See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Presentation of Interim Information
First Capital, Inc. (“Company”) is the financial holding company for First Harrison Bank (“Bank”), an Indiana chartered commercial bank and wholly owned subsidiary. First Harrison Investments, Inc. and First Harrison Holdings, Inc. are wholly-owned Nevada corporate subsidiaries of the Bank that jointly own First Harrison, LLC, a Nevada limited liability corporation that holds and manages an investment portfolio. First Harrison REIT, Inc. (“REIT”) is a wholly-owned subsidiary of First Harrison Holdings, Inc. that holds a portion of the Bank’s real estate mortgage loan portfolio. FHB Risk Mitigation Services, Inc. (“Captive”) is a wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company, the Bank and the Bank’s subsidiaries, and reinsurance to nine other third party insurance captives for which insurance may not be currently available or economically feasible in the insurance marketplace. Heritage Hill, LLC is a wholly-owned subsidiary of the Bank that is currently inactive.
In the opinion of management, the unaudited consolidated financial statements include all adjustments considered necessary to present fairly the financial position as of March 31, 2023, and the results of operations for the three months ended March 31, 2023 and 2022 and the cash flows for the three months ended March 31, 2023 and 2022. All of these adjustments are of a normal, recurring nature. Such adjustments are the only adjustments included in the unaudited consolidated financial statements. Interim results are not necessarily indicative of results for a full year or any other period.
The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and are presented as permitted by the instructions to Form 10-Q. Accordingly, they do not contain certain information included in the Company’s annual audited consolidated financial statements and related footnotes for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K.
The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current period presentation. The reclassifications had no effect on net income or stockholders’ equity.
2. Recent Accounting Pronouncements
Recently Adopted Accounting Guidance
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326). The update, commonly referred to as the current expected credit loss methodology (“CECL”), replaces the incurred loss methodology for recognizing credit losses under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost. The impairment model for available-for-sale debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2 – continued)
In November 2019, the FASB issued ASU No. 2019-10 which delayed the effective date of ASU 2016-13 for smaller reporting companies (as defined by the SEC) and other non-SEC reporting entities to fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. The Company met the definition of a smaller reporting company as of that date and was not required to adopt the standard until January 1, 2023.
Effective January 1, 2023, the Company adopted ASU 2016-13, as amended, under the modified retrospective method. The adoption replaced the allowance for loan losses with the allowance for credit losses ("ACL") on loans on the Consolidated Balance Sheets and replaced the related provision for loan losses with the provision for credit losses on loans on the Consolidated Statements of Income. Upon adoption, the Company recorded an increase in the beginning ACL on loans of $561,000. In addition, the Company established an ACL related to unfunded loan commitments of $131,000 upon adoption of CECL. The use of the modified retrospective method of adoption resulted in the Company recording a $529,000 reduction (net of tax) in retained earnings as of January 1, 2023. Results for reporting periods after January 1, 2023 are presented under Accounting Standards Codification (“ASC”) 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.
The Company expanded the loan portfolio segments used to determine the ACL on loans into eight loan segments as opposed to seven loan segments under the incurred loss methodology. The following table illustrates the impact of the segment expansion as of January 1, 2023.
| | | | | | | Segment | | | Amortized cost at | |
| | | Amortized cost at | | | Portfolio | | | December 31, 2022 | |
| (in thousands) | | December 31, 2022 | | | Reclassification | | | after Reclassification | |
| | | | | | | | | | | | | |
| Residential | | $ | 155,445 | | | $ | (155,445 | ) | | $ | - | |
| 1-4 Family Residential Mortgage | | | - | | | | 116,392 | | | | 116,392 | |
| Multifamily Residential | | | - | | | | 38,962 | | | | 38,962 | |
| Home Equity and Second Mortgage | | | 58,985 | | | | 92 | | | | 59,077 | |
| Commercial Real Estate | | | 161,332 | | | | (62 | ) | | | 161,270 | |
| Construction | | | 42,259 | | | | (42,259 | ) | | | - | |
| Land | | | 21,874 | | | | (21,874 | ) | | | - | |
| 1-4 Family Residential Construction | | | - | | | | 16,575 | | | | 16,575 | |
| Other Construction, Development and Land | | | - | | | | 47,633 | | | | 47,633 | |
| Commercial Business | | | 60,806 | | | | 7,248 | | | | 68,054 | |
| Other Consumer | | | 64,029 | | | | (7,262 | ) | | | 56,767 | |
| | | $ | 564,730 | | | $ | - | | | $ | 564,730 | |
Loans Held for Investment
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. The Company grants real estate mortgage, commercial business and consumer loans. Loan origination and commitment fees, as well as certain direct costs of underwriting and closing loans, are deferred and amortized as a yield adjustment to interest income over the lives of the related loans using the interest method. Amortization of net deferred loan fees is discontinued when a loan is placed on nonaccrual status. Accrued interest receivable totaled $1.9 million at March 31, 2023 and was reported in accrued interest receivable on the consolidated balance sheets and is excluded from the estimate of credit losses.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2 – continued)
ACL – Available For Sale (“AFS”) Debt Securities
For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any decline in fair value that has not been recorded through an ACL is recognized in other comprehensive income, net of applicable taxes.
Changes in the ACL are recorded as a provision for (or recovery of) credit loss expense. Losses are charged against the ACL when management believes that uncollectibility of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on AFS debt securities totaled $2.2 million at March 31, 2023 and was reported in accrued interest receivable on the consolidated balance sheet and is excluded from the estimate of credit losses.
ACL – Held To Maturity Debt Securities
Management measures expected credit losses on held to maturity debt securities on a collective basis by major security type. Accrued interest receivable on held to maturity debt securities totaled $18,000 at March 31, 2023 and was reported in accrued interest receivable on the consolidated balance sheet and is excluded from the estimate of credit losses. The held to maturity securities portfolio includes subordinated debt obligations issued by other bank holding companies.
The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At the time of adoption, the estimated reserve was immaterial.
ACL – Loans
The ACL is a valuation account that is deducted from an asset’s amortized cost basis to present the net amount expected to be collected on the asset. Loans are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2 – continued)
The Company utilizes a combination of the Open Pool/Snapshot and Weighted Average Remaining Maturity (“WARM”) methods in determining expected future credit losses. The Open Pool/Snapshot method takes a snapshot of a loan portfolio at a point in time in history and tracks that loan portfolio’s performance in the subsequent periods until its ultimate disposition. The WARM method uses average annual charge-off rates and the remaining life of the loan to estimate the ACL. For the Company’s loan portfolios, the remaining contractual life for each loan is adjusted by the expected scheduled payments and estimated prepayments. The average annual charge-off rate is applied to the amortization adjusted remaining life of the loan to determine the unadjusted lifetime historical charge-off rate. The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company’s historical look-back periods for the loan portfolio range from one to 10 years depending on the WARM of the given portfolio segment, and are updated on a quarterly basis.
The Company estimates the ACL on loans using relevant available information from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts. Historical loss experience provides the basis for the estimation of expected credit losses. Qualitative adjustments to historical loss information are made for losses reflected by peers, changes in underwriting standards, changes in economic conditions, changes in delinquency levels, collateral values and other factors.
Qualitative adjustments reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration industry and collateral concentrations, acquired loan portfolio characteristics and other credit-related analytics as deemed appropriate.
Management exercises significant judgment in evaluating the relevant historical loss experience and the qualitative factors. Management also monitors the differences between estimated and actual incurred loan losses for loans considered impaired in order to evaluate the effectiveness of the estimation process and make any changes in the methodology as necessary.
The ACL is measured on a collective (pooled) basis when similar risk characteristics exist. The Company’s pools/segments are largely determined based on loan types as defined by Call Report instructions. The Bank has identified and utilizes the following portfolio segments:
1–4 Family Residential Mortgage – 1–4 Family Residential Mortgage loans are primarily secured by 1-4 family residences that are owner-occupied and serve as the primary residence of the borrower. In addition, the Company typically has a senior (1st lien) position securing the collateral of loans in this portfolio. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by unemployment levels in the market area due to economic conditions. Repayment may also be impacted by changes in residential property values.
Home Equity and Second Mortgage – Home Equity and Second Mortgage loans and lines of credit are primarily secured by 1-4 family residences that are owner-occupied and serve as the primary residence of the borrower. However, the Company typically has a junior lien position securing the collateral of loans in this portfolio. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by unemployment levels in the market area due to economic conditions. Repayment may also be impacted by changes in residential property values. While secured by collateral similar to that of the 1–4 Family Residential Mortgage loans, loans within this segment are considered to carry elevated risk due to the Company’s junior lien position on the underlying collateral property.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2 – continued)
Multi-family Residential – Multi-family Residential loans are primarily secured by properties such as apartment complexes and other multi-tenant properties within the Company’s market area. In some situations, the collateral may reside outside of the Company’s typical market area. Repayment of these loans is often dependent on the successful operation and management of the properties and collection of associated rents. Repayment of such loans may be affected by adverse conditions in the real estate market or the economy.
1–4 Family Residential Construction (“1-4 Family Construction”) – 1–4 Family Construction loans are generally secured by 1-4 family residences that will be owner-occupied upon completion. Risks inherent in construction lending are related to the market value of the property held as collateral, the cost and timing of constructing or improving a property, movements in interest rates and the real estate market during the construction phase, and the ability of the borrower to obtain permanent financing. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by unemployment levels in the market area due to economic conditions. Repayment may also be impacted by changes in residential property values.
Other Construction, Development and Land – Other Construction, Development and Land loans include loans secured by multi-family properties, commercial projects, and vacant land. This portfolio includes both owner-occupied and speculative investment properties. Risks inherent in construction lending are related to the market value of the property held as collateral, the cost and timing of constructing or improving a property, the borrower’s ability to use funds generated by a project to service a loan until a project is completed, movements in interest rates and the real estate market during the construction phase, and the ability of the borrower to obtain permanent financing.
Commercial Real Estate – Commercial Real Estate loans are comprised of loans secured by various types of collateral including warehouses, retail space, mixed-use buildings and warehouses, among others, located in the Company’s primary lending area. Risks related to commercial real estate lending are related to the market value of the property taken as collateral, the underlying cash flows, and general economic condition of the local real estate market. Repayment of these loans is generally dependent on the ability of the borrower to attract tenants at lease rates that provide for adequate debt service and can be impacted by local economic conditions which impact vacancy rates. The Company generally obtains loan guarantees from financially capable parties for Commercial Real Estate loans. To a lesser degree, this segment also includes loans secured by farmland. The risks associated with loans secured by farmland are related to the market value of the property taken as collateral and the underlying cash flows from farming operations and general economic conditions.
Commercial Business – Commercial Business loans include lines of credit to businesses, term loans and letters of credit secured by business assets such as equipment, accounts receivable, inventory, or other assets excluding real estate. Loans in this portfolio may also be unsecured and are generally made to finance capital expenditures or fund operations. Commercial Business loans contain risks related to the value of the collateral securing the loan and the repayment is primarily dependent upon the financial success and viability of the borrower. As with Commercial Real Estate loans, the Company generally obtains loan guarantees from financially capable parties for Commercial Business loans.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2 – continued)
Other Consumer – Other Consumer loans consist of loans secured by new and used automobiles and trucks, recreational vehicles such as boats and RVs, mobile homes and secured and unsecured loans to individuals. The risks associated with these loans are related to local economic conditions including the unemployment level. To a lesser degree, this segment also includes loans secured by lawn and farm equipment as well as farm output. The risks associated with these loans are related to local economic conditions including the unemployment level, as well as general economic conditions impacting crop prices and the supply chain.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are also not included in the collective evaluation. When the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date adjusted for selling costs.
ACL – Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on off-balance sheet credit exposures is included in other liabilities on the consolidated balance sheets and is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Expected utilization rates based on Regulatory Credit Conversion Factors are compared to the current funded portion of the total commitment amount as a practical expedient for funded exposure at default.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings (“TDR”) and Vintage Disclosures. The ASU eliminates the current accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. For public business entities, the ASU also requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. The Company adopted ASU 2022-02 in conjunction with ASU 2016-13 and applied it prospectively with no cumulative-effect adjustment to retained earnings being recorded.
