FIRST CAPITAL, INC. General
As the holding company for the Bank, the Company conducts its business primarily
through the Bank. The Bank's results of operations depend primarily on net
interest income, which is the difference between the income earned on its
interest-earning assets, such as loans and investments, and the cost of its
interest-bearing liabilities, consisting primarily of deposits, retail
repurchase agreements and borrowings from the FHLB. The Bank's net income is
also affected by, among other things, fee income, provisions for loan losses,
operating expenses and income tax provisions. The Bank's results of operations
are also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
policies concerning monetary and fiscal affairs, housing and financial
institutions and the intended actions of the regulatory authorities.
39
--------------------------------------------------------------------------------Management uses various indicators to evaluate the Company's financial condition and results of operations. Indicators include the following:
? Net income and earnings per share - Net income attributable to the Company was
or
share for 2020.
? Return on average assets and return on average equity - Return on average
assets for 2022 was 1.03% compared to 1.05% for 2021 and 1.12% for 2020, and
return on average equity for 2022 was 13.07% compared to 10.15% for 2021 and
9.64% for 2020.
? Efficiency ratio - The Company's efficiency ratio (defined as noninterest
expenses divided by net interest income plus noninterest income) was 62.3% for
2022 compared to 64.8% for 2021 and 62.8% for 2020.
? Asset quality - Net loan charge-offs totaled
2021 and
outstanding remained virtually unchanged at 0.05% for 2020, 0.04% for 2021 and
0.05% for 2022. In addition, total nonperforming assets (consisting of
nonperforming loans and foreclosed real estate) increased slightly from
million, or 0.12% of total assets, at
0.13% of total assets, at
1.20% of total outstanding loans and 454.5% of nonperforming loans at December
31, 2022 compared to 1.25% of total outstanding loans and 457.4% of
nonperforming loans at December 31, 2021 .
? Shareholder return - Total annual shareholder return, including the decrease
in the Company's stock price from
compared to -31.4% for 2021 and -15.7% for 2020. The total return for the
three-year period was -61.7%.
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company and the Bank. The information contained in
this section should be read in conjunction with the consolidated financial
statements and the accompanying Notes to Consolidated Financial Statements
included in this report.
Operating Strategy
The Company is the parent company of an independent community-oriented financial
institution that delivers quality customer service and offers a wide range of
deposit, loan and investment products to its customers. The commitment to
customer needs, the focus on providing consistent customer service, and
community service and support are the keys to the Bank's past and future
success. The Company has no other material income other than that generated by
the Bank and its subsidiaries.
The Bank's primary business strategy is attracting deposits from the general
public and using those funds to originate residential mortgage loans,
multi-family residential loans, commercial real estate and business loans and
consumer loans. The Bank invests excess liquidity primarily in interest-bearing
deposits with the FHLB and other financial institutions, federal funds sold,
U.S. government and agency securities, local municipal obligations and
mortgage-backed securities.
In recent years, the Company's operating strategy has also included strategies
designed to enhance profitability by increasing sources of noninterest income
and improving operating efficiency while managing its capital and limiting its
credit risk and interest rate risk exposures. To accomplish these objectives,
the Company has focused on the following:
40
--------------------------------------------------------------------------------? Monitoring asset quality and credit risk in the loan and investment
portfolios, with an emphasis on those heavily impacted by the pandemic, and
originating high-quality commercial and consumer loans. In 2023, management
will continue to focus on maintaining the reduced level of nonperforming
assets through improved collection efforts and underwriting on nonperforming
loans.
? Being active in the local community, particularly through our efforts with
local schools, to uphold our high standing in our community and marketing to
our next generation of customers.
? Improving profitability by expanding our product offerings to customers and
leveraging recent investments in technology to increase the productivity and
efficiency of our staff. We have also recently completed a profit improvement
project with an outside consulting firm that we believe will improve overall
profitability in future periods through increased noninterest income and
decreased noninterest expenses.
? Continuing to emphasize commercial real estate and other commercial business
lending as well as consumer lending. The Bank will also continue to focus on
increasing secondary market lending as a source of noninterest income.
Management intends to continue to focus on growth in the loan portfolio and
the secondary market lending programs in our market areas.
? Growing commercial and personal demand deposit accounts which provide a
low-cost funding source.
? Continuing to evaluate vendor contracts for potential cost savings and
efficiencies.
? Continuing our capital management strategy to enhance shareholder value
through the repurchase of Company stock and the payment of dividends.
