receivable   475    119    76    265    120    247    228    1,530 
                                         
Net deferred loan origination fees and costs   99    18    (9)   (38)   -    1,025    -    1,095 
                                         
Recorded investment in loans  $137,019   $22,744   $25,442   $107,672   $36,417   $53,003   $57,558   $439,855 
                                         
                                         
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment  $2,184   $152   $521   $466   $427   $35   $-   $3,785 
Collectively evaluated for impairment   134,553    22,592    24,921    107,158    35,990    52,968    57,558    435,740 
Acquired with deteriorated credit quality   282    -    -    48    -    -    -    330 
                                         
Ending balance  $137,019   $22,744   $25,442   $107,672   $36,417   $53,003   $57,558   $439,855 

 

 

 - 17 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

 

An analysis of the allowance for loan losses as of June 30, 2019 is as follows:

 

   Residential        Commercial  Commercial  Home Equity  &  Other   
   Real Estate  Land  Construction  Real Estate  Business  2nd Mtg  Consumer  Total
   (In thousands)
Ending allowance balance attributable to loans:                  
                         
Individually evaluated for impairment  $2   $-   $-   $32   $-   $-   $-   $34 
Collectively evaluated for impairment   752    170    316    1,420    596    472    849    4,575 
Acquired with deteriorated credit quality   -    -    -    -    -    -    -    - 
                                         
Ending balance  $754   $170   $316   $1,452   $596   $472   $849   $4,609 

 

 

 

An analysis of the allowance for loan losses as of December 31, 2018 is as follows:

 

   Residential        Commercial  Commercial  Home Equity  &  Other   
   Real Estate  Land  Construction  Real Estate  Business  2nd Mtg  Consumer  Total
   (In thousands)
Ending allowance balance attributable to loans:                  
                         
Individually evaluated for impairment  $3   $-   $-   $44   $1   $-   $-   $48 
Collectively evaluated for impairment   690    162    224    1,357    458    443    683    4,017 
Acquired with deteriorated credit quality   -    -    -    -    -    -    -    - 
                                         
Ending balance  $693   $162   $224   $1,401   $459   $443   $683   $4,065 

 

 

 

 - 18 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

 

An analysis of the changes in the allowance for loan losses for the three months and six months ended June 30, 2019 is as follows:

 

   Residential        Commercial  Commercial  Home Equity  &  Other   
   Real Estate  Land  Construction  Real Estate  Business  2nd Mtg  Consumer  Total
   (In thousands)
Allowance for loan losses:                        
Changes in Allowance for Loan Losses for the three-months ended June 30, 2019
Beginning balance  $727   $164   $291   $1,391   $541   $450   $775   $4,339 
Provisions for loan losses   4    6    25    61    55    20    129    300 
Charge-offs   (92)   -    -    -    -    (2)   (119)   (213)
Recoveries   115    -    -    -    -    4    64    183 
                                         
Ending balance  $754   $170   $316   $1,452   $596   $472   $849   $4,609 
                                         
                                         
Changes in Allowance for Loan Losses for the six-months ended June 30, 2019
Beginning balance  $693   $162   $224   $1,401   $459   $443   $683   $4,065 
Provisions for loan losses   75    8    92    51    137    25    362    750 
Charge-offs   (130)   -    -    -    -    (2)   (300)   (432)
Recoveries   116    -    -    -    -    6    104    226 
                                         
Ending balance  $754   $170   $316   $1,452   $596   $472   $849   $4,609 

 

 

 - 19 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

 

An analysis of the changes in the allowance for loan losses for the three months and six months ended June 30, 2018 is as follows:

 

   Residential        Commercial  Commercial  Home Equity  &  Other   
   Real Estate  Land  Construction  Real Estate  Business  2nd Mtg  Consumer  Total
   (In thousands)
Allowance for loan losses:                        
Changes in Allowance for Loan Losses for the three-months ended June 30, 2018
Beginning balance  $301   $156   $291   $1,520   $276   $680   $407   $3,631 
Provisions for loan losses   398    (8)   (75)   (237)   141    (75)   172    316 
Charge-offs   (15)   0    0    0    0    (13)   (138)   (166)
Recoveries   4    0    0    23    0    15    44    86 
                                         
Ending balance  $688   $148   $216   $1,306   $417   $607   $485   $3,867 
                                         
                                         
Changes in Allowance for Loan Losses for the six-months ended June 30, 2018
Beginning balance  $219   $133   $245   $1,622   $291   $710   $414   $3,634 
Provisions for loan losses   538    15    (29)   (348)   126    (109)   320    513 
Charge-offs   (75)   0    0    0    (1)   (12)   (334)   (422)
Recoveries   6    0    0    32    1    18    85    142 
                                         
Ending balance  $688   $148   $216   $1,306   $417   $607   $485   $3,867 

 

 

 

 

 

 

 

 

 

 

 - 20 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

At June 30, 2019 and December 31, 2018, management applied qualitative factor adjustments to various portfolio segments which increased the estimated allowance for loan losses related to those portfolio segments by approximately $3.3 million and $3.1 million, respectively. These changes were made to reflect management’s estimates of inherent losses in these portfolio segments at June 30, 2019 and December 31, 2018.

 

Management also adjusts the historical loss factors for loans classified as watch, special mention and substandard that are not individually evaluated for impairment. The adjustments consider the increased likelihood of loss on classified loans based on the Company’s separate historical experience for classified loans. The effect of the adjustments for classified loans was to increase the estimated allowance for loan losses by $320,000 and $333,000 at June 30, 2019 and December 31, 2018, respectively. These factors were not adjusted during the period from December 31, 2018 to June 30, 2019.

 

Additional discussion of the Bank’s allowance for loan loss methodology can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

 - 21 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The following table summarizes the Company’s impaired loans as of June 30, 2019 and for the three months and six months ended June 30, 2019. The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the three or six month periods ended June 30, 2019:

 

   At June 30, 2019  Three Months Ended June 30, 2019  Six Months Ended June 30, 2019
      Unpaid     Average  Interest  Average  Interest
   Recorded  Principal  Related  Recorded  Income  Recorded  Income
   Investment  Balance  Allowance  Investment  Recognized  Investment  Recognized
   (In thousands)
Loans with no related allowance recorded:
Residential  $1,857   $2,120   $-   $2,025   $3   $2,073   $6 
Land   192    194    -    191    -    178    - 
Construction   -    -    -    263    -    349    - 
Commercial real estate   683    692    -    467    8    396    11 
Commercial business   374    427    -    385    3    390    6 
Home equity/2nd mortgage   28    38    -    27    -    29    - 
Other consumer   4    -    -    2    -    1    - 
                                    
    3,138    3,471    -    3,360    14    3,416    23 
                                    
Loans with an allowance recorded:
Residential   13    14    2    75    -    55    - 
Land   -    -    -    -    -    -    - 
Construction   -    -    -    -    -    -    - 
Commercial real estate   199    208    32    203    -    135    - 
Commercial business   26    30    -    26    -    88    - 
Home equity/2nd mortgage   -    -    -    -    -    9    - 
Other consumer   -    -    -    -    -    -    - 
                                    
