First Capital, Inc. — FY 2017 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, including the Louisville metropolitan area. This Form 10-K reports the fiscal year ended December 31, 2017; it is an annual filing, not a standalone Q4 report. The Bank’s core business is deposit-taking and lending, with a mix of residential, commercial real estate, commercial business and consumer loans.
Key financial metrics
| Metric | FY 2017 / Dec. 31, 2017 | Prior comparable period |
|---|---|---|
| Total assets | $759.0 million | $743.7 million at Dec. 31, 2016 |
| Net loans | $409.6 million | $381.2 million |
| Deposits | $664.6 million | $664.7 million |
| FHLB advances | $10.0 million | None |
| Net interest income | $25.0 million | $23.3 million |
| Net income attributable to First Capital | $7.44 million; diluted EPS $2.23 | $6.86 million; diluted EPS $2.05 |
| Net interest margin | 3.64% | 3.50% |
| Return on average assets / equity | 0.99% / 9.37% | 0.94% / 8.90% |
| Cash and cash equivalents | $25.9 million | $45.9 million |
| Stockholders’ equity attributable to First Capital | $80.9 million | $75.7 million |
Net interest income after the $915,000 loan-loss provision was $24.1 million. Noninterest income was $6.7 million and noninterest expense was $20.3 million. The efficiency ratio improved to 63.8% from 65.9%. Cash flow from operating activities was $13.4 million; investing activities used $40.4 million and financing activities provided $7.0 million, resulting in a $20.0 million decrease in cash and cash equivalents.
The Bank’s regulatory capital ratios were 9.67% Tier 1 leverage, 13.80% Tier 1 risk-based and common equity Tier 1, and 14.49% total risk-based capital. Management stated the Bank was well capitalized. The Company paid $0.86 per share in dividends for the year.
Material changes versus 2016
- Net income attributable to the Company rose about 8%; diluted EPS increased from $2.05 to $2.23. The increase reflected higher net interest income and noninterest income, partly offset by higher provision and operating costs.
- Net interest income increased 7.3%, supported by growth in average earning assets and a wider spread. Interest expense declined to $1.4 million from $1.8 million as the average cost of interest-bearing liabilities fell.
- Net loans grew $28.5 million, led by commercial business lending; commercial business loans increased to $34.1 million from $24.1 million. Securities available for sale rose to $271.2 million from $255.8 million, while cash and equivalents fell, principally as funds were deployed into loans and securities.
- Deposits were essentially unchanged, but the mix shifted: noninterest-bearing and savings accounts increased, while time deposits declined. The Bank ended the year with $10.0 million of FHLB advances, maturing in June 2018 at a weighted average rate of 1.67%.
- Asset quality improved overall: nonperforming assets declined to $6.8 million, or 0.90% of assets, from $7.7 million, or 1.04%. Nonperforming loans fell to $2.8 million; net charge-offs were $667,000, little changed from 2016. The allowance remained 0.88% of gross loans.
Outlook, risks and unusual items
- Management identified continued reduction of nonperforming assets, growth in commercial and consumer lending, expansion of secondary-market mortgage lending, and strengthening customer relationships in newer markets as priorities for 2018. The filing provides no numerical earnings or revenue guidance.
- The 2017 results included $290,000 of additional income tax expense from remeasuring deferred tax assets after the Tax Cuts and Jobs Act reduced the federal corporate rate to 21%. Excluding this charge, management stated net income would have been $7.7 million and diluted EPS $2.32. The tax accounting remained subject to possible adjustment during 2018.
- Interest-rate risk is material: 41.9% of loans were fixed-rate and held for investment. Management’s model estimated a 0.37% decline in one-year net interest income under an immediate 100-basis-point rate increase, and a 2.25% decline under a 100-basis-point decrease. These are model outputs, not forecasts.
- Credit risks include commercial real estate, commercial business, construction and junior-lien mortgage exposure. Management cited weaker local home construction, elevated past-due loan levels and loan-mix changes in setting qualitative allowance factors. Foreclosed real estate was $4.0 million; $3.8 million was associated with Peoples-acquired assets.
- Other risks include competition, deposit outflows and funding costs, local economic and real estate conditions, regulatory changes, cybersecurity and reliance on third-party systems. The Company reported immaterial cyber incidents during the year and said it continued to invest in controls.
- The Bank applied in September 2017 to convert from a federal savings association to an Indiana-chartered commercial bank. The conversion and the related holding-company status change were subject to regulatory approvals; the Federal Reserve had approved the latter conditionally. Management said the conversion was not expected to affect customers or eligible deposit insurance.
- Off-balance-sheet commitments to extend credit totaled $117.9 million, including construction and line-of-credit commitments; many may not be drawn. No material pending legal proceedings were reported.
Important facts for investors to verify
- Progress on the charter conversion and any resulting changes in supervision or operating requirements.
- Whether loan growth is accompanied by stable credit quality, particularly in commercial, construction and junior-lien portfolios; monitor the allowance, charge-offs, classified loans and foreclosed property sales.
- Refinancing or repayment of the $10.0 million FHLB advance due June 2018, alongside deposit retention and liquidity needs.
- Effects of changing rates on net interest margin, funding costs and securities values, and the assumptions behind the Bank’s interest-rate sensitivity models.
- Final tax effects of the TCJA and the timing and impact of adoption of the expected-credit-loss standard (CECL).
- Fourth-quarter results were unaudited: net income attributable to First Capital was $1.59 million and diluted EPS was $0.48, versus $1.74 million and $0.52 in Q4 2016.