? Evaluating growth opportunities to expand the Bank's market area and market
share through acquisitions of other financial institutions or branches of
other institutions. The acquisition of Peoples in
market area into
deposit account market share among
2023 will be to continue the enhancement and expansion of our customer
relationships in these and surrounding markets.
? Ensuring that the Company attracts and retains talented personnel and that an
optimal level of performance and customer service is promoted at all levels of
the Company.
41--------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
The accounting and reporting policies of the Company comply withU.S. GAAP and conform to general practices within the banking industry. The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding reported results. Critical accounting policies are those policies that require management to make assumptions about matters that are highly uncertain at the time an accounting estimate is made; and different estimates that the Company reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the Company's financial condition, changes in financial condition or results of operations. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized underU.S. GAAP.
Significant accounting policies, including the impact of recent accounting pronouncements, are discussed in Note 1 of the accompanying Notes to Consolidated Financial Statements. Those policies considered to be critical accounting policies are described below.
Allowances for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the IDFI andFDIC , as an integral part of their examination process, periodically reviews our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. Note 1 and Note 4 of the accompanying Notes to Consolidated Financial Statements describe the methodology used to determine the allowance for loan losses. The Company has not made any substantive changes to its methodology for determining the allowance for loan losses during the year endedDecember 31, 2022 , but management does review (and modify as necessary) the qualitative factors used in the estimate of the allowance for loan losses on a quarterly basis. Valuation Methodologies. In the ordinary course of business, management applies various valuation methodologies to assets and liabilities that often involve a significant degree of judgment, particularly when active markets do not exist for the items being valued. Generally, in evaluating various assets for potential impairment, management compares the fair value to the carrying value. Quoted market prices are referred to when estimating fair values for certain assets, such as certain investment securities. For investment securities for which quoted market prices are not available, the Company obtains fair value measurements from an independent pricing service. However, for those items for which market-based prices do not exist and an independent pricing service is not readily available, management utilizes significant estimates and assumptions to value such items. Examples of these items include goodwill and other intangible assets, acquired loans and deposits, foreclosed and other repossessed assets, impaired loans, stock-based compensation and certain other financial investments. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Company's results of operations. Note 19 of the accompanying Notes to Consolidated Financial Statements describes the methodologies used to determine the fair value of investment securities, impaired loans, loans held for sale and foreclosed real estate. There were no changes in the valuation techniques and related inputs used during the year endedDecember 31, 2022 . 42 --------------------------------------------------------------------------------
Selected Financial Data.
The consolidated financial data presented below is qualified in its entirety by
the more detailed financial data appearing elsewhere in this report, including
the Company's audited consolidated financial statements.
FINANCIAL CONDITION DATA: At December 31,
2022 2021 2020 2019 2018
(In thousands)
Total assets $ 1,151,400 $ 1,156,603 $ 1,017,551 $ 827,496 $ 794,162
Cash and cash equivalents (1) 66,298 172,509 175,888 51,360 41,112
Securities available for sale 460,819 447,335 283,502 254,562 261,841
Securities held to maturity 7,000 2,000 - - -
Interest-bearing time deposits 3,677 4,839 6,396 6,490 7,710
Net loans 557,958 483,287 500,331 466,494 434,260
Deposits 1,060,396 1,035,562 900,461 722,177 701,646
Stockholders' equity, net of
noncontrolling interest in
subsidiary 85,158 113,828 110,639 98,836 85,844
For the Year Ended
OPERATING DATA: December 31,
2022 2021 2020 2019 2018
(In thousands)
Interest income $ 33,940 $ 29,460 $ 29,647 $ 32,054 $ 28,886
Interest expense 1,594 1,128 1,561 1,960 1,611
Net interest income 32,346 28,332 28,086 30,094 27,275
Provision (credit) for
loan losses 950 (325 ) 1,801 1,425 1,168
Net interest income after
provision (credit) for
loan losses 31,396 28,657 26,285 28,669 26,107
Noninterest income 7,927 9,551 8,599 6,926 6,168
Noninterest expense 25,088 24,531 23,048 23,270 21,615
Income before income taxes 14,235 13,677 11,836 12,325 10,660
Income tax expense 2,320 2,240 1,692 1,987 1,394
Net Income 11,915 11,437 10,144 10,338 9,266
Less: net income
attributable to
noncontrolling interest in
subsidiary 13 13 13 13 13
Net Income attributable to
First Capital Inc. $ 11,902 $ 11,424 $ 10,131 $ 10,325 $ 9,253
PER SHARE DATA (2):
Net income - basic $ 3.55 $ 3.41 $ 3.03 $ 3.10 $ 2.78
Net income - diluted 3.55 3.41 3.02 3.09 2.77
Dividends 1.04 1.04 0.96 0.95 0.92
(1) Includes cash and due from banks, interest-bearing deposits in other depository
institutions and federal funds sold.
