UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission File No.
First Capital, Inc.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
| 1- | ||
| (Address of principal executive offices, zip code, telephone number) | ||
| Not applicable | ||
| (Former name, former address and former fiscal year, if changed since last report) | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | ||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
FIRST CAPITAL, INC.
INDEX
| FIRST CAPITAL, INC. | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| (Unaudited) | ||||||||
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| (In thousands) | ||||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest bearing deposits with banks | ||||||||
| Federal funds sold | ||||||||
| Total cash and cash equivalents | ||||||||
| Interest-bearing time deposits | ||||||||
| Securities available for sale, at fair value | ||||||||
| Loans, net | ||||||||
| Loans held for sale | ||||||||
| Federal Home Loan Bank and other stock, at cost | ||||||||
| Foreclosed real estate | ||||||||
| Premises and equipment | ||||||||
| Accrued interest receivable | ||||||||
| Cash value of life insurance | ||||||||
| Goodwill | ||||||||
| Core deposit intangible | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing | $ | $ | ||||||
| Interest-bearing | ||||||||
| Total deposits | ||||||||
| Accrued interest payable | ||||||||
| Accrued expenses and other liabilities | ||||||||
| Total liabilities | ||||||||
| EQUITY | ||||||||
| Preferred stock of par value per share Authorized shares; issued | ||||||||
| Common stock of par value per share Authorized shares; issued shares ( in 2019); outstanding shares ( in 2019) | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings-substantially restricted | ||||||||
| Unearned stock compensation | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Less treasury stock, at cost - shares ( in 2019) | ( | ) | ( | ) | ||||
| Total First Capital, Inc. stockholders' equity | ||||||||
| Noncontrolling interest in subsidiary | ||||||||
| Total equity | ||||||||
| Total Liabilities and Equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| PART I - FINANCIAL INFORMATION | ||||||||||||||||
| FIRST CAPITAL, INC. | ||||||||||||||||
| (Unaudited) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| INTEREST INCOME | (In thousands, except per share data) | |||||||||||||||
| Loans, including fees | $ | $ | $ | $ | ||||||||||||
| Securities: | ||||||||||||||||
| Taxable | ||||||||||||||||
| Tax-exempt | ||||||||||||||||
| Dividends | ||||||||||||||||
| Other interest income | ||||||||||||||||
| Total interest income | ||||||||||||||||
| INTEREST EXPENSE | ||||||||||||||||
| Deposits | ||||||||||||||||
| Total interest expense | ||||||||||||||||
| Net interest income | ||||||||||||||||
| Provision for loan losses | ||||||||||||||||
| Net interest income after provision for loan losses | ||||||||||||||||
| NONINTEREST INCOME | ||||||||||||||||
| Service charges on deposit accounts | ||||||||||||||||
| ATM and debit card fees | ||||||||||||||||
| Commission and fee income | ||||||||||||||||
| Loss on sale of securities available for sale and time deposits | ( | ) | ( | ) | ||||||||||||
| Unrealized gain (loss) on equity securities | ( | ) | ( | ) | ||||||||||||
| Gain on sale of loans | ||||||||||||||||
| Increase in cash surrender value of life insurance | ||||||||||||||||
| Other income | ||||||||||||||||
| Total noninterest income | ||||||||||||||||
| NONINTEREST EXPENSE | ||||||||||||||||
| Compensation and benefits | ||||||||||||||||
| Occupancy and equipment | ||||||||||||||||
| Data processing | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Advertising | ||||||||||||||||
| Net (gain) loss on foreclosed real estate | ( | ) | ||||||||||||||
| Other expenses | ||||||||||||||||
| Total noninterest expense | ||||||||||||||||
| Income before income taxes | ||||||||||||||||
| Income tax expense | ||||||||||||||||
| Net Income | ||||||||||||||||
| Less: net income attributable to noncontrolling interest in subsidiary | ||||||||||||||||
| Net Income Attributable to First Capital, Inc. | $ | $ | $ | $ | ||||||||||||
| Earnings per common share attributable to First Capital, Inc.: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Dividends per share | $ | $ | $ | $ | ||||||||||||
See accompanying notes to consolidated financial statements.
| PART I - FINANCIAL INFORMATION | ||||||||||||||||
| FIRST CAPITAL, INC. | ||||||||||||||||
| (Unaudited) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| OTHER COMPREHENSIVE INCOME | ||||||||||||||||
| Unrealized gains on securities available for sale: | ||||||||||||||||
| Unrealized holding gains arising during the period | ||||||||||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net of tax amount | ||||||||||||||||
| Less: reclassification adjustment for realized losses included in net income | ||||||||||||||||
| Income tax benefit | ( | ) | ( | ) | ||||||||||||
| Net of tax amount | ||||||||||||||||
| Other Comprehensive Income, net of tax | ||||||||||||||||
| Comprehensive Income | ||||||||||||||||
| Less: comprehensive income attributable to the noncontrolling interest in subsidiary | ||||||||||||||||
| Comprehensive Income Attributable to First Capital, Inc. | $ | $ | $ | $ | ||||||||||||
See accompanying notes to consolidated financial statements.
| PART I - FINANCIAL INFORMATION | ||||||||||||||||||||||||||||||||
| FIRST CAPITAL, INC. | ||||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | Unearned | ||||||||||||||||||||||||||||||
| Common | Paid-in | Retained | Comprehensive | Stock | Treasury | Noncontrolling | ||||||||||||||||||||||||||
| (In thousands) | Stock | Capital | Earnings | Income (Loss) | Compensation | Stock | Interest | Total | ||||||||||||||||||||||||
| Balances at July 1, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||||||
| Cash dividends | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
| Purchase of treasury shares | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balances at September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Balances at July 1, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||||||
| Cash dividends | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
| Purchase of treasury shares | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balances at September 30, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Balances at January 1, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||||||
| Cash dividends | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Restricted stock grants | ( | ) | ||||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
| Purchase of treasury shares | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balances at September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Balances at January 1, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||||||
| Cash dividends | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Restricted stock grants | ( | ) | ||||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
| Purchase of treasury shares | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balances at September 30, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||
See accompanying notes to consolidated financial statements.
| PART I - FINANCIAL INFORMATION | ||||||||
| FIRST CAPITAL, INC. | ||||||||
| (Unaudited) | ||||||||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | (In thousands) | |||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: | ||||||||
| Amortization of premiums and accretion of discounts on securities, net | ||||||||
| Depreciation and amortization expense | ||||||||
| Deferred income taxes | ||||||||
| Stock compensation expense | ||||||||
| Increase in cash value of life insurance | ( | ) | ( | ) | ||||
| Loss on sale of securities and time deposits | ||||||||
| Provision for loan losses | ||||||||
| Proceeds from sales of loans | ||||||||
| Loans originated for sale | ( | ) | ( | ) | ||||
| Gain on sale of loans | ( | ) | ( | ) | ||||
| Amortization of tax credit investment | ||||||||
| Unrealized (gain) loss on equity securities | ( | ) | ||||||
| Net realized and unrealized (gain) loss on foreclosed real estate | ( | ) | ||||||
| Increase in accrued interest receivable | ( | ) | ( | ) | ||||
| Increase (decrease) in accrued interest payable | ( | ) | ||||||
| Net change in other assets/liabilities | ( | ) | ||||||
| Net Cash Provided By Operating Activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Proceeds from maturities of interest-bearing time deposits | ||||||||
| Proceeds from sales of interest-bearing time deposits | ||||||||
| Purchase of interest-bearing time deposits | ( | ) | ( | ) | ||||
| Purchase of securities available for sale | ( | ) | ( | ) | ||||
| Proceeds from maturities of securities available for sale | ||||||||
| Proceeds from sales of securities available for sale | ||||||||
| Principal collected on mortgage-backed obligations | ||||||||
| Net increase in loans receivable | ( | ) | ( | ) | ||||
| Investment in tax credit entity | ( | ) | ( | ) | ||||
| Proceeds from sale of foreclosed real estate | ||||||||
| Purchase of premises and equipment | ( | ) | ( | ) | ||||
| Net Cash Used In Investing Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Net increase in deposits | ||||||||
| Purchase of treasury stock | ( | ) | ( | ) | ||||
| Dividends paid | ( | ) | ( | ) | ||||
| Net Cash Provided By Financing Activities | ||||||||
| Net Increase in Cash and Cash Equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
FIRST CAPITAL, INC.
