First Capital(FCAP) - 2020 Q2 - Quarterly Report

Part I Financial Information Item 1. Consolidated Financial Statements This section presents First Capital, Inc.'s unaudited consolidated financial statements and notes for periods ending June 30, 2020, and December 31, 2019 Consolidated Balance Sheets The consolidated balance sheets provide a snapshot of the Company's financial position, detailing assets, liabilities, and equity, with total assets increasing by 11.1% | Metric | June 30, 2020 (In thousands) | December 31, 2019 (In thousands) | | :----------------------------------- | :--------------------------- | :----------------------------- | | Total Assets | $919,618 | $827,496 | | Total Liabilities | $813,640 | $728,548 | | Total Equity | $105,978 | $98,948 | | Cash and cash equivalents | $106,421 | $51,360 | | Loans, net | $498,792 | $466,494 | | Total deposits | $807,636 | $722,177 | - Total assets increased by $92.1 million (11.1%) from December 31, 2019, to June 30, 2020[7][179] - Net loans receivable increased by $32.3 million, primarily due to a $45.1 million increase in PPP loans[7][68][180] - Total deposits increased by $85.5 million, driven by increases in noninterest-bearing demand deposits, interest-bearing demand deposits, and savings accounts, influenced by stimulus funds and decreased consumer spending[7][184] Consolidated Statements of Income Net income decreased for both the three and six months ended June 30, 2020, primarily due to a higher provision for loan losses | Metric | Three Months Ended June 30, 2020 (In thousands) | Three Months Ended June 30, 2019 (In thousands) | Six Months Ended June 30, 2020 (In thousands) | Six Months Ended June 30, 2019 (In thousands) | | :-------------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Total interest income | $7,374 | $8,219 | $15,048 | $15,877 | | Total interest expense | $404 | $491 | $872 | $947 | | Net interest income | $6,970 | $7,728 | $14,176 | $14,930 | | Provision for loan losses | $825 | $300 | $1,176 | $750 | | Net interest income after provision for loan losses | $6,145 | $7,428 | $13,000 | $14,180 | | Total noninterest income | $2,320 | $1,768 | $3,776 | $3,273 | | Total noninterest expense | $5,618 | $5,764 | $11,443 | $11,429 | | Income before income taxes | $2,847 | $3,432 | $5,333 | $6,024 | | Income tax expense | $405 | $568 | $794 | $1,010 | | Net Income Attributable to First Capital, Inc. | $2,438 | $2,860 | $4,532 | $5,007 | | Basic Earnings per common share | $0.73 | $0.86 | $1.36 | $1.50 | | Diluted Earnings per common share | $0.73 | $0.86 | $1.35 | $1.50 | - Net income attributable to the Company decreased by $422,000 for the three months ended June 30, 2020, and by $475,000 for the six months ended June 30, 2020, compared to the respective prior year periods[10][186][187] - The provision for loan losses significantly increased to $825,000 for the three months and $1.2 million for the six months ended June 30, 2020, primarily due to economic uncertainties related to COVID-19[10][195][196] - Noninterest income increased by $552,000 for the three months and $503,000 for the six months ended June 30, 2020, driven by gains on loan sales and ATM/debit card fees[10][201][202] Consolidated Statements of Comprehensive Income Comprehensive income attributable to First Capital, Inc. increased for the six months ended June 30, 2020, despite lower net income, due to higher other comprehensive income | Metric | Three Months Ended June 30, 2020 (In thousands) | Three Months Ended June 30, 2019 (In thousands) | Six Months Ended June 30, 2020 (In thousands) | Six Months Ended June 30, 2019 (In thousands) | | :--------------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net Income | $2,442 | $2,864 | $4,539 | $5,014 | | Other Comprehensive Income, net of tax | $1,362 | $3,100 | $3,943 | $4,939 | | Comprehensive Income Attributable to First Capital, Inc. | $3,800 | $5,960 | $8,475 | $9,946 | - Unrealized holding gains on securities available for sale, net of tax, were $1.36 million for the three months and $3.94 million for the six months ended June 30, 2020[13][14] Consolidated Statements of Changes in Stockholders' Equity This statement details equity movements for the six months ended June 30, 2020 and 2019, including net income, other comprehensive income, and dividends | Metric | Balances at January 1, 2020 (In thousands) | Net Income (In thousands) | Other Comprehensive Income (In thousands) | Cash Dividends (In thousands) | Restricted Stock Grants (In thousands) | Stock Compensation Expense (In thousands) | Purchase of Treasury Shares (In thousands) | Balances at June 30, 2020 (In thousands) | | :------------------------------------ | :--------------------------------------- | :------------------------ | :---------------------------------------- | :---------------------------- | :------------------------------------- | :---------------------------------------- | :----------------------------------------- | :--------------------------------------- | | Common Stock | $38 | - | - | - | - | - | - | $38 | | Additional Paid-in Capital | $40,723 | - | - | - | $961 | - | - | $41,684 | | Retained Earnings | $65,266 | $4,532 | - | $(1,621) | - | - | - | $68,177 | | Accumulated Other Comprehensive Income | $2,142 | - | $3,943 | - | - | - | - | $6,085 | | Unearned Stock Compensation | $(940) | - | - | - | $(961) | $197 | - | $(1,704) | | Treasury Stock | $(8,393) | - | - | - | - | - | $(14) | $(8,407) | | Noncontrolling Interest | $112 | $7 | - | $(14) | - | - | - | $105 | | Total | $98,948 | $4,539 | $3,943 | $(1,635) | - | $197 | $(14) | $105,978 | - Total stockholders' equity attributable to the Company increased from $98.8 million at December 31, 2019, to $105.9 million at June 30, 2020[7][185] - This increase was primarily due to a $3.9 million increase in the net unrealized gain on available-for-sale securities and a $2.9 million increase in retained net income[185] Consolidated Statements of Cash Flows Net cash provided by operating activities decreased, while net cash used in investing activities increased, and net cash provided by financing activities substantially increased | Metric | Six Months Ended June 30, 2020 (In thousands) | Six Months Ended June 30, 2019 (In thousands) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Net Cash Provided By Operating Activities | $4,242 | $6,099 | | Net Cash Used In Investing Activities | $(32,991) | $(18,069) | | Net Cash Provided By Financing Activities | $83,810 | $31,384 | | Net Increase in Cash and Cash Equivalents | $55,061 | $19,414 | | Cash and Cash Equivalents at End of Period | $106,421 | $60,526 | - Net cash provided by operating activities decreased from $6.1 million in 2019 to $4.2 million in 2020[18] - Net cash used in investing activities increased significantly from $18.1 million in 2019 to $33.0 million in 2020, primarily due to increased purchases of securities available for sale and net increase in loans receivable[18][19] - Net cash provided by financing activities more than doubled, from $31.4 million in 2019 to $83.8 million in 2020, largely driven by an $85.5 million net increase in deposits[19] Notes to Consolidated Financial Statements These notes provide detailed explanations and disclosures supporting the consolidated financial statements, offering crucial context for understanding the reported financial figures 1. Presentation of Interim Information This note outlines the Company's structure, interim financial statement presentation, and the significant impact of the COVID-19 pandemic and PPP loans - First Capital, Inc. is the financial holding company for First Harrison Bank and its subsidiaries[20] - The unaudited interim financial statements include all necessary adjustments and are prepared in accordance with GAAP for interim reporting[21][22] - The COVID-19 pandemic has led to significant declines in market interest rates and may adversely affect future financial conditions and results, particularly regarding expected credit losses on loans[24][27] - The Bank originated approximately $45.5 million in PPP loans through July 16, 2020, with net deferred loan fees of $1.5 million at June 30, 2020, expected to positively impact financial results[29] 2. Investment Securities This note details the Company's investment securities portfolio, including available-for-sale debt and equity securities, and their fair values and unrealized gains/losses | Investment Category | June 30, 2020 (Fair Value, In thousands) | December 31, 2019 (Fair Value, In thousands) | | :------------------------------------ | :--------------------------------------- | :----------------------------------------- | | Agency mortgage-backed securities | $69,876 | $69,498 | | Agency CMO | $35,191 | $43,084 | | Agency notes and bonds | $58,247 | $64,556 | | Municipal obligations | $93,785 | $77,424 | | Total securities available for sale | $257,099 | $254,562 | | Equity securities | $1,575 | $1,746 | | Metric | June 30, 2020 (In thousands) | December 31, 2019 (In thousands) | | :------------------------------------ | :--------------------------- | :----------------------------- | | Gross Unrealized Gains (AFS) | $7,950 | $3,644 | | Gross Unrealized Losses (AFS) | $82 | $901 | - The Company recognized an unrealized gain of $223,000 for the three months ended June 30, 2020, and an unrealized loss of $171,000 for the six months ended June 30, 2020, on its equity investment[45] - No sales of investment securities or time deposits occurred during the three and six months ended June 30, 2020[43] 3. Loans and Allowance for Loan Losses This note details the loan portfolio, loan loss policies, and allowance for loan losses, highlighting COVID-19's impact and PPP loan increases | Loan Category | June 30, 2020 (In thousands) | December 