(2) Per share data excludes net income attributable to noncontrolling interests.
43--------------------------------------------------------------------------------
At or For the Year Ended
SELECTED FINANCIAL RATIOS: December 31,
2022 2021 2020 2019 2018
Performance Ratios:
Return on assets (1) 1.03 % 1.05 % 1.12 % 1.26 % 1.19 %
Return on average equity (2) 13.07 % 10.15 % 9.64 % 11.13 % 11.46 %
Dividend payout ratio (3) 29.30 % 30.50 % 31.68 % 30.65 % 33.09 %
Average equity to average
assets 7.89 % 10.37 % 11.57 % 11.36 % 10.37 %
Interest rate spread (4) 2.90 % 2.80 % 3.32 % 3.93 % 3.72 %
Net interest margin (5) 2.95 % 2.84 % 3.39 % 4.02 % 3.79 %
Non-interest expense to average
assets 2.17 % 2.26 % 2.54 % 2.85 % 2.77 %
Average interest earning assets
to average interest bearing
liabilities 140.23 % 139.51 % 137.42 % 134.04 % 132.29 %
Regulatory Capital Ratios (Bank only): Community Bank Leverage Ratio (6) 9.18 % 8.84 % 9.37 % 10.01 % 9.57 % Tier 1 risk-based capital ratio 14.03 % 13.87 % Common equity tier 1 capital ratio 14.03 % 13.87 % Total risk-based capital ratio 14.90 % 14.62 % Asset Quality Ratios: Nonperforming loans as a percent of net loans (7) 0.27 % 0.28 % 0.29 % 0.38 % 0.70 % Nonperforming assets as a percent of total assets (8) 0.13 % 0.12 % 0.14 % 0.24 % 0.78 % Allowance for loan losses as a percent of gross loans receivable 1.20 % 1.25 % 1.31 % 1.08 % 0.93 % (1) Net income attributable toFirst Capital, Inc. divided by average assets. (2) Net income attributable toFirst Capital, Inc. divided by average equity. (3) Common stock dividends declared per share divided by net income per share. (4) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities. Tax exempt income is reported on a tax equivalent basis using a federal marginal rate of 21%. (5) Net interest income as a percentage of average interest-earning assets. (6) EffectiveMarch 31, 2020 , the Bank opted in to the Community Bank Leverage Ratio (CBLR) framework. As such, the other regulatory ratios are no longer provided. (7) Nonperforming loans consist of loans accounted for on a nonaccrual basis and accruing loans 90 days or more past due. (8) Nonperforming assets consist of nonperforming loans and real estate acquired in settlement of loans. 44
--------------------------------------------------------------------------------
Results of Operations for the Year Ended
Net Income. Net income attributable to the Company was$11.9 million ($3.55 per share diluted; weighted average common shares outstanding of 3,355,023, as adjusted) for the year endedDecember 31, 2022 compared to$11.4 million ($3.41 per share diluted; weighted average common shares outstanding of 3,346,495, as adjusted) for the year endedDecember 31, 2021 . Net Interest Income. Net interest income increased$4.0 million , or 14.2%, from$28.3 million for 2021 to$32.3 million for 2022 primarily due to increases in the average balance of interest-earning assets and the interest rate spread, the difference between the average tax-equivalent yield on interest-earning assets and the average cost of interest-bearing liabilities. Total interest income increased$4.5 million for 2022 as compared to 2021. The increase was primarily due to an increase in the average balance of interest-earning assets from$1.02 billion in 2021 to$1.13 billion in 2022. The tax-equivalent yield on interest-earning assets increased from 2.95% in 2021 to 3.10% in 2022, primarily due to the increase in short-term interest rates by theFederal Open Market Committee during 2022. Interest on loans increased$1.2 million when comparing the two periods due to an increase in the average balance of loans from$498.5 million in 2021 to$530.2 million in 2022. This increase was partially offset by a decrease in PPP loan fees recognized in interest income during 2022. These fees totaled$34,000 during 2022 compared to$2.0 million during 2021. Interest and dividends on investment securities (including FHLB stock) increased$2.4 million for 2022 compared to 2021 due to an increase in the average balance of investment securities from$364.0 million for 2021 to$495.6 million for 2022. Other interest income increased$944,000 for 2022 as compared to 2021 primarily due to the tax equivalent yield of federal funds sold increasing from 0.13% to 1.24% when comparing the two periods, partially offset by a decrease in the average balance of federal funds sold from$149.9 million for 2021 to$92.0 million for 2022. Total interest expense increased$466,000 , from$1.1 million for 2021 to$1.6 million for 2022, due to increases in the average cost of interest-bearing liabilities from 0.15% for 2021 to 0.20% for 2022 and in the average balance of interest-bearing liabilities from$734.5 million for 2021 to$802.8 million for 2022. As a result of the changes in interest-earning assets and interest-bearing liabilities, the interest