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 eight 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 holds and manages certain foreclosed real estate properties.
In the opinion of management, the unaudited consolidated financial statements include all adjustments considered necessary to present fairly the financial position as of September 30, 2020, and the results of operations for the three and nine months ended September 30, 2020 and 2019 and the cash flows for the nine months ended September 30, 2020 and 2019. 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, 2019 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.
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The COVID-19 pandemic has adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. Such events also may adversely affect business and consumer confidence, generally, and the Company and its customers, and their respective suppliers, vendors and processors, may be adversely affected.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1 – continued)
Due to the COVID-19 pandemic market interest rates have declined significantly, as the Federal Open Market Committee reduced the targeted federal funds interest rate range by 150 basis points during the month of March 2020 to 0% to 0.25%. These reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company's financial condition and results of operations in future periods. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the financial impact will be to the Company. It is reasonably possible that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans.
On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to explain that in consultation with the Financial Accounting Standards Board (“FASB”) staff that the federal banking agencies concluded that short-term modifications (e.g., six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not troubled debt restructurings (“TDRs”). The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was passed by Congress on March 27, 2020. The CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. The Bank has applied this guidance related to payment deferrals and other COVID-19 related loan modifications made through September 30, 2020, and additional modifications may occur in the fourth quarter of 2020.
The CARES Act also included a total allocation of $659 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”). This program is known as the Paycheck Protection Program (“PPP”). PPP loans are forgivable, in whole or in part, if the proceeds are used for eligible payroll costs and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and are 100% guaranteed by the SBA. PPP loans originated prior to June 5, 2020 have a term of two years, while PPP loans originated on or after June 5, 2020 have a term of five years. In accordance with the Paycheck Protection Flexibility Act of 2020, payments on PPP loans are deferred until the SBA remits the borrower’s loan forgiveness amount to the lender or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period. The SBA paid the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. The Bank originated PPP loans totaling approximately $
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Investment Securities
Investment securities have been classified in the consolidated balance sheets according to management’s intent. Investment securities at September 30, 2020 and December 31, 2019 are summarized as follows:
| Gross | Gross | |||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||||
| (In thousands) | Cost | Gains | Losses | Value | ||||||||||||||
| September 30, 2020 | ||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||
| Agency mortgage-backed securities | $ | $ | $ | $ | ||||||||||||||
| Agency CMO | ||||||||||||||||||
| Other debt securities: | ||||||||||||||||||
| Agency notes and bonds | ||||||||||||||||||
| Municipal obligations | ||||||||||||||||||
| Total securities available for sale | $ | $ | $ | $ | ||||||||||||||
| December 31, 2019 | ||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||
| Agency mortgage-backed securities | $ | $ | $ | $ | ||||||||||||||
| Agency CMO | ||||||||||||||||||
| Other debt securities: | ||||||||||||||||||
| Agency notes and bonds | ||||||||||||||||||
| Municipal obligations | ||||||||||||||||||
| Total securities available for sale | $ | $ | $ | $ | ||||||||||||||
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”) and the Federal Home Loan Bank (“FHLB”), which are government-sponsored enterprises.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2 – continued)
The amortized cost and fair value of debt securities as of September 30, 2020, 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 | ||||||||
| Amortized | Fair | |||||||
| Cost | Value | |||||||
| (In thousands) | ||||||||
| Due in one year or less | $ | $ | ||||||
| Due after one year through five years | ||||||||
| Due after five years through ten years | ||||||||
| Due after ten years | ||||||||
| Mortgage-backed securities and | ||||||||
| CMO | ||||||||
| $ | $ | |||||||
Information pertaining to investment securities with gross unrealized losses at September 30, 2020, 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) | ||||||||||||
| Continuous loss position less than twelve months: | ||||||||||||
| Agency mortgage-backed securities | $ | $ | ||||||||||
| Agency CMO | ||||||||||||
| Agency notes and bonds | ||||||||||||
| Municipal obligations | ||||||||||||
| Total less than twelve months | ||||||||||||
| Continuous loss position more than twelve months: | ||||||||||||
| Agency CMO | ||||||||||||
| Total more than twelve months | ||||||||||||
| Total securities available for sale | $ | $ | ||||||||||
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2 – continued)
Information pertaining to investment securities with gross unrealized losses at December 31, 2019, 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) | ||||||||||||
| Continuous loss position less than twelve months: | ||||||||||||
| Agency mortgage-backed securities | $ | $ | ||||||||||
| Agency CMO | ||||||||||||
| Agency notes and bonds | ||||||||||||
| Municipal obligations | ||||||||||||
| Total less than twelve months | ||||||||||||
| Continuous loss position more than twelve months: | ||||||||||||
| Agency mortgage-backed securities | ||||||||||||
| Agency CMO | ||||||||||||
| Agency notes and bonds | ||||||||||||
| Total more than twelve months | ||||||||||||
| Total securities available for sale | $ | $ | ||||||||||
Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recover in fair value.
At September 30, 2020, the U.S. government agency debt securities, including agency notes and bonds, mortgage-backed securities and CMO, and municipal obligations in a loss position had depreciated approximately
While management does not anticipate any credit-related impairment losses at September 30, 2020, additional deterioration in market and economic conditions may have an adverse impact on credit quality in the future.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2 – continued)
During the three months ended September 30, 2019, the Company realized gross gains of $
Certain available for sale debt securities were pledged to secure public fund deposits at September 30, 2020 and December 31, 2019.
Equity Securities
In September 2018, the Company acquired
3. Loans and Allowance for Loan Losses
The Company’s loan and allowance for loan loss policies are as follows:
Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses. The Company originates real estate mortgage, commercial business and consumer loans. 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.
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.
The recognition of income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments become
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
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 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 allowance for estimated losses 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 general component of the allowance for loan losses as discussed below. Specific reserves are not considered charge-offs in management’s analysis of the allowance for loan losses 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
The allowance for loan losses reflects management’s judgment of probable loan losses inherent in the loan portfolio at the balance sheet date. Additions to the allowance for loan losses are made by the provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The Company uses a disciplined process and methodology to evaluate the allowance for loan losses on at least a quarterly basis that is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated for impairment or loans otherwise classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the underlying discounted collateral value (or present value of estimated future cash flows) of the impaired loan is lower than the carrying value of that loan.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
The general component covers loans not considered to be impaired. Such loans are pooled by segment and losses are modeled using annualized historical loss experience adjusted for qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior five years. The Company’s historical loss experience is then adjusted for qualitative factors that are reviewed on a quarterly basis based on the risks present for each portfolio segment. Management considers changes and trends in the following qualitative loss factors: underwriting standards, economic conditions, changes and trends in past due and classified loans, collateral valuations, loan concentrations and other internal and external factors.