Recently Issued but Not Adopted Accounting Guidance
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurements (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The ASU clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. It also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted and the amendments in the ASU should be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. The adoption of the ASU is not expected to have a material impact on the Company’s financial position or results of operations.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2 – continued)
In March 2023, the FASB issued ASU No. 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures using the Proportional Amortization Method. The ASU allows entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received, and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense. This also aligns the treatment of other tax equity investments with that allowed for low income housing tax credit (“LIHTC”) investments. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted in any interim period. The Company already utilizes the proportional amortization method for its LIHTC investment and has no other material types of investments in tax credit structures. The adoption of the ASU is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
The Company has determined that all other recently issued accounting pronouncements will not have a material impact on the Company’s consolidated financial statements or do not apply to its operations.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Investment Securities
Investment securities have been classified in the consolidated balance sheets according to management’s intent. Investment securities at March 31, 2023 and December 31, 2022 are summarized as follows:
| | | | | | | Gross | | | Gross | | | | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| (In thousands) | | Cost | | | Gains | | | Losses | | | Value | |
| | | | | | | | | | | | | | | | | |
| March 31, 2023 | | | | | | | | | | | | | | | | |
| Securities available for sale: | | | | | | | | | | | | | | | | |
| Agency mortgage-backed securities | | $ | 91,600 | | | $ | - | | | $ | 9,294 | | | $ | 82,306 | |
| Agency CMO | | | 9,117 | | | | 53 | | | | 223 | | | | 8,947 | |
| Other debt securities: | | | | | | | | | | | | | | | | |
| Agency notes and bonds | | | 151,901 | | | | 18 | | | | 10,495 | | | | 141,424 | |
| Treasury notes and bonds | | | 82,638 | | | | - | | | | 2,827 | | | | 79,811 | |
| Municipal obligations | | | 172,666 | | | | 426 | | | | 15,490 | | | | 157,602 | |
| | | | | | | | | | | | | | | | | |
| Total securities available for sale | | $ | 507,922 | | | $ | 497 | | | $ | 38,329 | | | $ | 470,090 | |
| | | | | | | | | | | | | | | | | |
| Securities held to maturity: | | | | | | | | | | | | | | | | |
| Other debt securities: | | | | | | | | | | | | | | | | |
| Corporate notes | | $ | 7,000 | | | $ | - | | | $ | 1,704 | | | $ | 5,296 | |
| | | | | | | | | | | | | | | | | |
| Total securities held to maturity | | $ | 7,000 | | | $ | - | | | $ | 1,704 | | | $ | 5,296 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | | | | | |
| Securities available for sale: | | | | | | | | | | | | | | | | |
| Agency mortgage-backed securities | | $ | 95,056 | | | $ | - | | | $ | 11,193 | | | $ | 83,863 | |
| Agency CMO | | | 9,682 | | | | 20 | | | | 349 | | | | 9,353 | |
| Other debt securities: | | | | | | | | | | | | | | | | |
| Agency notes and bonds | | | 151,143 | | | | - | | | | 13,162 | | | | 137,981 | |
| Treasury notes and bonds | | | 82,646 | | | | - | | | | 3,914 | | | | 78,732 | |
| Municipal obligations | | | 168,939 | | | | 177 | | | | 18,226 | | | | 150,890 | |
| | | | | | | | | | | | | | | | | |
| Total securities available for sale | | $ | 507,466 | | | $ | 197 | | | $ | 46,844 | | | $ | 460,819 | |
| | | | | | | | | | | | | | | | | |
| Securities held to maturity: | | | | | | | | | | | | | | | | |
| Other debt securities: | | | | | | | | | | | | | | | | |
| Corporate notes | | $ | 7,000 | | | $ | - | | | $ | 1,689 | | | $ | 5,311 | |
| | | | | | | | | | | | | | | | | |
| Total securities held to maturity | | $ | 7,000 | | | $ | - | | | $ | 1,689 | | | $ | 5,311 | |
Agency notes and bonds, agency mortgage-backed securities and agency collateralized mortgage obligations (“CMO”) include securities issued by the Government National Mortgage Association (“GNMA”), a U.S. government agency, and the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), the Federal Farm Credit Bank (“FFCB”) and the Federal Home Loan Bank (“FHLB”), which are government-sponsored enterprises. Corporate notes classified as held to maturity include subordinated debt obligations issued by other bank holding companies.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
The amortized cost and fair value of debt securities as of March 31, 2023, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities and CMO may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.
| | | Securities Available for Sale | | | Securities Held to Maturity | |
| | | Amortized | | | Fair | | | Amortized | | | Fair | |
| | | Cost | | | Value | | | Cost | | | Value | |
| (In thousands) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Due in one year or less | | $ | 45,936 | | | $ | 45,056 | | | $ | - | | | $ | - | |
| Due after one year through five years | | | 213,953 | | | | 200,774 | | | | - | | | | - | |
| Due after five years through ten years | | | 41,376 | | | | 39,120 | | | | 2,000 | | | | 1,520 | |
| Due after ten years | | | 105,940 | | | | 93,887 | | | | 5,000 | | | | 3,776 | |
| | | | 407,205 | | | | 378,837 | | | | 7,000 | | | | 5,296 | |
| Mortgage-backed securities and CMO | | | 100,717 | | | | 91,253 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| | | $ | 507,922 | | | $ | 470,090 | | | $ | 7,000 | | | $ | 5,296 | |
Information pertaining to investment securities with gross unrealized losses at March 31, 2023, aggregated by investment category and the length of time that individual investment securities have been in a continuous loss position, follows.
| | | Number of | | | | | | | Gross | |
| | | Investment | | | Fair | | | Unrealized | |
| | | Positions | | | Value | | | Losses | |
| (Dollars in thousands) | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| March 31, 2023: | | | | | | | | | | | | |
| Securities available for sale: | | | | | | | | | | | | |
| Continuous loss position less than twelve months: | | | | | | | | | | | | |
| Agency mortgage-backed securities | | | 4 | | | $ | 3,589 | | | $ | 120 | |
| Agency CMO | | | 3 | | | | 2,604 | | | | 62 | |
| Agency notes and bonds | | | 6 | | | | 16,797 | | | | 221 | |
| Treasury notes and bonds | | | 10 | | | | 16,734 | | | | 266 | |
| Muncipal obligations | | | 36 | | | | 17,113 | | | | 195 | |
| Total less than twelve months | | | 59 | | | | 56,837 | | | | 864 | |
| | | | | | | | | | | | | |
| Continuous loss position more than twelve months: | | | | | | | | | | | | |
| Agency mortgage-backed securities | | | 93 | | | | 78,717 | | | | 9,174 | |
| Agency CMO | | | 22 | | | | 3,557 | | | | 161 | |
| Agency notes and bonds | | | 52 | | | | 121,382 | | | | 10,274 | |
| Treasury notes and bonds | | | 20 | | | | 63,078 | | | | 2,561 | |
| Muncipal obligations | | | 192 | | | | 104,118 | | | | 15,295 | |
| Total more than twelve months | | | 379 | | | | 370,852 | | | | 37,465 | |
| | | | | | | | | | | | | |
| Total securities available for sale | | | 438 | | | $ | 427,689 | | | $ | 38,329 | |
| | | | | | | | | | | | | |
| Securities held to maturity: | | | | | | | | | | | | |
| Continuous loss position more than twelve months: | | | | | | | | | | | | |
| Corporate notes | | | 4 | | | $ | 5,296 | | | $ | 1,704 | |
| Total more than twelve months | | | 4 | | | | 5,296 | | | | 1,704 | |
| | | | | | | | | | | | | |
| Total held to maturity | | | 4 | | | $ | 5,296 | | | $ | 1,704 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
Information pertaining to investment securities with gross unrealized losses at December 31, 2022, aggregated by investment category and the length of time that individual investment securities have been in a continuous position, follows.
| | | Number of | | | | | | | Gross | |
| | | Investment | | | Fair | | | Unrealized | |
| | | Positions | | | Value | | | Losses | |
| (Dollars in thousands) | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| December 31, 2022: | | | | | | | | | | | | |
| Securities available for sale: | | | | | | | | | | | | |
| Continuous loss position less than twelve months: | | | | | | | | | | | | |
| Agency mortgage-backed securities | | | 69 | | | $ | 27,561 | | | $ | 2,214 | |
| Agency CMO | | | 23 | | | | 6,287 | | | | 336 | |
| Agency notes and bonds | | | 15 | | | | 35,079 | | | | 1,314 | |
| Treasury notes and bonds | | | 17 | | | | 31,615 | | | | 997 | |
| Muncipal obligations | | | 154 | | | | 81,218 | | | | 5,960 | |
| Total less than twelve months | | | 278 | | | | 181,760 | | | | 10,821 | |
| | | | | | | | | | | | | |
| Continuous loss position more than twelve months: | | | | | | | | | | | | |
| Agency mortgage-backed securities | | | 28 | | | | 56,303 | | | | 8,979 | |
| Agency CMO | | | 3 | | | | 257 | | | | 13 | |
| Agency notes and bonds | | | 45 | | | | 102,902 | | | | 11,848 | |
| Treasury notes and bonds | | | 13 | | | | 47,117 | | | | 2,917 | |
| Muncipal obligations | | | 98 | | | | 52,279 | | | | 12,266 | |
| Total more than twelve months | | | 187 | | | | 258,858 | | | | 36,023 | |
| | | | | | | | | | | | | |
| Total securities available for sale | | | 465 | | | $ | 440,618 | | | $ | 46,844 | |
| | | | | | | | | | | | | |
| Securities held to maturity: | | | | | | | | | | | | |
| Continuous loss position less than twelve months: | | | | | | | | | | | | |
| Corporate notes | | | 3 | | | $ | 3,779 | | | $ | 1,221 | |
| Total less than twelve months | | | 3 | | | | 3,779 | | | | 1,221 | |
| | | | | | | | | | | | | |
| Continuous loss position more than twelve months: | | | | | | | | | | | | |
| Corporate notes | | | 1 | | | | 1,532 | | | | 468 | |
| Total more than twelve months | | | 1 | | | | 1,532 | | | | 468 | |
| | | | | | | | | | | | | |
| Total securities held to maturity | | | 4 | | | $ | 5,311 | | | $ | 1,689 | |
The Company has not identified any specific available for sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities. The Company reviews its securities on a quarterly basis to assess declines in fair value for credit losses. Consideration is given to such factors as the credit rating of the borrower, market conditions such as current interest rates, any adverse conditions specific to the security, and delinquency status on contractual payments. For the three months ended March 31, 2023, management concluded that in all instances securities with fair value less than carrying value was due to market and other factors; thus, no credit loss provision was required.
In addition, management assesses held to maturity securities for credit losses on a quarterly basis. The assessment includes review of performance metrics, identification of delinquency and evaluation of market factors. Based on this analysis, management concludes the decline in fair value is due to changes in interest rates and other market factors. Accordingly, no credit loss provision was recorded in earnings for the three months ended March 31, 2023.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
At March 31, 2023, the municipal obligations and U.S. government agency debt securities, including Treasury notes and bonds, agency notes and bonds, mortgage-backed securities and CMOs classified as available for sale and in a loss position had depreciated approximately 8.2% from the amortized cost basis. All of the U.S. government agency securities and municipal obligations are issued by U.S. government agencies, government-sponsored enterprises and municipal governments, or are secured by first mortgage loans and municipal project revenues. At March 31, 2023, the corporate notes classified as held to maturity in a loss position had depreciated approximately 24.3% from the amortized cost basis. These unrealized losses related principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As the Company has the ability to hold the debt securities until maturity, or the foreseeable future if classified as available for sale, no credit loss is deemed to exist.
On January 1, 2023, the Company adopted ASU 2016-13, which replaced the legacy GAAP other-than-temporary impairment (“OTTI”) model with a credit loss model. ASU 2016-13 requires an allowance on lifetime expected credit losses on held to maturity debt securities. As of January 1, 2023 and March 31, 2023, the Corporation estimated the expected credit losses to be immaterial based on the composition of the held to maturity securities portfolio.
While management does not anticipate any credit losses at March 31, 2023, additional deterioration in market and economic conditions may have an adverse impact on credit quality in the future.
There were no sales of investment securities during the three months ended March 31, 2023 or 2022.
Certain debt securities available for sale were pledged to secure public fund deposits at March 31, 2023 and December 31, 2022.
Equity Securities
In September 2018, the Company acquired 90,000 shares of common stock in another bank holding company, representing approximately 5% of the outstanding common stock of the entity, for a total investment of $1.9 million. During the three months ended March 31, 2023, the Company recognized an unrealized gain of $137,000, on this equity investment. During the three months ended March 31, 2022, the Company recognized an unrealized gain of $63,000, on this equity investment. At March 31, 2023 and December 31, 2022, the equity investment had a fair value of $1.6 million and $1.5 million, respectively, and is included in other assets on the consolidated balance sheets.
