First Capital, Inc. — FY 2014 Form 10-K
Business and period: Indiana-based bank holding company whose principal subsidiary, First Harrison Bank, operates 12 locations in southern Indiana. The filing reports the fiscal year ended December 31, 2014, with 2013 as the primary comparable period. Amounts below are U.S. dollars; financial statement amounts are generally in millions unless otherwise noted.
Financial results and position
| Metric | 2014 | 2013 |
|---|---|---|
| Interest income | $18.40 million | $18.41 million |
| Net interest income | $17.26 million | $16.76 million |
| Provision for loan losses | $0.19 million | $0.73 million |
| Noninterest income | $4.94 million | $4.64 million |
| Noninterest expense | $14.08 million | $13.33 million |
| Net income attributable to First Capital | $5.59 million; $2.03 diluted EPS | $5.07 million; $1.82 diluted EPS |
| Net interest margin | 4.14% | 4.07% |
| Return on average assets / equity | 1.22% / 10.09% | 1.11% / 9.56% |
Quarterly context: Fourth-quarter 2014 net income attributable to First Capital was $1.255 million, or $0.45 per diluted share, compared with $1.244 million, or $0.45 per diluted share, in fourth-quarter 2013. Fourth-quarter 2014 provision for loan losses was zero.
Balance sheet at year-end: Total assets were $472.8 million, up 6.4%; net loans were $300.6 million, up 4.2%; deposits were $412.6 million, up 10.4%; and stockholders’ equity attributable to the Company was $57.1 million. Cash and cash equivalents were $33.2 million, while available-for-sale securities were $100.2 million. The Bank had no FHLB advances or retail repurchase agreements outstanding at year-end, versus $5.5 million and $9.3 million, respectively, a year earlier.
Cash flow: Operating activities provided $6.9 million, investing activities used $5.6 million, and financing activities provided $20.8 million. Cash and cash equivalents increased $22.1 million to $33.2 million. Financing cash flow included $38.8 million of deposit growth, $2.3 million of dividends paid, and $0.9 million used to repurchase shares.
Credit quality and capital: Nonperforming assets fell to $3.3 million, or 0.70% of assets, from $6.0 million, or 1.34%. Net charge-offs declined to $266,000 from $539,000. The allowance for loan losses was $4.85 million, 1.57% of gross loans and 150.31% of nonperforming loans. The Bank was categorized as well capitalized under the applicable year-end rules; total risk-based capital was 15.80%, Tier 1 risk-based capital 14.55%, and Tier 1 leverage 10.59%.
Material changes versus 2013
- Net income increased about 10%, supported by a $497,000 increase in net interest income and a $535,000 lower loan-loss provision.
- Funding costs declined: total interest expense fell $509,000, reflecting lower deposit costs and reduced FHLB borrowing. The average cost of interest-bearing liabilities fell to 0.34% from 0.48%.
- Loan growth reflected commercial business loans, up $6.3 million, and growth in home equity, commercial real estate, and other consumer lending. Commercial business loans were 9.2% of gross loans and commercial real estate loans were 25.4%.
- Deposits grew by $38.8 million, including increased demand and savings balances. Some retail repurchase balances were transferred to interest-bearing demand deposits.
- Noninterest expense rose 5.6%, mainly from $518,000 higher compensation and benefits and $133,000 higher data-processing expense. The efficiency ratio increased to 63.5% from 62.3%.
- Available-for-sale securities declined $8.6 million. Other comprehensive income improved by $1.52 million, compared with a $2.42 million loss in 2013, principally reflecting changes in unrealized securities gains and losses.
Outlook, risks, and unusual items
- Outlook: The filing provides no numerical earnings or revenue guidance. Management described continued priorities of growing commercial and consumer lending, expanding secondary-market mortgage originations and low-cost deposits, controlling costs, and managing credit, capital, liquidity, and interest-rate risk. It also said it would evaluate acquisitions and branch opportunities.
- Interest-rate exposure: Fixed-rate loans were $142.8 million, or 46.3% of total loans. Modeling indicated a 1% rate increase could raise one-year net interest income by 1.35%, while a 3% increase could reduce it by 1.08%; a 1% rate decrease could reduce it by 2.05%. The modeled economic value of equity fell 18.42% under a 3% rate increase. Management cautioned that model outputs are not forecasts or guarantees.
- Credit and concentration risks: Lending is concentrated in a four-county southern Indiana market and includes real estate and commercial credits with greater risk than first-lien residential mortgages. At year-end, troubled debt restructurings totaled $4.0 million, including $2.1 million on nonaccrual; classified loans and special-mention loans were also present. Management cited local unemployment and reduced home construction in its allowance assessment.
- Allowance methodology: The Company changed its historical loss lookback from three years to five years in 2014, increasing the estimated allowance by approximately $91,000. Qualitative adjustments increased the estimated allowance by approximately $1.6 million; the overall qualitative factor added about $520,000, and classified-loan adjustments added about $664,000. Management estimates and collateral values are inherently judgmental.
- Notable items: Noninterest income included a $129,000 gain on life insurance. The Company formed a wholly owned captive insurance subsidiary in September 2014. In February 2015, it granted 19,500 restricted shares valued at $478,000, with expense to be recognized over five years.
- Commitments and contingencies: Total commitments to extend credit were approximately $59.1 million; standby letters of credit were $693,000. Management reported no material pending legal proceedings and no losses on commitments in 2014 or 2013.
- Regulatory and operational risks: Basel III capital rules took effect January 1, 2015, with requirements phased in over time; management believed the Company and Bank would meet fully phased-in requirements based on year-end 2014 information. The filing also identifies cyber incidents, third-party service providers, competition, regulatory costs, and local economic conditions as risks. The Company reported immaterial cyber incidents during the year, with no material losses.
Most important facts for investors to verify
- Whether the improvement in nonperforming assets and charge-offs continues, and whether the $4.85 million allowance remains adequate as the loan portfolio grows and shifts toward commercial lending.
- The performance and collateral coverage of nonaccrual loans, troubled debt restructurings, and classified credits, including the medical-office commercial loan with a $1.3 million specific allowance.
- Whether deposit growth is sustainable and how the $40.7 million of time deposits scheduled to mature within one year affects funding costs and liquidity.
- The sensitivity of earnings and economic value to interest-rate changes, given the fixed-rate loan exposure and the limitations of management’s models.
- The impact of Basel III implementation, the captive insurance subsidiary, and the 2015 restricted-stock grant on capital, expenses, and reported earnings.
- Dividend capacity: the Bank’s ability to pay dividends to the parent is regulated, and the parent reported only $309,000 of standalone liquid assets at year-end.
Audit and controls: The independent auditor issued an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.