Management also applies additional loss factor multiples to loans classified as watch, special mention and substandard that are not individually evaluated for impairment. The loss factor multiples for classified loans are based on management’s assessment of historical trends regarding losses experienced on classified loans in prior periods. See below for additional discussion of the qualitative factors utilized in management’s allowance for loan loss methodology at September 30, 2020 and December 31, 2019.
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.
Management utilizes the following portfolio segments in its analysis of the allowance for loan losses: residential real estate, land, construction, commercial real estate, commercial business, home equity and second mortgage, and other consumer loans. Additional discussion of the portfolio segments and the risks associated with each segment can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
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, 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.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
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 $
At September 30, 2020 and December 31, 2019, the balance of foreclosed real estate includes $
Loans at September 30, 2020 and December 31, 2019 consisted of the following:
| September 30, | December 31, | |||||||
| (In thousands) | 2020 | 2019 | ||||||
| Real estate mortgage loans: | ||||||||
| Residential | $ | $ | ||||||
| Land | ||||||||
| Residential construction | ||||||||
| Commercial real estate | ||||||||
| Commercial real estate construction | ||||||||
| Commercial business loans | ||||||||
| Consumer loans: | ||||||||
| Home equity and second mortgage loans | ||||||||
| Automobile loans | ||||||||
| Loans secured by savings accounts | ||||||||
| Unsecured loans | ||||||||
| Other consumer loans | ||||||||
| Gross loans | ||||||||
| Less undisbursed portion of loans in process | ( | ) | ( | ) | ||||
| Principal loan balance | ||||||||
| Deferred loan origination fees and costs, net | ( | ) | ||||||
| Allowance for loan losses | ( | ) | ( | ) | ||||
| Loans, net | $ | $ | ||||||
Included in commercial business loans at September 30, 2020, were $
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
The following table provides the components of the Company’s recorded investment in loans at September 30, 2020:
| Residential | Commercial | Commercial | Home Equity & | Other | ||||||||||||||||||||||||||||
| Real Estate | Land | Construction | Real Estate | Business | 2nd Mtg | Consumer | Total | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Recorded Investment in Loans: | ||||||||||||||||||||||||||||||||
| Principal loan balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||||||||||||||
| Net deferred loan origination fees and costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recorded investment in loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Recorded Investment in Loans as Evaluated for Impairment: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| Acquired with deteriorated credit quality | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
The following table provides the components of the Company’s recorded investment in loans at December 31, 2019:
| Residential | Commercial | Commercial | Home Equity & | Other | ||||||||||||||||||||||||||||
| Real Estate | Land | Construction | Real Estate | Business | 2nd Mtg | Consumer | Total | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Recorded Investment in Loans: | ||||||||||||||||||||||||||||||||
| Principal loan balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||||||||||||||
| Net deferred loan origination fees and costs | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Recorded investment in loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Recorded Investment in Loans as Evaluated for Impairment: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| Acquired with deteriorated credit quality | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
An analysis of the allowance for loan losses as of September 30, 2020 is as follows:
| Residential | Commercial | Commercial | Home Equity & | Other | ||||||||||||||||||||||||||||
| Real Estate | Land | Construction | Real Estate | Business | 2nd Mtg | Consumer | Total | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| Acquired with deteriorated credit quality | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
An analysis of the allowance for loan losses as of December 31, 2019 is as follows:
| Residential | Commercial | Commercial | Home Equity & | Other | ||||||||||||||||||||||||||||
| Real Estate | Land | Construction | Real Estate | Business | 2nd Mtg | Consumer | Total | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| Acquired with deteriorated credit quality | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
An analysis of the changes in the allowance for loan losses for the three and nine months ended September 30, 2020 is as follows:
| Residential | Commercial | Commercial | Home Equity & | Other | ||||||||||||||||||||||||||||
| Real Estate | Land | Construction | Real Estate | Business | 2nd Mtg | Consumer | Total | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Changes in Allowance for Loan Losses for the three-months ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Provisions for loan losses | ||||||||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Changes in Allowance for Loan Losses for the nine-months ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Provisions for loan losses | ||||||||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
An analysis of the changes in the allowance for loan losses for the three and nine months ended September 30, 2019 is as follows:
| Residential | Commercial | Commercial | Home Equity & | Other | ||||||||||||||||||||||||||||
| Real Estate | Land | Construction | Real Estate | Business | 2nd Mtg | Consumer | Total | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Changes in Allowance for Loan Losses for the three-months ended September 30, 2019 | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Provisions for loan losses | ( | ) | ||||||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Changes in Allowance for Loan Losses for the nine-months ended September 30, 2019 | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Provisions for loan losses | ||||||||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
At September 30, 2020 and December 31, 2019, the estimated allowance for loan losses related to qualitative factor adjustments to various portfolio segments totaled approximately $
Management also adjusts the historical loss factors for loans classified as watch, special mention and substandard that are not individually evaluated for impairment. The adjustments consider the increased likelihood of loss on classified loans based on the Company’s separate historical experience for classified loans. The effect of the adjustments for classified loans was to increase the estimated allowance for loan losses by $
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
The following table summarizes the Company’s impaired loans as of September 30, 2020 and for the three months and nine months ended September 30, 2020. The Company did recognize any interest income on impaired loans using the cash receipts method of accounting for the three or nine month periods ended September 30, 2020:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||
| At September 30, 2020 | September 30, 2020 | September 30, 2020 | ||||||||||||||||||||||||||
| Unpaid | Average | Interest | Average | Interest | ||||||||||||||||||||||||
| Recorded | Principal | Related | Recorded | Income | Recorded | Income | ||||||||||||||||||||||
| Investment | Balance | Allowance | Investment | Recognized | Investment | Recognized | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| Loans with no related allowance recorded: | ||||||||||||||||||||||||||||
| Residential | $ | $ | $ | - | $ | $ | $ | $ | ||||||||||||||||||||
| Land | - | |||||||||||||||||||||||||||
| Construction | - | |||||||||||||||||||||||||||
| Commercial real estate | - | |||||||||||||||||||||||||||
| Commercial business | - | |||||||||||||||||||||||||||
| Home equity/2nd mortgage | - | |||||||||||||||||||||||||||
| Other consumer | - | |||||||||||||||||||||||||||
| - | ||||||||||||||||||||||||||||
| Loans with an allowance recorded: | ||||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||||
| Land | ||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||||||
| Home equity/2nd mortgage | ||||||||||||||||||||||||||||
| Other consumer | ||||||||||||||||||||||||||||
| Total: | ||||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||||
| Land | ||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||||||
| Home equity/2nd mortgage | ||||||||||||||||||||||||||||
| Other consumer | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
The following table summarizes the Company’s impaired loans for the three months and nine months ended September 30, 2019. The Company did recognize any interest income on impaired loans using the cash receipts method of accounting for the three or nine month periods ended September 30, 2019:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2019 | September 30, 2019 | |||||||||||||||
| Average | Interest | Average | Interest | |||||||||||||
| Recorded | Income | Recorded | Income | |||||||||||||
