NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Presentation of Interim
Information
First Capital, Inc. (“Company”) is the savings
and loan holding company for First Harrison Bank (“Bank”). The information presented in this report relates primarily
to the Bank's operations. 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”) was incorporated as a wholly-owned subsidiary of First Harrison
Holdings, Inc. to hold a portion of the Bank’s real estate mortgage loan portfolio. On January 21, 2009, the REIT issued
105 shares of 12.5% redeemable cumulative preferred stock with an aggregate liquidation value of $105,000 in a private placement
offering in order to satisfy certain ownership requirements to qualify as a real estate investment trust. At September 30, 2016,
this noncontrolling interest represented 0.1% ownership of the REIT. 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 ten 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,
2016, and the results of operations for the three months and nine months ended September 30, 2016 and 2015 and the cash flows for
the nine months ended September 30, 2016 and 2015. 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, 2015 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.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Acquisition of Peoples
Bancorp, Inc. of Bullitt County
On December 4, 2015, the
Company completed its acquisition of Peoples Bancorp, Inc. of Bullitt County (“Peoples”) and its wholly owned subsidiary
The Peoples Bank of Bullitt County (“Peoples Bank”), headquartered in Shepherdsville, Kentucky, pursuant to an Agreement
and Plan of Merger dated June 4, 2015 (the “Merger Agreement”). Under the Merger Agreement, Peoples merged with and
into the Company, with the Company as the surviving corporation, and Peoples Bank merged with and into the Bank, with the Bank
as the surviving financial institution. The acquisition expanded the Company’s presence into Bullitt County, Kentucky and
its overall presence in the greater Louisville, Kentucky metropolitan market. The Company expects to benefit from growth in this
new market area as well as from expansion of the banking services provided to the existing customers of Peoples Bank. Cost savings
are also expected for the combined bank through economies of scale and the consolidation of business operations
.
The Company paid cash consideration of $14.7 million in
the transaction and issued 580,017 shares of Company common stock, with a total fair value of $14.8 million. As part of the merger,
the Company acquired foreclosed real estate with an estimated fair value of $3.75 million (the “Contingent Assets”).
Under the terms of the Merger Agreement, if the Company sells the Contingent Assets within 24 months after the effective date of
the merger or has entered into a written contract for the sale of the Contingent Assets which are then sold within 60 days after
the expiration of that 24-month period, the Company will distribute additional cash consideration of 50% of the sale proceeds in
excess of $3.75 million on a pro rata basis to the former shareholders of Peoples. Currently, there is no written contract for
the sale of the Contingent Assets and no contingent consideration is anticipated.
The transaction was accounted for using the acquisition
method of accounting. Accordingly, the results of operations of Peoples have been included in the Company’s results of operations
since the date of acquisition. Under the acquisition method of accounting, the purchase price was assigned to the assets acquired
and liabilities assumed based on their estimated fair values, net of applicable income tax effects. The excess of cost over the
fair value of the acquired net assets of $1.1 million was recorded as goodwill. The goodwill arising from the acquisition consisted
largely of the synergies and economies of scale expected from combining the operations of the Company and Peoples. No amount of
the goodwill arising in the acquisition is deductible for income tax purposes.
Acquisition-related costs of approximately $86,000 and
$353,000 are included in noninterest expense in the accompanying consolidated statements of income for the three and nine months,
respectively, ended September 30, 2015. There were no acquisition-related costs for the three or nine months ended September 30,
2016.
Additional information regarding the Peoples acquisition
can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Investment Securities
Debt and equity securities have been classified in the
consolidated balance sheets according to management’s intent. Investment securities at September 30, 2016 and December 31,
2015 are summarized as follows:
(In thousands)
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
98,359
|
|
|
$
|
728
|
|
|
$
|
35
|
|
|
$
|
99,052
|
|
Agency CMO
|
|
|
17,195
|
|
|
|
89
|
|
|
|
59
|
|
|
|
17,225
|
|
Other debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency notes and bonds
|
|
|
72,399
|
|
|
|
117
|
|
|
|
55
|
|
|
|
72,461
|
|
Municipal obligations
|
|
|
56,576
|
|
|
|
1,943
|
|
|
|
110
|
|
|
|
58,409
|
|
Subtotal - debt securities
|
|
|
244,529
|
|
|
|
2,877
|
|
|
|
259
|
|
|
|
247,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
103
|
|
|
|
0
|
|
|
|
0
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
244,632
|
|
|
$
|
2,877
|
|
|
$
|
259
|
|
|
$
|
247,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
3
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity
|
|
$
|
3
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
42,158
|
|
|
$
|
123
|
|
|
$
|
271
|
|
|
$
|
42,010
|
|
Agency CMO
|
|
|
9,391
|
|
|
|
41
|
|
|
|
101
|
|
|
|
9,331
|
|
Other debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency notes and bonds
|
|
|
84,797
|
|
|
|
11
|
|
|
|
355
|
|
|
|
84,453
|
|
Municipal obligations
|
|
|
49,527
|
|
|
|
1,372
|
|
|
|
60
|
|
|
|
50,839
|
|
Subtotal - debt securities
|
|
|
185,873
|
|
|
|
1,547
|
|
|
|
787
|
|
|
|
186,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
118
|
|
|
|
0
|
|
|
|
0
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
185,991
|
|
|
$
|
1,547
|
|
|
$
|
787
|
|
|
$
|
186,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
4
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity
|
|
$
|
4
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
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.
The amortized cost and fair value of debt securities
as of September 30, 2016, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities may differ
from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.
|
|
Securities Available for Sale
|
|
Securities Held to Maturity
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
2,543
|
|
|
$
|
2,550
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Due after one year through five years
|
|
|
76,637
|
|
|
|
76,854
|
|
|
|
0
|
|
|
|
0
|
|
Due after five years through ten years
|
|
|
17,579
|
|
|
|
17,855
|
|
|
|
|
|
|
|
|
|
Due after ten years
|
|
|
32,216
|
|
|
|
33,611
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
128,975
|
|
|
|
130,870
|
|
|
|
0
|
|
|
|
0
|
|
Mortgage-backed securities and CMO
|
|
|
115,554
|
|
|
|
116,277
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
244,529
|
|
|
$
|
247,147
|
|
|
$
|
3
|
|
|
$
|
3
|
|
Information pertaining to investment securities available
for sale with gross unrealized losses at September 30, 2016, aggregated by investment category and the length of time that individual
investment securities have been in a continuous position, follows:
|
|
Number of
Investment
Positions
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuous loss position less than twelve months:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency notes and bonds
|
|
|
8
|
|
|
$
|
29,198
|
|
|
$
|
55
|
|
Agency CMO
|
|
|
5
|
|
|
|
5,080
|
|
|
|
43
|
|
Agency mortgage-backed securities
|
|
|
10
|
|
|
|
21,381
|
|
|
|
34
|
|
Municipal obligations
|
|
|
19
|
|
|
|
10,602
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total less than twelve months
|
|
|
42
|
|
|
|
66,261
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuous loss position more than twelve months:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency CMO
|
|
|
5
|
|
|
|
2,744
|
|
|
|
16
|
|
Agency mortgage-backed securities
|
|
|
1
|
|
|
|
571
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total more than twelve months
|
|
|
6
|
|
|
|
3,315
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
|
48
|
|
|
$
|
69,576
|
|
|
$
|
259
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3 – continued)
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, 2016, 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 0.4% from the amortized cost basis. All of the U.S. government agency securities and municipal obligations
are issued by U.S. government agencies, government-sponsored enterprises and municipal governments, or are secured by first mortgage
loans and municipal project revenues. These unrealized losses related principally to current interest rates for similar types of
securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal
government, its agencies or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews
of the issuer’s financial condition. As the Company has the ability to hold the debt securities until maturity, or the foreseeable
future if classified as available for sale, no declines are deemed to be other-than-temporary.
