First Capital, Inc. — 2020 Form 10-K
Business context and reporting period. First Capital is the holding company for First Harrison Bank, a community bank serving five counties in Indiana and Kentucky. This annual report covers the fiscal year ended December 31, 2020; quarterly information is also provided. The bank’s principal activities are lending, deposit-taking, mortgage-loan sales and securities investment.
Key financial results
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Total assets | $1.018 billion | $827.5 million | Up 23.0% |
| Net loans | $500.3 million | $466.5 million | Up $33.8 million |
| Deposits | $900.5 million | $722.2 million | Up $178.3 million |
| Net interest income | $28.1 million | $30.1 million | Down 6.7% |
| Net interest margin | 3.39% | 4.02% | Down 63 basis points |
| Net income attributable to First Capital | $10.1 million | $10.3 million | Down 1.9% |
| Diluted earnings per share | $3.02 | $3.09 | Down 2.3% |
| Return on average assets / equity | 1.12% / 9.64% | 1.26% / 11.13% | Both lower |
| Allowance for loan losses | $6.6 million | $5.1 million | 1.31% of gross loans, versus 1.08% |
- Income and margins: Interest income was $29.6 million, down from $32.1 million. Noninterest income rose to $8.6 million from $6.9 million, chiefly on higher mortgage-loan sale gains and ATM/debit fees. Noninterest expense edged down to $23.0 million from $23.3 million. The efficiency ratio was 62.8%, versus 62.9%.
- Cash flow and liquidity: Operating activities provided $12.1 million; investing activities used $62.4 million; financing activities provided $174.9 million. Cash and cash equivalents ended the year at $175.9 million, up from $51.4 million, largely reflecting deposit growth. Available-for-sale securities were $283.5 million.
- Debt and capital: The bank reported no FHLB advances or other borrowings at year-end. Its Community Bank Leverage Ratio was 9.37%, above the applicable 8% 2020 threshold; management said the bank met capital requirements.
- Credit quality: Nonperforming assets were $1.5 million, or 0.14% of assets, down from $1.9 million, or 0.24%. Net charge-offs declined to $237,000 from $429,000. The 2020 provision for loan losses increased to $1.8 million from $1.4 million.
Material changes versus 2019
- Deposits rose sharply, led by noninterest-bearing demand, interest-bearing demand and savings accounts; loans grew, including a $37.0 million increase in commercial business loans.
- COVID-related rate cuts and low-yield Paycheck Protection Program loans contributed to lower asset yields and net interest margin. The bank originated $45.9 million of PPP loans; $37.3 million remained outstanding at year-end. It reported $1.8 million of gross SBA processing fees and $842,000 of net deferred PPP fees.
- Mortgage originations for secondary-market sale increased to $143.9 million from $70.8 million. Gains on loan sales reached $2.7 million, including a $214,000 gain from selling the bank’s credit-card portfolio.
- The allowance increased by $1.6 million, including higher qualitative reserves for COVID-19 uncertainty. Management attributed $6.0 million of the $6.6 million year-end allowance to qualitative factor adjustments.
- Available-for-sale securities increased to $283.5 million from $254.6 million. Stockholders’ equity attributable to the company rose to $110.6 million, including a $4.7 million after-tax unrealized securities gain.
Outlook, commentary and risks
- No earnings, revenue or margin guidance is provided. Management said it would focus on asset quality, commercial and consumer lending, secondary-market mortgage sales, low-cost demand deposits, operating efficiency and customer relationships. It was pursuing additional PPP lending after the program’s renewal.
- COVID-related payment extensions had been approved on approximately $68.1 million of loans, primarily commercial real estate; $65.3 million remained outstanding and $65.1 million had resumed payments by year-end. Hotel and restaurant loans were $12.1 million and $4.8 million, respectively; all but one $164,000 credit was current.
- Principal risks include uncertain pandemic effects on borrowers and collateral, higher future credit losses, commercial real estate and business-loan concentrations, fixed-rate lending exposure, interest-rate changes, deposit competition, cybersecurity and third-party service-provider disruptions. Management warned that credit-loss estimates could be materially affected near term.
- Interest-rate modeling projected higher one-year net interest income under immediate rate increases and lower income under decreases. The company cautions that modeling depends on assumptions and is not a forecast of actual results.
- Liquidity included $118.2 million of total commitments to extend credit; actual funding needs may be lower because commitments can expire undrawn. The holding company reported $3.0 million of standalone liquid assets. A $35 million shelf registration was available, subject to board authorization and market conditions.
- The company continued its quarterly dividend, totaling $0.96 per share for 2020. Future dividends remain subject to earnings, capital, regulatory and other constraints. The independent auditor issued an unqualified opinion on the financial statements; it did not audit or opine on internal control effectiveness.
Important facts for investors to verify
- Whether COVID-era loan extensions, especially in commercial real estate, have continued to perform and whether the $6.6 million allowance adequately reflects emerging losses.
- The extent to which PPP fee recognition, mortgage-sale volumes and gains supported 2020 noninterest income, and how those sources may change.
- Whether the sharp deposit increase and elevated cash balance persist, and how liquidity and asset yields respond as deposits reprice or leave.
- The bank’s interest-rate sensitivity, given its disclosed fixed-rate loan exposure and the 2020 decline in net interest margin.
- Capacity for dividends or repurchases under bank-level restrictions, and the terms and potential dilution of any securities issued under the shelf registration.
- Reconcile minor apparent inconsistencies in the filing’s narrative and tables, including its stated 2020 effective tax rate comparison; the financial statements report 14.3% for 2020 and 16.1% for 2019.