rate spread (tax equivalent basis) increased from 2.80% for 2021 to 2.90% for 2022. For further information, see "Average Balances and Yields" below. The changes in interest income and interest expense resulting from changes in volume and changes in rates for 2022 and 2021 are shown in the schedule captioned "Rate/Volume Analysis" included herein. Provision for Loan Losses. Based on management's analysis of the allowance for loan losses, a provision for loan losses of$950,000 was recognized for 2022 primarily due to loan growth. The Company recognized a negative provision for losses of$325,000 for 2021 primarily to reflect changes to qualitative factors within the Bank's allowance for loan losses calculation related to the COVID-19 pandemic. Total outstanding loans increased by$75.3 million during 2022 as compared to a decrease of$18.4 million during 2021. Net charge-offs increased from$217,000 for 2021 to$261,000 for 2022, and nonperforming loans increased from$1.3 million atDecember 31, 2021 to$1.5 million atDecember 31, 2022 . The provisions were recorded to bring the allowance to the level determined in applying the allowance methodology after reduction for net charge-offs during the year. Provisions for loan losses are charges to earnings to maintain the total allowance for loan losses at a level considered reasonable 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. 45
-------------------------------------------------------------------------------- Noninterest income. Noninterest income decreased$1.6 million to$7.9 million for 2022 primarily due to a decrease of$1.6 million in gains on the sale of loans as increased interest rates slowed lending in residential mortgages. There was also a$414,000 unrealized loss on equity securities in 2022 compared to a$328,000 unrealized gain on equity securities during 2021. This was partially offset by increases in services charges on deposit accounts and ATM and debit card fees of$399,000 and$269,000 , respectively. Noninterest expense. Noninterest expense increased$557,000 to$25.1 million for 2022 primarily due to increases in data processing expense, compensation and benefits expense and other expenses of$499,000 ,$160,000 and$112,000 , respectively. This was partially offset by a$282,000 decrease in professional fees when comparing the two periods. A significant factor in the increase in data processing expenses during 2022 was an increase in ATM processing fees and the continued expansion of digital products. Income tax expense. Tax expense increased$80,000 for 2022 to$2.3 million primarily due to an increase in pre-tax income. As a result, the effective tax rate decreased slightly from 16.4% for 2021 to 16.3% for 2022. See Note 12 of the accompanying Notes to Consolidated Financial Statements for additional details on the Company's income tax expense.
Results of Operations for the Year Ended
Net Income. Net income attributable to the Company was$11.4 million ($3.41 per share diluted; weighted average common shares outstanding of 3,346,495, as adjusted) for the year endedDecember 31, 2021 compared to$10.1 million ($3.02 per share diluted; weighted average common shares outstanding of 3,349,277, as adjusted) for the year endedDecember 31, 2020 . Net Interest Income. Net interest income increased$246,000 , or 0.9%, from$28.1 million for 2020 to$28.3 million for 2021 primarily due to an increase in the average balance of interest-earning assets, partially offset by a decrease in the interest rate spread, the difference between the average tax-equivalent yield on interest-earning assets and the average cost of interest-bearing liabilities. Total interest income decreased$187,000 for 2021 as compared to 2020. This decrease was primarily due to a decrease in the tax-equivalent yield on interest-earning assets from 3.57% for 2020 to 2.95% for 2021, partially offset by an increase in the average balance of interest-earning assets from$846.3 million for 2020 to$1.02 billion for 2021. Interest on loans decreased$751,000 as a result of the average tax-equivalent yield on loans decreasing from 4.93% for 2020 to 4.78% for 2021. Interest and dividends on investment securities (including FHLB stock) increased$607,000 for 2021 compared to 2020 due to an increase in the average balance of investment securities from$256.1 million for 2020 to$364.0 million for 2021 partially offset by a decrease in the tax equivalent yield on investment securities from 2.08% in 2020 to 1.67% in 2021. Other interest income decreased$43,000 for 2021 as compared to 2020 primarily due to the tax equivalent yield of federal funds sold and interest-bearing deposits with banks decreasing from 0.40% to 0.20% when comparing the two periods, partially offset by an increase in the average balance of other interest-earning assets from$92.0 million for 2020 to$162.3 million for 2021.
