FIRST CAPITAL INC annual report, FY2019

Full document

First Capital, Inc. — FY2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report; fourth-quarter figures below are unaudited. First Capital is a bank holding company operating through First Harrison Bank, serving five counties in Indiana and Kentucky.

Financial performance and condition

  • Earnings: Net income attributable to First Capital was $10.325 million, up 11.6% from $9.253 million in 2018. Diluted EPS rose to $3.09 from $2.77. Return on assets was 1.26%; return on average equity was 11.13%.
  • Net interest and margins: Net interest income increased 10.3% to $30.094 million. Net interest margin improved to 4.02% from 3.79%, and the interest-rate spread rose to 3.93% from 3.72%. The efficiency ratio improved to 62.9% from 64.6%.
  • Other income and costs: Noninterest income was $6.926 million, up $758,000. Noninterest expense rose $1.655 million to $23.270 million, mainly from compensation and data processing costs. The 2019 effective tax rate was 16.1%, versus 13.1%.
  • Credit costs and asset quality: Provision for loan losses increased to $1.425 million from $1.168 million. Net charge-offs decreased to $429,000 from $737,000. Nonperforming assets fell to $1.948 million, or 0.24% of assets, from $6.199 million, or 0.78%; the decline largely reflected foreclosed real estate sales. The allowance was $5.061 million, 1.08% of gross loans.
  • Balance sheet and funding: Total assets grew 4.2% to $827.496 million. Net loans increased to $466.494 million; deposits rose 2.9% to $722.177 million. Cash and cash equivalents were $51.360 million and available-for-sale securities were $254.562 million. There were no FHLB advances or other line-of-credit borrowings at year-end.
  • Capital and shareholder returns: Stockholders’ equity attributable to First Capital was $98.836 million, up from $85.844 million. Bank capital ratios included a 10.01% leverage ratio and 14.90% total risk-based capital ratio; the Bank was reported as well capitalized. Dividends were $0.95 per share for the year.
  • Cash flow: Operating activities provided $14.077 million; investing activities used $21.107 million; financing activities provided $17.278 million. Cash and equivalents increased by $10.248 million.

Fourth-quarter comparison

Fourth-quarter net income attributable to First Capital was $2.403 million, down from $2.496 million in fourth-quarter 2018; diluted EPS was $0.72 versus $0.75. Net interest income rose to $7.447 million from $7.176 million, while provision expense increased to $450,000 from $200,000. Noninterest income increased to $1.820 million from $1.208 million, and noninterest expense increased to $5.971 million from $5.469 million. Higher income tax expense ($440,000 versus $216,000) also contributed to lower quarterly net income.

Material changes versus 2018

  • Loan growth was led by commercial real estate, commercial business, consumer and construction lending. Gross loans increased to $493.499 million from $463.905 million.
  • Residential mortgage originations for secondary-market sale increased to $70.8 million from $54.3 million, while residential loans held in portfolio declined.
  • Deposits increased $20.5 million; cash and equivalents rose $10.2 million. Available-for-sale securities declined $7.3 million.
  • Nonperforming loans declined to $1.778 million from $3.057 million, and foreclosed real estate fell to $170,000 from $3.142 million.
  • Stockholders’ equity increased partly due to retained earnings and a $5.6 million after-tax unrealized gain on available-for-sale securities, recorded in other comprehensive income.

Outlook, risks and notable items

  • Management gave no quantified earnings or revenue guidance. Its stated 2020 priorities include sustaining lower nonperforming assets, growing loans and demand deposits, expanding secondary-market mortgage lending, improving efficiency and evaluating acquisition or branch opportunities.
  • Management described local and broader economic conditions as relatively stable through 2019, but highlighted risks from deterioration in the economy, interest-rate changes, competition, deposit flows, loan delinquencies and collateral values. Fixed-rate loans were 41.5% of loans, creating exposure if funding costs rise faster than asset yields.
  • The Bank’s one-year interest-rate simulation projected net interest income to increase 4.35%, 8.07% and 11.59% under immediate, sustained rate increases of 100, 200 and 300 basis points, respectively, and decline 5.27% and 9.62% under decreases of 100 and 200 basis points. Management cautioned that model assumptions are not guarantees of actual results.
  • Management’s qualitative allowance adjustments added approximately $3.8 million to the estimated allowance; adjustments for classified loans added another $386,000. These estimates depend on management judgments and economic conditions.
  • The company expects adoption of the CECL credit-loss standard to increase the allowance through a one-time retained-earnings adjustment, but said the amount was not yet known. As a smaller reporting company, its adoption date had been delayed to fiscal years beginning after December 15, 2022; early adoption was permitted.
  • Fourth-quarter 2019 rollout of a new digital platform and termination fees from the prior provider contributed to higher data-processing expense. The company reported some immaterial cyber incidents during the year and continued investments in security.
  • There were no pending legal proceedings believed by management to be material. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.

Most important facts for investors to verify

  • Whether loan growth, especially in commercial real estate, construction and commercial business lending, is being matched by stable credit performance.
  • The basis and sensitivity of the allowance estimate, including qualitative adjustments, collateral valuation discounts and expected CECL effects.
  • Whether deposit growth and low funding costs can continue, and how fixed-rate asset exposure responds to changes in rates.
  • Whether the rise in compensation and technology costs produces the planned efficiency and income benefits.
  • How much of equity growth and reported comprehensive income depends on unrealized securities gains, and whether those gains persist.
  • Capacity to meet $121.5 million of commitments to extend credit while maintaining liquidity and regulatory capital; the filing notes many commitments may expire undrawn.