While management does not anticipate any credit-related
impairment losses at September 30, 2016, additional deterioration in market and economic conditions may have an adverse impact
on credit quality in the future.
During the nine months ended September 30, 2016, the Company
realized gross gains on sales of available for sale municipal securities of $176,000. During the three months ended September 30,
2016 and the three and nine months ended September 30, 2015, the Company did not have any security sales.
In June 2014, the Company acquired an additional 31,750
shares of common stock in another financial institution, in addition to the 100,000 shares acquired in December 2013, representing
approximately 9% of the outstanding common stock of the entity, for a total investment of $711,000. The investment was accounted
for using the cost method of accounting and was included in other assets in the consolidated balance sheet. The Company’s
investment was sold for $856,000 in July 2016, resulting in a gain of $145,000 which was recognized in the quarter ending September
30, 2016 and is included in other noninterest income in the accompanying statement of income.
4. 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 grants 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.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
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 ninety (90) days past due unless, in the opinion
of management, the outstanding interest remains collectible. Past due status is determined based on contractual terms. Generally,
by applying the cash receipts method, interest income is subsequently recognized only as received until the loan is returned to
accrual status. The cash receipts method is used when the likelihood of further loss on the loan is remote. Otherwise, the Company
applies the cost recovery method and applies all payments as a reduction of the unpaid principal balance until the loan qualifies
for return to accrual status. Interest income on impaired loans is recognized using the cost recovery method, unless the likelihood
of further loss on the loan is remote.
A loan is restored to accrual status when all principal
and interest payments are brought current and the borrower has demonstrated the ability to make future payments of principal and
interest as scheduled, which generally requires that the borrower demonstrate a period of performance of at least six consecutive
months.
For portfolio segments other than consumer loans, the
Company’s practice is to charge-off any loan or portion of a loan when the loan is determined by management to be uncollectible
due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition,
the depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or for other
reasons. A partial charge-off is recorded on a loan when the uncollectibility of a portion of the loan has been confirmed, such
as when a loan is discharged in bankruptcy, the collateral is liquidated, a loan is restructured at a reduced principal balance,
or other identifiable events that lead management to determine the full principal balance of the loan will not be repaid. A specific
reserve is recognized as a component of the 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. At September 30, 2016, the Company had 10 loans on which partial charge-offs of $468,000 had been recorded.
Consumer loans not secured by real estate are typically
charged off at 90 days past due, or earlier if deemed uncollectible, unless the loans are in the process of collection. Overdrafts
are charged off after 45 days past due. Charge-offs are typically recorded on loans secured by real estate when the property is
foreclosed upon.
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.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
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 discounted
cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.
The general component covers non-classified loans and classified
loans that are found, upon individual evaluation, to not 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 most recent twelve calendar quarters unless
the historical loss experience is not considered indicative of the level of risk in the remaining balance of a particular portfolio
segment, in which case an adjustment is determined by management. The Company’s historical loss experience is then adjusted
by an overall loss factor weighting adjustment based on a qualitative analysis prepared by management and reviewed on a quarterly
basis. The overall loss factor considers changes in underwriting standards, economic conditions, changes and trends in past due
and classified loans 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 overall loss factor and loss factor multiples for
classified loans as of September 30, 2016 and December 31, 2015.
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, 2015.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
A loan is considered impaired when, based on current
information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior
payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan
basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s
obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Values for collateral dependent loans are generally
based on appraisals obtained from independent licensed real estate appraisers, with adjustments applied for estimated costs to
sell the property, costs to complete unfinished or repair damaged property and other factors. New appraisals are generally obtained
for all significant properties when a loan is identified as impaired, and a property is considered significant if the value of
the property is estimated to exceed $200,000. Subsequent appraisals are obtained as needed or if management believes there has
been a significant change in the market value of the property. In instances where it is not deemed necessary to obtain a new appraisal,
management bases its impairment and allowance for loan loss analysis on the original appraisal with adjustments for current conditions
based on management’s assessment of market factors and management’s inspection of the property.
At September 30, 2016, the recorded investments in loans secured by residential
real estate properties for which formal foreclosure proceedings are in process was $799,000.
Loans at September 30, 2016 and December 31, 2015 consisted of the following:
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
|
|
September 30,
|
|
December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
|
|
|
|
Real estate mortgage loans:
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
133,929
|
|
|
$
|
147,933
|
|
Land
|
|
|
13,195
|
|
|
|
12,962
|
|
Residential construction
|
|
|
26,972
|
|
|
|
16,391
|
|
Commercial real estate
|
|
|
93,798
|
|
|
|
84,493
|
|
Commercial real estate contruction
|
|
|
8,848
|
|
|
|
1,090
|
|
Commercial business loans
|
|
|
22,888
|
|
|
|
23,095
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
Home equity and second mortgage loans
|
|
|
42,093
|
|
|
|
38,476
|
|
Automobile loans
|
|
|
33,025
|
|
|
|
28,828
|
|
Loans secured by savings accounts
|
|
|
1,819
|
|
|
|
2,096
|
|
Unsecured loans
|
|
|
3,782
|
|
|
|
4,350
|
|
Other consumer loans
|
|
|
9,070
|
|
|
|
7,210
|
|
Gross loans
|
|
|
389,419
|
|
|
|
366,924
|
|
Less undisbursed portion of loans in process
|
|
|
(20,495
|
)
|
|
|
(4,926
|
)