| Investment | Recognized | Investment | Recognized | |||||||||||||
| Loans with no related allowance recorded: | ||||||||||||||||
| Residential | $ | $ | $ | $ | ||||||||||||
| Land | ||||||||||||||||
| Construction | ||||||||||||||||
| Commercial real estate | ||||||||||||||||
| Commercial business | ||||||||||||||||
| Home equity/2nd mortgage | ||||||||||||||||
| Other consumer | ||||||||||||||||
| Loans with an allowance recorded: | ||||||||||||||||
| Residential | ||||||||||||||||
| Land | ||||||||||||||||
| Construction | ||||||||||||||||
| Commercial real estate | ||||||||||||||||
| Commercial business | ||||||||||||||||
| Home equity/2nd mortgage | ||||||||||||||||
| Other consumer | ||||||||||||||||
| Total: | ||||||||||||||||
| Residential | ||||||||||||||||
| Land | ||||||||||||||||
| Construction | ||||||||||||||||
| Commercial real estate | ||||||||||||||||
| Commercial business | ||||||||||||||||
| Home equity/2nd mortgage | ||||||||||||||||
| Other consumer | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
The following table summarizes the Company’s impaired loans as of December 31, 2019:
| Unpaid | ||||||||||||
| Recorded | Principal | Related | ||||||||||
| Investment | Balance | Allowance | ||||||||||
| (In thousands) | ||||||||||||
| Loans with no related allowance recorded: | ||||||||||||
| Residential | $ | $ | $ | - | ||||||||
| Land | - | |||||||||||
| Construction | - | |||||||||||
| Commercial real estate | - | |||||||||||
| Commercial business | - | |||||||||||
| Home equity/2nd mortgage | - | |||||||||||
| Other consumer | - | |||||||||||
| - | ||||||||||||
| Loans with an allowance recorded: | ||||||||||||
| Residential | ||||||||||||
| Land | ||||||||||||
| Construction | ||||||||||||
| Commercial real estate | ||||||||||||
| Commercial business | ||||||||||||
| Home equity/2nd mortgage | ||||||||||||
| Other consumer | ||||||||||||
| Total: | ||||||||||||
| Residential | ||||||||||||
| Land | ||||||||||||
| Construction | ||||||||||||
| Commercial real estate | ||||||||||||
| Commercial business | ||||||||||||
| Home equity/2nd mortgage | ||||||||||||
| Other consumer | ||||||||||||
| $ | $ | $ | ||||||||||
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
Nonperforming loans consists of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at September 30, 2020 and December 31, 2019:
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||
| Loans 90+ Days | Total | Loans 90+ Days | Total | |||||||||||||||||||||
| Nonaccrual | Past Due | Nonperforming | Nonaccrual | Past Due | Nonperforming | |||||||||||||||||||
| Loans | Still Accruing | Loans | Loans | Still Accruing | Loans | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Residential | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Land | ||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||
| Home equity/2nd mortgage | ||||||||||||||||||||||||
| Other consumer | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The following table presents the aging of the recorded investment in loans at September 30, 2020:
| 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 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Land | ||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||||||
| Home equity/2nd mortgage | ||||||||||||||||||||||||||||
| Other consumer | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
The following table presents the aging of the recorded investment in loans at December 31, 2019:
| 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 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Land | ||||||||||||||||||||||||||||
| Construction | ||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||||||
| Home equity/2nd mortgage | ||||||||||||||||||||||||||||
| Other consumer | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
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)
(3 – continued)
The following table presents the recorded investment in loans by risk category as of the date indicated:
| Residential | Commercial | Commercial | Home Equity & | Other | ||||||||||||||||||||||||||||
| Real Estate | Land | Construction | Real Estate | Business | 2nd Mtg | Consumer | Total | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| September 30, 2020 | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Loss | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Loss | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
The following table summarizes the Company’s TDRs by accrual status as of September 30, 2020 and December 31, 2019:
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||
| Related Allowance | Related Allowance | |||||||||||||||||||||||||||||||
| Accruing | Nonaccrual | Total | for Loan Losses | Accruing | Nonaccrual | Total | for Loan Losses | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Troubled debt restructurings: | ||||||||||||||||||||||||||||||||
| Residential real estate | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||
| Commercial business | ||||||||||||||||||||||||||||||||
| Home equity and second mortgage | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
At September 30, 2020 and December 31, 2019, there were
The Company restructured
There were
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
There were
As discussed in Note 1, the federal banking agencies issued guidance in March 2020 that short-term modifications (e.g., six months) made to a borrower affected by the COVID-19 pandemic does not need to be identified as a TDR if the loan was current at the time of the modification. The CARES Act also addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs. As of September 30, 2020, the Bank had approved payment extensions of primarily one to three months on $
Purchased Credit Impaired (PCI) Loans
Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. Such loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit score, loan type and date of origination. In determining the estimated fair value of purchased loans or pools, management considers a number of factors including the remaining life, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows expected to be received, among others. Purchased loans that have evidence of credit deterioration since origination for which it is deemed probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments are accounted for in accordance with FASB Accounting Standards Codification (“ASC”) 310-30. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. The difference between the expected cash flows and the fair value at acquisition is recorded as interest income over the remaining life of the loan or pool of loans and is referred to as the accretable yield. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which is recognized as future interest income.
The following table presents the carrying amount of PCI loans accounted for under ASC 310-30 at September 30, 2020 and December 31, 2019:
| September 30, | December 31, | |||||||
| (In thousands) | 2020 | 2019 | ||||||
| Residential real estate | $ | $ | ||||||
| Commercial real estate | ||||||||
| Carrying amount | ||||||||
| Allowance for loan losses | ||||||||
| Carrying amount, net of allowance | $ | $ | ||||||
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
The outstanding balance of PCI loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties was $
There was a $
Accretable yield, or income expected to be collected, is as follows for the three and nine month periods ended September 30, 2020 and 2019:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 9/30/2020 | 9/30/2019 | 9/30/2020 | 9/30/2019 | |||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | ||||||||||||
| New loans purchased | ||||||||||||||||
| Accretion to income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Disposals and other adjustments | ||||||||||||||||
| Reclassification (to) from nonaccretable difference | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance at end of period | $ | $ | $ | $ | ||||||||||||
4. 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 September 30, 2020 and December 31, 2019, the balance of the Bank’s investment was $
The investment is accounted for using the proportional amortization method. During the three month periods ended September 30, 2020 and 2019, the Bank recognized amortization expense of $
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Supplemental Disclosure for Earnings Per Share
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 9/30/2020 | 9/30/2019 | 9/30/2020 | 9/30/2019 | |||||||||||||
| (Dollars in thousands, except for share and per share data) | ||||||||||||||||
| Basic | ||||||||||||||||
| Earnings: | ||||||||||||||||
| Net income attributable to First Capital, Inc. | $ | $ | $ | $ | ||||||||||||
| Shares: | ||||||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Net income attributable to First Capital, Inc. per common share, basic | $ | $ | $ | $ | ||||||||||||
| Diluted | ||||||||||||||||
| Earnings: | ||||||||||||||||
| Net income attributable to First Capital, Inc. | $ | $ | $ | $ | ||||||||||||
| Shares: | ||||||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Add: Dilutive effect of restricted stock | ||||||||||||||||
| Weighted average common shares outstanding, as adjusted | ||||||||||||||||
| Net income attributable to First Capital, Inc. per common share, diluted | $ | $ | $ | $ | ||||||||||||
Nonvested restricted stock shares are not considered as outstanding for purposes of computing weighted average common shares outstanding.