In October 2021, the Company entered into an agreement to invest in a bank technology fund through a limited partnership. At March 31, 2023 and December 31, 2022, the Company’s investment in the limited partnership was $1.0 million and is reflected in other assets on the consolidated balance sheets. The unfunded commitment related to the limited partnership investment at March 31, 2023 and December 31, 2022 was $680,000 and $780,000, respectively, and is reflected in other liabilities on the consolidated balance sheets. The Company expects to fulfill the commitment as capital calls are made through 2026. The investment is accounted for as an equity security without a readily determinable fair value, and has been recorded at cost, less any impairment, and adjustments resulting from observable price changes. There were no impairments or adjustments on equity securities without readily determinable fair values during the three months ended March 31, 2023 or 2022.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Loans and Allowance for Credit Losses
Additional information regarding the Company’s loan and ACL on loan policies and loan portfolios follow:
A substantial portion of the loan portfolio is represented by mortgage loans to customers in the Louisville, Kentucky metropolitan statistical area (MSA). The ability of the Company’s customers to honor their loan agreements is largely dependent upon the real estate and general economic conditions in this area.
The recognition of income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments become 90 days past due unless, in the opinion of management, the outstanding interest remains collectible. Past due status is determined based on contractual terms. Generally, by applying the cash receipts method, interest income is subsequently recognized only as received until the loan is returned to accrual status. The cash receipts method is used when the likelihood of further loss on the loan is remote. Otherwise, the Company applies the cost recovery method and applies all payments as a reduction of the unpaid principal balance until the loan qualifies for return to accrual status. Interest income on impaired loans is recognized using the cost recovery method, unless the likelihood of further loss on the loan is remote.
A loan is restored to accrual status when all principal and interest payments are brought current and the borrower has demonstrated the ability to make future payments of principal and interest as scheduled, which generally requires that the borrower demonstrate a period of performance of at least six consecutive months.
For portfolio segments other than consumer loans, the Company’s practice is to charge-off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or for other reasons. A partial charge-off is recorded on a loan when the uncollectibility of a portion of the loan has been confirmed, such as when a loan is discharged in bankruptcy, the collateral is liquidated, a loan is restructured at a reduced principal balance, or other identifiable events that lead management to determine the full principal balance of the loan will not be repaid. A specific reserve is recognized as a component of the ACL on loans individually evaluated for impairment. Partial charge-offs on nonperforming and impaired loans are included in the Company’s historical loss experience used to estimate the collective (pooled) component of the ACL on loans as discussed below. Specific reserves are not considered charge-offs in management’s analysis of the ACL on loans because they are estimates and the outcome of the loan relationship is undetermined.
Consumer loans not secured by real estate are typically charged off at 90 days past due, or earlier if deemed uncollectible, unless the loans are in the process of collection. Overdrafts are charged off after 45 days past due. Charge-offs are typically recorded on loans secured by real estate when the property is foreclosed upon.
Refer to Note 2 ACL – Loans for additional information and accounting policies related to the ACL on loans.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, past loan modifications, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Values for collateral dependent loans are generally based on appraisals obtained from independent licensed real estate appraisers, with adjustments applied for estimated costs to sell the property, costs to complete unfinished or repair damaged property and other factors. New appraisals are generally obtained for all significant properties when a loan is identified as impaired, and a property is considered significant if the value of the property is estimated to exceed $200,000. Subsequent appraisals are obtained as needed or if management believes there has been a significant change in the market value of the property. In instances where it is not deemed necessary to obtain a new appraisal, management bases its impairment and ACL analysis on the original appraisal with adjustments for current conditions based on management’s assessment of market factors and management’s inspection of the property. At March 31, 2023 all of the Bank’s loans evaluated on an individual basis were considered collateral dependent.
The Company held no foreclosed real estate at March 31, 2023 or December 31, 2022. At March 31, 2023 and December 31, 2022, the amortized cost basis in loans secured by residential real estate properties for which formal foreclosure proceedings are in process was $382,000 and $104,000, respectively.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
Loans at March 31, 2023 and December 31, 2022 consisted of the following:
| | | March 31, | | | December 31, | |
| (In thousands) | | 2023 | | | 2022 | |
| | | | | | | (As reclassified) | |
| | | | | | | | | |
| 1-4 Family Residential Mortgage | | $ | 122,675 | | | $ | 116,269 | |
| Home Equity and Second Mortgage | | | 57,130 | | | | 57,872 | |
| Multifamily Residential | | | 39,656 | | | | 38,973 | |
| 1-4 Family Residential Construction | | | 19,071 | | | | 16,575 | |
| Other Construction, Development and Land | | | 49,901 | | | | 47,632 | |
| Commercial Real Estate | | | 161,968 | | | | 161,362 | |
| Commercial Business | | | 67,228 | | | | 68,066 | |
| Other Consumer | | | 54,053 | | | | 56,768 | |
| Principal loan balance | | | 571,682 | | | | 563,517 | |
| | | | | | | | | |
| Deferred loan origination fees and costs, net | | | 1,217 | | | | 1,213 | |
| Allowance for credit losses | | | (7,323 | ) | | | (6,772 | ) |
| | | | | | | | | |
| Loans, net | | $ | 565,576 | | | $ | 557,958 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
The following table provides the components of the Company’s amortized cost basis in loans at March 31, 2023:
| | | | | | | | | | | | | | | | | | | Other | | | | | | | | | | | | | | | | | |
| | | 1-4 Family | | | Home Equity | | | | | | | 1-4 Family | | | Construction, | | | | | | | | | | | | | | | | | |
| | | Residential | | | and Second | | | Multifamily | | | Residential | | | Development | | | Commercial | | | Commercial | | | Other | | | | | |
| | | Mortgage | | | Mortgage | | | Residential | | | Construction | | | and Land | | | Real Estate | | | Business | | | Consumer | | | Total | |
| | | (In thousands) | |
| Amortized Cost Basis in Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Principal loan balance | | $ | 122,675 | | | $ | 57,130 | | | $ | 39,656 | | | $ | 19,071 | | | $ | 49,901 | | | $ | 161,968 | | | $ | 67,228 | | | $ | 54,053 | | | $ | 571,682 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net deferred loan origination fees and costs | | | 127 | | | | 1,210 | | | | (14 | ) | | | - | | | | (3 | ) | | | (91 | ) | | | (12 | ) | | | - | | | | 1,217 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized cost basis in loans | | $ | 122,802 | | | $ | 58,340 | | | $ | 39,642 | | | $ | 19,071 | | | $ | 49,898 | | | $ | 161,877 | | | $ | 67,216 | | | $ | 54,053 | | | $ | 572,899 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
An analysis of the changes in the ACL on loans for the three months ended March 31, 2023 is as follows:
| | | | | | | | | | | | | | | | | | | Other | | | | | | | | | | | | | | | | | |
| | | 1-4 Family | | | Home Equity | | | | | | | 1-4 Family | | | Construction, | | | | | | | | | | | | | | | | | |
| | | Residential | | | and Second | | | Multifamily | | | Residential | | | Development | | | Commercial | | | Commercial | | | Other | | | | | |
| | | Mortgage | | | Mortgage | | | Residential | | | Construction | | | and Land | | | Real Estate | | | Business | | | Consumer | | | Total | |
| | | (In thousands) | |
| ACL on Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance, prior to adoption of ASC 326 | | $ | 1,036 | | | $ | 531 | | | $ | 346 | | | $ | 206 | | | $ | 587 | | | $ | 2,029 | | | $ | 1,156 | | | $ | 881 | | | $ | 6,772 | |
| Impact of adopting ASC 326 | | | 423 | | | | (26 | ) | | | (3 | ) | | | (9 | ) | | | 13 | | | | (130 | ) | | | (142 | ) | | | 435 | | | | 561 | |
| Provision for credit losses | | | (43 | ) | | | (139 | ) | | | 38 | | | | (10 | ) | | | (111 | ) | | | 291 | | | | 220 | | | | (53 | ) | | | 193 | |
| Charge-offs | | | (2 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (155 | ) | | | (118 | ) | | | (275 | ) |
| Recoveries | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5 | | | | 67 | | | | 72 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance | | $ | 1,414 | | | $ | 366 | | | $ | 381 | | | $ | 187 | | | $ | 489 | | | $ | 2,190 | | | $ | 1,084 | | | $ | 1,212 | | | $ | 7,323 | |
Accrued interest on loans of $1.9 million at March 31, 2023, is included in accrued interest receivable on the consolidated balance sheets and is excluded from the estimate of credit losses.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. There have been no significant changes to the types of collateral securing the Company’s collateral dependent loans. The following table presents the amortized cost basis of, and ACL allocation to, individually evaluated collateral-dependent loans by class of loans as of March 31, 2023:
| | | Real | | | | | | | | | | | ACL | |
| | | Estate | | | Other | | | Total | | | Allocation | |
| | | | | | | | | | | | | | | | | |
| 1-4 Family Residential Mortgage | | $ | 1,062 | | | $ | - | | | $ | 1,062 | | | $ | 12 | |
| Home Equity and Second Mortgage | | | 344 | | | | - | | | | 344 | | | | 2 | |
| Multifamily Residential | | | - | | | | - | | | | - | | | | - | |
| 1-4 Family Residential Construction | | | - | | | | - | | | | - | | | | - | |
| Other Construction, Development and Land | | | 52 | | | | - | | | | 52 | | | | - | |
| Commercial Real Estate | | | 1,128 | | | | - | | | | 1,128 | | | | - | |
| Commercial Business | | | - | | | | 162 | | | | 162 | | | | - | |
| Other Consumer | | | - | | | | - | | | | - | | | | - | |
| | | $ | 2,586 | | | $ | 162 | | | $ | 2,748 | | | $ | 14 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
Nonperforming loans consists of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 89 days still accruing as of March 31, 2023:
| | | | | | | | | | | Loans 90+ Days | | | Total | |
| | | Nonaccrual Loans | | | Total | | | Past Due | | | Nonperforming | |
| | | with No ACL (1) | | | Nonaccrual | | | Still Accruing | | | Loans | |
| | | (In thousands) | |
| | | | | | | | | | | | | | | | | |
| 1-4 Family Residential Mortgage | | $ | 766 | | | $ | 804 | | | $ | - | | | $ | 804 | |
| Home Equity and Second Mortgage | | | 274 | | | | 344 | | | | - | | | | 344 | |
| Multifamily Residential | | | - | | | | - | | | | - | | | | - | |
| 1-4 Family Residential Construction | | | - | | | | - | | | | - | | | | - | |
| Other Construction, Development and Land | | | 52 | | | | 52 | | | | - | | | | 52 | |
| Commercial Real Estate | | | 33 | | | | 33 | | | | - | | | | 33 | |
| Commercial Business | | | - | | | | 27 | | | | - | | | | 27 | |
| Other Consumer | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 1,125 | | | $ | 1,260 | | | $ | - | | | $ | 1,260 | |
(1) Includes nonaccrual loans with no ACL and are also included in Total Nonaccrual loans of $1,260.
No interest income was recognized on nonaccrual loans during the three months ended March 31, 2023.
The following table presents the aging of the amortized cost basis in loans at March 31, 2023:
| | | 30-59 Days | | | 60-89 Days | | | 90 Days or More | | | Total | | | | | | | Total | |
| | | Past Due | | | Past Due | | | Past Due | | | Past Due | | | Current | | | Loans | |
| | | (In thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 Family Residential Mortgage | | $ | 2,114 | | | $ | - | | | $ | 384 | | | $ | 2,498 | | | $ | 120,304 | | | $ | 122,802 | |
| Home Equity and Second Mortgage | | | 638 | | | | - | | | | 70 | | | | 708 | | | | 57,632 | | | | 58,340 | |
| Multifamily Residential | | | - | | | | - | | | | - | | | | - | | | | 39,642 | | | | 39,642 | |
| 1-4 Family Residential Construction | | | - | | | | - | | | | - | | | | - | | | | 19,071 | | | | 19,071 | |
| Other Construction, Development and Land | | | 50 | | | | - | | | | 52 | | | | 102 | | | | 49,796 | | | | 49,898 | |
| Commercial Real Estate | | | 58 | | | | - | | | | - | | | | 58 | | | | 161,819 | | | | 161,877 | |
| Commercial Business | | | 14 | | | | 200 | | | | - | | | | 214 | | | | 67,002 | | | | 67,216 | |
| Other Consumer | | | 213 | | | | 48 | | | | - | | | | 261 | | | | 53,792 | | | | 54,053 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 3,087 | | | $ | 248 | | | $ | 506 | | | $ | 3,841 | | | $ | 569,058 | | | $ | 572,899 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
Occasionally, the Company modifies loans to borrowers in financial distress. During the three months ended March 31, 2023, no material loans to borrowers experiencing financial distress were modified. There were no loans to borrowers experiencing financial distress that were modified during the previous 12 months and which subsequently defaulted during the three months ended March 31, 2023. There were no unfunded commitments associated with loans modified for borrowers experiencing financial distress as of March 31, 2023 and December 31, 2022.