|
|
|
|
|
|
|
|
|
|
Principal loan balance
|
|
|
368,924
|
|
|
|
361,998
|
|
|
|
|
|
|
|
|
|
|
Deferred loan origination fees, net
|
|
|
763
|
|
|
|
583
|
|
Allowance for loan losses
|
|
|
(3,320
|
)
|
|
|
(3,415
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
366,367
|
|
|
$
|
359,166
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
The following table provides the components of the Company’s
recorded investment in loans at September 30, 2016:
|
|
Residential
Real Estate
|
|
Land
|
|
Construction
|
|
Commercial
Real Estate
|
|
Commercial
Business
|
|
Home Equity &
2nd Mtg
|
|
Other
Consumer
|
|
Total
|
|
|
(In thousands)
|
Recorded Investment in Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal loan balance
|
|
$
|
133,929
|
|
|
$
|
13,195
|
|
|
$
|
15,325
|
|
|
$
|
93,798
|
|
|
$
|
22,888
|
|
|
$
|
42,093
|
|
|
$
|
47,696
|
|
|
$
|
368,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
440
|
|
|
|
56
|
|
|
|
37
|
|
|
|
263
|
|
|
|
59
|
|
|
|
135
|
|
|
|
189
|
|
|
|
1,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan origination fees and costs
|
|
|
73
|
|
|
|
13
|
|
|
|
0
|
|
|
|
(44
|
)
|
|
|
1
|
|
|
|
720
|
|
|
|
0
|
|
|
|
763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans
|
|
$
|
134,442
|
|
|
$
|
13,264
|
|
|
$
|
15,362
|
|
|
$
|
94,017
|
|
|
$
|
22,948
|
|
|
$
|
42,948
|
|
|
$
|
47,885
|
|
|
$
|
370,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded Investment in Loans as Evaluated for Impairment:
|
Individually evaluated for impairment
|
|
$
|
2,034
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,983
|
|
|
$
|
61
|
|
|
$
|
62
|
|
|
$
|
30
|
|
|
$
|
5,170
|
|
Collectively evaluated for impairment
|
|
|
132,031
|
|
|
|
13,264
|
|
|
|
15,362
|
|
|
|
90,785
|
|
|
|
22,887
|
|
|
|
42,886
|
|
|
|
47,855
|
|
|
|
365,070
|
|
Acquired with deteriorated credit quality
|
|
|
377
|
|
|
|
0
|
|
|
|
0
|
|
|
|
249
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
134,442
|
|
|
$
|
13,264
|
|
|
$
|
15,362
|
|
|
$
|
94,017
|
|
|
$
|
22,948
|
|
|
$
|
42,948
|
|
|
$
|
47,885
|
|
|
$
|
370,866
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
The following table provides the components of the Company’s
recorded investment in loans at December 31, 2015:
|
|
Residential
Real Estate
|
|
Land
|
|
Construction
|
|
Commercial
Real Estate
|
|
Commercial
Business
|
|
Home Equity &
2nd Mtg
|
|
Other
Consumer
|
|
Total
|
|
|
(In thousands)
|
Recorded Investment in Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal loan balance
|
|
$
|
147,933
|
|
|
$
|
12,962
|
|
|
$
|
12,555
|
|
|
$
|
84,493
|
|
|
$
|
23,095
|
|
|
$
|
38,476
|
|
|
$
|
42,484
|
|
|
$
|
361,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
584
|
|
|
|
70
|
|
|
|
61
|
|
|
|
281
|
|
|
|
64
|
|
|
|
130
|
|
|
|
171
|
|
|
|
1,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan origination fees and costs
|
|
|
58
|
|
|
|
6
|
|
|
|
0
|
|
|
|
(46
|
)
|
|
|
(6
|
)
|
|
|
571
|
|
|
|
0
|
|
|
|
583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment in loans
|
|
$
|
148,575
|
|
|
$
|
13,038
|
|
|
$
|
12,616
|
|
|
$
|
84,728
|
|
|
$
|
23,153
|
|
|
$
|
39,177
|
|
|
$
|
42,655
|
|
|
$
|
363,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded Investment in Loans as Evaluated for Impairment:
|
Individually evaluated for impairment
|
|
$
|
1,996
|
|
|
$
|
24
|
|
|
$
|
0
|
|
|
$
|
3,623
|
|
|
$
|
167
|
|
|
$
|
136
|
|
|
$
|
0
|
|
|
$
|
5,946
|
|
Collectively evaluated for impairment
|
|
|
145,695
|
|
|
|
13,014
|
|
|
|
12,616
|
|
|
|
80,639
|
|
|
|
22,986
|
|
|
|
39,041
|
|
|
|
42,655
|
|
|
|
356,646
|
|
Acquired with deteriorated credit quality
|
|
|
884
|
|
|
|
0
|
|
|
|
0
|
|
|
|
466
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
148,575
|
|
|
$
|
13,038
|
|
|
$
|
12,616
|
|
|
$
|
84,728
|
|
|
$
|
23,153
|
|
|
$
|
39,177
|
|
|
$
|
42,655
|
|
|
$
|
363,942
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
An analysis of the allowance for loan losses as of September 30,
2016 is as follows:
|
|
Residential
Real Estate
|
|
Land
|
|
Construction
|
|
Commercial
Real Estate
|
|
Commercial
Business
|
|
Home Equity &
2nd Mtg
|
|
Other
Consumer
|
|
Total
|
|
|
(In thousands)
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
15
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
13
|
|
|
$
|
6
|
|
|
$
|
34
|
|
Collectively evaluated for impairment
|
|
|
367
|
|
|
|
49
|
|
|
|
63
|
|
|
|
1,576
|
|
|
|
141
|
|
|
|
813
|
|
|
|
277
|
|
|
|
3,286
|
|
Acquired with deteriorated credit quality
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
382
|
|
|
$
|
49
|
|
|
$
|
63
|
|
|
$
|
1,576
|
|
|
$
|
141
|
|
|
$
|
826
|
|
|
$
|
283
|
|
|
$
|
3,320
|
|
An analysis of the allowance for loan losses as of December 31,
2015 is as follows:
|
|
Residential
Real Estate
|
|
Land
|
|
Construction
|
|
Commercial
Real Estate
|
|
Commercial
Business
|
|
Home Equity &
2nd Mtg
|
|
Other
Consumer
|
|
Total
|
|
|
(In thousands)
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
6
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
49
|
|
|
$
|
100
|
|
|
$
|
11
|
|
|
$
|
0
|
|
|
$
|
166
|
|
Collectively evaluated for impairment
|
|
|
521
|
|
|
|
157
|
|
|
|
47
|
|
|
|
1,492
|
|
|
|
161
|
|
|
|
615
|
|
|
|
256
|
|
|
|
3,249
|
|
Acquired with deteriorated credit quality
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
527
|
|
|
$
|
157
|
|
|
$
|
47
|
|
|
$
|
1,541
|
|
|
$
|
261
|
|
|
$
|
626
|
|
|
$
|
256
|
|
|
$
|
3,415
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
An analysis of the changes in the allowance for loan losses for
the three months and nine months ended September 30, 2016 is as follows:
|
|
Residential
Real Estate
|
|
Land
|
|
Construction
|
|
Commercial
Real Estate
|
|
Commercial
Business
|
|
Home Equity &
2nd Mtg
|
|
Other
Consumer
|
|
Total
|
|
|
(In thousands)
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Allowance for Loan Losses for the three-months ended September 30, 2016
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
408
|
|
|
$
|
47
|
|
|
$
|
42
|
|
|
$
|
1,473
|
|
|
$
|
162
|
|
|
$
|
791
|
|
|
$
|
266
|
|
|
$
|
3,189
|
|
Provisions for loan losses
|
|
|
(29
|
)
|
|
|
2
|
|
|
|
21
|
|
|
|
100
|
|
|
|
(21
|
)
|
|
|
31
|
|
|
|
96
|
|
|
|
200
|
|
Charge-offs
|
|
|
(14
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(106
|
)
|
|
|
(120
|
)
|
Recoveries
|
|
|
17
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
4
|
|
|
|
27
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
382
|
|
|
$
|
49
|
|
|
$
|
63
|
|
|
$
|
1,576
|
|
|
$
|
141
|
|
|
$
|
826
|
|
|
$
|
283
|
|
|
$
|
3,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Allowance for Loan Losses for the nine-months ended September 30, 2016
|
Beginning balance
|
|
$
|
527
|
|
|
$
|
157
|
|
|
$
|
47
|
|
|
$
|
1,541
|
|
|
$
|
261
|
|
|
$
|
626
|
|
|
$
|
256
|
|
|
$
|
3,415
|
|
Provisions for loan losses
|
|
|
(70
|
)
|
|
|
(99
|
)
|
|
|
16
|
|
|
|
96
|
|
|
|
(9
|
)
|
|
|
223
|
|
|
|
268
|
|
|
|
425
|
|
Charge-offs
|
|
|
(108
|
)
|
|
|
(9
|
)
|
|
|
0
|
|
|
|
(82
|
)
|
|
|
(114
|
)
|
|
|
(36
|
)
|
|
|
(325
|
)
|
|
|
(674
|
)
|
Recoveries
|
|
|
33
|
|
|
|
0
|
|
|
|
0
|
|
|
|
21
|
|
|
|
3
|
|
|
|
13
|
|
|
|
84
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
382
|
|
|
$
|
49
|
|
|
$
|
63
|
|
|
$
|
1,576
|
|
|
$
|
141
|
|
|
$
|
826
|
|
|
$
|
283
|
|
|
$
|
3,320
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
An analysis of the changes in the allowance for loan losses for