Total interest expense decreased
Provision for Loan Losses. Based on management's analysis of the allowance for loan losses, the Company recognized a negative provision for loan losses of$325,000 for 2021 compared to a provision for losses of$1.8 million for 2020. The decrease in provision for loan losses primarily reflects changes to qualitative factors within the Bank's allowance for loan losses calculation related to the COVID-19 pandemic. Total outstanding loans decreased by$18.4 million during 2021 as compared to an increase of$36.2 million during 2020. Net charge-offs decreased from$237,000 for 2020 to$217,000 for 2021, and nonperforming loans decreased from$1.5 million atDecember 31, 2020 to$1.3 million atDecember 31, 2021 . The provisions were recorded to bring the allowance to the level determined in applying the allowance methodology after reduction for net charge-offs during the year. 46 -------------------------------------------------------------------------------- Provisions for loan losses are charges to earnings to maintain the total allowance for loan losses at a level considered reasonable 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. Noninterest income. Noninterest income increased$952,000 to$9.6 million for 2021 primarily due to increases in ATM and debit card fees of$588,000 partially offset by a decrease in gains on loans sold of$277,000 when comparing the two periods. Included in gains on the sale of loans during 2020 was a$214,000 gain on the sale of the Bank's$1.5 million credit card portfolio. The increase in ATM and debit card fees is primarily attributable to increased transaction volume. In addition, noninterest income during 2021 included a$328,000 unrealized gain on equity securities compared to a$194,000 unrealized loss on equity securities during 2020. Noninterest expense. Noninterest expense increased$1.5 million , to$24.5 million for 2021 primarily due to increases in compensation and benefits expense, data processing expense and professional fees of$729,000 ,$349,000 and$335,000 , respectively. Compensation and benefits increased for 2021 primarily due to normal salary and wage increases. A significant factor in the increase in data processing expenses during 2021 was the expiration of contract credits in 2021 included in the Bank's new digital platform in the fourth quarter of 2019. The increase in professional fees during 2021 is primarily due to fees related to a profitability enhancement study which began in the fourth quarter of 2021 and will be completed in the first quarter of 2022. Income tax expense. Tax expense increased$548,000 for 2021 to$2.2 million primarily due to an increase in pre-tax income and a change inKentucky tax law that subjects the Bank to the state's corporate income tax effectiveJanuary 1, 2021 . As a result, the effective tax rate increased from 14.3% for 2020 to 16.4% for 2021. Average Balances and Yields. The following table sets forth certain information for the periods indicated regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earnings assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average historical cost balances of assets or liabilities, respectively, for the periods presented and do not give effect to changes in fair value that are included as a separate component of stockholders' equity. Average balances are derived from daily balances. Tax-exempt income on loans and investment securities has been adjusted to a tax equivalent basis using the federal marginal tax rate of 21%. 47 -------------------------------------------------------------------------------- Year Ended December 31, 2022 2021 2020 Average Average Average (Dollars in thousands) Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost Interest-earning assets: Loans (1) (2) (3): Taxable$ 521,945 $ 24,768 4.75 % $
489,803
8,214 240 2.92 % 8,680 255 2.94 % 5,262 170 3.23 %
Total loans 530,159 25,008 4.72 % 498,483 23,826 4.78 % 498,209 24,559 4.93 %
Investment
securities:
Taxable (4) 348,431 4,509 1.29 % 241,444 2,660 1.10 % 170,610 2,613 1.53 % Tax-exempt
147,215 4,056 2.76 % 122,506 3,423 2.79 % 85,501 2,714 3.17 %
Total investment
securities 495,646 8,565 1.73 % 363,950 6,083 1.67 % 256,111 5,327 2.08 %
Federal funds sold 91,982 1,137 1.24 % 149,864
189 0.13 % 80,584 183 0.23 %
Other
interest-earning
assets (5) 7,918 132 1.67 % 12,414 135 1.09 % 11,366 184 1.62 %
Total
interest-earning