31, 2019 (In thousands) | | :------------------------------------ | :--------------------------- | :----------------------------- | | Residential mortgage loans | $128,754 | $131,959 | | Commercial real estate | $129,321 | $121,563 | | Commercial business loans | $77,515 | $45,307 | | Home equity and second mortgage loans | $53,243 | $54,677 | | Total Gross Loans | $522,421 | $493,499 | | Allowance for loan losses | $(6,064) | $(5,061) | | Loans, net | $498,792 | $466,494 | - Commercial business loans increased significantly, primarily due to $45.1 million in PPP loans guaranteed by the SBA[68] | Metric | June 30, 2020 (In thousands) | December 31, 2019 (In thousands) | | :------------------------------------ | :--------------------------- | :----------------------------- | | Allowance for loan losses | $6,064 | $5,061 | | Provision for loan losses (6 months) | $1,176 | $750 | | Net charge-offs (6 months) | $173 | $206 | - The allowance for loan losses increased by $1.0 million, with increases to qualitative factors largely related to economic uncertainties surrounding COVID-19[75][80] | Nonperforming Loans | June 30, 2020 (In thousands) | December 31, 2019 (In thousands) | | :------------------------------------ | :--------------------------- | :----------------------------- | | Nonaccrual Loans | $2,336 | $1,765 | | Loans 90+ Days Past Due Still Accruing | $16 | $13 | | Total Nonperforming Loans | $2,352 | $1,778 | - The Bank approved payment extensions on $68.1 million of loans due to COVID-19, with $33.2 million having resumed normal payments by June 30, 2020[106] 4. Qualified Affordable Housing Project Investment This note details the Bank's investment in affordable housing projects, including balances, unfunded commitments, amortization expense, and tax credits | Metric | June 30, 2020 (In thousands) | December 31, 2019 (In thousands) | | :------------------------------------ | :--------------------------- | :----------------------------- | | Investment balance | $3,100 | $3,200 | | Unfunded commitment | $1,100 | $1,900 | | Metric | Six Months Ended June 30, 2020 (In thousands) | Six Months Ended June 30, 2019 (In thousands) | | :------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Amortization expense | $182 | $169 | | Tax credits and other tax benefits | $220 | $248 | 5. Supplemental Disclosure for Earnings Per Share This note provides a breakdown of basic and diluted earnings per share calculations, including net income and weighted average common shares outstanding | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income attributable to First Capital, Inc. (In thousands) | $2,438 | $2,860 | $4,532 | $5,007 | | Basic EPS | $0.73 | $0.86 | $1.36 | $1.50 | | Diluted EPS | $0.73 | $0.86 | $1.35 | $1.50 | | Weighted average common shares outstanding (Basic) | 3,336,573 | 3,329,837 | 3,336,516 | 3,329,840 | | Weighted average common shares outstanding (Diluted) | 3,347,871 | 3,341,813 | 3,349,079 | 3,340,950 | 6. Stock-Based Compensation Plan This note describes the Company's equity incentive plans, including shares available for issuance, restricted stock grants, and recognized compensation expense - The 2009 Equity Incentive Plan terminated on May 20, 2019, and the 2019 Equity Incentive Plan was adopted on May 22, 2019, with 176,150 shares available for issuance[120][123] - As of June 30, 2020, 161,900 shares were available for issuance under the 2019 Plan[124] - The Company granted 14,250 restricted stock shares on February 18, 2020, under the 2019 Plan, with a total value of $961,000, vesting ratably through July 1, 2025[126] | Metric | Three Months Ended June 30, 2020 (In thousands) | Six Months Ended June 30, 2020 (In thousands) | | :------------------------------------ | :-------------------------------------------- | :------------------------------------------ | | Stock compensation expense | $104 | $197 | - At June 30, 2020, there was $1.7 million of unrecognized compensation expense related to nonvested restricted shares, expected to be recognized over a weighted average period of 3.8 years[130] 7. Supplemental Disclosures of Cash Flow Information This note provides additional details on cash payments for interest and taxes, and noncash investing activities like transfers from loans to foreclosed real estate | Metric | Six Months Ended June 30, 2020 (In thousands) | Six Months Ended June 30, 2019 (In thousands) | | :------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Cash payments for interest | $895 | $926 | | Cash payments for taxes (net of refunds) | $0 | $642 | | Transfers from loans to real estate acquired through foreclosure | $58 | $206 | 8. Fair Value Measurements This note details the Company's fair value measurements for financial and nonfinancial assets, categorizing them by input observability and describing valuation methodologies - The Company uses a fair value hierarchy (Level 1, 2, 3) to prioritize inputs to valuation techniques[132][134][135] | Asset Category | June 30, 2020 (Total Fair Value, In thousands) | December 31, 2019 (Total Fair Value, In thousands) | | :------------------------------------ | :--------------------------------------- | :----------------------------------------- | | Securities available for sale | $257,099 | $254,562 | | Equity securities | $1,575 | $1,746 | | Impaired loans | $3,763 | $2,731 | | Loans held for sale | $7,211 | $4,176 | | Foreclosed real estate | $58 | $170 | - All impaired loans and foreclosed real estate are classified as Level 3, with significant unobservable inputs including discounts from appraised value for market conditions, collateral condition, and estimated selling costs[143][144][147][149][150] - The weighted average discount for impaired loans increased from 47% at December 31, 2019, to 91% at June 30, 2020, reflecting changes in market conditions and collateral assessment[147] 9. Revenue from Contracts with Customers This note details the Company's noninterest income from customer contracts, categorized by source and explaining the timing of revenue recognition | Revenue Source | Three Months Ended June 30, 2020 (In thousands) | Three Months Ended June 30, 2019 (In thousands) | Six Months Ended June 30, 2020 (In thousands) | Six Months Ended June 30, 2019 (In thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Service charges on deposit accounts | $322 | $516 | $828 | $977 | | ATM and debit card fees | $876 | $729 | $1,641 | $1,376 | | Investment advisory income | $79 | $146 | $192 | $244 | | Other (from contracts) | $30 | $33 | $64 | $67 | | Total Revenue from contracts with customers | $1,307 | $1,424 | $2,725 | $2,664 | - ATM and debit card fees increased significantly, while service charges on deposit accounts decreased for both the three and six-month periods[156] - Revenue recognition varies by service: transaction-based fees are recognized at execution, account maintenance fees over time, and interchange fees daily[156][157][158] 10. Recent Accounting Pronouncements This note discusses recently issued or adopted accounting pronouncements, specifically CECL and fair value measurement disclosures, and their impact on the Company - ASU No. 2016-13 (CECL) replaces the incurred loss methodology with an expected credit loss methodology[162] - The effective date for CECL for smaller reporting companies like First Capital, Inc. has been delayed to fiscal years beginning after December 15, 2022, and the Company does not intend to early adopt[163] - The adoption of ASU No. 2018-13, which modifies fair value measurement disclosure requirements, effective January 1, 2020, did not have a material impact on the Company's financial position or results of operations[166] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance and condition, including the impact of COVID-19 on assets, liabilities, and income drivers - The COVID-19 pandemic has significantly impacted operations, leading to updated branch procedures, expanded remote work, and assistance programs for customers, including payment extensions on $68.1 million of loans[172][174][175] - The Bank actively participated in the PPP, disbursing approximately $45.5 million in loans by July 16, 2020[176] - Total assets increased by 11.1% to $919.6 million at June 30, 2020, primarily due to increases in cash and cash equivalents ($55.1 million) and net loans receivable ($32.3 million)[179][180][183] - Total deposits increased by $85.4 million to $807.6 million, driven by noninterest-bearing and interest-bearing demand deposits, influenced by stimulus funds and decreased consumer spending[184] - Net income attributable to the Company decreased for both the three and six months ended June 30, 2020, primarily due to a decrease in net interest income after provision for loan losses, partially offset by increased noninterest income[186][187] - Net interest income decreased due to a decline in the interest rate spread, despite an increase in interest-earning assets, largely influenced by lower market rates and the origination of low-interest PPP loans[188][190][192][193][194] - The provision for loan losses increased significantly due to economic uncertainties surrounding COVID-19, despite a decrease in net charge-offs[195][196] - Noninterest income increased, driven by gains on loan sales and ATM/debit card fees, partially offset by a decrease in service charges on deposit accounts[201][202] - Income tax expense decreased, with the effective tax rate falling to 14.9% for the six months and 14.2% for the three months ended June 30, 2020, due to lower taxable income and increased nontaxable income[206] - The Bank opted into the Community Bank Leverage Ratio (CBLR) framework as of June 30, 2020, with a CBLR of 9.66%, classifying it as 'well-capitalized' under regulatory