6. 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
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6 – continued)
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
At September 30, 2020,
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 September 30, 2020,
On February 18, 2020, the Company granted
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6 – continued)
A summary of the Company’s nonvested restricted shares under the Plan as of September 30, 2020 and changes during the nine-month period then ended is presented below.
| Weighted | ||||||||
| Number | Average | |||||||
| of | Grant Date | |||||||
| Shares | Fair Value | |||||||
| Nonvested at January 1, 2020 | $ | |||||||
| Granted | ||||||||
| Vested | ||||||||
| Forfeited | ||||||||
| Nonvested at September 30, 2020 | $ | |||||||
There were
7. Supplemental Disclosures of Cash Flow Information
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| (In thousands) | ||||||||
| Cash payments for: | ||||||||
| Interest | $ | $ | ||||||
| Taxes (net of refunds received) | ||||||||
| Noncash investing activities: | ||||||||
| Transfers from loans to real estate acquired through foreclosure | ||||||||
| 8. | 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. |
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8 – continued)
| 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. |
| 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 on the following page. These valuation methodologies were applied to all of the Company’s financial and nonfinancial assets carried at fair value or the lower of cost or fair value. The table below presents the balances of assets measured at fair value on a recurring and nonrecurring basis as of September 30, 2020 and December 31, 2019. The Company had
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8 – continued)
| Carrying Value | ||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| September 30, 2020 | ||||||||||||||||
| Assets Measured on a Recurring Basis | ||||||||||||||||
| Securities available for sale: | ||||||||||||||||
| Agency mortgage-backed securities | $ | $ | $ | $ | ||||||||||||
| Agency CMO | ||||||||||||||||
| Agency notes and bonds | ||||||||||||||||
| Municipal obligations | ||||||||||||||||
| Total securities available for sale | $ | $ | $ | $ | ||||||||||||
| Equity securities | $ | $ | $ | |||||||||||||
| Assets Measured on a Nonrecurring Basis | ||||||||||||||||
| Impaired loans: | ||||||||||||||||
| Residential real estate | $ | $ | $ | $ | ||||||||||||
| Land | ||||||||||||||||
| Commercial real estate | ||||||||||||||||
| Commercial business | ||||||||||||||||
| Home equity and second mortgage | ||||||||||||||||
| Total impaired loans | $ | $ | $ | $ | ||||||||||||
| Loans held for sale | $ | $ | $ | $ | ||||||||||||
| Foreclosed real estate: | ||||||||||||||||
| Residential real estate | $ | $ | $ | $ | ||||||||||||
| Total foreclosed real estate | $ | $ | $ | $ | ||||||||||||
| December 31, 2019 | ||||||||||||||||
| Assets Measured on a Recurring Basis | ||||||||||||||||
| Securities available for sale: | ||||||||||||||||
| Agency mortgage-backed securities | $ | $ | $ | $ | ||||||||||||
| Agency CMO | ||||||||||||||||
| Agency notes and bonds | ||||||||||||||||
| Municipal obligations | ||||||||||||||||
| Total securities available for sale | $ | $ | $ | $ | ||||||||||||
| Equity securities | $ | $ | $ | |||||||||||||
| Assets Measured on a Nonrecurring Basis | ||||||||||||||||
| Impaired loans: | ||||||||||||||||
| Residential real estate | $ | $ | $ | $ | ||||||||||||
| Land | ||||||||||||||||
| Commercial real estate | ||||||||||||||||
| Commercial business | ||||||||||||||||
| Home equity and second mortgage | ||||||||||||||||
| Other consumer | ||||||||||||||||
| Total impaired loans | $ | $ | $ | $ | ||||||||||||
| Loans held for sale | $ | $ | $ | $ | ||||||||||||
| Foreclosed real estate: | ||||||||||||||||
| Residential real estate | $ | $ | $ | $ | ||||||||||||
| Total foreclosed real estate | $ | $ | $ | $ | ||||||||||||
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8 – 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.
Impaired Loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of impaired loans is classified as Level 3 in the fair value hierarchy.
Impaired loans are carried at the present value of estimated future cash flows using the loan's effective interest rate or the fair value of collateral less estimated costs to sell if the loan is collateral dependent. At September 30, 2020 and December 31, 2019, all impaired loans were considered to be collateral dependent for the purpose of determining fair value. 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, adjusted for estimated costs to sell the property, costs to complete or repair the property and other factors 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)
(8 – continued)
At September 30, 2020, the significant unobservable inputs used in the fair value measurement of 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
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 based on specific prices of underlying contracts for sales to investors. These measurements are classified as Level 2.
Foreclosed Real Estate. Foreclosed real estate is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of foreclosed real estate is classified as Level 3 in the fair value hierarchy.
Foreclosed real estate is reported at fair value less estimated costs to dispose of the property. The fair values are determined by real estate appraisals which are then discounted to reflect management’s estimate of the fair value of the property given current market conditions and the condition of the collateral. At September 30, 2020 and December 31, 2019, the discount from appraised value was
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 nine month periods ended September 30, 2020 and 2019. There were no transfers into or out of the Company’s Level 3 financial assets for the nine month periods ended September 30, 2020 and 2019.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8 – continued)
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:
| Carrying | Fair | Fair Value Measurements Using | ||||||||||||||||||
| (In thousands) | Value | Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| September 30, 2020 | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Interest-bearing time deposits | ||||||||||||||||||||
| Securities available for sale | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Loans, net | ||||||||||||||||||||
| FHLB and other restricted stock | N/A | N/A | N/A | N/A | ||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Equity securities (included in other assets) | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| December 31, 2019: | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Interest-bearing time deposits | ||||||||||||||||||||
| Securities available for sale | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Loans, net | ||||||||||||||||||||
| FHLB and other restricted stock | N/A | N/A | N/A | N/A | ||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Equity securities (included in other assets) | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 9. | 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 and nine months ended September 30, 2020 and 2019:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Service charges on deposit accounts | $ | $ | $ | $ | ||||||||||||
| ATM and debit card fees | ||||||||||||||||
| Investment advisory income | ||||||||||||||||
| Other | ||||||||||||||||
| Revenue from contracts with customers | ||||||||||||||||
| Net gains on loans and investments | ||||||||||||||||
| Increase in cash value of life insurance | ||||||||||||||||
| Other | ||||||||||||||||
| Other noninterest income | ||||||||||||||||
| Total noninterest income | $ | $ | $ | $ | ||||||||||||
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.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9 – continued)
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.
| 10. | Recent Accounting Pronouncements |
The following are summaries of recently issued or adopted accounting pronouncements that impact the accounting and reporting practices of the Company:
In June 2016, the 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. For the Company, the amendments in the update were originally effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact the guidance will have upon adoption, but management expects its allowance for loan losses to increase through a one-time adjustment to retained earnings. However, until the evaluation is complete, the magnitude of the increase will be unknown. In planning for the implementation of ASU 2016-13, the Company has formed a CECL implementation team consisting of members of senior management that meets on a periodic basis and is currently evaluating software solutions, data requirements and loss methodologies.
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. Early adoption is permitted as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is a smaller reporting company as defined by the SEC, and currently does not intend to early adopt CECL.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(10 – continued)
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The update removes, modifies and adds certain disclosure requirements for fair value measurements. Among other changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements, but will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in the update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The adoption of this update effective January 1, 2020 did not have a material impact on the Company’s consolidated financial position or results of operations.
In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs. The ASU amends the guidance under Subtopic 310-20 to provide that for each reporting period, to the extent that the amortized cost basis of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess (that is, the premium) shall be amortized to the next call date unless the premium of the individual callable debt security is amortized based on consideration of estimated prepayments. The amendments in the update are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not permitted for public entities. All entities should apply the amendments in the update on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The adoption of this update is not expected to have a material impact on the Company's consolidated financial position or results of operations.