There were no TDRs that were restructured during the three months ended March 31, 2022. There were no principal charge-offs recorded as a result of TDRs and there was no specific allowance for loan losses related to TDRs modified during the three months ended March 31, 2022. There were no TDRs modified within the previous 12 months for which there was a subsequent payment default during the three months ended March 31, 2022.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the institution’s books as an asset is not warranted.
Loans not meeting the criteria above that are analyzed individually as part of the described process are considered to be pass rated loans.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
| | | Term Loans Amortized Cost Basis by Origination Year | | | | | | | | | |
| | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior | | | Revolving | | | Total | |
| | | (In thousands) | |
| 1-4 Family Residential Mortgage | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 9,390 | | | $ | 34,819 | | | $ | 30,244 | | | $ | 7,916 | | | $ | 10,734 | | | $ | 28,638 | | | $ | - | | | $ | 121,741 | |
| Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | 257 | | | | - | | | | 257 | |
| Doubtful | | | - | | | | 19 | | | | 175 | | | | - | | | | - | | | | 610 | | | | - | | | | 804 | |
| | | $ | 9,390 | | | $ | 34,838 | | | $ | 30,419 | | | $ | 7,916 | | | $ | 10,734 | | | $ | 29,505 | | | $ | - | | | $ | 122,802 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current period gross write-offs | | $ | - | | | $ | - | | | $ | 2 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Home Equity and Second Mortgage | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 751 | | | $ | 5,111 | | | $ | 593 | | | $ | 273 | | | $ | 255 | | | $ | 518 | | | $ | 50,495 | | | $ | 57,996 | |
| Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | 274 | | | | - | | | | 70 | | | | 344 | |
| | | $ | 751 | | | $ | 5,111 | | | $ | 593 | | | $ | 273 | | | $ | 529 | | | $ | 518 | | | $ | 50,565 | | | $ | 58,340 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current period gross write-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
| | | Term Loans Amortized Cost Basis by Origination Year | | | | | | | | | |
| | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior | | | Revolving | | | Total | |
| | | (In thousands) | |
| Multifamily Residential | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 1,557 | | | $ | 10,726 | | | $ | 9,940 | | | $ | 8,134 | | | $ | 4,469 | | | $ | 4,816 | | | $ | - | | | $ | 39,642 | |
| Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | $ | 1,557 | | | $ | 10,726 | | | $ | 9,940 | | | $ | 8,134 | | | $ | 4,469 | | | $ | 4,816 | | | $ | - | | | $ | 39,642 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current period gross write-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1-4 Family Residential Construction | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 2,306 | | | $ | 12,362 | | | $ | 3,082 | | | $ | - | | | $ | - | | | $ | 1,321 | | | $ | - | | | $ | 19,071 | |
| Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | $ | 2,306 | | | $ | 12,362 | | | $ | 3,082 | | | $ | - | | | $ | - | | | $ | 1,321 | | | $ | - | | | $ | 19,071 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current period gross write-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
| | | Term Loans Amortized Cost Basis by Origination Year | | | | | | | | | |
| | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior | | | Revolving | | | Total | |
| | | (In thousands) | |
| Other Construction, Development and Land | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 3,580 | | | $ | 26,348 | | | $ | 11,714 | | | $ | 2,954 | | | $ | 1,325 | | | $ | 3,875 | | | $ | - | | | $ | 49,796 | |
| Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | 50 | | | | - | | | | 50 | |
| Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | 52 | | | | - | | | | 52 | |
| | | $ | 3,580 | | | $ | 26,348 | | | $ | 11,714 | | | $ | 2,954 | | | $ | 1,325 | | | $ | 3,977 | | | $ | - | | | $ | 49,898 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current period gross write-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial Real Estate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 3,272 | | | $ | 40,200 | | | $ | 27,946 | | | $ | 22,097 | | | $ | 19,413 | | | $ | 44,777 | | | $ | 2,294 | | | $ | 159,999 | |
| Special Mention | | | - | | | | - | | | | - | | | | 179 | | | | 427 | | | | 65 | | | | 79 | | | | 750 | |
| Substandard | | | - | | | | - | | | | - | | | | 237 | | | | - | | | | 858 | | | | - | | | | 1,095 | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | 33 | | | | - | | | | 33 | |
| | | $ | 3,272 | | | $ | 40,200 | | | $ | 27,946 | | | $ | 22,513 | | | $ | 19,840 | | | $ | 45,733 | | | $ | 2,373 | | | $ | 161,877 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current period gross write-offs | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
| | | Term Loans Amortized Cost Basis by Origination Year | | | | | | | | | |
| | | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior | | | Revolving | | | Total | |
| | | (In thousands) | |
| Commercial Business | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 5,459 | | | $ | 17,812 | | | $ | 13,160 | | | $ | 6,586 | | | $ | 6,735 | | | $ | 4,340 | | | $ | 12,672 | | | $ | 66,764 | |
| Special Mention | | | - | | | | 31 | | | | 22 | | | | - | | | | 168 | | | | 4 | | | | 38 | | | | 263 | |
| Substandard | | | - | | | | - | | | | - | | | | - | | | | 48 | | | | - | | | | 114 | | | | 162 | |
| Doubtful | | | - | | | | - | | | | - | | | | 27 | | | | - | | | | - | | | | - | | | | 27 | |
| | | $ | 5,459 | | | $ | 17,843 | | | $ | 13,182 | | | $ | 6,613 | | | $ | 6,951 | | | $ | 4,344 | | | $ | 12,824 | | | $ | 67,216 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current period gross write-offs | | $ | - | | | $ | 155 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 155 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Consumer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 6,502 | | | $ | 20,535 | | | $ | 11,963 | | | $ | 4,649 | | | $ | 2,136 | | | $ | 6,146 | | | $ | 2,068 | | | $ | 53,999 | |
| Special Mention | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 54 | | | | 54 | |
| Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | $ | 6,502 | | | $ | 20,535 | | | $ | 11,963 | | | $ | 4,649 | | | $ | 2,136 | | | $ | 6,146 | | | $ | 2,122 | | | $ | 54,053 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current period gross write-offs | | $ | - | | | $ | 18 | | | $ | 23 | | | $ | 10 | | | $ | 6 | | | $ | 32 | | | $ | 29 | | | $ | 118 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 32,817 | | | $ | 167,913 | | | $ | 108,642 | | | $ | 52,609 | | | $ | 45,067 | | | $ | 94,431 | | | $ | 67,529 | | | $ | 569,008 | |
| Special Mention | | | - | | | | 31 | | | | 22 | | | | 179 | | | | 595 | | | | 119 | | | | 117 | | | | 1,063 | |
| Substandard | | | - | | | | - | | | | - | | | | 237 | | | | 48 | | | | 1,115 | | | | 168 | | | | 1,568 | |
| Doubtful | | | - | | | | 19 | | | | 175 | | | | 27 | | | | 274 | | | | 695 | | | | 70 | | | | 1,260 | |
| | | $ | 32,817 | | | $ | 167,963 | | | $ | 108,839 | | | $ | 53,052 | | | $ | 45,984 | | | $ | 96,360 | | | $ | 67,884 | | | $ | 572,899 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current period gross write-offs | | $ | - | | | $ | 173 | | | $ | 25 | | | $ | 10 | | | $ | 6 | | | $ | 32 | | | $ | 29 | | | $ | 275 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
Allowance for Loan Losses
Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses using the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.
The following table provides the components of the Company’s recorded investment in loans at March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | Home Equity | | | | | | | | | |
| | | Residential | | | | | | | | | | | Commercial | | | Commercial | | | and Second | | | Other | | | | | |
| | | Real Estate | | | Land | | | Construction | | | Real Estate | | | Business | | | Mortgage | | | Consumer | | | Total | |
| | | (In thousands) | |
| Recorded Investment in Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Principal loan balance | | $ | 137,762 | | | $ | 19,489 | | | $ | 31,702 | | | $ | 148,492 | | | $ | 58,031 | | | $ | 55,893 | | | $ | 59,670 | | | $ | 511,039 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accrued interest receivable | | | 468 | | | | 103 | | | | 74 | | | | 300 | | | | 163 | | | | 166 | | | | 199 | | | | 1,473 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net deferred loan origination fees and costs | | | 99 | | | | 13 | | | | (11 | ) | | | (72 | ) | | | (21 | ) | | | 1,148 | | | | - | | | | 1,156 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recorded investment in loans | | $ | 138,329 | | | $ | 19,605 | | | $ | 31,765 | | | $ | 148,720 | | | $ | 58,173 | | | $ | 57,207 | | | $ | 59,869 | | | $ | 513,668 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recorded Investment in Loans as Evaluated for Impairment: | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 824 | | | $ | 102 | | | $ | - | | | $ | 599 | | | $ | 167 | | | $ | 287 | | | $ | - | | | $ | 1,979 | |
| Collectively evaluated for impairment | | | 137,236 | | | | 19,503 | | | | 31,765 | | | | 148,113 | | | | 58,006 | | | | 56,920 | | | | 59,869 | | | | 511,412 | |
| Acquired with deteriorated credit quality | | | 269 | | | | - | | | | - | | | | 8 | | | | - | | | | - | | | | - | | | | 277 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance | | $ | 138,329 | | | $ | 19,605 | | | $ | 31,765 | | | $ | 148,720 | | | $ | 58,173 | | | $ | 57,207 | | | $ | 59,869 | | | $ | 513,668 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
The following table provides the components of the Company’s recorded investment in loans at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | Home Equity | | | | | | | | | |
| | | Residential | | | | | | | | | | | Commercial | | | Commercial | | | and Second | | | Other | | | | | |
| | | Real Estate | | | Land | | | Construction | | | Real Estate | | | Business | | | Mortgage | | | Consumer | | | Total | |
| | | (In thousands) | |
| Recorded Investment in Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Principal loan balance | | $ | 155,334 | | | $ | 21,860 | | | $ | 42,271 | | | $ | 161,425 | | | $ | 60,817 | | | $ | 57,781 | | | $ | 64,029 | | | $ | 563,517 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accrued interest receivable | | | 493 | | | | 123 | | | | 105 | | | | 343 | | | | 170 | | | | 348 | | | | 236 | | | | 1,818 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net deferred loan origination fees and costs | | | 111 | | | | 14 | | | | (12 | ) | | | (93 | ) | | | (11 | ) | | | 1,204 | | | | - | | | | 1,213 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recorded investment in loans | | $ | 155,938 | | | $ | 21,997 | | | $ | 42,364 | | | $ | 161,675 | | | $ | 60,976 | | | $ | 59,333 | | | $ | 64,265 | | | $ | 566,548 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recorded Investment in Loans as Evaluated for Impairment: | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 854 | | | $ | 51 | | | $ | - | | | $ | 463 | | | $ | 195 | | | $ | 372 | | | $ | - | | | $ | 1,935 | |
| Collectively evaluated for impairment | | | 154,798 | | | | 21,946 | | | | 42,364 | | | | 161,212 | | | | 60,781 | | | | 58,961 | | | | 64,265 | | | | 564,327 | |
| Acquired with deteriorated credit quality | | | 286 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 286 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance | | $ | 155,938 | | | $ | 21,997 | | | $ | 42,364 | | | $ | 161,675 | | | $ | 60,976 | | | $ | 59,333 | | | $ | 64,265 | | | $ | 566,548 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
An analysis of the allowance for loan losses as of March 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | Home Equity | | | | | | | | | |
| | | Residential | | | | | | | | | | | Commercial | | | Commercial | | | and Second | | | Other | | | | | |
| | | Real Estate | | | Land | | | Construction | | | Real Estate | | | Business | | | Mortgage | | | Consumer | | | Total | |
| | | (In thousands) | |
| Ending allowance balance attributable to loans: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | 1 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 5 | | | $ | - | | | $ | 6 | |