the three months and nine months ended September 30, 2015 is as follows:
|
|
Residential
Real Estate
|
|
Land
|
|
Construction
|
|
Commercial
Real Estate
|
|
Commercial
Business
|
|
Home Equity &
2nd Mtg
|
|
Other
Consumer
|
|
Total
|
|
|
(In thousands)
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Allowance for Loan Losses for the three-months ended September 30, 2015
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
634
|
|
|
$
|
173
|
|
|
$
|
51
|
|
|
$
|
1,669
|
|
|
$
|
161
|
|
|
$
|
648
|
|
|
$
|
264
|
|
|
$
|
3,600
|
|
Provisions for loan losses
|
|
|
(15
|
)
|
|
|
(12
|
)
|
|
|
(2
|
)
|
|
|
(60
|
)
|
|
|
19
|
|
|
|
26
|
|
|
|
44
|
|
|
|
0
|
|
Charge-offs
|
|
|
(41
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(36
|
)
|
|
|
(79
|
)
|
|
|
(156
|
)
|
Recoveries
|
|
|
6
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
|
|
29
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
584
|
|
|
$
|
161
|
|
|
$
|
49
|
|
|
$
|
1,613
|
|
|
$
|
185
|
|
|
$
|
644
|
|
|
$
|
258
|
|
|
$
|
3,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Allowance for Loan Losses for the nine-months ended September 30, 2015
|
Beginning balance
|
|
$
|
609
|
|
|
$
|
201
|
|
|
$
|
60
|
|
|
$
|
1,501
|
|
|
$
|
1,480
|
|
|
$
|
720
|
|
|
$
|
275
|
|
|
$
|
4,846
|
|
Provisions for loan losses
|
|
|
27
|
|
|
|
(40
|
)
|
|
|
(11
|
)
|
|
|
96
|
|
|
|
(97
|
)
|
|
|
(20
|
)
|
|
|
95
|
|
|
|
50
|
|
Charge-offs
|
|
|
(61
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(1,205
|
)
|
|
|
(68
|
)
|
|
|
(203
|
)
|
|
|
(1,537
|
)
|
Recoveries
|
|
|
9
|
|
|
|
0
|
|
|
|
0
|
|
|
|
16
|
|
|
|
7
|
|
|
|
12
|
|
|
|
91
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
584
|
|
|
$
|
161
|
|
|
$
|
49
|
|
|
$
|
1,613
|
|
|
$
|
185
|
|
|
$
|
644
|
|
|
$
|
258
|
|
|
$
|
3,494
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
At September 30, 2016 and December 31, 2015, management
applied specific qualitative factor adjustments to the residential real estate, construction, commercial real estate, commercial
business, land, and home equity and second mortgage portfolio segments as they determined that the historical loss experience was
not indicative of the level of risk in the remaining balance of those portfolio segments. These adjustments increased the loss
factors by 0.25% to 20% for certain loan groups, and increased the estimated allowance for loan losses related to those portfolio
segments by approximately $1.7 million and $1.4 million at September 30, 2016 and December 31, 2015, respectively. These changes
were made to reflect management’s estimates of inherent losses in these portfolio segments at September 30, 2016 and December
31, 2015.
At September 30, 2016 and December 31, 2015, for each
loan portfolio segment, management applied an overall qualitative factor of 1.18 to the Company’s historical loss factors.
The overall qualitative factor is derived from management’s analysis of changes and trends in the following qualitative factors:
underwriting standards, economic conditions, past due loans and other internal and external factors. Each of the four factors above
was assigned an equal weight to arrive at an average for the overall qualitative factor of 1.18 at September 30, 2016 and December
31, 2015, respectively. The effect of the overall qualitative factor was to increase the estimated allowance for loan losses by
$509,000 and $457,000 at September 30, 2016 and December 31, 2015, respectively. Additional discussion of the overall qualitative
factor can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. There were no changes
in management’s assessment of the overall qualitative factor components from December 31, 2015 to September 30, 2016.
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 $642,000 and
$410,000 at September 30, 2016 and December 31, 2015, respectively. During the period from December 31, 2015 to September 30, 2016,
management adjusted these factors to compensate for the acquisition of the Peoples loan portfolio.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
The following table summarizes the Company’s impaired loans
as of September 30, 2016 and for the three months and nine months ended September 30, 2016. The Company did not recognize any
interest income on impaired loans using the cash receipts method of accounting for the three or nine month periods ended September
30, 2016:
|
|
At September 30, 2016
|
|
Three Months Ended
September 30, 2016
|
|
Nine Months Ended
September 30, 2016
|
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
|
(In thousands)
|
Loans with no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
1,914
|
|
|
$
|
2,260
|
|
|
$
|
0
|
|
|
$
|
1,903
|
|
|
$
|
6
|
|
|
$
|
1,912
|
|
|
$
|
20
|
|
Land
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6
|
|
|
|
0
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
3
|
|
Commercial real estate
|
|
|
2,983
|
|
|
|
3,412
|
|
|
|
0
|
|
|
|
3,396
|
|
|
|
18
|
|
|
|
3,394
|
|
|
|
55
|
|
Commercial business
|
|
|
61
|
|
|
|
66
|
|
|
|
0
|
|
|
|
62
|
|
|
|
0
|
|
|
|
64
|
|
|
|
0
|
|
Home equity/2nd mortgage
|
|
|
49
|
|
|
|
55
|
|
|
|
0
|
|
|
|
52
|
|
|
|
0
|
|
|
|
53
|
|
|
|
1
|
|
Other consumer
|
|
|
10
|
|
|
|
28
|
|
|
|
0
|
|
|
|
7
|
|
|
|
0
|
|
|
|
5
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,017
|
|
|
|
5,821
|
|
|
|
0
|
|
|
|
5,420
|
|
|
|
27
|
|
|
|
5,434
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
120
|
|
|
|
123
|
|
|
|
15
|
|
|
|
157
|
|
|
|
0
|
|
|
|
132
|
|
|
|
0
|
|
Land
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
87
|
|
|
|
0
|
|
|
|
124
|
|
|
|
0
|
|
Commercial business
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33
|
|
|
|
0
|
|
|
|
50
|
|
|
|
0
|
|
Home equity/2nd mortgage
|
|
|
13
|
|
|
|
14
|
|
|
|
13
|
|
|
|
13
|
|
|
|
0
|
|
|
|
30
|
|
|
|
0
|
|
Other consumer
|
|
|
20
|
|
|
|
20
|
|
|
|
6
|
|
|
|
29
|
|
|
|
0
|
|
|
|
22
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
|
|
157
|
|
|
|
34
|
|
|
|
319
|
|
|
|
0
|
|
|
|
358
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
2,034
|
|
|
|
2,383
|
|
|
|
15
|
|
|
|
2,060
|
|
|
|
6
|
|
|
|
2,044
|
|
|
|
20
|
|
Land
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6
|
|
|
|
0
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
3
|
|
Commercial real estate
|
|
|
2,983
|
|
|
|
3,412
|
|
|
|
0
|
|
|
|
3,483
|
|
|
|
18
|
|
|
|
3,518
|
|
|
|
55
|
|
Commercial business
|
|
|
61
|
|
|
|
66
|
|
|
|
0
|
|
|
|
95
|
|
|
|
0
|
|
|
|
114
|
|
|
|
0
|
|
Home equity/2nd mortgage
|
|
|
62
|
|
|
|
69
|
|
|
|
13
|
|
|
|
65
|
|
|
|
0
|
|
|
|
83
|
|
|
|
1
|
|
Other consumer
|
|
|
30
|
|
|
|
48
|
|
|
|
6
|
|
|
|
36
|
|
|
|
0
|
|
|
|
27
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,170
|
|
|
$
|
5,978
|
|
|
$
|
34
|
|
|
$
|
5,739
|
|
|
$
|
27
|
|
|
$
|
5,792
|
|
|
$
|
79
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
The following table summarizes the Company’s impaired loans
for the three months and nine months ended September 30, 2015. The Company did not recognize any interest income on impaired loans
using the cash receipts method of accounting for the three or nine month periods ended September 30, 2015:
|
|
Three Months Ended
September 30, 2015
|
|
Nine Months Ended
September 30, 2015
|
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
|
|
Loans with no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
1,177
|
|
|
$
|
5
|
|
|
$
|
1,211
|
|
|
$
|
14
|
|
Land
|
|
|
21
|
|
|
|
0
|
|
|
|
19
|
|
|
|
0
