First Capital, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed March 29, 2024. This is an annual report, not a standalone Q4 filing. First Harrison Bank operates in southern Indiana and Bullitt County, Kentucky. The consolidated financial statements received an unqualified audit opinion.
Financial performance and position
| Metric | FY2023 / Dec. 31, 2023 | Prior comparable |
|---|---|---|
| Net income attributable to First Capital | $12.8 million; diluted EPS $3.82 | FY2022: $11.9 million; $3.55 |
| Net interest income | $34.6 million | FY2022: $32.3 million |
| Net interest margin | 3.16% | FY2022: 2.95% |
| Interest rate spread | 2.85% | FY2022: 2.90% |
| Noninterest income / expense | $7.6 million / $26.0 million | FY2022: $7.9 million / $25.1 million |
| Return on average assets / equity | 1.12% / 14.03% | FY2022: 1.03% / 13.07% |
| Total assets | $1.158 billion | Dec. 31, 2022: $1.151 billion |
| Net loans / total deposits | $614.4 million / $1.025 billion | FY-end 2022: $558.0 million / $1.060 billion |
| Cash and cash equivalents | $38.7 million | FY-end 2022: $66.3 million |
| Borrowings | $21.5 million under the Federal Reserve BTFP; 4.89% fixed rate, less than one year remaining | None at FY-end 2022 |
| Bank community bank leverage ratio | 9.92% | FY-end 2022: 9.18% |
Cash flow: Operating cash flow was $14.2 million, versus $16.5 million in 2022. Investing activities used $23.9 million, compared with $144.0 million in 2022; financing activities used $17.8 million, versus providing $21.3 million in 2022. Cash and cash equivalents declined $27.6 million during 2023.
Credit quality: Nonperforming loans were approximately $1.8 million (0.28% of loans), up from $1.5 million at year-end 2022. Net charge-offs rose to $469,000 from $261,000. The allowance for credit losses on loans was $8.0 million, or 1.29% of gross loans, compared with $6.8 million at year-end 2022. Special-mention loans totaled $7.1 million; substandard loans were $1.8 million.
Securities and equity: Available-for-sale securities had a $437.3 million fair value and $468.5 million amortized cost at year-end; accumulated other comprehensive loss improved to $24.0 million from $35.7 million. The company reported no credit-loss provision on securities, attributing unrealized losses to market factors. Stockholders’ equity attributable to the company increased to $105.2 million from $85.2 million.
Changes versus FY2022
- Net income increased 7.5%, while net interest income increased 6.9%. Higher loan yields and balances lifted interest income, but deposit costs rose sharply: average cost of interest-bearing deposits increased to 1.04% from 0.20%. Total interest expense rose to $9.0 million from $1.6 million.
- Loans grew $57.7 million, led by other construction, development and land loans (+$29.1 million), residential mortgages (+$17.2 million) and commercial real estate (+$7.4 million). Total deposits declined $35.2 million; growth in time deposits was more than offset by outflows from noninterest-bearing, savings and other demand accounts.
- Noninterest income fell $295,000, principally from lower loan-sale gains and commission and fee income. Noninterest expense rose $940,000, including higher data-processing costs, FDIC premiums and fraud losses.
- The company adopted CECL on January 1, 2023, adding $561,000 to the opening loan allowance and establishing a $131,000 reserve for unfunded commitments; adoption reduced retained earnings by $529,000 after tax. Prior-year results were not restated.
- Q4 2023 net income attributable to First Capital was $3.11 million, or $0.93 diluted EPS, compared with $3.54 million, or $1.06, in Q4 2022. Q4 net interest income was $8.55 million versus $9.11 million.
Outlook, risks and unusual items
- No quantified earnings or balance-sheet guidance was provided. Management’s 2024 priorities include loan and secondary-market mortgage growth, expanding demand deposits, maintaining credit quality, improving efficiency and noninterest income, evaluating acquisitions, and controlling costs. Management cited a completed profit-improvement project but did not quantify expected benefits.
- Liquidity merits attention: cash declined, deposits contracted and the Bank used BTFP and FHLB funding during the year. Uninsured deposits were estimated at $319.5 million, down from $393.7 million. Certificates of deposit totaling $110.7 million mature within one year; total commitments to extend credit were $181.7 million.
- Interest-rate and securities risks remain material. About 48.6% of loans were fixed-rate loans held for investment. Interest-rate simulations showed net interest income sensitivity to rate changes, while estimated economic value of equity fell 9.33% under a modeled 300-basis-point rate increase. These are model estimates, not forecasts.
- Commercial real estate was 27.2% of gross loans, and construction, development and land loans grew substantially. The filing identifies economic weakness, property-value declines, borrower repayment capacity, deposit competition, funding costs, cyber incidents, vendor dependence and regulatory changes as risks.
- The IRS proposed rules that could cause the company’s captive insurer to be treated as a listed transaction and potentially create material tax expense. The captive was dissolved on December 31, 2023; management could not reasonably estimate any potential tax liability because final regulations had not been published.
- The Bank remained categorized as well capitalized and management reported compliance with applicable capital requirements. Management also reported effective disclosure controls and internal control over financial reporting; the external auditor did not attest to internal control.
Important facts for investors to verify
- Deposit trends, particularly the pace and cost of replacing withdrawn low-cost deposits, and the Bank’s liquidity and collateral capacity as BTFP funding matures.
- Loan performance and allowance adequacy, especially in construction/development, commercial real estate and commercial business portfolios; review subsequent delinquencies, criticized loans and charge-offs.
- Whether margin and earnings can hold up as deposit repricing continues and fixed-rate assets remain outstanding.
- The status and potential tax consequences of the proposed IRS captive-insurance regulations, plus the accounting and returns from tax-credit investments.
- The large unrealized securities losses, their effect on tangible capital and liquidity, and management’s ability to hold securities without a forced sale.