    238    252    34    304    -    287    - 
                                    
Total:
Residential   1,870    2,134    2    2,100    3    2,128    6 
Land   192    194    -    191    -    178    - 
Construction   -    -    -    263    -    349    - 
Commercial real estate   882    900    32    670    8    531    11 
Commercial business   400    457    -    411    3    478    6 
Home equity/2nd mortgage   28    38    -    27    -    38    - 
Other consumer   4    -    -    2    -    1    - 
                                    
   $3,376   $3,723   $34   $3,664   $14   $3,703   $23 

 

 

 - 22 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The following table summarizes the Company’s impaired loans for the three months and six months ended June 30, 2018. The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the three or six month periods ended June 30, 2018:

 

   Three Months Ended June 30, 2018  Six  Months Ended June 30, 2018
   Average  Interest  Average  Interest
   Recorded  Income  Recorded  Income
   Investment  Recognized  Investment  Recognized
    
Loans with no related allowance recorded:                    
Residential  $2,327   $5   $2,449   $13 
Land   214    0    142    0 
Construction   0    0    0    0 
Commercial real estate   312    5    342    10 
Commercial business   254    4    173    7 
Home equity/2nd mortgage   77    0    71    1 
Other consumer   8    1    5    1 
                     
    3,192    15    3,182    32 
                     
Loans with an allowance recorded:                    
Residential   267    0    248    0 
Land   0    0    0    0 
Construction   0    0    0    0 
Commercial real estate   0    0    0    0 
Commercial business   28    0    29    0 
Home equity/2nd mortgage   7    0    9    0 
Other consumer   0    0    0    0 
                     
    302    0    286    0 
                     
Total:                    
Residential   2,594    5    2,697    13 
Land   214    0    142    0 
Construction   0    0    0    0 
Commercial real estate   312    5    342    10 
Commercial business   282    4    202    7 
Home equity/2nd mortgage   84    0    80    1 
Other consumer   8    1    5    1 
                     
   $3,494   $15   $3,468   $32 

 

 - 23 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

The following table summarizes the Company’s impaired loans as of December 31, 2018:

 

      Unpaid   
   Recorded  Principal  Related
   Investment  Balance  Allowance
   (In thousands)
Loans with no related allowance recorded:               
Residential  $2,170   $2,409   $- 
Land   152    153    - 
Construction   521    521    - 
Commercial real estate   255    260    - 
Commercial business   400    451    - 
Home equity/2nd mortgage   35    44    - 
Other consumer   -    -    - 
                
    3,533    3,838    - 
                
Loans with an allowance recorded:               
Residential   14    15    3 
Land   -    -    - 
Construction   -    -    - 
Commercial real estate   211    213    44 
Commercial business   27    30    1 
Home equity/2nd mortgage   -    -    - 
Other consumer   -    -    - 
                
    252    258    48 
                
Total:               
Residential   2,184    2,424    3 
Land   152    153    - 
Construction   521    521    - 
Commercial real estate   466    473    44 
Commercial business   427    481    1 
Home equity/2nd mortgage   35    44    - 
Other consumer   -    -    - 
                
   $3,785   $4,096   $48 

 

 

 - 24 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

 

Nonperforming loans consists of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at June 30, 2019 and December 31, 2018:

 

   June 30, 2019  December 31, 2018
      Loans 90+ Days  Total     Loans 90+ Days  Total
   Nonaccrual  Past Due  Nonperforming  Nonaccrual  Past Due  Nonperforming
   Loans  Still Accruing  Loans  Loans  Still Accruing  Loans
   (In thousands)
                   
Residential  $1,713   $76   $1,789   $1,769   $-   $1,769 
Land   192    -    192    152    -    152 
Construction   -    -    -    521    -    521 
Commercial real estate   351    -    351    371    -    371 
Commercial business   198    -    198    207    -    207 
Home equity/2nd mortgage   28    -    28    35    -    35 
Other consumer   -    5    5    -    2    2 
                               
Total  $2,482   $81   $2,563   $3,055   $2   $3,057 

 

 

The following table presents the aging of the recorded investment in loans at June 30, 2019:

 

                  Purchased   
   30-59 Days  60-89 Days  90 Days or More  Total     Credit  Total
   Past Due  Past Due  Past Due  Past Due  Current  Impaired Loans  Loans
   (In thousands)
                      
Residential  $3,254   $620   $1,168   $5,042   $135,316   $283   $140,641 
Land   163    104    156    423    22,276    -    22,699 
Construction   -    -    -    -    32,893    -    32,893 
Commercial real estate   346    -    -    346    111,693    43    112,082 
Commercial business   63    55    143    261    41,497    -    41,758 
Home equity/2nd mortgage   288    -    28    316    55,210    -    55,526 
Other consumer   391    7    5    403    60,149    -    60,552 
                                    
Total  $4,505   $786   $1,500   $6,791   $459,034   $326   $466,151 

 

 

 - 25 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

 

The following table presents the aging of the recorded investment in loans at December 31, 2018:

 

                  Purchased   
   30-59 Days  60-89 Days  90 Days or More  Total     Credit  Total
   Past Due  Past Due  Past Due  Past Due  Current  Impaired Loans  Loans
   (In thousands)
                      
Residential  $2,617   $926   $1,189   $4,732   $132,005   $282   $137,019 
Land   247    39    152    438    22,306    -    22,744 
Construction   -    -    -    -    25,442    -    25,442 
Commercial real estate   450    -    -    450    107,174    48    107,672 
Commercial business   377    -    145    522    35,895    -    36,417 
Home equity/2nd mortgage   191    -    35    226    52,777    -    53,003 
Other consumer   491    50    2    543    57,015    -    57,558 
                                    
   Total  $4,373   $1,015   $1,523   $6,911   $432,614   $330   $439,855 

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:

 

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the institution’s books as an asset is not warranted.

 

Loans not meeting the criteria above that are analyzed individually as part of the described process are considered to be pass rated loans.