assets 1,125,705 34,842 3.10 % 1,024,711 30,233 2.95 % 846,270 30,253 3.57 % Noninterest-earning assets 28,849 61,048 62,287 Total assets$ 1,154,554 $ 1,085,759 $ 908,557 Interest-bearing liabilities: Interest-bearing demand deposits$ 466,476 $ 928 0.20 %$ 427,381 $ 508 0.12 %$ 352,327 $ 591 0.17 % Savings accounts 282,455 357 0.13 % 245,142 167 0.07 % 197,267 239 0.12 % Time deposits 53,851 309 0.57 % 62,008 453 0.73 % 66,216 731 1.10 % Total deposits 802,782 1,594 0.20 % 734,531 1,128 0.15 % 615,810 1,561 0.25 % Total interest-bearing liabilities 802,782 1,594 0.20 % 734,531 1,128 0.15 % 615,810 1,561 0.25 % Noninterest-bearing liabilities: Noninterest-bearing deposits 255,113 232,196 180,904 Other liabilities 5,591 6,487 6,735 Total liabilities 1,063,486 973,214 803,449 Stockholders' equity (6) 91,068 112,545 105,108 Total liabilities and stockholders' equity$ 1,154,554 $ 1,085,759 $ 908,557 Net interest income (tax equivalent basis)$ 33,248 $ 29,105 $ 28,692 Less: tax equivalent adjustment (902 ) (773 ) (606 ) Net interest income$ 32,346 $ 28,332 $ 28,086 Interest rate spread 2.90 % 2.80 % 3.32 % Net interest margin 2.95 % 2.84 % 3.39 % Ratio of average interest-earning assets to average interest-bearing liabilities 140.23 % 139.51 % 137.42 % (1) Interest income on loans includes fee income of$925,000 ,$2.8 million and$1.8 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Loan fee income includes fees related to PPP loans of$34,000 ,$2.0 million and$791,000 for 2022, 2021 and 2020 , respectively. (2) Average loan balances include loans held for sale and nonperforming loans. (3) Interest income on loans includes net accretion on acquired loans of$10,000 ,$1,000 and$36,000 for the years endedDecember 31, 2022 , 2021 and 2020, respectively. (4) Includes taxable debt and equity securities and FHLB stock. (5) Includes interest-bearing deposits with banks and interest-bearing time deposits. (6) Stockholders' equity attributable toFirst Capital, Inc. 48 -------------------------------------------------------------------------------- Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on net interest income and interest expense computed on a tax-equivalent basis. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) effects attributable to changes in rate and volume (change in rate multiplied by changes in volume). Tax exempt income on loans and investment securities has been adjusted to a tax-equivalent basis using the federal marginal tax rate of 21%. 2022 Compared to 2021 2021 Compared to 2020 Increase (Decrease) Due to
Increase (Decrease) Due to
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
(In thousands)Interest-earning
assets:
Loans:
Taxable$ (298 ) $ 1,514 $ (19 ) $ 1,197 $ (672 ) $ (150 ) $ 4 $ (818 ) Tax-exempt (2 ) (13 ) - (15 ) (15 ) 110 (10 ) 85 Total loans (300 ) 1,501 (19 ) 1,182
(687 ) (40 ) (6 ) (733 )
Investment
securities:
Taxable 462 1,184 203 1,849 (734 ) 1,086 (305 ) 47 Tax-exempt (38 ) 678 (7 ) 633 (325 ) 1,175 (141 ) 709 Total investment securities securities 424 1,862 196 2,482
(1,059 ) 2,261 (446 ) 756
Federal funds sold 1,665 (75 ) (642 ) 948 (82 ) 157 (69 ) 6 Other interest-earning assets 72 (49 ) (26 ) (3 ) (60 ) 17 (6 ) (49 ) Total net change in income on interest- earning assets 1,861 3,239 (491 ) 4,609 (1,888 ) 2,395 (527 ) (20 ) Interest-bearing liabilities: Interest-bearing deposits 337 95 34 466 (612 ) 298 (119 ) (433 ) Total net change in expense on interest- bearing liabilities 337 95 34 466 (612 ) 298 (119 ) (433 ) Net change in net interest income (tax equivalent basis)$ 1,524 $ 3,144 $ (525 ) $ 4,143 $
(1,276 )$ 2,097 $ (408 ) $ 413 49
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Comparison of Financial Condition at
Total assets decreased from$1.16 billion atDecember 31, 2021 to$1.15 billion atDecember 31, 2022 primarily due to a decrease in federal funds sold partially offset by an increase in net loans receivable. Net loans receivable increased from$483.3 million atDecember 31, 2021 to$558.0 million atDecember 31, 2022 . All loan categories increased during 2022, but the primary loan types behind the growth were residential mortgage loans, commercial real estate loans, commercial business loans and construction loans which increased by$24.7 million ,$23.5 million ,$9.0 million and$8.9 million , respectively. The Bank continued to sell the majority of newly originated fixed-rate residential mortgage loans in the secondary market. The Bank originated$49.2 million in residential mortgages for sale in the secondary market during 2022 compared to$128.4 million in 2021. Of the total originations for 2022,$15.8 million paid off existing loans in the Bank's portfolio, the majority of which were construction loans. Originating mortgage loans for sale in the secondary market allows the Bank to better manage its interest rate risk, while offering a full line of mortgage products to prospective customers. Securities available for sale, at fair value, consisting primarily ofU.S. agency mortgage-backed securities and collateralized mortgage obligations,U.S. agency notes and bonds,Treasury notes and bonds and municipal obligations, increased from$447.3 million atDecember 31, 2021 to$460.8 million atDecember 31, 2022 . Purchases of securities available for sale totaled$94.3 million in 2022. These purchases were partially offset by principal repayments of$22.2 million and maturities of$7.9 