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
1,755
|
|
|
|
19
|
|
|
|
1,768
|
|
|
|
57
|
|
Commercial business
|
|
|
0
|
|
|
|
1
|
|
|
|
7
|
|
|
|
1
|
|
Home equity/2nd mortgage
|
|
|
62
|
|
|
|
1
|
|
|
|
66
|
|
|
|
1
|
|
Other consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,015
|
|
|
|
26
|
|
|
|
3,071
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
205
|
|
|
|
0
|
|
|
|
223
|
|
|
|
0
|
|
Land
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
38
|
|
|
|
0
|
|
|
|
39
|
|
|
|
0
|
|
Commercial business
|
|
|
0
|
|
|
|
0
|
|
|
|
419
|
|
|
|
0
|
|
Home equity/2nd mortgage
|
|
|
80
|
|
|
|
0
|
|
|
|
80
|
|
|
|
0
|
|
Other consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
323
|
|
|
|
0
|
|
|
|
761
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,382
|
|
|
|
5
|
|
|
|
1,434
|
|
|
|
14
|
|
Land
|
|
|
21
|
|
|
|
0
|
|
|
|
19
|
|
|
|
0
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
1,793
|
|
|
|
19
|
|
|
|
1,807
|
|
|
|
57
|
|
Commercial business
|
|
|
0
|
|
|
|
1
|
|
|
|
426
|
|
|
|
1
|
|
Home equity/2nd mortgage
|
|
|
142
|
|
|
|
1
|
|
|
|
146
|
|
|
|
1
|
|
Other consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,338
|
|
|
$
|
26
|
|
|
$
|
3,832
|
|
|
$
|
73
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
The following table summarizes the Company’s impaired loans
as of December 31, 2015:
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
|
(In thousands)
|
Loans with no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
1,938
|
|
|
$
|
2,330
|
|
|
$
|
0
|
|
Land
|
|
|
24
|
|
|
|
27
|
|
|
|
0
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
3,389
|
|
|
|
3,706
|
|
|
|
0
|
|
Commercial business
|
|
|
67
|
|
|
|
67
|
|
|
|
0
|
|
Home equity/2nd mortgage
|
|
|
56
|
|
|
|
65
|
|
|
|
0
|
|
Other consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,474
|
|
|
|
6,195
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
58
|
|
|
|
62
|
|
|
|
6
|
|
Land
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
234
|
|
|
|
260
|
|
|
|
49
|
|
Commercial business
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
Home equity/2nd mortgage
|
|
|
80
|
|
|
|
81
|
|
|
|
11
|
|
Other consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
472
|
|
|
|
503
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,996
|
|
|
|
2,392
|
|
|
|
6
|
|
Land
|
|
|
24
|
|
|
|
27
|
|
|
|
0
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
3,623
|
|
|
|
3,966
|
|
|
|
49
|
|
Commercial business
|
|
|
167
|
|
|
|
167
|
|
|
|
100
|
|
Home equity/2nd mortgage
|
|
|
136
|
|
|
|
146
|
|
|
|
11
|
|
Other consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,946
|
|
|
$
|
6,698
|
|
|
$
|
166
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
Nonperforming loans consists of nonaccrual loans and loans over
90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at September
30, 2016 and December 31, 2015:
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
Nonaccrual
Loans
|
|
Loans 90+ Days
Past Due
Still Accruing
|
|
Total
Nonperforming
Loans
|
|
Nonaccrual
Loans
|
|
Loans 90+ Days
Past Due
Still Accruing
|
|
Total
Nonperforming
Loans
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
1,584
|
|
|
$
|
27
|
|
|
$
|
1,611
|
|
|
$
|
1,648
|
|
|
$
|
271
|
|
|
$
|
1,919
|
|
Land
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
24
|
|
|
|
75
|
|
|
|
99
|
|
Construction
|
|
|
0
|
|
|
|
177
|
|
|
|
177
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
1,658
|
|
|
|
0
|
|
|
|
1,658
|
|
|
|
2,267
|
|
|
|
0
|
|
|
|
2,267
|
|
Commercial business
|
|
|
61
|
|
|
|
0
|
|
|
|
61
|
|
|
|
167
|
|
|
|
0
|
|
|
|
167
|
|
Home equity/2nd mortgage
|
|
|
44
|
|
|
|
0
|
|
|
|
44
|
|
|
|
116
|
|
|
|
0
|
|
|
|
116
|
|
Other consumer
|
|
|
30
|
|
|
|
0
|
|
|
|
30
|
|
|
|
0
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,377
|
|
|
$
|
204
|
|
|
$
|
3,581
|
|
|
$
|
4,222
|
|
|
$
|
355
|
|
|
$
|
4,577
|
|
The following table presents the aging of the recorded investment
in loans at September 30, 2016:
|
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
90 Days or More
Past Due
|
|
Total
Past Due
|
|
Current
|
|
Purchased
Credit
Impaired Loans
|
|
Total
Loans
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
2,387
|
|
|
$
|
417
|
|
|
$
|
928
|
|
|
$
|
3,732
|
|
|
$
|
130,333
|
|
|
$
|
377
|
|
|
$
|
134,442
|
|
Land
|
|
|
152
|
|
|
|
0
|
|
|
|
0
|
|
|
|
152
|
|
|
|
13,112
|
|
|
|
0
|
|
|
|
13,264
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
177
|
|
|
|
177
|
|
|
|
15,185
|
|
|
|
0
|
|
|
|
15,362
|
|
Commercial real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
742
|
|
|
|
742
|
|
|
|
93,026
|
|
|
|
249
|
|
|
|
94,017
|
|
Commercial business
|
|
|
119
|
|
|
|
57
|
|
|
|
0
|
|
|
|
176
|
|
|
|
22,772
|
|
|
|
0
|
|
|
|
22,948
|
|
Home equity/2nd mortgage
|
|
|
100
|
|
|
|
269
|
|
|
|
13
|
|
|
|
382
|
|
|
|
42,566
|
|
|
|
0
|
|
|
|
42,948
|
|
Other consumer
|
|
|
235
|
|
|
|
115
|
|
|
|
30
|
|
|
|
380
|
|
|
|
47,505
|
|
|
|
0
|
|
|
|
47,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,993
|
|
|
$
|
858
|
|
|
$
|
1,890
|
|
|
$
|
5,741
|
|
|
$
|
364,499
|
|
|
$
|
626
|
|
|
$
|
370,866
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
The following table presents the aging of the recorded investment
in loans at December 31, 2015:
|
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
90 Days or More
Past Due
|
|
Total
Past Due
|
|
Current
|
|
Purchased
Credit
Impaired Loans
|
|
Total
Loans
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
3,078
|
|
|
$
|
786
|
|
|
$
|
1,256
|
|
|
$
|
5,120
|
|
|
$
|
142,571
|
|
|
$
|
884
|
|
|
$
|
148,575
|
|
Land
|
|
|
55
|
|
|
|
26
|
|
|
|
99
|
|
|
|
180
|
|
|
|
12,858
|
|
|
|
0
|
|
|
|
13,038
|
|
Construction
|
|
|
71
|
|
|
|
0
|
|
|
|
0
|
|
|
|
71
|
|
|
|
12,545
|
|
|
|
0
|
|
|
|
12,616
|
|
Commercial real estate
|
|
|
435
|
|
|
|
773
|
|
|
|
396
|
|
|
|
1,604
|
|
|
|
82,658
|
|
|
|
466
|
|
|
|
84,728
|
|
Commercial business
|
|
|
0
|
|
|
|
100
|
|
|
|
67
|
|
|
|
167
|
|
|
|
22,986
|
|
|
|
0
|
|
|
|
23,153
|
|
Home equity/2nd mortgage
|
|
|
365
|
|
|
|
6
|
|
|
|
80
|
|
|
|
451
|
|
|
|
38,726
|
|
|
|
0
|
|
|
|
39,177
|
|
Other consumer
|
|
|
464
|
|
|
|
13
|
|
|
|
9
|
|
|
|
486
|
|
|
|
42,169
|
|
|
|
0
|
|
|
|
42,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,468
|
|
|
$
|
1,704
|
|
|
$
|
1,907
|
|
|
$
|
8,079
|
|
|
$
|
354,513
|
|
|
$
|
1,350
|
|
|
$
|
363,942
|
|
The Company categorizes loans into risk categories based on relevant
information about the ability of borrowers to service their debt such as: current financial information, public information, historical
payment experience, credit documentation, and current economic trends, among other factors. The Company classifies loans based
on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:
Special Mention:
Loans classified as special mention have
a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result
in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard:
Loans classified as substandard are inadequately
protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified
have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct
possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful:
Loans classified as doubtful have all the weaknesses
inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss:
Loans classified as loss are considered uncollectible
and of such little value that their continuance on the institution’s books as an asset is not warranted.