 

 

 - 26 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

 

The following table presents the recorded investment in loans by risk category as of the date indicated:

 

 

   Residential        Commercial  Commercial  Home Equity  &  Other   
   Real Estate  Land  Construction  Real Estate  Business  2nd Mtg  Consumer  Total
   (In thousands)
June 30, 2019                                        
Pass  $137,676   $22,051   $32,698   $109,023   $40,665   $55,416   $60,552   $458,081 
Special Mention   48    330    195    1,742    633    -    -    2,948 
Substandard   1,131    126    -    966    262    82    -    2,567 
Doubtful   1,786    192    -    351    198    28    -    2,555 
Loss   -    -    -    -    -    -    -    - 
                                         
Total  $140,641   $22,699   $32,893   $112,082   $41,758   $55,526   $60,552   $466,151 
                                         
December 31, 2018                                        
Pass  $133,878   $22,458   $24,921   $104,843   $35,162   $52,859   $57,529   $431,650 
Special Mention   133    65    -    1,520    763    -    29    2,510 
Substandard   1,168    69    -    938    285    109    -    2,569 
Doubtful   1,840    152    521    371    207    35    -    3,126 
Loss   -    -    -    -    -    -    -    - 
                                         
Total  $137,019   $22,744   $25,442   $107,672   $36,417   $53,003   $57,558   $439,855 

 

 

 

 

 - 27 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

 

The following table summarizes the Company’s troubled debt restructurings (TDRs) by accrual status as of June 30, 2019 and December 31, 2018:

 

   June 30, 2019  December 31, 2018
            Related Allowance           Related Allowance
   Accruing  Nonaccrual  Total  for Loan Losses  Accruing  Nonaccrual  Total  for Loan Losses
   (In thousands)
Troubled debt restructurings:                                        
Residential real estate  $145   $290   $435   $-   $295   $302   $597   $- 
Commercial real estate   529    347    876    32    190    371    561    44 
Commercial business   202    -    202    -    218    -    218    - 
                                         
Total  $876   $637   $1,513   $32   $703   $673   $1,376   $44 

 

At June 30, 2019 and December 31, 2018, there were no commitments to lend additional funds to debtors whose loan terms have been modified in a TDR.

 

The Company restructured two commercial real estate loans during the three and six months ended June 30, 2019, with pre-modification and post-modification aggregate balances of $436,000. The Company restructured one commercial business loan during the six months ended June 30, 2018, with a pre-modification and post-modification balance of $179,000. There were no TDRs that were restructured during the three months ended June 30, 2018. For the TDRs restructured in 2019 and 2018, the terms of modification included an extension and the deferral of contractual principal payments.

 

There were no principal charge-offs recorded as a result of TDRs and there was no specific allowance for loan losses related to TDRs modified during the three and six months ended June 30, 2019 or 2018.

 

 

 - 28 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

There were no TDRs modified within the previous 12 months for which there was a subsequent payment default (defined as the loan becoming more than 90 days past due, being moved to nonaccrual status, or the collateral being foreclosed upon) during the three and six months ended June 30, 2019 and 2018. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan. The Company did not recognize any provisions for loan losses or net charge-offs as a result of defaulted TDRs for the three and six months ended June 30, 2019 and 2018.

 

Purchased Credit Impaired (PCI) Loans

 

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. Such loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit score, loan type and date of origination. In determining the estimated fair value of purchased loans or pools, management considers a number of factors including the remaining life, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows expected to be received, among others. Purchased loans that have evidence of credit deterioration since origination for which it is deemed probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-30. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. The difference between the expected cash flows and the fair value at acquisition is recorded as interest income over the remaining life of the loan or pool of loans and is referred to as the accretable yield. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which is recognized as future interest income.

 

The following table presents the carrying amount of PCI loans accounted for under ASC 310-30 at June 30, 2019 and December 31, 2018:

 

   June 30,  December 31,
(In thousands)  2019  2018
       
Residential real estate  $283   $282 
Commercial real estate   43    48 
Carrying amount   326    330 
Allowance for loan losses   -    - 
Carrying amount, net of allowance  $326   $330 

 

The outstanding balance of PCI loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties was $503,000 and $519,000 at June 30, 2019 and December 31, 2018, respectively.

 

There was no allowance for loan losses related to PCI loans at June 30, 2019 and December 31, 2018. There was a $2,000 reduction of the allowance for loan losses related to PCI loans for the six-month period ended June 30, 2018. There were no net provisions for loans losses related to PCI loans for the three-month period ended June 30, 2018 or for the three-month or six-month periods ended June 30, 2019.

 - 29 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

Accretable yield, or income expected to be collected, is as follows for the three and six month periods ended June 30, 2019 and 2018:

 

   Three Months Ended  Six Months Ended
   6/30/2019  6/30/2018  6/30/2019  6/30/2018
             
Balance at beginning of period  $409   $459   $423   $470 
New loans purchased   -    -    -    - 
Accretion to income   (12)   (15)   (24)   (29)
Disposals and other adjustments   -    -    -    - 
Reclassification (to) from nonaccretable difference   (7)   (1)   (9)   2 
                     
Balance at end of period  $390   $443   $390   $443 

 

 

4.Qualified Affordable Housing Project Investment

 

On January 19, 2018, the Bank entered into an agreement to invest in qualified affordable housing projects through a limited liability company. At June 30, 2019 and December 31, 2018, the balance of the Bank’s investment was $3.4 million and $3.6 million, respectively, and is reflected in other assets on the consolidated balance sheets. The unfunded commitment related to the qualified affordable housing project investment at June 30, 2019 and December 31, 2018 was $2.5 million and $2.9 million, respectively, and is reflected in other liabilities on the consolidated balance sheets. The Bank expects to fulfill the commitment as capital calls are made through 2029.

 

The investment is accounted for using the proportional amortization method. During the three month periods ended June 30, 2019 and 2018, the Bank recognized amortization expense of $87,000 and $82,000, respectively, which was included in income tax expense on the consolidated statements of income. Additionally, during the three month periods ended June 30, 2019 and 2018, the Bank recognized tax credits and other tax benefits from its qualified affordable housing project investment of $123,000 and $98,000, respectively. During the six month periods ended June 30, 2019 and 2018, the Bank recognized amortization expense of $169,000 and $164,000, respectively, which was included in income tax expense on the consolidated statements of income. Additionally, during the six month periods ended June 30, 2019 and 2018, the Bank recognized tax credits and other tax benefits from its qualified affordable housing project investment of $248,000 and $196,000, respectively.

 

 

 

 - 30 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.Supplemental Disclosure for Earnings Per Share

 

             
   Three Months Ended  Six Months Ended
   6/30/2019  6/30/2018  6/30/2019  6/30/2018
             
Basic  (Dollars in thousands, except for share and per share data)
Earnings:            
Net income attributable to First Capital, Inc.  $2,860   $2,100   $5,007   $4,233 
                     
Shares:                    
Weighted average common shares outstanding   3,329,837    3,326,797    3,329,840    3,326,632 
                     
Net income attributable to First Capital, Inc. per common share, basic  $0.86   $0.63   $1.50   $1.27 
                     
Diluted                    
Earnings:                    
Net income attributable to First Capital, Inc.  $2,860   $2,100   $5,007   $4,233 
                     
Shares:                    
Weighted average common shares outstanding   3,329,837    3,326,797    3,329,840    3,326,632 
Add: Dilutive effect of restricted stock   11,976    7,041    11,110    6,401 
                     
Weighted average common shares outstanding, as adjusted   3,341,813    3,333,838    3,340,950    3,333,033 
                     
Net income attributable to First Capital, Inc. per common share, diluted  $0.86   $0.63   $1.50   $1.27 

 

Nonvested restricted stock shares are not considered as outstanding for purposes of computing weighted average common shares outstanding. No shares were excluded from the calculations of diluted net income per share because their effect would be anti-dilutive for the three-month and six-month periods ended June 30, 2019 and 2018.