million in 2022. There was also an unrealized loss of$48.8 million on the securities available for sale portfolio during 2022 due primarily to increasing market rates during the year. No securities were sold during 2022. The Bank invests excess cash in securities that provide safety, liquidity and yield. Accordingly, we purchase mortgage-backed securities to provide cash flow for loan demand and deposit changes, we purchaseU.S Treasury and federal agency notes for short-term yield and low risk, and municipals are purchased to improve our tax equivalent yield focusing on longer term profitability. Cash and cash equivalents decreased from$172.5 million atDecember 31, 2021 to$66.3 million atDecember 31, 2022 , as excess liquidity was used to fund loan growth and purchase investment securities.
Total deposits increased
There were no outstanding borrowings at
Total stockholders' equity attributable to the Company decreased$28.7 million from$113.8 million atDecember 31, 2021 to$85.2 million atDecember 31, 2022 . This decrease is primarily the result of a$37.5 million net unrealized loss on available for sale securities partially offset by a$8.4 million increase in retained net income. The net unrealized loss on available for sale securities during 2022 is primarily due to increases in market interest rates. As ofDecember 31, 2022 , the Company had repurchased 104,787 shares of the 240,467 shares authorized by the Board of Directors under the current stock repurchase program which was announced inAugust 2008 and 433,321 shares since the original repurchase program began in 2001. 50 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Liquidity refers to the ability of a financial institution to generate sufficient cash flow to fund current loan demand, meet deposit withdrawals and pay operating expenses. The Bank's primary sources of funds are new deposits, proceeds from loan repayments and prepayments and proceeds from the maturity of securities. The Bank may also borrow from the FHLB. While loan repayments and maturities of securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. AtDecember 31, 2022 , the Bank had cash and interest-bearing deposits with banks (including interest-bearing time deposits) of$68.2 million and securities available for sale with a fair value of$459.8 million . If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB, collateral eligible for repurchase agreements and unsecured federal funds purchased lines of credit with other financial institutions. The Bank 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. AtDecember 31, 2022 , the Bank had total commitments to extend credit of$193.2 million . See Note 16 in the accompanying Notes to Consolidated Financial Statements. AtDecember 31, 2022 , the Bank had certificates of deposit scheduled to mature within one year of$26.3 million . 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 requires funds to pay any dividends to its shareholders and to repurchase any shares of its common stock. The Company's primary source of income is dividends received from the Bank and the Captive. The amount of dividends the Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the banking regulators, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. AtDecember 31, 2022 , the Company (on an unconsolidated basis) had liquid assets of$2.7 million . The Bank is required to maintain specific amounts of capital pursuant to regulations. As previously mentioned in this report, in 2020 the Bank elected to opt in to the CBLR framework. As ofDecember 31, 2022 the Bank was in compliance with all regulatory capital requirements which were effective as of such date with a CBLR of 9.18%. See Note 18 in the accompanying Notes to Consolidated Financial Statements. OnSeptember 24, 2020 , the Company filed an automatic shelf registration statement with theSEC . The shelf registration permits the Company to issue up to$35 million of debt and equity securities, of which$35 million remains available, subject to Board authorization and market conditions. While we seek to preserve flexibility with respect to cash requirements, there can be no assurance that market conditions would permit us to sell securities on acceptable terms at any given time or at all.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented in this report have been prepared in accordance withU.S. GAAP, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of the financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Market Risk Analysis Qualitative Aspects of Market Risk. Market risk is the risk that the estimated fair value of our assets and liabilities will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes. 51 -------------------------------------------------------------------------------- The Company's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates by operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity. 