| Collectively evaluated for impairment | | | 1,196 | | | | 235 | | | | 387 | | | | 1,927 | | | | 994 | | | | 512 | | | | 957 | | | | 6,208 | |
| Acquired with deteriorated credit quality | | | 31 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 31 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance | | $ | 1,228 | | | $ | 235 | | | $ | 387 | | | $ | 1,927 | | | $ | 994 | | | $ | 517 | | | $ | 957 | | | $ | 6,245 | |
An analysis of the allowance for loan losses as of December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | Home Equity | | | | | | | | | |
| | | Residential | | | | | | | | | | | Commercial | | | Commercial | | | and Second | | | Other | | | | | |
| | | Real Estate | | | Land | | | Construction | | | Real Estate | | | Business | | | Mortgage | | | Consumer | | | Total | |
| | | (In thousands) | |
| Ending allowance balance attributable to loans: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 155 | | | $ | - | | | $ | - | | | $ | 155 | |
| Collectively evaluated for impairment | | | 1,383 | | | | 265 | | | | 526 | | | | 2,031 | | | | 891 | | | | 530 | | | | 991 | | | | 6,617 | |
| Acquired with deteriorated credit quality | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance | | $ | 1,383 | | | $ | 265 | | | $ | 526 | | | $ | 2,031 | | | $ | 1,046 | | | $ | 530 | | | $ | 991 | | | $ | 6,772 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
An analysis of the changes in the allowance for loan losses for the three months ended March 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | Home Equity | | | | | | | | | |
| | | Residential | | | | | | | | | | | Commercial | | | Commercial | | | and Second | | | Other | | | | | |
| | | Real Estate | | | Land | | | Construction | | | Real Estate | | | Business | | | Mortgage | | | Consumer | | | Total | |
| | | (In thousands) | |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | | $ | 1,174 | | | $ | 234 | | | $ | 403 | | | $ | 1,884 | | | $ | 873 | | | $ | 527 | | | $ | 988 | | | $ | 6,083 | |
| Provisions for loan losses | | | 49 | | | | 1 | | | | (16 | ) | | | 43 | | | | 121 | | | | (10 | ) | | | (13 | ) | | | 175 | |
| Charge-offs | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (74 | ) | | | (74 | ) |
| Recoveries | | | 5 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 56 | | | | 61 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ending balance | | $ | 1,228 | | | $ | 235 | | | $ | 387 | | | $ | 1,927 | | | $ | 994 | | | $ | 517 | | | $ | 957 | | | $ | 6,245 | |
At March 31, 2022 and December 31, 2022, management applied qualitative factor adjustments to each portfolio segment as they determined that the historical loss experience was not indicative of the level of risk in the remaining balance of those portfolio segments. As part of their analysis of qualitative factors, management considers the changes and trends in the following: Peer Data, Underwriting Standards, Economic Conditions, Past Due Loans, Collateral and Other Internal and External Factors.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
The following table summarizes the Company’s impaired loans as of March 31, 2022 and for the three months ended March 31, 2022. The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the three month period ended March 31, 2022:
| | | At March 31, 2022 | | | Three Months Ended March 31, 2022 | |
| | | | | | | Unpaid | | | | | | | Average | | | Interest | |
| | | Recorded | | | Principal | | | Related | | | Recorded | | | Income | |
| | | Investment | | | Balance | | | Allowance | | | Investment | | | Recognized | |
| | | (In thousands) | |
| Loans with no related allowance recorded: | | | | | | | | | | | | | | | | | |
| Residential | | $ | 796 | | | $ | 926 | | | $ | - | | | $ | 915 | | | $ | 5 | |
| Land | | | 102 | | | | 104 | | | | - | | | | 102 | | | | - | |
| Construction | | | - | | | | - | | | | - | | | | - | | | | - | |
| Commercial real estate | | | 599 | | | | 616 | | | | - | | | | 651 | | | | 6 | |
| Commercial business | | | 167 | | | | 166 | | | | - | | | | 171 | | | | 2 | |
| Home equity and second mortgage | | | - | | | | - | | | | - | | | | 8 | | | | - | |
| Other consumer | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | 1,664 | | | | 1,812 | | | | - | | | | 1,847 | | | | 13 | |
| Loans with an allowance recorded: | | | | | | | | | | | | | | | | | | | | |
| Residential | | | 28 | | | | 28 | | | | 1 | | | | 14 | | | | - | |
| Land | | | - | | | | - | | | | - | | | | - | | | | - | |
| Construction | | | - | | | | - | | | | - | | | | - | | | | - | |
| Commercial real estate | | | - | | | | - | | | | - | | | | - | | | | - | |
| Commercial business | | | - | | | | - | | | | - | | | | - | | | | - | |
| Home equity and second mortgage | | | 287 | | | | 297 | | | | 5 | | | | 288 | | | | - | |
| Other consumer | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | 315 | | | | 325 | | | | 6 | | | | 302 | | | | - | |
| Total: | | | | | | | | | | | | | | | | | | | | |
| Residential | | | 824 | | | | 954 | | | | 1 | | | | 929 | | | | 5 | |
| Land | | | 102 | | | | 104 | | | | - | | | | 102 | | | | - | |
| Construction | | | - | | | | - | | | | - | | | | - | | | | - | |
| Commercial real estate | | | 599 | | | | 616 | | | | - | | | | 651 | | | | 6 | |
| Commercial business | | | 167 | | | | 166 | | | | - | | | | 171 | | | | 2 | |
| Home equity and second mortgage | | | 287 | | | | 297 | | | | 5 | | | | 296 | | | | - | |
| Other consumer | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | $ | 1,979 | | | $ | 2,137 | | | $ | 6 | | | $ | 2,149 | | | $ | 13 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
The following table summarizes the Company’s impaired loans as of December 31, 2022:
| | | | | | | Unpaid | | | | | |
| | | Recorded | | | Principal | | | Related | |
| | | Investment | | | Balance | | | Allowance | |
| | | (In thousands) | |
| Loans with no related allowance recorded: | | | | | | | | | |
| Residential | | $ | 854 | | | $ | 996 | | | $ | - | |
| Land | | | 51 | | | | 51 | | | | - | |
| Construction | | | - | | | | - | | | | - | |
| Commercial real estate | | | 463 | | | | 484 | | | | - | |
| Commercial business | | | 40 | | | | 40 | | | | - | |
| Home equity and second mortgage | | | 372 | | | | 389 | | | | - | |
| Other consumer | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| | | $ | 1,780 | | | $ | 1,960 | | | $ | - | |
| | | | | | | | | | | | | |
| Loans with an allowance recorded: | | | | | | | | | | | | |
| Residential | | $ | - | | | $ | - | | | $ | - | |
| Land | | | - | | | | - | | | | - | |
| Construction | | | - | | | | - | | | | - | |
| Commercial real estate | | | - | | | | - | | | | - | |
| Commercial business | | | 155 | | | | 155 | | | | 155 | |
| Home equity and second mortgage | | | - | | | | - | | | | - | |
| Other consumer | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| | | $ | 155 | | | $ | 155 | | | $ | 155 | |
| | | | | | | | | | | | | |
| Total: | | | | | | | | | | | | |
| Residential | | $ | 854 | | | $ | 996 | | | $ | - | |
| Land | | | 51 | | | | 51 | | | | - | |
| Construction | | | - | | | | - | | | | - | |
| Commercial real estate | | | 463 | | | | 484 | | | | - | |
| Commercial business | | | 195 | | | | 195 | | | | 155 | |
| Home equity and second mortgage | | | 372 | | | | 389 | | | | - | |
| Other consumer | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| | | $ | 1,935 | | | $ | 2,115 | | | $ | 155 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
The following table presents the recorded investment in nonperforming loans at December 31, 2022:
| | | December 31, 2022 | |
| | | | | | | Loans 90+ Days | | | Total | |
| | | Nonaccrual | | | Past Due | | | Nonperforming | |
| | | Loans | | | Still Accruing | | | Loans | |
| | | (In thousands) | |
| | | | | | | | | | | | | |
| Residential | | $ | 744 | | | $ | 83 | | | $ | 827 | |
| Land | | | 51 | | | | - | | | | 51 | |
| Construction | | | - | | | | - | | | | - | |
| Commercial real estate | | | 81 | | | | - | | | | 81 | |
| Commercial business | | | 155 | | | | - | | | | 155 | |
| Home equity and second mortgage | | | 372 | | | | - | | | | 372 | |
| Other consumer | | | - | | | | 4 | | | | 4 | |
| | | | | | | | | | | | | |
| Total | | $ | 1,403 | | | $ | 87 | | | $ | 1,490 | |
The following table presents the aging of the recorded investment in loans at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | Purchased | | | | | |
| | | 30-59 Days | | | 60-89 Days | | | 90 Days or More | | | Total | | | | | | | Credit | | | Total | |
| | | Past Due | | | Past Due | | | Past Due | | | Past Due | | | Current | | | Impaired Loans | | | Loans | |
| | | (In thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential | | $ | 2,229 | | | $ | 226 | | | $ | 543 | | | $ | 2,998 | | | $ | 152,654 | | | $ | 286 | | | $ | 155,938 | |
| Land | | | 119 | | | | - | | | | 51 | | | | 170 | | | | 21,827 | | | | - | | | | 21,997 | |
| Construction | | | - | | | | - | | | | - | | | | - | | | | 42,364 | | | | - | | | | 42,364 | |
| Commercial real estate | | | - | | | | - | | | | - | | | | - | | | | 161,675 | | | | - | | | | 161,675 | |
| Commercial business | | | - | | | | - | | | | 155 | | | | 155 | | | | 60,821 | | | | - | | | | 60,976 | |
| Home equity and second mortgage | | | 206 | | | | 278 | | | | 93 | | | | 577 | | | | 58,756 | | | | - | | | | 59,333 | |
| Other consumer | | | 211 | | | | 72 | | | | 4 | | | | 287 | | | | 63,978 | | | | - | | | | 64,265 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 2,765 | | | $ | 576 | | | $ | 846 | | | $ | 4,187 | | | $ | 562,075 | | | $ | 286 | | | $ | 566,548 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
The following table presents the recorded investment in loans by risk category as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | Home Equity | | | | | | | | | |
| | | Residential | | | | | | | | | | | Commercial | | | Commercial | | | and Second | | | Other | | | | | |
| | | Real Estate | | | Land | | | Construction | | | Real Estate | | | Business | | | Mortgage | | | Consumer | | | Total | |
| | | (In thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 154,429 | | | $ | 21,827 | | | $ | 42,364 | | | $ | 159,842 | | | $ | 60,261 | | | $ | 58,937 | | | $ | 64,149 | | | $ | 561,809 | |
| Special Mention | | | - | | | | 60 | | | | - | | | | 679 | | | | 388 | | | | - | | | | 116 | | | | 1,243 | |
| Substandard | | | 765 | | | | 59 | | | | - | | | | 1,073 | | | | 172 | | | | 24 | | | | - | | | | 2,093 | |
| Doubtful | | | 744 | | | | 51 | | | | - | | | | 81 | | | | 155 | | | | 372 | | | | - | | | | 1,403 | |
| Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 155,938 | | | $ | 21,997 | | | $ | 42,364 | | | $ | 161,675 | | | $ | 60,976 | | | $ | 59,333 | | | $ | 64,265 | | | $ | 566,548 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
Purchased Credit Deteriorated (“PCD”) Loans
The Company has purchased groups of loans, some of which have experienced more than insignificant credit deterioration since origination. An ACL for PCD loans is determined using the same methodology as other loans held for investment. Upon adoption of ASC 326, the Company elected to maintain pools of loans that were previously accounted for as purchased credit impairment (“PCI”) loans under ASC 310-30 and will continue to account for these pools as a unit of account. Loans are only removed from the existing pools if they are written off, paid off or sold. Upon adoption of ASC 326, the ACL was determined for each pool and added to the pool’s carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis will be amortized into interest income over the remaining life of the pool. Changes to the ACL after adoption are recorded through the provision for credit losses. The carrying amount of PCD loans at March 31, 2023 and December 31, 2022 was $242,000 and $244,000, respectively. There was no ACL related to PCD loans at March 31, 2023 and December 31, 2022.
ACL on Off-Balance-Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The Company recorded an ACL for unfunded commitments of $131,000 in conjunction with the Company’s adoption of ASU 2016-13 on January 1, 2023. The ACL for off-balance-sheet credit exposures is presented in accrued expenses and other liabilities on the consolidated balance sheets. Changes in the ACL for off-balance-sheet credit exposures are reflected in the provision for credit losses on the consolidated statements of income. There were no changes to the ACL for off-balance-sheet credit exposures during the three months ended March 31, 2023.