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, 2019 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
During the nine months ended September 30, 2020, there was no significant change in the Company’s critical accounting policies or the application of critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
COVID-19 Update
The COVID-19 pandemic has placed significant health, economic and other major hardships throughout the communities we serve, the United States and the entire world. The Company has implemented a number of procedures in response to the pandemic to support the safety and well-being of our employees, customers and shareholders:
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
| ● |
Following the guidelines of the Center for Disease Control and local governments, we have updated our branch operating procedures. Currently, one lobby in each county of our footprint is open and the remaining offices are drive thru only with the exception of one in-store location, which remains closed. However, this is subject to change again in the future based on state and local orders and bank policies. We have enhanced daily cleaning of our facilities and have instructed employees to maintain appropriate social distancing and require employees to wear a mask in open areas. We also actively encourage customers to utilize alternative channels such as our online and mobile banking platforms. Our customer service and retail departments remain fully staffed and available to assist customers. |
| ● |
We hold executive committee meetings frequently to address issues as the guidelines related to the pandemic and related programs change rapidly. |
| ● |
We have expanded our use of technology to allow many of our employees to work safely and productively from home. Most of our normally scheduled meetings, including Board of Director meetings and various committee meetings, are now held virtually instead of in-person. |
| ● |
The Bank is assisting its customers experiencing COVID-19 related hardships by approving payment extensions and waiving or refunding certain banking fees. As of September 30, 2020, the Bank had approved payment extensions on approximately $68.1 million of loans, primarily related to commercial real estate lending relationships. These payment extensions are generally for periods of one to three months, but may extend for up to six months. As of September 30, 2020, approximately $58.1 million of that total had resumed normal monthly payments. |
| ● |
The Bank was an active participant in the PPP and disbursed approximately $45.9 million for PPP loans to its customers prior to the program’s close on August 8, 2020. |
| ● |
Certain industries are widely expected to be particularly impacted by COVID-19 and efforts to contain it. Those industries include travel, hospitality and entertainment. At September 30, 2020, the Company’s commercial loan exposure to the hotel and restaurant industries was approximately $12.1 million and $5.2 million, respectively, representing approximately 3.3% of the total loan portfolio. Based on the evaluation at September 30, 2020, management believes the allowance for loan losses is adequate to cover estimated losses in the loan portfolio. However, as the pandemic continues, additional losses could be recognized. |
Management continues to closely monitor the pandemic and will take additional action to respond to the pandemic as the situation continues to evolve.
Financial Condition
Total assets increased $120.7 million from $827.5 million at December 31, 2019 to $948.2 million at September 30, 2020, an increase of 14.6%.
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
Net loans receivable (excluding loans held for sale) increased $25.6 million from $466.5 million at December 31, 2019 to $492.1 million at September 30, 2020. Commercial business loans and commercial real estate loans increased $34.5 million and $6.6 million, respectively, during the nine months ended September 30, 2020. Residential mortgage loans and construction loans decreased $4.8 million and $2.9 million, respectively, during the same period. The increase in commercial business loans is due to our participation in the PPP, with balances of such loans totaling $45.9 million at September 30, 2020.
Securities available for sale increased $9.5 million from December 31, 2019 to $264.0 million at September 30, 2020. Purchases of $65.5 million of securities classified as available for sale were made during the nine months ended September 30, 2020 and consisted primarily of municipal bonds, U.S. government agency notes and bonds and mortgage-backed securities and CMO’s. Principal payments and maturities of available for sale securities totaled $33.6 million and $26.2 million, respectively, during the nine months ended September 30, 2020. No securities were sold during the nine months ended September 30, 2020.
Cash and cash equivalents increased $82.9 million from December 31, 2019 to $134.2 million at September 30, 2020, primarily due to increases in deposit balances.
Total deposits increased from $722.2 million at December 31, 2019 to $833.4 million at September 30, 2020. Noninterest-bearing demand deposits, interest-bearing demand deposits and savings accounts increased $48.9 million, $37.5 million and $27.5 million, respectively, during the nine months ended September 30, 2020 primarily due to normal balance fluctuations, stimulus funds (including PPP loan funds) and decreased consumer spending.
Total stockholders' equity attributable to the Company increased from $98.8 million at December 31, 2019 to $108.0 million at September 30, 2020, primarily due to a $4.8 million increase in retained net income and a $4.2 million increase in the net unrealized gain on available for sale securities during the nine months ended September 30, 2020. The increase in the net unrealized gain on available for sale securities during the period is primarily due to changes in market interest rates.
Results of Operations
Net income for the nine-month periods ended September 30, 2020 and 2019. Net income attributable to the Company was $7.3 million ($2.17 per diluted share) for the nine months ended September 30, 2020 compared to $7.9 million ($2.37 per diluted share) for the same time period in 2019. The decrease is primarily due to a decrease in net interest income after provision for loan losses partially offset by an increase in noninterest income.
Net income for the three-month periods ended September 30, 2020 and 2019. Net income attributable to the Company was $2.7 million ($0.82 per diluted share) for the three months ended September 30, 2020 compared to $2.9 million ($0.87 per diluted share) for the three months ended September 30, 2019. The decrease in net income for 2020 is primarily due to a decrease in net interest income after provision for loan losses partially offset by an increase in noninterest income.
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
Net interest income for the nine-month periods ended September 30, 2020 and 2019. Net interest income decreased $1.6 million for the nine months ended September 30, 2020 compared to the same period in 2019 primarily due to a decrease in the interest rate spread partially offset by an increase in interest-earning assets.
Total interest income decreased $1.8 million for the nine months ended September 30, 2020 compared to the same period in 2019. For the nine months ended September 30, 2020, the average balance of interest-earning assets and their tax-equivalent yield were $822.3 million and 3.68%, respectively. During the same period in 2019, the average balance of those assets was $758.3 million and the tax-equivalent yield was 4.30%. The decrease in the tax-equivalent yield was due to the Federal Open Market Committee (FOMC) lowering rates due to the COVID-19 pandemic and the Bank originating $45.9 million in PPP loans during 2020 at a fixed interest rate of 1.00%. As a result, the tax-equivalent yield on loans decreased from 5.57% for the nine months ended September 30, 2019 to 4.96% for the nine months ended September 30, 2020.
Total interest expense decreased $207,000 for the nine months ended September 30, 2020 compared to the same period in 2019. The average balance of interest-bearing liabilities increased from $566.5 million for 2019 to $601.7 million for 2020. The average rate paid on interest-bearing liabilities decreased from 0.34% to 0.28% when comparing the two periods. As a result of the changes in interest-earning assets and interest-bearing liabilities, the interest rate spread on a tax-equivalent basis decreased from 3.96% for the nine months ended September 30, 2019 to 3.40% for the same period in 2020.
Net interest income for the three-month periods ended September 30, 2020 and 2019. Net interest income decreased $848,000 for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to a decrease in the interest rate spread partially offset by an increase in interest-earning assets.
Total interest income decreased $980,000 for the three months ended September 30, 2020 compared to the same period in 2019. For the three months ended September 30, 2020, the average balance of interest-earning assets and their tax-equivalent yield were $871.2 million and 3.40%, respectively. During the same period in 2019, the average balance of those assets was $766.9 million and the tax-equivalent yield was 4.35%. The changes in yields are primarily due the previously mentioned lower market rates and PPP loans. As a result, the tax-equivalent yield on loans decreased from 5.59% to 4.72% when comparing the two periods.