 

6.Stock-Based Compensation Plans

 

On May 20, 2009, the Company adopted the 2009 Equity Incentive Plan (the “2009 Plan”) which terminated as of May 20, 2019. The 2009 Plan provided for the award of stock options, restricted stock, performance shares and stock appreciation rights. The aggregate number of shares of the Company’s common stock available for issuance under the 2009 Plan could not exceed 223,000 shares and 176,150 shares were still available for issuance under the 2009 Plan at its termination.

 

On May 22, 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan provides for the award of stock options, restricted stock, performance shares and stock appreciation rights. The aggregate number of shares of the Company’s common stock available for issuance under the 2019 Plan may not exceed 176,150 shares. If an award under the 2009 Plan is canceled, terminates, expires, is forfeited or lapses for any reason, any issued shares subject to the award shall not be available for issuance pursuant to awards subsequently granted under the 2019 Plan. Further, no additional participants, as that term is defined in the 2009 Plan, are eligible for grants of awards under the 2009 Plan.

 - 31 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(6 – continued)

 

At June 30, 2019, 176,150 shares of the Company’s common stock were available for issuance under the 2019 Plan. The Company may grant both non-statutory and statutory stock options which may not have a term exceeding ten years. In the case of incentive stock options, the aggregate fair value of the stock (determined at the time the incentive stock option is granted) for which any optionee may be granted incentive options which are first exercisable during any calendar year shall not exceed $100,000. Option prices may not be less than the fair market value of the underlying stock at the date of the grant. An award of a performance share is a grant of a right to receive shares of the Company’s common stock which is contingent upon the achievement of specific performance criteria or other objectives set at the grant date. Stock appreciation rights are equity or cash settled share-based compensation arrangements whereby the number of shares that will ultimately be issued or the cash payment is based upon the appreciation of the Company’s common stock. Awards granted under the 2019 Plan may be granted either alone, in addition to, or in tandem with, any other award granted under the 2019 Plan. The terms of the 2019 Plan also include provisions whereby all unearned options and restricted shares become immediately exercisable and fully vested upon a change in control.

 

The fair market value of stock options granted is estimated at the date of grant using an option pricing model. Expected volatilities are based on historical volatility of the Company's stock. The expected term of options granted represents the period of time that options are expected to be outstanding and is based on historical trends. The risk free rate for the expected life of the options is based on the U.S. Treasury yield curve in effect at the time of grant. As of June 30, 2019, no stock options had been granted under the plans.

 

On February 19, 2019, the Company granted 9,750 restricted stock shares under the 2009 Plan to directors, officers and key employees at a grant-date price of $52.09 per share for a total of $508,000. The restricted stock vests ratably from the grant date through July 1, 2024, with 20% of the shares vesting each year on July 1 beginning July 1, 2020. On February 20, 2018, the Company granted 20,000 restricted stock shares under the 2009 Plan to directors, officers and key employees at a grant-date price of $37.42 per share for a total of $748,000. The restricted stock vests ratably from the grant date through July 1, 2023, with 20% of the shares vesting each year on July 1 beginning July 1, 2019. Compensation expense is measured based on the fair market value of the restricted stock at the grant date and is recognized ratably over the period during which the shares are earned (the vesting period). Compensation expense related to restricted stock recognized for the three-month and six-month periods ended June 30, 2019 amounted to $62,000 and $118,000, respectively. Compensation expense related to restricted stock recognized for the three-month and six-month periods ended June 30, 2018 amounted to $57,000 and $106,000, respectively.

 

A summary of the Company’s nonvested restricted shares under the plans as of June 30, 2019 and changes during the six-month period then ended is presented below.

 

      Weighted
   Number  Average
   of  Grant Date
   Shares  Fair Value
       
Nonvested at January 1, 2019   24,900   $34.10 
Granted   9,750    52.09 
Vested   -    - 
Forfeited   -    - 
           
Nonvested at June 30, 2019   34,650   $39.16 

 

 

 - 32 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(6 – continued)

 

At June 30, 2019, there was $1.1 million of unrecognized compensation expense related to nonvested restricted shares. The compensation expense is expected to be recognized over the remaining vesting period of 5.0 years.

 

7.Supplemental Disclosures of Cash Flow Information

 

   Six Months Ended
   June 30,
   2019  2018
   (In thousands)
Cash payments for:          
Interest  $926   $731 
Taxes (net of refunds received)   642    705 
           
Noncash investing activities:          
Transfers from loans to real estate acquired          
through foreclosure   206    176 

 

 

8.Fair Value Measurements

 

FASB ASC Topic 820, Fair Value Measurements, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are described as follows:

 

  Level 1:  Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted market price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
      
  Level 2:  Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs that are derived principally from or can be corroborated by observable market data by correlation or other means.
      
  Level 3:  Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth on the following page. These valuation methodologies were applied to all of the Company’s financial and nonfinancial assets carried at fair value or the lower of cost or fair value. The table below presents the balances of assets measured at fair value on a recurring and nonrecurring basis as of June 30, 2019 and December 31, 2018. The Company had no liabilities measured at fair value as of June 30, 2019 or December 31, 2018.

 - 33 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(8 – continued)

 

   Carrying Value
(In thousands)  Level 1  Level 2  Level 3  Total
             
June 30, 2019                    
Assets Measured on a Recurring Basis                    
Securities available for sale:                    
Agency mortgage-backed securities  $-   $84,658   $-   $84,658 
Agency CMO   -    40,226    -    40,226 
Agency notes and bonds   -    64,459    -    64,459 
Municipal obligations   -    70,102    -    70,102 
Total securities available for sale  $-   $259,445   $-   $259,445 
                     
Equity securities  $1,832   $-   $-    1,832 
                     
Assets Measured on a Nonrecurring Basis                    
Impaired loans:                    
Residential real estate  $-   $-   $1,868   $1,868 
Land   -    -    192    192 
Commercial real estate   -    -    850    850 
Commercial business   -    -    400    400 
Home equity and second mortgage   -    -    28    28 
Other consumer   -    -    4    4 
Total impaired loans  $-   $-   $3,342   $3,342 
                     
Loans held for sale  $-   $3,962   $-   $3,962 
                     
Foreclosed real estate:                    
Residential real estate  $-   $-   $84   $84 
Commercial real estate   -    -    2,825    2,825 
Total foreclosed real estate  $-   $-   $2,909   $2,909 
                     
December 31, 2018                    
Assets Measured on a Recurring Basis                    
Securities available for sale:                    
Agency mortgage-backed securities  $-   $91,257   $-   $91,257 
Agency CMO   -    32,992    -    32,992 
Agency notes and bonds   -    74,504    -    74,504 
Municipal obligations   -    63,088    -    63,088 
Total securities available for sale  $-   $261,841   $-   $261,841 
                     
Equity securities  $1,715   $-   $-    1,715 
                     
Assets Measured on a Nonrecurring Basis                    
Impaired loans:                    
Residential real estate  $-   $-   $2,181   $2,181 
Land   -    -    152    152 
Construction   -    -    521    521 
Commercial real estate   -    -    422    422 
Commercial business   -    -    426    426 
Home equity and second mortgage   -    -    35    35 
Total impaired loans  $-   $-   $3,737   $3,737 
                     