5. Qualified Affordable Housing Project Investment
On January 19, 2018, the Bank entered into an agreement to invest in qualified affordable housing projects through a limited liability company. At March 31, 2023 and December 31, 2022, the balance of the Bank’s investment was $2.1 million and $2.2 million, respectively, and is reflected in other assets on the consolidated balance sheets. The unfunded commitment related to the qualified affordable housing project investment was $216,000 at March 31, 2023 and December 31, 2022 and is reflected in other liabilities on the consolidated balance sheets. The Bank expects to fulfill the commitment as capital calls are made through 2029.
The investment is accounted for using the proportional amortization method. During the three month periods ended March 31, 2023 and 2022, the Bank recognized amortization expense of $89,000, which was included in income tax expense on the consolidated statements of income. Additionally, during the three month periods ended March 31, 2023 and 2022, the Bank recognized tax credits and other tax benefits from its qualified affordable housing project investment of $104,000 and $105,000, respectively.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Supplemental Disclosure for Earnings Per Share
| | | Three Months Ended | |
| | | March 31, | |
| | | 2023 | | | 2022 | |
| (Dollars in thousands, except per share data) | | | | | | | | |
| | | | | | | | | |
| Basic | | | | | | | | |
| Earnings: | | | | | | | | |
| Net income attributable to First Capital, Inc. | | $ | 3,816 | | | $ | 2,527 | |
| | | | | | | | | |
| Shares: | | | | | | | | |
| Weighted average common shares outstanding | | | 3,353,623 | | | | 3,350,745 | |
| | | | | | | | | |
| Net income attributable to First Capital, Inc. per common share, basic | | $ | 1.14 | | | $ | 0.75 | |
| | | | | | | | | |
| Diluted | | | | | | | | |
| Earnings: | | | | | | | | |
| Net income attributable to First Capital, Inc. | | $ | 3,816 | | | $ | 2,527 | |
| | | | | | | | | |
| Shares: | | | | | | | | |
| Weighted average common shares outstanding | | | 3,353,623 | | | | 3,350,745 | |
| Add: Dilutive effect of restricted stock | | | - | | | | - | |
| | | | | | | | | |
| Weighted average common shares outstanding, as adjusted | | | 3,353,623 | | | | 3,350,745 | |
| | | | | | | | | |
| Net income attributable to First Capital, Inc. per common share, diluted | | $ | 1.14 | | | $ | 0.75 | |
Nonvested restricted stock shares are not considered as outstanding for purposes of computing weighted average common shares outstanding. Restricted shares totaling 12,550 and 22,350 were excluded from the calculation of diluted net income per share for the three-month periods ended March 31, 2023 and 2022, respectively.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Stock-Based Compensation Plan
On May 20, 2009, the Company adopted the 2009 Equity Incentive Plan (the “2009 Plan”) which terminated as of May 20, 2019. The 2009 Plan provided for the award of stock options, restricted stock, performance shares and stock appreciation rights. The aggregate number of shares of the Company’s common stock available for issuance under the 2009 Plan could not exceed 223,000 shares and 176,150 shares were still available for issuance under the 2009 Plan at its termination.
On May 22, 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan provides for the award of stock options, restricted stock, performance shares and stock appreciation rights. The aggregate number of shares of the Company’s common stock available for issuance under the 2019 Plan may not exceed 176,150 shares. If an award under the 2009 Plan is canceled, terminates, expires, is forfeited or lapses for any reason, any issued shares subject to the award shall not be available for issuance pursuant to awards subsequently granted under the 2019 Plan. Further, no additional participants, as that term is defined in the 2009 Plan, are eligible for grants of awards under the 2009 Plan. The Company generally issues new shares under the 2019 Plan from its authorized but unissued shares.
At March 31, 2023, 162,350 shares of the Company’s common stock were available for issuance under the 2019 Plan. The Company may grant both non-statutory and statutory stock options which may not have a term exceeding ten years. In the case of incentive stock options, the aggregate fair value of the stock (determined at the time the incentive stock option is granted) for which any optionee may be granted incentive options which are first exercisable during any calendar year shall not exceed $100,000. Option prices may not be less than the fair market value of the underlying stock at the date of the grant. An award of a performance share is a grant of a right to receive shares of the Company’s common stock which is contingent upon the achievement of specific performance criteria or other objectives set at the grant date. Stock appreciation rights are equity or cash settled share-based compensation arrangements whereby the number of shares that will ultimately be issued or the cash payment is based upon the appreciation of the Company’s common stock. Awards granted under the 2019 Plan may be granted either alone, in addition to, or in tandem with, any other award granted under the 2019 Plan. The terms of the 2019 Plan also include provisions whereby all unearned options and restricted shares become immediately exercisable and fully vested upon a change in control.
The fair market value of stock options granted is estimated at the date of grant using an option pricing model. Expected volatilities are based on historical volatility of the Company's stock. The expected term of options granted represents the period of time that options are expected to be outstanding and is based on historical trends. The risk free rate for the expected life of the options is based on the U.S. Treasury yield curve in effect at the time of grant. As of March 31, 2023, no stock options had been granted under the Plans.
Compensation expense is measured based on the fair market value of the restricted stock at the grant date and is recognized ratably over the period during which the shares are earned (the vesting period). The Company accounts for any forfeitures when they occur, and any previously recognized compensation for an award is reversed in the period the award is forfeited. Compensation expense related to restricted stock recognized for the three-month periods ended March 31, 2023 and 2022 amounted to $84,000 and $98,000, respectively. The total income tax benefit related to stock-based compensation was $20,000 and $23,000 for the three-month periods ended March 31, 2023 and 2022, respectively.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(7 – continued)
A summary of the Company’s nonvested restricted shares under the Plan as of March 31, 2023 and changes during the three-month period then ended is presented below.
| | | | | | | Weighted | |
| | | Number | | | Average | |
| | | of | | | Grant Date | |
| | | Shares | | | Fair Value | |
| | | | | | | | | |
| Nonvested at January 1, 2023 | | | 12,550 | | | $ | 57.07 | |
| Granted | | | - | | | | - | |
| Vested | | | - | | | | - | |
| Forfeited | | | - | | | | - | |
| Nonvested at March 31, 2023 | | | 12,550 | | | $ | 57.07 | |
There were no restricted shares that vested during the three-month periods ended March 31, 2023 or 2022. At March 31, 2023, there was $465,000 of unrecognized compensation expense related to nonvested restricted shares. The compensation expense is expected to be recognized over a weighted average period of 1.9 years.
8. Supplemental Disclosures of Cash Flow Information
| | | Three Months Ended | |
| | | March 31, | |
| | | 2023 | | | 2022 | |
| | | (In thousands) | |
| Cash payments for: | | | | | | | | |
| Interest | | $ | 900 | | | $ | 275 | |
| Taxes (net of refunds received) | | | - | | | | - | |
9. Fair Value Measurements
FASB ASC Topic 820, Fair Value Measurements, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are described as follows:
| | Level 1: | Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted market price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. |
| | Level 2: | Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs that are derived principally from or can be corroborated by observable market data by correlation or other means. |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9 – continued)
| | Level 3: | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. The table below presents the balances of assets measured at fair value on a recurring and nonrecurring basis as of March 31, 2023 and December 31, 2022. The Company had no liabilities measured at fair value as of March 31, 2023 or December 31, 2022.
| | | Carrying Value | |
| (In thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | | | | | | | | | | | | |
| March 31, 2023 | | | | | | | | | | | | | | | | |
| Assets Measured on a Recurring Basis | | | | | | | | | | | | | | | | |
| Securities available for sale: | | | | | | | | | | | | | | | | |
| Agency mortgage-backed securities | | $ | - | | | $ | 82,306 | | | $ | - | | | $ | 82,306 | |
| Agency CMO | | | - | | | | 8,947 | | | | - | | | | 8,947 | |
| Agency notes and bonds | | | - | | | | 141,424 | | | | - | | | | 141,424 | |
| Treasury notes and bonds | | | - | | | | 79,811 | | | | - | | | | 79,811 | |
| Municipal obligations | | | - | | | | 157,602 | | | | - | | | | 157,602 | |
| Total securities available for sale | | $ | - | | | $ | 470,090 | | | $ | - | | | $ | 470,090 | |
| | | | | | | | | | | | | | | | | |
| Equity securities | | $ | 1,604 | | | $ | - | | | $ | - | | | | 1,604 | |
| | | | | | | | | | | | | | | | | |
| Assets Measured on a Nonrecurring Basis | | | | | | | | | | | | | |
| Collateral dependent loans: | | | | | | | | | | | | | | | | |
| 1-4 Family Residential Mortgage | | $ | - | | | $ | - | | | $ | 26 | | | $ | 26 | |
| Home Equity and Second Mortgage | | | - | | | | - | | | | 68 | | | | 68 | |
| Total collateral dependent loans | | $ | - | | | $ | - | | | $ | 94 | | | $ | 94 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | | | | | |
| Assets Measured on a Recurring Basis | | | | | | | | | | | | | | | | |
| Securities available for sale: | | | | | | | | | | | | | | | | |
| Agency mortgage-backed securities | | $ | - | | | $ | 83,863 | | | $ | - | | | $ | 83,863 | |
| Agency CMO | | | - | | | | 9,353 | | | | - | | | | 9,353 | |
| Agency notes and bonds | | | - | | | | 137,981 | | | | - | | | | 137,981 | |
| Treasury notes and bonds | | | - | | | | 78,732 | | | | - | | | | 78,732 | |
| Municipal obligations | | | - | | | | 150,890 | | | | - | | | | 150,890 | |
| Total securities available for sale | | $ | - | | | $ | 460,819 | | | $ | - | | | $ | 460,819 | |
| | | | | | | | | | | | | | | | | |
| Equity securities | | $ | 1,467 | | | $ | - | | | $ | - | | | | 1,467 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9 – continued)
Fair value is based upon quoted market prices, where available. If quoted market prices are not available, fair value is based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Securities Available for Sale and Equity Securities. Securities classified as available for sale and equity securities are reported at fair value on a recurring basis. These securities are classified as Level 1 of the valuation hierarchy where quoted market prices from reputable third-party brokers are available in an active market. If quoted market prices are not available, the Company obtains fair value measurements from an independent pricing service. These securities are reported using Level 2 inputs and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. For securities where quoted market prices, market prices of similar securities or prices from an independent third-party pricing service are not available, fair values are calculated using discounted cash flows or other market indicators and are classified within Level 3 of the fair value hierarchy. Changes in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect. Changes in fair value of equity securities are recorded in noninterest income on the consolidated statements of income.
Loans Held for Sale. Loans held for sale are carried at the lower of cost or market value. The portfolio is comprised of residential real estate loans and fair value is estimated based on specific prices of underlying contracts for sales to investors. These measurements are carried at Level 2 in the fair value hierarchy. At March 31, 2023 and December 31, 2022 , the Company did not have any loans held for sale measured at fair value on a nonrecurring basis.
Collateral Dependent Impaired Loans. Collateral dependent impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. In accordance with accounting standards, only collateral dependent impaired loans for which a specific ACL has been established require classification in the fair value hierarchy. The fair value of collateral dependent impaired loans is classified as Level 3 in the fair value hierarchy.
Collateral dependent Impaired loans with specific allocations of ACL are measured at the fair value of the collateral less estimated costs to sell. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable. The fair value of the collateral is generally determined based on real estate appraisals or other independent evaluations by qualified professionals, which are then discounted to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9 – continued)
At March 31, 2023, the significant unobservable inputs used in the fair value measurement of collateral dependent impaired loans included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the collateral ranging from 20% to 24%, with a weighted average discount of 23%. The Company recognized provisions for credit losses on collateral dependent impaired loans of $40,000 for the three months ended March 31, 2023. The Company recognized a reduction in provisions for loan losses for collateral dependent impaired loans for the three months ended March 31, 2022 of $1,000.
There have been no changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and nonrecurring basis during the three-month periods ended March 31, 2023 and 2022. There were no transfers into or out of the Company’s Level 3 financial assets for the three-month periods ended March 31, 2023 and 2022.