Loans not meeting the criteria above that are analyzed individually
as part of the described process are considered to be pass rated loans.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
The following table presents the recorded investment in loans by
risk category as of the date indicated:
|
|
Residential
Real Estate
|
|
Land
|
|
Construction
|
|
Commercial
Real Estate
|
|
Commercial
Business
|
|
Home Equity &
2nd Mtg
|
|
Other
Consumer
|
|
Total
|
|
|
(In thousands)
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
131,029
|
|
|
$
|
13,105
|
|
|
$
|
15,362
|
|
|
$
|
84,107
|
|
|
$
|
22,023
|
|
|
$
|
42,703
|
|
|
$
|
47,782
|
|
|
$
|
356,111
|
|
Special Mention
|
|
|
518
|
|
|
|
88
|
|
|
|
0
|
|
|
|
3,466
|
|
|
|
864
|
|
|
|
161
|
|
|
|
73
|
|
|
|
5,170
|
|
Substandard
|
|
|
1,035
|
|
|
|
71
|
|
|
|
0
|
|
|
|
4,696
|
|
|
|
0
|
|
|
|
40
|
|
|
|
0
|
|
|
|
5,842
|
|
Doubtful
|
|
|
1,860
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,748
|
|
|
|
61
|
|
|
|
44
|
|
|
|
30
|
|
|
|
3,743
|
|
Loss
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
134,442
|
|
|
$
|
13,264
|
|
|
$
|
15,362
|
|
|
$
|
94,017
|
|
|
$
|
22,948
|
|
|
$
|
42,948
|
|
|
$
|
47,885
|
|
|
$
|
370,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
140,438
|
|
|
$
|
10,077
|
|
|
$
|
12,286
|
|
|
$
|
76,389
|
|
|
$
|
22,365
|
|
|
$
|
38,956
|
|
|
$
|
42,553
|
|
|
$
|
343,064
|
|
Special Mention
|
|
|
3,657
|
|
|
|
125
|
|
|
|
330
|
|
|
|
4,446
|
|
|
|
471
|
|
|
|
0
|
|
|
|
53
|
|
|
|
9,082
|
|
Substandard
|
|
|
1,948
|
|
|
|
2,812
|
|
|
|
0
|
|
|
|
1,195
|
|
|
|
150
|
|
|
|
105
|
|
|
|
49
|
|
|
|
6,259
|
|
Doubtful
|
|
|
2,532
|
|
|
|
24
|
|
|
|
0
|
|
|
|
2,698
|
|
|
|
167
|
|
|
|
116
|
|
|
|
0
|
|
|
|
5,537
|
|
Loss
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
148,575
|
|
|
$
|
13,038
|
|
|
$
|
12,616
|
|
|
$
|
84,728
|
|
|
$
|
23,153
|
|
|
$
|
39,177
|
|
|
$
|
42,655
|
|
|
$
|
363,942
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
The following table summarizes the Company’s troubled debt
restructurings (TDRs) by accrual status as of September 30, 2016 and December 31, 2015:
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
Accruing
|
|
Nonaccrual
|
|
Total
|
|
Related Allowance
for Loan Losses
|
|
Accruing
|
|
Nonaccrual
|
|
Total
|
|
Related Allowance
for Loan Losses
|
|
|
(In thousands)
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
336
|
|
|
$
|
328
|
|
|
$
|
664
|
|
|
$
|
0
|
|
|
$
|
342
|
|
|
$
|
315
|
|
|
$
|
657
|
|
|
$
|
0
|
|
Commercial real estate
|
|
|
1,320
|
|
|
|
171
|
|
|
|
1,491
|
|
|
|
0
|
|
|
|
1,348
|
|
|
|
294
|
|
|
|
1,642
|
|
|
|
0
|
|
Home equity and 2nd mortgage
|
|
|
18
|
|
|
|
0
|
|
|
|
18
|
|
|
|
0
|
|
|
|
20
|
|
|
|
0
|
|
|
|
20
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,674
|
|
|
$
|
499
|
|
|
$
|
2,173
|
|
|
$
|
0
|
|
|
$
|
1,710
|
|
|
$
|
609
|
|
|
$
|
2,319
|
|
|
$
|
0
|
|
At September 30, 2016 and December 31, 2015, there were no commitments
to lend additional funds to debtors whose loan terms have been modified in a TDR.
There were no TDRs that were restructured during either the three
and nine months ended September 30, 2016 or September 30, 2015.
There were no principal charge-offs recorded as a result of TDRs
and there was no specific allowance for loan losses related to TDRs modified during the three and nine months ended September 30,
2016 or September 30, 2015.
There were no TDRs modified within the previous 12 months for which
there was a subsequent payment default (defined as the loan becoming more than 90 days past due, being moved to nonaccrual status,
or the collateral being foreclosed upon) during the three and nine months ended September 30, 2016 and 2015. In the event that
a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance
for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
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 Financial Accounting Standards Board
(“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, 2016 and December 31, 2015:
(In thousands)
|
|
September 30,
2016
|
|
December 31,
2015
|
|
|
|
|
|
Residential real estate
|
|
$
|
377
|
|
|
$
|
884
|
|
Commercial real estate
|
|
|
249
|
|
|
|
466
|
|
Carrying amount
|
|
|
626
|
|
|
|
1,350
|
|
Allowance for loan losses
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Carrying amount, net of allowance
|
|
$
|
626
|
|
|
$
|
1,350
|
|
The outstanding balance of PCI loans accounted for under
ASC 310-30, including contractual principal, interest, fees and penalties was $778,000 and $1.6 million at September 30, 2016 and
December 31, 2015, respectively.
