First Capital, Inc. — 2013 Form 10-K
Business context and reporting period. First Capital is the holding company for First Harrison Bank, a community bank operating 13 locations in southern Indiana. Its core business is deposit-taking and lending, with a growing emphasis on commercial real estate and business loans. This annual report covers the fiscal year ended December 31, 2013; comparisons are primarily with 2012. The filing was signed March 27, 2014.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Interest income | $18.4 million | $18.8 million |
| Net interest income | $16.8 million | $16.3 million |
| Provision for loan losses | $725,000 | $1.5 million |
| Noninterest income | $4.6 million | $4.5 million |
| Noninterest expense | $13.3 million | $13.9 million |
| Net income attributable to First Capital | $5.1 million; $1.82 per diluted share | $3.9 million; $1.41 per diluted share |
| Net interest margin | 4.07% | 4.00% |
| Return on average assets / equity | 1.11% / 9.56% | 0.86% / 7.54% |
- Net interest income rose 2.6%, primarily because funding costs fell: total interest expense decreased $812,000, while interest income fell $389,000. The average cost of interest-bearing liabilities declined to 0.48% from 0.73%.
- Net income increased by about 29%. Management noted that 2012 included a $693,000 pretax charge for a voluntary early-retirement program; excluding its net effect, 2012 net income would have been about $4.3 million.
- Cash provided by operating activities was $9.8 million; investing activities used $3.3 million and financing activities used $17.2 million. Cash and cash equivalents declined $10.7 million to $11.1 million.
Financial position, liquidity and asset quality
- Total assets were $444.4 million, down 3.2% from $459.1 million. Net loans rose 2.9% to $288.5 million; available-for-sale securities fell to $108.8 million from $123.0 million.
- Deposits declined 2.7% to $373.8 million. Funding included $9.3 million of retail repurchase agreements and $5.5 million of Federal Home Loan Bank advances. Total stockholders’ equity was $53.3 million.
- At year-end, cash and cash equivalents were $11.1 million, interest-bearing time deposits were $4.4 million, and available-for-sale securities had a fair value of $108.8 million. The Bank reported $58.9 million in commitments to extend credit and $42.2 million in certificates of deposit maturing within one year.
- Bank capital ratios were 10.89% Tier 1 leverage, 14.86% Tier 1 risk-based, and 16.11% total risk-based. The Bank met applicable capital requirements and was categorized as well capitalized by the OCC.
- Nonperforming loans were $5.5 million, or 1.90% of net loans, versus $7.9 million and 2.81% a year earlier. Nonperforming assets were $6.0 million, or 1.34% of assets, versus $8.2 million and 1.78%. Net charge-offs fell to $539,000 from $971,000.
- The allowance for loan losses was $4.9 million, or 1.64% of gross loans, and covered 89.72% of nonperforming loans. Troubled debt restructurings totaled $3.6 million, including $1.9 million on nonaccrual status.
- Commercial real estate represented 25.5% of gross loans and commercial business loans 7.3%. Commercial real estate loans grew $7.8 million during the year. The Bank reported $5.3 million of doubtful loans, $5.9 million of substandard loans, and $4.1 million of special-mention loans.
Material changes, outlook and risks
- The balance sheet continued shifting toward commercial lending: commercial real estate loans increased, while residential mortgage loans declined modestly as the Bank sold most newly originated fixed-rate mortgages. It originated $36.7 million of residential mortgages for sale in 2013, down from $42.7 million in 2012.
- Deposits decreased $10.5 million, mainly reflecting lower time deposits and interest-bearing demand balances; savings deposits increased $7.0 million. Management said some customers were reluctant to commit to longer-term deposits in a low-rate environment.
- Available-for-sale securities generated a $2.4 million after-tax other comprehensive loss, compared with a $92,000 gain in 2012, principally reflecting unrealized valuation changes. The portfolio ended 2013 with $2.3 million of gross unrealized losses; management attributed these mainly to interest rates and did not consider them other-than-temporary.
- The allowance methodology was adjusted in 2013 for commercial real estate, commercial business, vacant land, and home equity/second mortgage exposures, increasing the estimated allowance for those segments by approximately $1.1 million. Management cited local economic conditions, elevated delinquency trends, and increased commercial and junior-lien lending risk.
- Management’s strategy includes growing commercial lending and low-cost demand deposits, expanding secondary-market mortgage activity, controlling costs, investing in technology, and considering acquisitions. No specific earnings or revenue guidance was provided.
- Key risks include local economic weakness, unemployment and real estate values; credit losses in commercial, construction and consumer lending; competition for loans and deposits; regulatory and compliance costs; and interest-rate exposure. The Bank held a significant amount of fixed-rate loans. Its rate simulation projected a 1% rate increase would raise one-year net interest income 1.62%, while a 3% increase would reduce it 0.88%; modeled economic value of equity fell 26.43% under a 3% increase. These are model estimates, not forecasts.
- The filing describes Basel III capital requirements taking effect in 2015, with the capital conservation buffer phased in from 2016 through 2019. Management warned that regulatory changes could increase costs. It reported no material pending legal proceedings and no material unresolved staff comments.
- Quarterly fourth-quarter 2013 net income attributable to First Capital was $1.244 million, or $0.45 per share; the filing does not provide a separate quarterly cash-flow statement.
Important facts for investors to verify
- Whether lower funding costs can continue to offset lower yields on loans and securities, and how deposit trends affect funding needs.
- Whether asset-quality improvement is durable, particularly for commercial real estate, commercial business, construction and junior-lien loans; review classified loans, TDRs and collateral assumptions.
- Whether the $4.9 million allowance remains adequate given local economic conditions and management’s qualitative adjustments.
- The liquidity and refinancing implications of $42.2 million in near-term certificate maturities, $5.5 million of FHLB advances due in June 2014, and outstanding credit commitments.
- The sensitivity of earnings, securities values and capital to rate changes, including the assumptions and limitations of the Bank’s interest-rate models.
- The effect of unrealized securities losses on equity and whether future market movements could require further impairment recognition.
- The Bank’s capacity to maintain dividends and repurchases: the filing reports a $0.80 annual dividend per share and notes that dividends depend on regulatory limits and distributions from the Bank.