GAAP requires disclosure of the fair value of financial assets and financial liabilities, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The estimated fair values of the Company's financial instruments are as follows
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9 – continued)
| | | Carrying | | | Fair | | | Fair Value Measurements Using | |
| (In thousands) | | Value | | | Value | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023: | | | | | | | | | | | | | | | | | | | | |
| Financial assets: | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 35,881 | | | $ | 35,881 | | | $ | 35,881 | | | $ | - | | | $ | - | |
| Interest-bearing time deposits | | | 3,676 | | | | 3,652 | | | | - | | | | 3,652 | | | | - | |
| Securities available for sale | | | 470,090 | | | | 470,090 | | | | - | | | | 470,090 | | | | - | |
| Securities held to maturity | | | 7,000 | | | | 5,296 | | | | - | | | | 5,296 | | | | - | |
| Loans held for sale | | | 576 | | | | 587 | | | | - | | | | 587 | | | | - | |
| Loans, net | | | 565,576 | | | | 567,198 | | | | - | | | | - | | | | 567,198 | |
| FHLB and other restricted stock | | | 1,836 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| Accrued interest receivable | | | 4,156 | | | | 4,156 | | | | - | | | | 4,156 | | | | - | |
| Equity securities (included in other assets) | | | 1,604 | | | | 1,604 | | | | 1,604 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 1,035,450 | | | | 1,033,446 | | | | - | | | | - | | | | 1,033,446 | |
| Accrued interest payable | | | 218 | | | | 218 | | | | - | | | | 218 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022: | | | | | | | | | | | | | | | | | | | | |
| Financial assets: | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 66,298 | | | $ | 66,298 | | | $ | 66,298 | | | $ | - | | | $ | - | |
| Interest-bearing time deposits | | | 3,677 | | | | 3,638 | | | | - | | | | 3,638 | | | | - | |
| Securities available for sale | | | 460,819 | | | | 460,819 | | | | - | | | | 460,819 | | | | - | |
| Securities held to maturity | | | 7,000 | | | | 5,311 | | | | - | | | | 5,311 | | | | - | |
| Loans held for sale | | | 793 | | | | 803 | | | | - | | | | 803 | | | | - | |
| Loans, net | | | 557,958 | | | | 554,634 | | | | - | | | | - | | | | 554,634 | |
| FHLB and other restricted stock | | | 1,836 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| Accrued interest receivable | | | 4,285 | | | | 4,285 | | | | - | | | | 4,285 | | | | - | |
| Equity securities (included in other assets) | | | 1,467 | | | | 1,467 | | | | 1,467 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 1,060,396 | | | | 1,058,122 | | | | - | | | | - | | | | 1,058,122 | |
| Accrued interest payable | | | 123 | | | | 123 | | | | - | | | | 123 | | | | - | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9 – continued)
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits and other transactions accounts. The fair value of securities and interest-bearing time deposits in other financial institutions is based on quoted market prices (where available) or values obtained from an independent pricing service. The fair value of loans, excluding loans held for sale, and fixed-maturity certificates of deposit is based on discounted cash flows using current market rates applied to the estimated life and credit risk of the instrument. The fair value of loans held for sale is based on specific prices of underlying contracts for sales to investors. It is not practicable to determine the fair value of FHLB and other restricted stock due to restrictions placed on its transferability. The methods utilized to measure the fair value of financial instruments at March 31, 2023 and December 31, 2022 represent an approximation of exit price, but an actual exit price may differ.
10. Revenue from Contracts with Customers
Substantially all of the Company’s revenue from contracts with customers in the scope of FASB ASC 606 is recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the three months ended March 31, 2023 and 2022:
| | | Three Months Ended | |
| | | March 31, | |
| | | 2023 | | | 2022 | |
| | | (In thousands) | |
| | | | | | | | | |
| Service charges on deposit accounts | | $ | 562 | | | $ | 509 | |
| ATM and debit card fees | | | 1,087 | | | | 1,007 | |
| Investment advisory income | | | 12 | | | | 122 | |
| Other | | | 33 | | | | 32 | |
| Revenue from contracts with customers | | | 1,694 | | | | 1,670 | |
| | | | | | | | | |
| Net gains on loans and investments | | | 223 | | | | 398 | |
| Increase in cash value of life insurance | | | 45 | | | | 50 | |
| Other | | | 29 | | | | 29 | |
| Other noninterest income | | | 297 | | | | 477 | |
| | | | | | | | | |
| Total noninterest income | | $ | 1,991 | | | $ | 2,147 | |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(10 – continued)
A description of the Company’s revenue streams accounted for under FASB ASC 606 follows:
Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as stop payment charges and statement rendering, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.
ATM and Debit Card Fees: The Company earns ATM usage fees and interchange fees from debit cardholder transactions conducted through a payment network. ATM fees are recognized at the point in time the transaction occurs. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
Investment Advisory Income: The Company earns trust, insurance commissions, brokerage commissions and annuities income from its contracts with customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company provides the contracted services and are generally assessed based on the market value of assets under management. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed. Other related fees, which are based on a fixed fee schedule, are recognized when the services are rendered.
Other Income: Other income from contracts with customers includes safe deposit box fees and ACH origination fees. This revenue is recognized at the time the transaction is executed or over the period the Company satisfies the performance obligation.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
Safe Harbor Statement for Forward-Looking Statements
This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts nor guarantees of future performance; rather they are statements based on the Company’s current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements can be identified by use of the words “expects,” “believes,” “anticipates,” “intends,” “could,” “should” and similar expressions. Forward-looking statements also include, but are not limited to, statements regarding estimated cost savings, plans and objectives for future operations, and the Company’s business and growth strategies.
Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, the severity, magnitude and duration of the COVID-19 pandemic, including impacts of the pandemic and of businesses’ and governments’ responses to the pandemic on our operations and personnel, and on commercial activity and demand across our and our customers’ businesses, market, economic, operational, liquidity, credit and interest rate risks associated with the Company’s business (including developments and volatility arising from the COVID-19 pandemic), general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; the ability of the Company to execute its business plan; legislative and regulatory changes; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed in Part II of this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2022 under “Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. These forward-looking statements are made only as of the date of this Quarterly Report on Form 10-Q and, except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with GAAP. The preparation of the Company's financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes involve the most complex and subjective estimates and judgments and have the most effect on the Company's reported financial position and results of operations are described as critical accounting policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. The Company adopted ASU 2016-13 on January 1, 2023 and replaced the allowance for loan losses incurred loss model discussed in the Form 10-K for the year ended December 31, 2022 with the ACL CECL model. The adoption of ASU 2016-13 also impacted the Company’s accounting policies for available for sale and held to maturity debt securities. Refer to Notes 2, 3, and 4 for additional information and accounting policies related to the adoption of ASU 2016-13.
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
Financial Condition
Total assets decreased $16.2 million from $1.15 billion at December 31, 2022 to $1.14 billion at March 31, 2023, a decrease of 1.4%.
Net loans receivable (excluding loans held for sale) increased $7.6 million from $558.0 million at December 31, 2022 to $565.6 million at March 31, 2023. 1-4 family residential mortgage, 1-4 family residential construction and other construction, development and land loan increases of $6.4 million, $2.5 million and $2.3 million, respectively, were partially offset by a $2.7 million decrease in consumer loans during the three months ended March 31, 2023.
Cash and cash equivalents decreased from $66.3 million at December 31, 2022 to $35.9 million at March 31, 2023 as management utilized liquidity to fund loan growth and the Bank experienced deposit outflows.
Securities available for sale increased $9.3 million from $460.8 million at December 31, 2022 to $470.1 million at March 31, 2023. Purchases of $6.3 million of securities classified as available for sale were made during the three months ended March 31, 2023 and consisted primarily of municipal bonds, U.S. government agency notes and bonds and mortgage-backed securities. Principal payments and maturities of available for sale securities totaled $3.9 million and $1.5 million, respectively, during the three months ended March 31, 2023. There was also an unrealized gain of $8.8 million on the securities available for sale portfolio during the period ended March 31, 2023 due primarily to decreasing market interest rates during the period.
Total deposits decreased from $1.06 billion at December 31, 2022 to $1.04 billion at March 31, 2023. Noninterest-bearing checking accounts, interest-bearing checking accounts, and savings accounts decreased $1.4 million, $17.5 million and $11.9 million, respectively, during the three months ended March 31, 2023, while time deposits increased $5.8 million during the period. Deposit inflows and outflows are influenced by prevailing market interest rates, competition, local and national economic conditions, and fluctuations in our customers' own liquidity needs and may also be influenced by recent developments in the financial services industry. Significant competition for deposits driven by high interest rate alternatives for depositors is currently impacting deposit fluctuations and increasing our cost of deposits.
Total stockholders' equity attributable to the Company increased from $85.2 million at December 31, 2022 to $94.0 million at March 31, 2023, due to a $6.7 million net unrealized gain on available for sale securities and a $2.4 million increase in retained net income. The net unrealized gain on available for sale securities during the period is primarily due to decreases in market interest rates.
Results of Operations
Net income for the three-month periods ended March 31, 2023 and 2022. Net income attributable to the Company was $3.8 million ($1.14 per diluted share) for the three months ended March 31, 2023 compared to $2.5 million ($0.75 per diluted share) for the three months ended March 31, 2022.
Net interest income for the three-month periods ended March 31, 2023 and 2022. Net interest income after provision for credit losses increased $2.2 million for the three months ended March 31, 2023 as compared to the same period in 2022.
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
Total interest income increased $3.0 million for the three months ended March 31, 2023 compared to the same period in 2022 due to increases in the average tax-equivalent yield on interest-earning assets from 2.68% for the three months ended March 31, 2022 to 3.73% for the three months ended March 31, 2023 and in the average balance of interest-earning assets from $1.10 billion for the three months ended March 31, 2022 to $1.12 billion for the three months ended March 31, 2023. The increase in the tax-equivalent yield was primarily due to an increase in the tax equivalent yield on loans to 5.40% for the three months ended March 31, 2023 compared to 4.43% for the same period in 2022.
Total interest expense increased $743,000 when comparing the periods due to an increase in the average cost of interest-bearing liabilities from 0.13% for the first quarter of 2022 to 0.51% for the first quarter of 2023 partially offset by a decrease in the average balance of interest-bearing liabilities from $799.5 million for the first quarter of 2022 to $788.2 million for the first quarter of 2023. As a result of the changes in interest-earning assets and interest-bearing liabilities, the interest rate spread increased from 2.55% for the quarter ended March 31, 2022 to 3.22% for the same period in 2023.
Provision for credit losses. Based on management’s analysis of the ACL, the provision for credit losses was $193,000 for the three-month period ended March 31, 2023 compared to a $175,000 provision for loan losses for the same period in 2022 under the incurred loss model. The provision for credit losses was higher in 2023 compared to 2022 due to growth in the loan portfolio and an increase in net charge-offs. The Bank recognized net charge-offs of $203,000 for the three months ended March 31, 2023 compared to $13,000 during the same period in 2022. Upon adoption of ASU 2016-13 on January 1, 2023, the Bank recorded an increase in the beginning ACL on loans of $561,000, increasing the ACL on loans as a percentage of loans receivable to 1.29% as compared to 1.20% at December 31, 2022 prior to adoption.
Provisions for credit losses are charges to earnings to maintain the total ACL at a level considered adequate based on management’s estimate of future credit losses. Although management uses the best information available, future adjustments to the ACL may be necessary due to changes in economic, operating, regulatory and other conditions that may be beyond the Bank’s control. While the Bank maintains the ACL at a level that it considers adequate to provide for estimated losses, there can be no assurance that further additions will not be made to the ACL and that actual losses will not exceed the estimated amounts.
The methodology used in determining the ACL for loans includes segmenting the loan portfolio by identifying risk characteristics common to groups of loans, determining and measuring impairment of individual loans based on the present value of expected future cash flows or the fair value of collateral, and determining and measuring impairment for groups of loans with similar characteristics by applying loss factors that consider the qualitative factors which may affect the loss rates.
The ACL on loans was $7.3 million at March 31, 2023 and the allowance for loan losses was $6.8 million at December 31, 2022. At March 31, 2023 and December 31, 2022, nonperforming loans amounted to $1.3 million and $1.4 million, respectively.
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
Noninterest income for the three-month periods ended March 31, 2023 and 2022. Noninterest income decreased $156,000 for the quarter ended March 31, 2023 as compared to the same period in 2022. Gains on the sale of loans and commission and fee income decreased $249,000 and $110,000, respectively, when comparing the two periods. This was partially offset by increases in ATM and debit card fees and unrealized gain on equity securities of $80,000 and $74,000, respectively.