Loans held for sale  $-   $2,849   $-   $2,849 
                     
Foreclosed real estate:                    
Residential real estate  $-   $-   $33   $33 
Commercial real estate   -    -    3,109    3,109 
Total foreclosed real estate  $-   $-   $3,142   $3,142 

 

 

 

 - 34 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(8 – continued)

 

Fair value is based upon quoted market prices, where available. If quoted market prices are not available, fair value is based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

 

Securities Available for Sale and Equity Securities. Securities classified as available for sale and equity securities are reported at fair value on a recurring basis.  These securities are classified as Level 1 of the valuation hierarchy where quoted market prices from reputable third-party brokers are available in an active market. If quoted market prices are not available, the Company obtains fair value measurements from an independent pricing service.  These securities are reported using Level 2 inputs and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. For securities where quoted market prices, market prices of similar securities or prices from an independent third party pricing service are not available, fair values are calculated using discounted cash flows or other market indicators and are classified within Level 3 of the fair value hierarchy. Changes in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect. Changes in fair value of equity securities are recorded in noninterest income on the consolidated statements of income.

 

Impaired Loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of impaired loans is classified as Level 3 in the fair value hierarchy.

 

Impaired loans are carried at the present value of estimated future cash flows using the loan's effective interest rate or the fair value of collateral less estimated costs to sell if the loan is collateral dependent. At June 30, 2019 and December 31, 2018, all impaired loans were considered to be collateral dependent for the purpose of determining fair value. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable. The fair value of the collateral is generally determined based on real estate appraisals or other independent evaluations by qualified professionals, adjusted for estimated costs to sell the property, costs to complete or repair the property and other factors to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral.

 

 - 35 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(8 – continued)

 

At June 30, 2019, the significant unobservable inputs used in the fair value measurement of impaired loans included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the collateral ranging from 11% to 66%, with a weighted average discount of 38%. At December 31, 2018, the significant unobservable inputs used in the fair value measurement of impaired loans included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the collateral ranging from 20% to 62%, with a weighted average discount of 39%. The Company recognized provisions for loan losses of $12,000 and $137,000 for the six months ended June 30, 2019 and 2018, respectively, for impaired loans. The Company recognized a reduction to the provision for loan losses of $8,000 for the three months ended June 30, 2019 and a provision of $72,000 for the three months ended June 30, 2018 for impaired loans.

 

Loans Held for Sale. Loans held for sale are carried at the lower of cost or market value. The portfolio is comprised of residential real estate loans and fair value is based on specific prices of underlying contracts for sales to investors.  These measurements are classified as Level 2.

 

Foreclosed Real Estate. Foreclosed real estate is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of foreclosed real estate is classified as Level 3 in the fair value hierarchy.

 

Foreclosed real estate is reported at fair value less estimated costs to dispose of the property. The fair values are determined by real estate appraisals which are then discounted to reflect management’s estimate of the fair value of the property given current market conditions and the condition of the collateral. At June 30, 2019, the significant unobservable inputs used in the fair value measurement of foreclosed real estate included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the property ranging from 22% to 73%, with a weighted average of 24%. At December 31, 2018, the discount from appraised value ranged from 10% to 79%, with a weighted average of 51%. The Company recognized losses of $354,000 to write down foreclosed real estate for the six months ended June 30, 2019 and $217,000 to write down foreclosed real estate for the three months ended June 30, 2019. The Company recognized losses of $419,000 to write down foreclosed real estate for the three and six months ended June 30, 2018.

 

There have been no changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and nonrecurring basis during the six month periods ended June 30, 2019 and 2018. There were no transfers into or out of the Company’s Level 3 financial assets for the six month periods ended June 30, 2019 and 2018. In addition, there were no transfers into or out of Levels 1 and 2 of the fair value hierarchy during the six month periods ended June 30, 2019 and 2018.

 

 

 - 36 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(8 – continued)

 

GAAP requires disclosure of the fair value of financial assets and financial liabilities, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The estimated fair values of the Company's financial instruments are as follows:

 

   Carrying  Fair  Fair Value Measurements Using
(In thousands)  Value  Value  Level 1  Level 2  Level 3
                
June 30, 2019                         
Financial assets:                         
Cash and cash equivalents  $60,526   $60,526   $60,526   $-   $- 
Interest-bearing time deposits   6,245    6,340    -    6,340    - 
Securities available for sale   259,445    259,445    -    259,445    - 
Loans held for sale   3,962    4,033    -    4,033    - 
Loans, net   459,928    472,960    -    -    472,960 
FHLB and other restricted stock   1,988     N/A      N/A      N/A      N/A  
Accrued interest receivable   2,987    2,987    -    2,987    - 
Equity securities (included in other assets)   1,832    1,832    1,832    -    - 
                          
Financial liabilities:                         
Deposits   734,627    733,775    -    -    733,775 
Accrued interest payable   172    172    -    172    - 
                          
December 31, 2018:                         
Financial assets:                         
Cash and cash equivalents  $41,112   $41,112   $41,112   $-   $- 
Interest-bearing time deposits   7,710    7,650    -    7,650    - 
Securities available for sale   261,841    261,841    -    261,841    - 
Loans held for sale   2,849    2,900    -    2,900    - 
Loans, net   434,260    427,200    -    -    427,200 
FHLB and other restricted stock   1,988     N/A      N/A      N/A      N/A  
Accrued interest receivable   2,828    2,828    -    2,828    - 
Equity securities (included in other assets)   1,715    1,715    1,715    -    - 
                          
Financial liabilities:                         
Deposits   701,646    699,864    -    -    699,864 
Accrued interest payable   150    150    -    150    - 

 

      

 - 37 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9.Revenue from Contracts with Customers

 

Substantially all of the Company’s revenue from contracts with customers in the scope of FASB ASC 606 is recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the three and six months ended June 30, 2019 and 2018:

 

   Three Months Ended  Six Months Ended
   June 30,  June 30,
   2019  2018  2019  2018
   (In thousands)
             
Service charges on deposit accounts  $516   $545   $977   $1,054 
ATM and debit card fees   729    643    1,376    1,243 
Investment advisory income   146    130    244    218 
Other   33    33    67    68 
Revenue from contracts with customers   1,424    1,351    2,664    2,583 
                     
Net gains on loans and investments   246    194    438    435 
Increase in cash value of life insurance   70    85    118    128 
Other   28    106    53    116 
Other noninterest income   344    385    609    679 
                     
Total noninterest income  $1,768   $1,736   $3,273   $3,262 

 

A description of the Company’s revenue streams accounted for under FASB ASC 606 follows:

 

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as stop payment charges and statement rendering, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.