There was no allowance for loan losses related to PCI
loans at September 30, 2016 or at December 31, 2015. There were no net provisions for loan loss related to PCI loans for the nine
months ended September 30, 2016, nor for the three and nine months ended September 30, 2015. There was a $6,000 reduction of the
allowance for loan losses on PCI loans for the three months ended September 30, 2016. There were no reductions of the allowance
for loan losses on PCI loans for the three and nine months ended September 30, 2015.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4 – continued)
Accretable yield, or income expected to be collected,
is as follows for the three and nine month periods ended September 30, 2016:
(In thousands)
|
|
Three Months Ended
September 30, 2016
|
|
Nine Months Ended
September 30, 2016
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
165
|
|
|
$
|
319
|
|
New loans purchased
|
|
|
-
|
|
|
|
-
|
|
Accretion to income
|
|
|
(17
|
)
|
|
|
(61
|
)
|
Disposals and other adjustments
|
|
|
(19
|
)
|
|
|
(93
|
)
|
Reclassification (to) from nonaccretable difference
|
|
|
42
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
171
|
|
|
$
|
171
|
|
5. Supplemental Disclosure
for Earnings Per Share
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
9/30/2016
|
|
9/30/2015
|
|
9/30/2016
|
|
9/30/2015
|
|
|
|
|
|
|
|
|
|
Basic
|
|
(Dollars in thousands, except for share and per share data)
|
Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to First Capital, Inc.
|
|
$
|
1,758
|
|
|
$
|
1,398
|
|
|
$
|
5,123
|
|
|
$
|
4,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
3,342,015
|
|
|
|
2,740,631
|
|
|
|
3,340,066
|
|
|
|
2,740,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to First Capital, Inc. per common share,
basic
|
|
$
|
0.53
|
|
|
$
|
0.51
|
|
|
$
|
1.53
|
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to First Capital, Inc.
|
|
$
|
1,758
|
|
|
$
|
1,398
|
|
|
$
|
5,123
|
|
|
$
|
4,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
3,342,015
|
|
|
|
2,740,631
|
|
|
|
3,340,066
|
|
|
|
2,740,608
|
|
Add: Dilutive effect of restricted stock
|
|
|
2,034
|
|
|
|
838
|
|
|
|
1,787
|
|
|
|
373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, as adjusted
|
|
|
3,344,049
|
|
|
|
2,741,469
|
|
|
|
3,341,853
|
|
|
|
2,740,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to First Capital, Inc. per common share,
diluted
|
|
$
|
0.53
|
|
|
$
|
0.51
|
|
|
$
|
1.53
|
|
|
$
|
1.49
|
|
Nonvested restricted stock shares are not considered as
outstanding for purposes of computing weighted average common shares outstanding.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Stock Option Plan
On May 20, 2009, the Company adopted the 2009 Equity Incentive
Plan (the Plan). The 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 Plan may not exceed
223,000 shares. The Company may grant both non-statutory and statutory stock options which may not have a term exceeding ten years.
In the case of incentive stock options, the aggregate fair value of the stock (determined at the time the incentive stock option
is granted) for which any optionee may be granted incentive options which are first exercisable during any calendar year shall
not exceed $100,000. Option prices may not be less than the fair market value of the underlying stock at the date of the grant.
An award of a performance share is a grant of a right to receive shares of the Company’s common stock which is contingent
upon the achievement of specific performance criteria or other objectives set at the grant date. Stock appreciation rights are
equity or cash settled share-based compensation arrangements whereby the number of shares that will ultimately be issued or the
cash payment is based upon the appreciation of the Company’s common stock. Awards granted under the Plan may be granted either
alone, in addition to, or in tandem with, any other award granted under the Plan.
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, 2016, no stock options had been granted under the Plan.
On February 17, 2015, the Company granted 19,500 restricted
stock shares to directors, officers and key employees at a grant-date price of $24.50 per share for a total of $478,000. The restricted
stock vests ratably from the grant date through July 1, 2020, with 20% of the shares vesting each year on July 1 beginning July
1, 2016. Compensation expense is measured based on the fair market value of the restricted stock at the grant date and is recognized
ratably over the period during which the shares are earned (the vesting period). Compensation expense related to restricted stock
recognized for the three-month and nine-month periods ended September 30, 2016 amounted to $21,000 and $61,000, respectively.
A summary of the Company’s nonvested restricted
shares under the Plan as of September 30, 2016 and changes during the nine-month period then ended is presented below.
|
|
Number
of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
Nonvested at January 1, 2016
|
|
|
18,000
|
|
|
$
|
24.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
4,000
|
|
|
$
|
24.50
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2016
|
|
|
14,000
|
|
|
$
|
24.50
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6 – continued)
There were 4,000 restricted shares that vested during
the nine-month period ended September 30, 2016. The total fair value of restricted shares that vested during the nine-month period
ended September 30, 2016 was $132,000. At September 30, 2016, there was $322,000 of total unrecognized compensation expense related
to nonvested restricted shares. The compensation expense is expected to be recognized over the remaining vesting period of 3.75
years.
7. Supplemental Disclosures
of Cash Flow Information
|
|
Nine Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
|
(
In thousands
)
|
Cash payments for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,400
|
|
|
$
|
740
|
|
Taxes (net of refunds received)
|
|
|
713
|
|
|
|
1,035
|
|
|
|
|
|
|
|
|
|
|
Noncash investing activities:
|
|
|
|
|
|
|
|
|
Transfers from loans to real estate acquired through foreclosure
|
|
|
582
|
|
|
|
605
|
|
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
|
|
|
|
|
|
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, 2016 and December 31, 2015. The Company had no liabilities measured
at fair value as of September 30, 2016 or December 31, 2015.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8 – continued)
|
|
Carrying Value
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
0
|
|
|
$
|
99,052
|
|
|
$
|
0
|
|
|
$
|
99,052
|
|
Agency CMO
|
|
|
0
|
|
|
|
17,225
|
|
|
|
0
|
|
|
|
17,225
|
|
Agency notes and bonds
|
|
|
0
|
|
|
|
72,461
|
|
|
|
0
|
|
|
|
72,461
|
|
Municipal obligations
|
|
|
0
|
|
|
|
58,409
|
|
|
|
0
|
|
|
|
58,409
|
|
Mutual funds
|
|
|
103
|
|
|
|
0
|
|
|
|
0
|
|
|
|
103
|
|
Total securities available for sale
|
|
$
|
103
|
|
|
$
|
247,147
|
|
|
$
|
0
|
|
|
$
|
247,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured on a Nonrecurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,019
|
|
|
$
|
2,019
|
|
Commercial real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
2,983
|
|
|
|
2,983
|
|
Commercial business
|
|
|
0
|
|
|
|
0
|
|
|
|
61
|
|
|
|
61
|
|
Home equity and second mortgage
|
|
|
0
|
|
|
|
0
|
|
|
|
49
|
|
|
|
49
|
|
Other consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
24
|
|
|
|
24
|
|
Total impaired loans
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5,136
|
|
|
$
|
5,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
0
|
|
|
$
|
2,553
|
|
|
$
|
0
|
|
|
$
|
2,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
519
|
|
|
$
|
519
|
|
Commercial real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
3,735
|
|
|
|
3,735
|
|
Total foreclosed real estate
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,254
|
|
|
$
|
4,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
0
|
|
|
$
|
42,010
|
|
|
$
|
0
|
|
|
$
|
42,010
|
|
Agency CMO
|
|
|
0
|
|
|
|
9,331
|
|
|
|
0
|
|
|
|
9,331
|
|
Agency notes and bonds
|
|
|
0
|
|
|
|
84,453
|
|
|
|
0
|
|
|
|
84,453
|
|
Municipal obligations
|
|
|
0
|
|
|
|
50,839
|
|
|
|
0
|
|
|
|
50,839
|
|
Mutual funds
|
|
|
118
|
|
|
|
0
|
|
|
|
0
|
|
|
|
118
|
|
Total securities available for sale
|
|
$
|
118
|
|
|
$
|
186,633
|
|
|
$
|
0
|
|
|
$
|
186,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured on a Nonrecurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,990
|
|
|
$
|
1,990
|
|
Land
|
|
|
0
|
|
|
|
0
|
|
|
|
24
|
|
|
|
24
|
|
Commercial real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
3,574
|
|
|
|
3,574
|
|
Commercial business
|
|
|
0
|
|
|
|
0
|
|
|
|
67
|
|
|
|
67
|
|
Home equity and second mortgage
|
|
|
0
|
|
|
|
0
|
|
|
|
125
|
|
|
|
125
|
|
Total impaired loans
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5,780
|
|
|
$
|
5,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
0
|
|
|
$
|
3,081
|
|
|
$
|
0
|
|
|
$
|
3,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
557
|
|
|
$
|
557
|
|
Land
|
|
|
0
|
|
|
|
0
|
|
|
|
203
|
|
|
|
203
|
|
Commercial real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
4,130
|
|
|
|
4,130
|
|
Total foreclosed real estate
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,890
|
|
|
$
|
4,890
|
|
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
.