guidelines[212] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section addresses the Company's exposure to interest rate risk and its management strategies, presenting quantitative analyses of NII at Risk and EVE sensitivity - Market risk is defined as the risk of declining fair value of assets and liabilities or reduced net income due to changes in interest rates or financial market volatility[217] - The Company manages interest rate risk by attempting to manage the mismatch between asset and liability maturities and interest rates, emphasizing short-term commercial and consumer loans, and relying on stable retail deposits[218] - The Company does not maintain a trading account, engage in hedging activities, purchase high-risk derivative instruments, or is subject to foreign currency or commodity price risk[219] Simulated Net Interest Income at Risk (One-Year Horizon) | Immediate Change in Interest Rates | June 30, 2020 (Dollar Change, In thousands) | June 30, 2020 (Percent Change) | December 31, 2019 (Dollar Change, In thousands) | December 31, 2019 (Percent Change) | | :--------------------------------- | :------------------------------------------ | :----------------------------- | :-------------------------------------------- | :--------------------------------- | | +300bp | $1,746 | 6.56% | $3,438 | 11.59% | | +200bp | $2,140 | 8.03% | $2,392 | 8.07% | | +100bp | $1,071 | 4.02% | $1,289 | 4.35% | | (100)bp | $(559) | (2.10)% | $(1,562) | (5.27)% | - NII at Risk simulations project that an immediate and sustained increase in rates would increase net interest income, while a 100bp decrease would decrease it[224] Simulated Economic Value of Equity (EVE) Sensitivity | Immediate Change in Interest Rates | June 30, 2020 (Dollar Change, In thousands) | June 30, 2020 (Percent Change) | December 31, 2019 (Dollar Change, In thousands) | December 31, 2019 (Percent Change) | | :--------------------------------- | :------------------------------------------ | :----------------------------- | :-------------------------------------------- | :--------------------------------- | | +300bp | $52,034 | 43.84% | $56,973 | 38.81% | | +200bp | $44,094 | 37.15% | $40,896 | 27.86% | | +100bp | $23,451 | 19.76% | $21,902 | 14.92% | | (100)bp | $(21,303) | (17.95)% | $(23,704) | (16.15)% | - EVE simulations indicate an expected increase in EVE with rising interest rates and a decrease with falling rates[229] Item 4. Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures and reports no material changes to internal control over financial reporting - The Company's disclosure controls and procedures were evaluated and deemed effective as of June 30, 2020[233] - No material changes to internal control over financial reporting occurred during the quarter ended June 30, 2020[234] Part II Other Information Item 1. Legal Proceedings This section states that there are no legal proceedings to report for the Company - The Company has no legal proceedings to disclose[236] Item 1A. Risk Factors This section supplements previously disclosed risk factors, focusing on the adverse and uncertain impacts of the COVID-19 pandemic on business and financial results - The COVID-19 pandemic poses significant risks, including adverse effects on business, operations, and financial results, with ultimate impacts being highly uncertain and unpredictable[238][240][243] - Key uncertainties include the pandemic's duration, lifting of restrictions, changes in customer and business behavior, and potential impacts on collateral values, borrower credit quality, and loan repayment ability[241] - Market interest rates have significantly declined due to the COVID-19 pandemic, with the Federal Open Market Committee reducing the federal funds rate to 0% to 0.25% in March 2020[239] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the Company's stock repurchase program, detailing shares purchased during the quarter and remaining authorization - The board of directors authorized the repurchase of up to 240,467 shares of common stock[244] - During the quarter ended June 30, 2020, 211 shares were purchased under the program at an average price of $63.21 per share[244] - A maximum of 141,139 shares may yet be purchased under the plan[244] Item 3. Defaults upon Senior Securities This section indicates that there are no defaults upon senior securities to report - Not applicable; no defaults upon senior securities[245] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the Company - Not applicable; no mine safety disclosures[246] Item 5. Other Information This section indicates that there is no other information to report - No other information to disclose[247] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, certifications, and XBRL-related documents - The exhibits include organizational documents (Articles of Incorporation, Bylaws), certifications (CEO, CFO), and XBRL interactive data files[250]