 

ATM and Debit Card Fees: The Company earns ATM usage fees and interchange fees from debit cardholder transactions conducted through a payment network. ATM fees are recognized at the point in time the transaction occurs. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

 

Investment Advisory Income: The Company earns trust, insurance commissions, brokerage commissions and annuities income from its contracts with customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company provides the contracted services and are generally assessed based on the market value of assets under management. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed. Other related fees, which are based on a fixed fee schedule, are recognized when the services are rendered.

 

 - 38 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(9 – continued)

 

Other Income: Other income from contracts with customers includes safe deposit box fees and ACH origination fees. This revenue is recognized at the time the transaction is executed or over the period the Company satisfies the performance obligation.

 

10.Recent Accounting Pronouncements

 

The following are summaries of recently issued or adopted accounting pronouncements that impact the accounting and reporting practices of the Company:

 

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this update as of January 1, 2019 did not have a material impact on the Company’s consolidated financial position or results of operations. The Company also adopted all applicable practical expedients, including the option to not recognize lease assets and liabilities for short-term leases.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). The update replaces the incurred loss methodology for recognizing credit losses under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost. The impairment model for available-for-sale debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary. For the Company, the amendments in the update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact the guidance will have upon adoption, but management expects to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective. However, the magnitude of the adjustment is unknown. In planning for the implementation of ASU 2016-13, the Company has formed a current expected credit loss (“CECL”) implementation team consisting of members of senior management that meets on a periodic basis and is currently evaluating software solutions, data requirements and loss methodologies.

 

 - 39 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(10 – continued)

 

In July 2019, the FASB voted to propose a delay in the effective date of ASU 2016-13 for smaller reporting companies (as defined by the SEC) and other non-SEC reporting entities. The proposal would delay the effective date to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is a smaller reporting company and would qualify for the delayed effective date if the proposal is approved by the FASB.

 

In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) – Premium Amortization on Purchased Callable Debt Securities. The update shortens the amortization period for certain callable debt securities held at a premium. Specifically, the update requires the premium to be amortized to the earliest call date. The update does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in the update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this update effective January 1, 2019 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The update removes, modifies and adds certain disclosure requirements for fair value measurements. Among other changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements, but will be required to disclose the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. The amendments in the update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

 

 

11.Sale of Foreclosed Real Estate

 

Foreclosed real estate at June 30, 2019 includes one commercial property valued at $2.8 million. On June 6, 2019, the Company signed a Purchase Agreement to sell the property for $2.8 million, net of broker commissions and other costs, and wrote the property down to its net realizable value. The sale of the property was completed on July 19, 2019.

 

 

 

 

 - 40 - 

 

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

 

Safe Harbor Statement for Forward-Looking Statements

 

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts nor guarantees of future performance; rather they are statements based on the Company’s current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements can be identified by use of the words “expects,” “believes,” “anticipates,” “intends,” “could,” “should” and similar expressions. Forward-looking statements also include, but are not limited to, statements regarding estimated cost savings, plans and objectives for future operations, and the Company’s business and growth strategies.

 

Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; the ability of the Company to execute its business plan; legislative and regulatory changes; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed in Part II of this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2018 under “Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. These forward-looking statements are made only as of the date of this Quarterly Report on Form 10-Q and, except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

 

Critical Accounting Policies

 

During the six months ended June 30, 2019, there was no significant change in the Company’s critical accounting policies or the application of critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

Financial Condition

 

Total assets increased $40.7 million from $794.2 million at December 31, 2018 to $834.9 million at June 30, 2019, an increase of 5.1%.

 

Net loans receivable (excluding loans held for sale) increased $25.6 million from $434.3 million at December 31, 2018 to $459.9 million at June 30, 2019. Construction loans, commercial business loans and commercial mortgage loans increased $7.4 million, $5.3 million and $4.4 million, respectively, during the six months ended June 30, 2019.

 

Securities available for sale decreased $2.4 million from $261.8 million at December 31, 2018 to $259.4 million at June 30, 2019. Purchases of $32.0 million of securities classified as available for sale were made during the six months ended June 30, 2019 and consisted primarily of municipal bonds, U.S. government agency notes and bonds and mortgage-backed CMO’s. Maturities and principal repayments of available for sale securities totaled $22.6 million and $11.8 million, respectively, during the six months ended June 30, 2019. Municipal bonds, U.S. government agency notes and bonds, mortgage-backed securities and CMO’s with a fair value of $5.4 million were sold during the six months ended June 30, 2019.

 - 41 - 

 

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

 

Cash and cash equivalents increased from $41.1 million at December 31, 2018 to $60.5 million at June 30, 2019, primarily due to excess liquidity from increases in deposit balances.

 

Total deposits increased from $701.6 million at December 31, 2018 to $734.6 million at June 30, 2019. Noninterest-bearing checking accounts, interest bearing checking accounts and savings accounts increased $15.3 million, $14.1 million and $5.6 million, respectively, during the six months ended June 30, 2019 primarily due to new accounts and normal balance fluctuations, while time deposits decreased $2.1 million during the period.

 

Total stockholders' equity attributable to the Company increased from $85.8 million at December 31, 2018 to $94.3 million at June 30, 2019, primarily due to a $4.9 million increase in the net unrealized gain on available for sale securities and a $3.4 million increase in retained net income during the six months ended June 30, 2019. The increase in the net unrealized gain on available for sale securities during the period is primarily due to changes in long-term market interest rates.

 

Results of Operations

 

Net income for the six-month periods ended June 30, 2019 and 2018. Net income attributable to the Company was $5.0 million ($1.50 per share) for the six months ended June 30, 2019 compared to $4.2 million ($1.27 per share) for the same time period in 2018. The increase is primarily due to an increase in net interest income after provision for loan losses partially offset by increases in noninterest expense and income tax expense.

 

Net income for the three-month periods ended June 30, 2019 and 2018. Net income attributable to the Company was $2.9 million ($0.86 per share) for the three months ended June 30, 2019 compared to $2.1 million ($0.63 per share) for the three months ended June 30, 2018. The increase in net income for 2019 is primarily due to an increase in net interest income after provision for loan losses partially offset by an increase in income tax expense.

 

Net interest income for the six-month periods ended June 30, 2019 and 2018. Net interest income increased $1.8 million for the six months ended June 30, 2019 compared to the same period in 2018 primarily due to increases in interest-earning assets and the interest rate spread.

 

Total interest income increased $2.1 million for the six months ended June 30, 2019 compared to the same period in 2018. For the six months ended June 30, 2019, the average balance of interest-earning assets and their tax-equivalent yield were $754.0 million and 4.27%, respectively. During the same period in 2018, the average balance of those assets was $719.8 million and the tax-equivalent yield was 3.90%.

 

Total interest expense increased $210,000 for the six months ended June 30, 2019 compared to the same period in 2018. The average balance of interest-bearing liabilities increased from $548.0 million for 2018 to $566.0 million for 2019. The average rate paid on interest-bearing liabilities increased from 0.27% to 0.33% when comparing the two periods. As a result of the changes in interest-earning assets and interest-bearing liabilities, the interest rate spread on a tax-equivalent basis increased from 3.63% for the six months ended June 30, 2018 to 3.94% for the same period in 2019.

