First Capital, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 22, 2023. Although the request identifies 2022 Q4, this is an annual filing. The company is a bank holding company operating First Harrison Bank in southern Indiana and the Louisville, Kentucky area.
Financial performance and condition
- Earnings: Net income attributable to First Capital was $11.9 million, or $3.55 diluted EPS, versus $11.4 million and $3.41 in 2021. Fourth-quarter 2022 net income attributable to the company was $3.54 million, or $1.06 diluted EPS.
- Interest income and margins: Interest income was $33.9 million and interest expense $1.6 million; net interest income rose 14.2% to $32.3 million. Net interest margin improved to 2.95% from 2.84%, and the interest-rate spread to 2.90% from 2.80%.
- Other income and costs: Noninterest income declined 17.0% to $7.9 million, mainly as gains on loan sales fell to $833,000 from $2.4 million. Noninterest expense rose 2.3% to $25.1 million. The efficiency ratio improved to 62.3% from 64.8%.
- Returns: Return on average assets was 1.03% versus 1.05%; return on average equity increased to 13.07% from 10.15%.
- Balance sheet: Total assets were $1.151 billion, down slightly from $1.157 billion. Net loans grew to $558.0 million from $483.3 million; deposits rose to $1.060 billion from $1.036 billion.
- Credit quality: The allowance for loan losses was $6.8 million, or 1.20% of gross loans, compared with $6.1 million and 1.25%. Net charge-offs were $261,000, or 0.05% of average loans. Nonperforming loans totaled $1.49 million, versus $1.33 million; foreclosed real estate was zero.
- Cash flow: Operating cash flow was $16.5 million, investing cash outflow $144.0 million, and financing cash inflow $21.3 million. Cash and cash equivalents declined $106.2 million to $66.3 million, principally as liquidity funded loan growth and securities purchases.
- Debt and liquidity: The Bank had no FHLB advances or other line-of-credit borrowings at year-end. Deposits were its primary funding source. The filing estimates uninsured deposits of $393.7 million. Parent-company cash and cash equivalents were $2.7 million.
- Capital and securities: The Bank’s Community Bank Leverage Ratio was 9.18%, above the 9.00% requirement stated for 2022. Available-for-sale securities had a fair value of $460.8 million. Their $48.8 million pretax unrealized loss contributed to a $37.5 million after-tax AOCI loss and a decline in company stockholders’ equity to $85.2 million from $113.8 million.
Material changes versus 2021
- Net interest income increased as average interest-earning assets and yields rose; higher 2022 market rates also increased deposit costs modestly.
- Loan growth was strong, particularly in residential mortgages, commercial real estate, commercial business, and construction lending. Residential mortgage originations for secondary-market sale fell to $49.2 million from $128.4 million.
- Provision for loan losses shifted to an expense of $950,000 from a $325,000 credit in 2021, primarily reflecting loan growth. Nonperforming loans increased modestly.
- Deposit growth slowed to $24.8 million from $135.1 million. Cash balances fell substantially as the Bank deployed excess liquidity.
- Unrealized losses on available-for-sale securities increased significantly amid rising rates, reducing reported equity despite higher net income.
Outlook, risks, and unusual items
- Management gave no numerical earnings or balance-sheet guidance. Its stated 2023 priorities include loan and secondary-market mortgage growth, maintaining asset quality, growing low-cost demand deposits, improving efficiency and noninterest income, and evaluating expansion opportunities.
- Management expects CECL adoption from January 1, 2023 to increase the allowance for credit losses by approximately $700,000 through a one-time retained-earnings adjustment; the estimate remained subject to finalization and could change.
- Interest-rate exposure is material: 43.8% of loans were fixed-rate and held for investment. The filing’s models projected higher one-year net interest income under rising-rate scenarios, but model results depend on assumptions and are not guarantees. Rate increases also drove substantial securities valuation losses.
- Key risks include local economic and recession conditions, inflation and rates, borrower repayment and collateral values, commercial real estate and construction concentrations, deposit competition and outflows, cybersecurity and third-party technology reliance, and extensive regulatory requirements.
- Off-balance-sheet commitments totaled $193.2 million, including loan commitments, unused credit lines, construction draws, and standby letters of credit. The company reported no losses on these commitments in 2022 or 2021. Management said there were no pending legal proceedings it believed material.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded internal control over financial reporting was effective; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- How CECL was ultimately adopted in 2023 and how actual allowance levels compare with the estimated $700,000 increase.
- Whether loan growth, especially commercial real estate and construction, is accompanied by stable delinquencies, nonperforming loans, and charge-offs.
- Deposit retention and pricing trends, including the concentration of uninsured deposits and any resulting funding-cost pressure.
- Whether securities unrealized losses remain unrealized or affect liquidity, capital, or earnings; confirm the effect on equity and regulatory capital.
- Whether the planned profitability initiatives improve noninterest income and expenses, and whether mortgage-sale activity recovers from 2022 levels.