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 the use of retail deposits, compared to brokered deposits, reduces the effects of interest rate fluctuations because they generally represent a more stable source of funds. Quantitative Aspects of Market Risk. The Company does not maintain a trading account for any class of financial instrument nor does the Company engage in hedging activities or purchase high-risk derivative instruments. Furthermore, the Company is not subject to foreign currency exchange rate risk or commodity price risk. Potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits, extending loans and investing in investment securities. Many factors affect the Company's exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. The Company's earnings can also be affected by the monetary and fiscal policies of theU.S. Government and its agencies, particularly the FRB. 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 onDecember 31, 2022 and 2021 financial information. At December 31, 2022 At December 31, 2021 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$ 4,012 11.28 %$ 885 3.19 % 200bp 2,683 7.54 1,853 6.68 100bp 1,345 3.78 908 3.27 Static - - - - (100)bp 2,945 8.28 (743 ) (2.68 ) (200)bp 1,117 3.14 (2,004 ) (7.23 ) (300)bp (798 ) (2.25 ) AtDecember 31, 2022 and 2021, the Company's simulated exposure to an increase in interest rates shows that an immediate and sustained increase in rates of 1.00%, 2.00% or 3.00% would increase the Company's net interest income over a one year horizon compared to a flat interest rate scenario. AtDecember 31, 2022 , an immediate and sustained decrease in rates of 1.00% or 2.00% would also increase the Company's net interest income over a one year horizon compared to a flat rates scenario. Alternatively, atDecember 31, 2021 , an immediate and sustained decrease in rates of 1.00% or 2.00% would decrease the Company's net interest income over a one year horizon compared to a flat interest rate scenario. Due to increasing market rates during 2022, the Company also modeled an immediate and sustained decrease of 3.00% atDecember 31, 2022 which resulted in a decrease in the Company's net interest income over a one year horizon compared to a flat interest rate scenario. During the year endedDecember 31, 2022 , the Company updated the betas on deposits to better reflect the market and also updated the deposit decay rates to levels indicated in a third-party study of customer accounts. 52
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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.
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 December 31, 2022 and 2021 financial information.
At December 31, 2022
Immediate Change Economic Value of Equity Economic Value of Equity as a
in the Level Dollar Dollar Percent Percent of Present Value of Assets
of Interest Rates Amount Change Change EVE Ratio Change
(Dollars in thousands)
300bp $ 322,611 $ 25,242 8.49 % 30.96 % 464bp
200bp 319,861 22,492 7.56 29.87 355bp
100bp 311,941 14,572 4.90 28.36 204bp
Static 297,369 - - 26.32 0bp
(100)bp 306,021 8,652 2.91 26.36 4bp
(200)bp 271,270 (26,099 ) (8.78 ) 22.76 (356)bp
(300)bp 227,786 (69,583 ) (23.40 ) 18.62 (770)bp
At December 31, 2021
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
(Dollars in thousands)
300bp $ 214,645 $ 46,620 27.75 % 20.18 % 555bp
200bp 211,155 43,130 25.67 19.36 473bp
100bp 191,558 23,533 14.01 17.13 250bp
Static 168,025 - - 14.63 0bp
(100)bp 136,411 (31,614 ) (18.82 ) 11.57 (306)bp
(200)bp 97,661 (70,364 ) (41.88 ) 8.11 (652)bp
The previous tables indicate that at December 31, 2022 and 2021 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 200 basis point decrease in
prevailing interest rates. At December 31, 2022 , the company would expect an
increase in its EVE in the event of a sudden and sustained 100 basis point
decrease in prevailing interest rates as compared to a decrease under the same
scenario as of December 31, 2021 . Due to increasing market rates during 2022,
the Company also modeled a sudden and sustained 300 basis point decrease in
prevailing interest rates as of December 31, 2022 , which resulted in a decrease
in its EVE. As previously mentioned in this report, during the year ended
December 31, 2022 , the Company updated the betas on deposits to better reflect
the market and also updated the deposit decay rates to levels indicated in a
third-party study of customer accounts.
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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.
Impact of Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 of the accompanying Notes to Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated herein by reference to the section captioned "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk Analysis" in this Annual Report on Form 10-K.
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