 

 

 

 - 42 - 

 

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

 

Net interest income for the three-month periods ended June 30, 2019 and 2018. Net interest income increased $1.1 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily due to increases in interest-earning assets and the tax-equivalent yield on interest-earning assets.

 

Total interest income increased $1.2 million for the three months ended June 30, 2019 compared to the same period in 2018. For the three months ended June 30, 2019, the average balance of interest-earning assets and their tax-equivalent yield were $767.0 million and 4.35%, respectively. During the same period in 2018, the average balance of those assets was $728.6 million and the tax-equivalent yield was 3.93%. The changes in balances and yields are primarily due a change in asset mix as higher-yielding loans have grown and have replaced lower-yielding securities.

 

Total interest expense increased $96,000 for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. The average balance of interest-bearing liabilities increased from $555.2 million to $573.3 million when comparing the two periods and the average rate paid on those liabilities increased from 0.28% for the three months ended June 30, 2018 to 0.34% for the same period in 2019. As a result, the tax-equivalent interest rate spread increased from 3.65% for the three months ended June 30, 2018 to 4.01% for the three months ended June 30, 2019.

 

Provision for loan losses. Based on management’s analysis of the allowance for loan losses, the provision for loan losses increased from $513,000 for the six-month period ended June 30, 2018 to $750,000 for the same period in 2019 and decreased from $316,000 for the three months ended June 30, 2018 to $300,000 for the three months ended June 30, 2019. The increase in the provision for loan losses for the six months ended June 30, 2019 compared to the same period in 2018 is primarily due to loan growth, as the balance of loans increased $26.2 million for 2019 compared to an increase of $10.0 million for 2018. The Bank recognized net charge-offs of $206,000 for the six months ended June 30, 2019 compared to $280,000 during the same period in 2018.

 

Provisions for loan losses are charges to earnings to maintain the total allowance for loan losses at a level considered adequate by management to provide for probable known and inherent loan losses based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specified impaired loans and economic conditions. Although management uses the best information available, future adjustments to the allowance may be necessary due to changes in economic, operating, regulatory and other conditions that may be beyond the Bank’s control. While the Bank maintains the allowance for loan losses at a level that it considers adequate to provide for estimated losses, there can be no assurance that further additions will not be made to the allowance for loan losses and that actual losses will not exceed the estimated amounts.

 

The methodology used in determining the allowance for loan losses includes segmenting the loan portfolio by identifying risk characteristics common to groups of loans, determining and measuring impairment of individual loans based on the present value of expected future cash flows or the fair value of collateral, and determining and measuring impairment for groups of loans with similar characteristics by applying loss factors that consider the qualitative factors which may affect the loss rates.

 

 

 

 

 - 43 - 

 

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

 

The allowance for loan losses was $4.6 million at June 30, 2019 and $4.1 million at December 31, 2018. Management has deemed these amounts as adequate at each date based on its best estimate of probable known and inherent loan losses at each date. At June 30, 2019, nonperforming loans totaled $2.6 million compared to $3.1 million at December 31, 2018. Included in nonperforming loans were loans 90 days or more past due and still accruing interest of $81,000 and $2,000 at June 30, 2019 and December 31, 2018, respectively. These loans were accruing interest because the estimated value of the collateral and collection efforts are deemed sufficient to ensure full recovery. At June 30, 2019 and December 31, 2018, nonaccrual loans totaled $2.5 million and $3.1 million, respectively.

 

Noninterest income for the six-month periods ended June 30, 2019 and 2018. Noninterest income for the six months ended June 30, 2019 increased $11,000 compared to the six months ended June 30, 2018. The increase was primarily due to increases in ATM and debit card fees and unrealized gains on equity securities of $133,000 and $117,000, respectively, partially offset by decreases of $112,000 and $77,000 in gains on the sale of loans and service charges on deposit accounts, respectively.

 

Noninterest income for the three-month periods ended June 30, 2019 and 2018. Noninterest income for the quarter ended June 30, 2019 increased $32,000 as compared to the quarter ended June 30, 2018. ATM and debit card fees increased $86,000 when comparing the two periods and losses on the sale of securities of $96,000 were recognized during the quarter ended June 30, 2018. This was partially offset by a $78,000 decrease in other income primarily related to a gain on bank-owned life insurance recognized in 2018.

 

Noninterest expense for the six-month periods ended June 30, 2019 and 2018. Noninterest expense for the six months ended June 30, 2019 increased $478,000 compared to the same period in 2018 due primarily to increases in compensation and benefit expense and data processing expense of $414,000 and $199,000, respectively, when comparing the two periods. This was partially offset by a $233,000 decrease in net losses on foreclosed real estate.

 

Noninterest expense for the three-month periods ended June 30, 2019 and 2018. Noninterest expense for the quarter ended June 30, 2019 increased $67,000 compared to the quarter ended June 30, 2018 primarily due to increases in compensation and benefit expense of $266,000 and data processing expense of $105,000, partially offset by a $307,000 decrease in net losses on foreclosed real estate when comparing the two periods.

 

Income tax expense. Income tax expense for the six-month period ended June 30, 2019 was $1.0 million, for an effective tax rate of 16.8%, compared to $648,000, for an effective tax rate of 13.3%, for the same period in 2018. For the three-month period ended June 30, 2019, income tax expense and the effective tax rate were $568,000 and 16.6%, respectively, compared to $287,000 and 12.0%, respectively, for the same period in 2018. The increase in the effective tax rate is primarily due an increase in taxable income and a reduction in benefits from a tax credit entity recognized in 2019.

 

 

 - 44 - 

 

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

 

Liquidity and Capital Resources

 

The Bank’s primary sources of funds are customer deposits, proceeds from loan repayments, maturing securities and FHLB advances. While loan repayments and maturities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. At June 30, 2019, the Bank had cash and cash equivalents of $60.5 million and securities available-for-sale with a fair value of $259.4 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB of Indianapolis and additional collateral eligible for repurchase agreements.

 

The Bank’s primary investing activity is the origination of one-to-four family mortgage loans and commercial real estate loans and, to a lesser extent, consumer, multi-family, commercial business and residential construction loans. The Bank also invests in U.S. Government and agency securities and mortgage-backed securities issued by U.S. Government agencies.

 

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

 

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company, on a stand-alone basis, is responsible for paying any dividends declared to its shareholders. The Board of Directors of the Company also has authorized the repurchase of shares of its common stock. The Company’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the Indiana Department of Financial Institutions (“IDFI”), cannot exceed net income for that year to date plus retained net income (as defined under Indiana law) for the preceding two calendar years. On a stand-alone basis, the Company had liquid assets of $2.9 million at June 30, 2019.