Total interest expense decreased $132,000 for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The average balance of interest-bearing liabilities increased from $567.7 million to $625.9 million when comparing the two periods, which was more than offset by a decrease in the average rate paid on those liabilities from 0.35% for the three months ended September 30, 2019 to 0.24% for the same period in 2020. As a result, the tax-equivalent interest rate spread decreased from 4.00% for the three months ended September 30, 2019 to 3.16% for the three months ended September 30, 2020.
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
Provision for loan losses. Based on management’s analysis of the allowance for loan losses, the provision for loan losses increased from $975,000 for the nine-month period ended September 30, 2019 to $1.6 million for the same period in 2020 and increased from $225,000 for the three months ended September 30, 2019 to $400,000 for the three months ended September 30, 2020. During the nine-month period ended September 30, 2020, net loans receivable increased $25.6 million compared to an increase of $34.1 million during the same period in 2019. However, the increase in loans for 2020 is primarily due to PPP loans which are 100% guaranteed by the SBA. The Bank recognized net charge-offs of $233,000 for the nine months ended September 30, 2020 compared to $301,000 during the same period in 2019. The additional provision for 2020 was made primarily to reflect changes to qualitative factors within the Bank’s allowance for loan losses calculation related to economic uncertainties surrounding COVID-19.
Provisions for loan losses are charges to earnings to maintain the total allowance for loan losses at a level considered adequate by management to provide for probable known and inherent loan losses based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specified impaired loans and economic conditions. Although management uses the best information available, future adjustments to the allowance 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 allowance for loan losses 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 allowance for loan losses and that actual losses will not exceed the estimated amounts.
The methodology used in determining the allowance for loan losses 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 allowance for loan losses was $6.4 million at September 30, 2020 and $5.1 million at December 31, 2019. Management has deemed these amounts as adequate at each date based on its best estimate of probable known and inherent loan losses at each date. While it is too early to know the full extent of potential future losses associated with the impact of COVID-19, management continues to monitor the situation and may need to adjust future expectations as developments occur throughout the remainder of the year. At September 30, 2020, nonperforming loans totaled $2.2 million compared to $1.8 million at December 31, 2019. Included in nonperforming loans were loans 90 days or more past due and still accruing interest of $13,000 at December 31, 2019. These loans were accruing interest because the estimated value of the collateral and collection efforts were deemed sufficient to ensure full recovery. There were no loans 90 days or more past due and still accruing interest at September 30, 2020. At September 30, 2020 and December 31, 2019, nonaccrual loans totaled $2.2 million and $1.8 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 nine-month periods ended September 30, 2020 and 2019. Noninterest income for the nine months ended September 30, 2020 increased $1.3 million compared to the nine months ended September 30, 2019. The increase was primarily due to increases in gains on loans sold and ATM and debit card fees of $1.3 million and $461,000, respectively, partially offset by a $245,000 decrease in service charges on deposit accounts when comparing the two periods. The $1.3 million increase in gains on loans sold includes a $214,000 gain on the sale of the Bank’s credit card portfolio. In addition, the nine months ended September 30, 2020 included a $126,000 unrealized loss on equity securities compared to a $108,000 unrealized gain on equity securities during the same period in 2019.
Noninterest income for the three-month periods ended September 30, 2020 and 2019. Noninterest income for the quarter ended September 30, 2020 increased $783,000 as compared to the quarter ended September 30, 2019. The third quarter of 2020 included $980,000 in gains on the sale of loans compared to $353,000 during the same period in 2019. Included in the gains on loans sold during the third quarter of 2020 was the previously mentioned $214,000 gain on the sale of the Bank’s $1.5 million credit card portfolio. ATM and debit card fees also increased $196,000, when comparing the two periods. This was partially offset by a $96,000 decrease in service charges on deposit accounts.
Noninterest expense for the nine-month periods ended September 30, 2020 and 2019. Noninterest expenses increased $67,000 for the nine months ended September 30, 2020 as compared to the same period in 2019. Compensation and benefit expense increased $758,000 when comparing the two periods, primarily due to increased incentive compensation related to gains on the sale of loans. This was partially offset by decreases in net loss on foreclosed real estate, data processing expense and advertising expense of $292,000, $246,000 and $127,000, respectively.
Noninterest expense for the three-month periods ended September 30, 2020 and 2019. Noninterest expense increased $53,000 for the quarter ended September 30, 2020 as compared to the same period in 2019. Compensation and benefits expense increased $134,000 when comparing the two periods. This was partially offset by data processing expense which decreased $90,000 when comparing the two periods.
Income tax expense. Income tax expense for the nine-month period ended September 30, 2020 was $1.2 million, for an effective tax rate of 14.2%, compared to $1.5 million, for an effective tax rate of 16.3%, for the same period in 2019. For the three-month period ended September 30, 2020, income tax expense and the effective tax rate were $413,000 and 13.1%, respectively, compared to $537,000 and 15.5%, respectively, for the same period in 2019. The decrease in the effective tax rate is primarily due to a decrease in taxable interest income and an increase in nontaxable income in 2020.
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 September 30, 2020, the Bank had cash and cash equivalents of $132.8 million and securities available-for-sale with a fair value of $264.0 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB of Indianapolis and additional collateral eligible for repurchase agreements.
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
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 $3.0 million at September 30, 2020.
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 had originally set the minimum ratio at 9%. However, pursuant to the CARES Act and related interim final rules, the minimum CBLR will be 8% for calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. 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 7% for 2020, 7.5% for 2021 and 8% for 2022 and thereafter. 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 has opted into the CBLR framework as of September 30, 2020 and its CBLR was 9.53% as of that date. At September 30, 2020, the Bank was considered “well-capitalized” under applicable regulatory guidelines.
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
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, 2019.
For the nine months ended September 30, 2020, 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.
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.
PART I – ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
FIRST CAPITAL, INC.
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.
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 September 30, 2020 and December 31, 2019 financial information:
| At September 30, 2020 |
At December 31, 2019 |
|||||||||||||||
| 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 |
$ | 1,843 | 7.10 | % |
$ | 3,438 | 11.59 | % |
||||||||
| 200bp |
2,239 | 8.62 | 2,392 | 8.07 | ||||||||||||
| 100bp |
1,121 | 4.32 | 1,289 | 4.35 | ||||||||||||
| Static |
- | - | - | - | ||||||||||||
| (100)bp |
(615 | ) | (2.37 | ) | (1,562 | ) | (5.27 | ) | ||||||||
At September 30, 2020 and December 31, 2019, the Company’s simulated exposure to a change 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. Alternatively, an immediate and sustained decrease in rates of 1.00% would decrease the Company’s net interest income over a one year horizon compared to a flat interest rate scenario. During the nine months ended September 30, 2020, the Company updated discount rates and betas on loans and deposits to better reflect the market and also updated deposit decay rates to levels indicated in a third-party study of customer accounts.
PART I – ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
FIRST CAPITAL, INC.