Noninterest expense for the three-month periods ended March 31, 2023 and 2022. Noninterest expense increased $407,000 for the quarter ended March 31, 2023 as compared to the same period in 2022, due primarily to increases in compensation and benefits and data processing expense of $295,000 and $162,000, respectively. This was partially offset by a decrease in professional fees of $104,000.
Income tax expense. Income tax expense increased $369,000 for the first quarter of 2023 as compared to the first quarter of 2022 primarily due to an increase in pre-tax net income. As a result, the effective tax rate for the quarter ended March 31, 2023 was 16.8% compared to 13.7% for the same period in 2022.
Liquidity and Capital Resources
The Bank’s primary sources of funds are customer deposits, proceeds from loan repayments, maturing securities and FHLB advances. While loan repayments and maturities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. At March 31, 2023, the Bank had cash and cash equivalents of $35.9 million and securities available-for-sale with a fair value of $470.1 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB, collateral eligible for repurchase agreements and unsecured federal funds purchased lines of credit with other financial institutions.
The Bank’s primary investing activity is the origination of one-to-four family mortgage loans and commercial real estate loans and, to a lesser extent, consumer, multi-family, commercial business and residential construction loans. The Bank also invests in U.S. Government and agency securities and mortgage-backed securities issued by U.S. Government agencies.
The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company, on a stand-alone basis, is responsible for paying any dividends declared to its shareholders. The Board of Directors of the Company also has authorized the repurchase of shares of its common stock. The Company’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the Indiana Department of Financial Institutions (“IDFI”), cannot exceed net income for that year to date plus retained net income (as defined under Indiana law) for the preceding two calendar years. On a stand-alone basis, the Company had liquid assets of $2.3 million at March 31, 2023.
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
The Bank is required to maintain specific amounts of capital pursuant to regulatory requirements. Beginning in 2020, qualifying community banks with assets of less than $10 billion are eligible to opt in to the Community Bank Leverage Ratio (“CBLR”) framework. The CBLR is the ratio of a bank’s tangible equity capital to average total consolidated assets. A qualifying community bank that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new CBLR at not less than 8% and not more than 10%, and has set the minimum ratio at 9% effective January 1, 2022. A financial institution that falls below the minimum CBLR generally has a two quarter grace period to get back into compliance as long as it maintains a minimum CBLR of 8%. A financial institution can elect to be subject to or opt out of the CBLR framework at any time. As a qualified community bank, the Bank had opted into the CBLR framework as of March 31, 2023 and December 31, 2022 and its CBLR was 9.46% and 9.18% as of those dates, respectively. Management believes that the Bank met all capital adequacy requirements to which it was subject as of March 31, 2023. At both March 31, 2023 and December 31, 2022, the Bank was considered “well-capitalized” under applicable regulatory guidelines.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded on the Company’s financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are primarily used to manage customers’ requests for funding and take the form of loan commitments and letters of credit. A further presentation of the Company’s off-balance sheet arrangements is presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The Company adopted ASU 2016-13 effective January 1, 2023 which requires an ACL on off-balance sheet credit exposures. See Note 4 for additional information.
For the three months ended March 31, 2023, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.
PART I – ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
FIRST CAPITAL, INC.
Qualitative Aspects of Market Risk. Market risk is the risk that the estimated fair value of the Company’s assets and liabilities will decline as a result of changes in interest rates or financial market volatility, or that the Company’s net income will be significantly reduced by interest rate changes.
The Company’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. In order to reduce the exposure to interest rate fluctuations, the Company has developed strategies to manage its liquidity, shorten its effective maturities of certain interest-earning assets and decrease the interest rate sensitivity of its asset base. Management has sought to decrease the average maturity of its assets by emphasizing the origination of short-term commercial and consumer loans, all of which are retained by the Company for its portfolio. The Company relies on retail deposits as its primary source of funds. Management believes retail deposits, compared to brokered deposits, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds.
Quantitative Aspects of Market Risk. The Company does not maintain a trading account for any class of financial instrument nor does the Company engage in hedging activities or purchase high-risk derivative instruments. Furthermore, the Company is not subject to foreign currency exchange rate risk or commodity price risk.
Potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits, extending loans and investing in investment securities. Many factors affect the Company’s exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. The Company’s earnings can also be affected by the monetary and fiscal policies of the U.S. Government and its agencies, particularly the Board of Governors of the Federal Reserve System.
An element in the Company’s ongoing process is to measure and monitor interest rate risk using a Net Interest Income at Risk simulation to model the interest rate sensitivity of the balance sheet and to quantify the impact of changing interest rates on the Company. The model quantifies the effects of various possible interest rate scenarios on projected net interest income over a one-year horizon. The model assumes a semi-static balance sheet and measures the impact on net interest income relative to a base case scenario of hypothetical changes in interest rates over twelve months and provides no effect given to any steps that management might take to counter the effect of the interest rate movements. The scenarios include prepayment assumptions, changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates in order to capture the impact from re-pricing, yield curve, option, and basis risks.
PART I – ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
FIRST CAPITAL, INC.
Results of the Company’s simulation modeling, which assumes an immediate and sustained parallel shift in market interest rates, project that the Company’s net interest income could change as follows over a one-year horizon, relative to our base case scenario, based on March 31, 2023 and December 31, 2022 financial information:
| |
|
At March 31, 2023 |
|
|
At December 31, 2022 |
|
| Immediate Change |
|
One Year Horizon |
|
|
One Year Horizon |
|
| in the Level |
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
| of Interest Rates |
|
Change |
|
|
Change |
|
|
Change |
|
|
Change |
|
| |
|
(Dollars in thousands) |
|
| 300bp |
|
$ |
1,088 |
|
|
|
3.35 |
% |
|
$ |
4,012 |
|
|
|
11.28 |
% |
| 200bp |
|
|
731 |
|
|
|
2.25 |
|
|
|
2,683 |
|
|
|
7.54 |
|
| 100bp |
|
|
368 |
|
|
|
1.13 |
|
|
|
1,345 |
|
|
|
3.78 |
|
| Static |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| (100)bp |
|
|
46 |
|
|
|
0.14 |
|
|
|
2,945 |
|
|
|
8.28 |
|
| (200)bp |
|
|
52 |
|
|
|
0.16 |
|
|
|
1,117 |
|
|
|
3.14 |
|
| (300)bp |
|
|
35 |
|
|
|
0.11 |
|
|
|
(798 |
) |
|
|
(2.25 |
) |
At March 31, 2023 and December 31, 2022, the Company’s simulated exposure to an increase in interest rates shows that an immediate and sustained increase in rates of 1.00%, 2.00% or 3.00% would increase the Company’s net interest income over a one year horizon compared to a flat interest rate scenario. At March 31, 2023, an immediate and sustained decrease in rates of 1.00%, 2.00% or 3.00% would also increase the Company’s net interest income over a one year horizon compared to a flat rates scenario, although the amounts are considered immaterial. At December 31, 2022, an immediate and sustained decrease in rates of 1.00% or 2.00% would also increase the Company’s net interest income over a one year horizon compared to a flat rates scenario. At December 31, 2022, an immediate and sustained decrease in rates of 3.00% would decrease the Company’s net interest income over a one year horizon compared to a flat rates scenario. During the three months ended March 31, 2023, management evaluated and adjusted deposit rate betas in its scenarios to better reflect the increasing rate environment and increased competitive pressure for deposits.
The Company also has longer term interest rate risk exposure, which may not be appropriately measured by Net Interest Income at Risk modeling. Therefore, the Company also uses an Economic Value of Equity (“EVE”) interest rate sensitivity analysis in order to evaluate the impact of its interest rate risk on earnings and capital. This is measured by computing the changes in net EVE for its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. EVE modeling involves discounting present values of all cash flows for on and off balance sheet items under different interest rate scenarios and provides no effect given to any steps that management might take to counter the effect of the interest rate movements. The discounted present value of all cash flows represents the Company’s EVE and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. The amount of base case EVE and its sensitivity to shifts in interest rates provide a measure of the longer term re-pricing and option risk in the balance sheet.
PART I – ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
FIRST CAPITAL, INC.
Results of the Company’s simulation modeling, which assumes an immediate and sustained parallel shift in market interest rates, project that the Company’s EVE could change as follows, relative to the Company’s base case scenario, based on March 31, 2023 and December 31, 2022 financial information:
| |
|
At March 31, 2023 |
| Immediate Change |
|
Economic Value of Equity |
|
|
Economic Value of Equity as a |
| in the Level |
|
Dollar |
|
|
Dollar |
|
|
Percent |
|
|
Percent of Present Value of Assets |
| of Interest Rates |
|
Amount |
|
|
Change |
|
|
Change |
|
|
EVE Ratio |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 300bp |
|
$ |
290,828 |
|
|
$ |
20,851 |
|
|
|
7.72 |
% |
|
|
28.20 |
% |
410bp |
| 200bp |
|
|
289,053 |
|
|
|
19,076 |
|
|
|
7.07 |
|
|
|
27.27 |
|
317bp |
| 100bp |
|
|
282,532 |
|
|
|
12,555 |
|
|
|
4.65 |
|
|
|
25.93 |
|
183bp |
| Static |
|
|
269,977 |
|
|
|
- |
|
|
|
- |
|
|
|
24.10 |
|
0bp |
| (100)bp |
|
|
250,173 |
|
|
|
(19,804 |
) |
|
|
(7.33 |
) |
|
|
21.73 |
|
(237)bp |
| (200)bp |
|
|
222,344 |
|
|
|
(47,633 |
) |
|
|
(17.64 |
) |
|
|
18.79 |
|
(531)bp |
| (300)bp |
|
|
185,745 |
|
|
|
(84,232 |
) |
|
|
(31.20 |
) |
|
|
15.29 |
|
(881)bp |
| |
|
At December 31, 2022 |
| Immediate Change |
|
Economic Value of Equity |
|
|
Economic Value of Equity as a |
| in the Level |
|
Dollar |
|
|
Dollar |
|
|
Percent |
|
|
Percent of Present Value of Assets |
| of Interest Rates |
|
Amount |
|
|
Change |
|
|
Change |
|
|
EVE Ratio |
|
Change |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 300bp |
|
$ |
322,611 |
|
|
$ |
25,242 |
|
|
|
8.49 |
% |
|
|
30.96 |
% |
464bp |
| 200bp |
|
|
319,861 |
|
|
|
22,492 |
|
|
|
7.56 |
|
|
|
29.87 |
|
355bp |
| 100bp |
|
|
311,941 |
|
|
|
14,572 |
|
|
|
4.90 |
|
|
|
28.36 |
|
204bp |
| Static |
|
|
297,369 |
|
|
|
- |
|
|
|
- |
|
|
|
26.32 |
|
0bp |
| (100)bp |
|
|
306,021 |
|
|
|
8,652 |
|
|
|
2.91 |
|
|
|
26.36 |
|
4bp |
| (200)bp |
|
|
271,270 |
|
|
|
(26,099 |
) |
|
|
(8.78 |
) |
|
|
22.76 |
|
(356)bp |
| (300)bp |
|
|
227,786 |
|
|
|
(69,583 |
) |
|
|
(23.40 |
) |
|
|
18.62 |
|
(770)bp |
The tables indicate that at March 31, 2023 and December 31, 2022 the Company would expect an increase in its EVE in the event of a sudden and sustained 100, 200 or 300 basis point increase in prevailing interest rates. At March 31, 2023, the Company would expect a decrease in its EVE in the event of a sudden and sustained 100, 200 or 300 basis point decrease in prevailing interest rates. At December 31, 2022, the Company would expect an increase in its EVE in the event of a sudden and sustained 100 basis point decrease in prevailing interest rates compared to decreases in the EVE in the event of sudden and sustained 200 or 300 basis point decreases in the prevailing interest rates. As previously mentioned in this report, during the three months ended March 31, 2023, management evaluated and adjusted deposit rate betas in its scenarios to better reflect the increasing rate environment and increased competitive pressure for deposits.
PART I – ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
FIRST CAPITAL, INC.
The models are driven by expected behavior in various interest rate scenarios and many factors besides market interest rates affect the Company’s net interest income and EVE. For this reason, the Company models many different combinations of interest rates and balance sheet assumptions to understand its overall sensitivity to market interest rate changes. Therefore, as with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables and it is recognized that the model outputs are not guarantees of actual results. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in the modeling scenarios.
PART I - ITEM 4
CONTROLS AND PROCEDURES
FIRST CAPITAL, INC.
Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.