 

The Bank is required to maintain specific amounts of capital pursuant to regulatory requirements. As of June 30, 2019, the Bank was in compliance with all regulatory capital requirements that were effective as of such date with Tier 1 capital to average assets, common equity Tier 1 capital to risk-weighted assets, Tier 1 capital to risk-weighted assets and total capital to risk-weighted assets ratios of 9.6%, 13.9%, 13.9% and 14.7%, respectively. The regulatory requirements at that date to be considered “well-capitalized” under applicable regulations were 5.0%, 6.5%, 8.0% and 10.0%, respectively. At June 30, 2019, the Bank was considered “well-capitalized” under applicable regulatory guidelines.

 

 

 

 - 45 - 

 

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

 

 

Off-Balance Sheet Arrangements

 

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded on the Company’s financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are primarily used to manage customers’ requests for funding and take the form of loan commitments and letters of credit. A further presentation of the Company’s off-balance sheet arrangements is presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

For the six months ended June 30, 2019, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.

 

 

 

 

 

 

 

 

 - 46 - 

 

PART I – ITEM 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

FIRST CAPITAL, INC.

 

Qualitative Aspects of Market Risk. Market risk is the risk that the estimated fair value of the Company’s assets and liabilities will decline as a result of changes in interest rates or financial market volatility, or that the Company’s net income will be significantly reduced by interest rate changes.

 

The Company’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. In order to reduce the exposure to interest rate fluctuations, the Company has developed strategies to manage its liquidity, shorten its effective maturities of certain interest-earning assets and decrease the interest rate sensitivity of its asset base. Management has sought to decrease the average maturity of its assets by emphasizing the origination of short-term commercial and consumer loans, all of which are retained by the Company for its portfolio. The Company relies on retail deposits as its primary source of funds. Management believes retail deposits, compared to brokered deposits, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds.

 

Quantitative Aspects of Market Risk. The Company does not maintain a trading account for any class of financial instrument nor does the Company engage in hedging activities or purchase high-risk derivative instruments. Furthermore, the Company is not subject to foreign currency exchange rate risk or commodity price risk.

 

Potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits, extending loans and investing in investment securities. Many factors affect the Company’s exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. The Company’s earnings can also be affected by the monetary and fiscal policies of the U.S. Government and its agencies, particularly the Board of Governors of the Federal Reserve System.

 

An element in the Company’s ongoing process is to measure and monitor interest rate risk using a Net Interest Income at Risk simulation to model the interest rate sensitivity of the balance sheet and to quantify the impact of changing interest rates on the Company. The model quantifies the effects of various possible interest rate scenarios on projected net interest income over a one-year horizon. The model assumes a semi-static balance sheet and measures the impact on net interest income relative to a base case scenario of hypothetical changes in interest rates over twelve months and provides no effect given to any steps that management might take to counter the effect of the interest rate movements. The scenarios include prepayment assumptions, changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates in order to capture the impact from re-pricing, yield curve, option, and basis risks.

 

 

 

 - 47 - 

 

PART I – ITEM 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

FIRST CAPITAL, INC.

 

Results of the Company’s simulation modeling, which assumes an immediate and sustained parallel shift in market interest rates, project that the Company’s net interest income could change as follows over a one-year horizon, relative to our base case scenario, based on June 30, 2019 and December 31, 2018 financial information:

 

   At June 30, 2019  At December 31, 2018
Immediate Change  One Year Horizon  One Year Horizon
in the Level  Dollar  Percent  Dollar  Percent
of Interest Rates  Change  Change  Change  Change
   (Dollars in thousands)
300bp  $3,412    11.29%  $790    2.91%
200bp   2,323    7.68    318    1.17 
100bp   1,185    3.92    176    0.65 
Static   -    -    -    - 
(100)bp   (1,341)   (4.44)   876    3.23 
(200)bp   (2,965)   (9.81)   139    0.51 

 

At June 30, 2019, the Company’s simulated exposure to a change in interest rates shows that an immediate and sustained increase in rates of 1.00%, 2.00% or 3.00% would increase the Company’s net interest income over a one year horizon compared to a flat interest rate scenario. Alternatively, an immediate and sustained decrease in rates of 1.00% or 2.00% would decrease the Company’s net interest income over a one year horizon compared to a flat interest rate scenario. At December 31, 2018, all scenarios described would have resulted in an increase of the Company’s net interest income over a one year horizon compared to a flat interest scenario. During the six months ended June 30, 2019, the Company updated the discount rates and betas used in the model for loans and deposits to better reflect the market, and also updated the deposit decay rates based on a third-party study of customer accounts.

 

The Company also has longer term interest rate risk exposure, which may not be appropriately measured by Net Interest Income at Risk modeling. Therefore, the Company also uses an Economic Value of Equity (“EVE”) interest rate sensitivity analysis in order to evaluate the impact of its interest rate risk on earnings and capital. This is measured by computing the changes in net EVE for its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. EVE modeling involves discounting present values of all cash flows for on and off balance sheet items under different interest rate scenarios and provides no effect given to any steps that management might take to counter the effect of the interest rate movements. The discounted present value of all cash flows represents the Company’s EVE and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. The amount of base case EVE and its sensitivity to shifts in interest rates provide a measure of the longer term re-pricing and option risk in the balance sheet.

 

 

 - 48 - 

 

PART I – ITEM 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

FIRST CAPITAL, INC.

 

Results of the Company’s simulation modeling, which assumes an immediate and sustained parallel shift in market interest rates, project that the Company’s EVE could change as follows, relative to the Company’s base case scenario, based on June 30, 2019 and December 31, 2018 financial information:

 

   At June 30, 2019
Immediate Change  Economic Value of Equity  Economic Value of Equity as a
in the Level  Dollar  Dollar  Percent  Percent of Present Value of Assets
of Interest Rates  Amount  Change  Change  EVE Ratio  Change
                
300bp  $193,474   $50,404    35.23%   23.95%   684bp
200bp   179,333    36,263    25.35    21.92    481bp
100bp   162,545    19,475    13.61    19.64    253bp
Static   143,070    -    -    17.11    0bp
(100)bp   120,797    (22,273)   (15.57)   14.30    (281)bp
(200)bp   97,040    (46,030)   (32.17)   11.35    (576)bp

 

   At December 31, 2018
Immediate Change  Economic Value of Equity  Economic Value of Equity as a
in the Level  Dollar  Dollar  Percent  Percent of Present Value of Assets
of Interest Rates  Amount  Change  Change  EVE Ratio  Change
                
300bp  $106,468   $3,885    3.79%   14.67%   142bp
200bp   106,176    3,593    3.50    14.31    106bp
100bp   104,978    2,395    2.33    13.85    60bp
Static   102,583    -    -    13.25    0bp
(100)bp   102,230    (353)   (0.34)   12.95    (30)bp
(200)bp   93,763    (8,820)   (8.60)   11.63    (162)bp

 

The previous tables indicate that at June 30, 2019 and December 31, 2018 the Company would expect an increase in its EVE in the event of a sudden and sustained 100, 200 or 300 basis point increase in prevailing interest rates and a decrease in its EVE in the event of a sudden and sustained 100 or 200 basis point decrease in prevailing interest rates. As previously mentioned in this report, during the six months ended June 30, 2019, the Company