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 September 30, 2020 and December 31, 2019 financial information:
| At September 30, 2020 |
|||||||||||||||||
| 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 |
$ | 179,159 | $ | 58,898 | 48.98 | % |
22.25 | % |
783bp |
||||||||
| 200bp |
163,333 | 43,072 | 35.82 | 20.03 | 561bp |
||||||||||||
| 100bp |
144,052 | 23,791 | 19.78 | 17.46 | 304bp |
||||||||||||
| Static |
120,261 | - | - | 14.42 | 0bp |
||||||||||||
| (100)bp |
103,108 | (17,153 | ) | (14.26 | ) | 12.22 | (220)bp |
||||||||||
| At December 31, 2019 |
|||||||||||||||||
| 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 |
$ | 203,781 | $ | 56,973 | 38.81 | % |
25.40 | % |
773bp |
||||||||
| 200bp |
187,704 | 40,896 | 27.86 | 23.10 | 543bp |
||||||||||||
| 100bp |
168,710 | 21,902 | 14.92 | 20.52 | 285bp |
||||||||||||
| Static |
146,808 | - | - | 17.67 | 0bp |
||||||||||||
| (100)bp |
123,104 | (23,704 | ) | (16.15 | ) | 14.64 | (303)bp |
||||||||||
The previous tables indicate that at September 30, 2020 and December 31, 2019 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 and a decrease in its EVE in the event of a sudden and sustained 100 basis point decrease in prevailing interest rates. As previously mentioned in this report, during the nine months ended September 30, 2020, the Company updated discount rates and betas on loans and deposits to better reflect the market and also updated deposit decay rates to levels indicated in a third-party study of customer accounts.
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.
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 September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
OTHER INFORMATION
FIRST CAPITAL, INC.
None.
| Item 1A. |
Risk Factors |
In addition to the risk factors previously disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company made the following update in its Form 10-Q for the quarter ended March 31, 2020, which has been further updated below for information as of September 30, 2020.
The COVID-19 pandemic could adversely affect the business and results of operations of the Company, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic (including the possibility of resurgence of COVID-19 after initial abatement) and actions taken by governmental authorities to the pandemic.
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and around the world. Due to the COVID-19 pandemic, market interest rates have declined significantly, as the Federal Open Market Committee reduced the targeted federal funds interest rate range by 150 basis points during the month of March 2020 to 0% to 0.25%. Also in response to COVID-19, many state and local governments have instituted emergency restrictions that have substantially limited the activities of individuals and the operations of businesses and industries.
COVID-19 has had a substantial impact on numerous aspects of life in the United States, including threats to public health, increased volatility in markets, and severe effects on national and local economies. The ultimate effect of COVID-19 on the Company's business will depend on numerous factors and future developments that are highly uncertain and cannot be predicted with confidence.
At this time, it is unknown how long the COVID-19 pandemic will last, or when restrictions on individuals and businesses will be lifted and businesses and their employees will be able to resume normal activities. As a result, we have faced and may continue to face a decrease in demand for certain products, reduced access to our branches by our customers, and disruptions in the operations of our venders. Additionally, customers that are increasingly forced to work remotely and may not have appropriately secured remote networks may be more vulnerable to cyber-attacks or phishing schemes. Further, additional information may emerge regarding the severity of COVID-19 and additional actions may be taken by federal, state, and local governments to contain COVID-19 or treat its impact. Changes in the behavior of customers, businesses and their employees as a result of the COVID-19 pandemic, including social distancing practices, even after formal restrictions have been lifted, are also unknown. As a result of the COVID-19 pandemic and the actions taken to contain it or reduce its impact, the Company may experience changes in the value of collateral securing outstanding loans, impairment of our goodwill and other financial assets, diminished access to capital markets and other funding sources,
PART II
OTHER INFORMATION
FIRST CAPITAL, INC.
(1A – continued)
reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with their terms. Further, although the Federal Reserve's monetary policies to date have been accommodative and may benefit us to some degree by supporting economic activity of our customers, sudden shifts in the Federal Reserve's policies may impact our ability to grow and/or effectively manage interest-rate risk. While we continue to anticipate that our capital and liquidity positions will be sufficient, sustained adverse effects may impair these positions or prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements.
These and similar factors and events may have substantial negative effects on the business, financial condition, and results of operations of the Company and its customers. The extent to which the pandemic impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning its severity and the actions necessary to contain it or address its impact, among others. The duration of these impacts resulting from the COVID-19 is unknown, and the resulting customer behavioral changes are not fully known and may not be temporary.
As a participating lender in the Small Business Administration’s Paycheck Protection Program (the “PPP”), the Company may be exposed to credit losses as well as litigation and compliance risk.
The Company is an active participant in the PPP and as of September 30, 2020 has processed and approved loan applications representing $45.9 million in funding to new and existing clients. The Company’s participation in the PPP, and participation in any other relief programs now or in the future, exposes the Company to credit, compliance, litigation and other risks.
Among other regulatory requirements, PPP loans are subject to forbearance of loan payments for a six-month period to the extent that loans are not eligible for forgiveness. If PPP borrowers fail to qualify for loan forgiveness, the Company has a greater risk of holding the PPP loans at unfavorable interest rates. In addition, since the passing of the CARES Act, there is continued ambiguity in the laws, rules, and guidance regarding the operation, application and forgiveness procedures, which exposes the Company to risks relating to noncompliance with the PPP. There is further risk that the SBA could conclude there is a deficiency in the manner in which the Company originated, funded, serviced, or processed PPP loans, which may or may not be related to the ambiguity in the CARES Act and subsequent rules and guidance promulgated by the SBA and the U.S. Department of the Treasury regarding the operation of the PPP. In the event of such deficiency, the SBA may deny its liability under its guaranty, reduce the amount of the guaranty, or, if the SBA has already made payment under the guaranty, seek recovery of any loss related to such deficiency.
PART II
OTHER INFORMATION
FIRST CAPITAL, INC.
(1A – continued)
Since the opening of the PPP, banks have been subject to litigation relating to the policies and procedures that they used in processing applications for the program. The Company may be exposed to the risk of litigation: (1) from both customers and non-customers that have approached the Company in connection with PPP loans and its policies and procedures used in processing applications for the program; and (2) from agents of the PPP borrowers claiming they are entitled to a portion of the Company’s loan processing fees as a result of their assisting borrowers with their PPP loan applications. If any such litigation is filed against the Company and is not resolved in a manner favorable to the Company, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 19, 2008, the board of directors authorized the repurchase of up to 240,467 shares of the Company’s outstanding common stock. The stock repurchase program will expire upon the purchase of the maximum number of shares authorized under the program, unless the board of directors terminates the program earlier. There were 1,911 shares purchased under the stock repurchase program at an average price of $70.09 per share during the quarter ended September 30, 2020. The maximum number of shares that may yet be purchased under the plan is 139,228.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
None.
PART II
OTHER INFORMATION
FIRST CAPITAL, INC.
| Item 6. | Exhibits | |
| 3.1 | Articles of Incorporation of First Capital, Inc. (1) | |
| 3.2 | Fifth Amended and Restated Bylaws of First Capital, Inc. (2) | |
| 11.0 |
||
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | |
| 32.1 | Section 1350 Certification of Chief Executive Officer | |
| 32.2 | Section 1350 Certification of Chief Financial Officer | |
| 101.INS |
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded with the Inline XBRL document |
|
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
___________________
| (1) |
Incorporated by reference to Exhibit 3.1 filed with the Registration Statement on Form SB-2 on September 16, 1998, and any amendments thereto, Registration No. 333-63515, as amended by that Amendment to Articles of Incorporation provided as Exhibit 3.1 to the Report on Form 8-K files with the Securities and Exchange Commission on May 19, 2016. |
| (2) |
Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 18, 2013. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FIRST CAPITAL, INC. | ||||
| (Registrant) | ||||
| Dated November 9, 2020 | BY: | /s/William W. Harrod | ||
| William W. Harrod | ||||
| President and CEO | ||||
| Dated November 9, 2020 | BY: | /s/ Michael C. Frederick | ||
| Michael C. Frederick | ||||
| Executive Vice President, CFO and Treasurer | ||||