Securities
classified as available for sale 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. Changes in fair value
of securities available for sale are recorded in other comprehensive income, net of income tax effect.
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, 2016 and December 31, 2015, 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. At September 30, 2016, 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 32% to 60%, with a weighted average discount
of 45%. At December 31, 2015, the discount from appraised value ranged from 10% to 59%, with a weighted average discount of 16%.
The Company recognized provisions for loan losses of $106,000 and $83,000 for the nine months ended September 30, 2016 and 2015,
respectively, for impaired loans. The Company recognized provisions for loan losses of $1,000 for the three months ended September
30, 2015 for impaired loans. The Company did not recognize any provisions for loan losses for impaired loans for the three months
ended September 30, 2016.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8 – continued)
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, 2016, the significant unobservable inputs used in the fair value measurement of foreclosed real estate
included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated
costs to sell the property ranging from 8% to 41%, with a weighted average of 39%. At December 31, 2015, the discount from appraised
value ranged from 9% to 43%, with a weighted average of 30%. The Company recognized losses of $83,000 to write down foreclosed
real estate for the nine months ended September 30, 2016. There were no charges to write down foreclosed real estate recognized
in income for the three months ended September 30, 2016 or for the three and nine months ended September 30, 2015.
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, 2016 and 2015. There were no transfers into or out of the Company’s Level 3 financial assets for the nine month
periods ended September 30, 2016 and 2015. In addition, there were no transfers into or out of Levels 1 and 2 of the fair value
hierarchy during the nine month periods ended September 30, 2016 and 2015.
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 Vale Measurements Using
|
(In thousands)
|
|
Value
|
|
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
70,381
|
|
|
$
|
70,381
|
|
|
$
|
70,381
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Interest-bearing time deposits
|
|
|
15,540
|
|
|
|
15,565
|
|
|
|
0
|
|
|
|
15,565
|
|
|
|
0
|
|
Securities available for sale
|
|
|
247,250
|
|
|
|
247,250
|
|
|
|
103
|
|
|
|
247,147
|
|
|
|
0
|
|
Securities held to maturity
|
|
|
3
|
|
|
|
3
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
Loans held for sale
|
|
|
2,553
|
|
|
|
2,614
|
|
|
|
0
|
|
|
|
2,614
|
|
|
|
0
|
|
Loans, net
|
|
|
366,367
|
|
|
|
374,656
|
|
|
|
0
|
|
|
|
0
|
|
|
|
374,656
|
|
FHLB and other stock
|
|
|
1,650
|
|
|
|
1,650
|
|
|
|
0
|
|
|
|
1,650
|
|
|
|
0
|
|
Accrued interest receivable
|
|
|
2,361
|
|
|
|
2,361
|
|
|
|
0
|
|
|
|
2,361
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
658,747
|
|
|
|
658,389
|
|
|
|
0
|
|
|
|
0
|
|
|
|
658,389
|
|
Accrued interest payable
|
|
|
137
|
|
|
|
137
|
|
|
|
0
|
|
|
|
137
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
109,174
|
|
|
$
|
109,174
|
|
|
$
|
109,174
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Interest-bearing time deposits
|
|
|
16,655
|
|
|
|
16,696
|
|
|
|
0
|
|
|
|
16,696
|
|
|
|
0
|
|
Securities available for sale
|
|
|
186,751
|
|
|
|
186,751
|
|
|
|
118
|
|
|
|
186,633
|
|
|
|
0
|
|
Securities held to maturity
|
|
|
4
|
|
|
|
4
|
|
|
|
0
|
|
|
|
4
|
|
|
|
0
|
|
Loans held for sale
|
|
|
3,081
|
|
|
|
3,145
|
|
|
|
0
|
|
|
|
3,145
|
|
|
|
0
|
|
Loans, net
|
|
|
359,166
|
|
|
|
359,784
|
|
|
|
0
|
|
|
|
0
|
|
|
|
359,784
|
|
FHLB and other stock
|
|
|
1,650
|
|
|
|
1,650
|
|
|
|
0
|
|
|
|
1,650
|
|
|
|
0
|
|
Accrued interest receivable
|
|
|
2,244
|
|
|
|
2,244
|
|
|
|
0
|
|
|
|
2,244
|
|
|
|
0
|
|
Cost method investment (included in other assets)
|
|
|
711
|
|
|
|
711
|
|
|
|
0
|
|
|
|
711
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
637,177
|
|
|
|
636,406
|
|
|
|
0
|
|
|
|
0
|
|
|
|
636,406
|
|
Accrued interest payable
|
|
|
167
|
|
|
|
167
|
|
|
|
0
|
|
|
|
167
|
|
|
|
0
|
|
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8 – continued)
The carrying amounts in the preceding table are included
in the consolidated balances sheets under the applicable captions. The following methods and assumptions were used to estimate
the fair value of each class of financial instrument for which it is practicable to estimate that value:
Cash and Cash Equivalents and Interest-Bearing Time
Deposits
For cash and short-term investments, including cash and
due from banks, interest-bearing deposits with banks, federal funds sold, and interest-bearing time deposits with other financial
institutions, the carrying amount is a reasonable estimate of fair value.
Investment Securities
For marketable equity securities, the fair values are
based on quoted market prices. For debt securities, the Company obtains fair value measurements from an independent pricing service
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 FHLB stock, a restricted equity security, the carrying amount
is a reasonable estimate of fair value because it is not marketable. For other cost method equity investments where a quoted market
value is not available, the carrying amount is a reasonable estimate of fair value.
Loans
The fair value of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for
the same remaining maturities. The carrying amount of accrued interest receivable approximates its fair value. The fair value of
loans held for sale is based on specific prices of underlying contracts for sale to investors.
Deposits
The fair value of demand deposits, savings accounts, money
market deposit accounts and other transaction accounts is the amount payable on demand at the balance sheet date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for
deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.
Borrowed Funds
The carrying amounts of retail repurchase agreements approximate
their fair value. The fair value of advances from FHLB is estimated by discounting the future cash flows using the current rates
at which similar loans with the same remaining maturities could be obtained.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. 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 May 2014, the FASB issued Accounting Standards Update
(“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The update provides a five-step revenue
recognition model for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide
goods or services to their customers (unless the contracts are included in the scope of other standards). The guidance requires
an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods and services. For public entities (as
defined in ASU No. 2014-09), the guidance was originally effective for annual reporting periods beginning after December 15, 2016,
including interim periods within that reporting period. However, with the issuance of ASU No. 2015-14 in August 2015, the FASB
deferred the effective date of ASU No. 2014-09 by one year for all entities, making the amendments effective for public entities
for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Companies
have the option to apply ASU No. 2014-09 as of the original effective date. Management is evaluating the new guidance, but does
not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial position or results
of operations.
In January 2016, the FASB issued ASU No. 2016-01,
Financial
Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities
.
The guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. In particular,
the guidance revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities
and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends
certain disclosure requirements associated with fair value of financial instruments. For public business entities (as defined in
ASU No. 2016-01), the guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. Entities should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of
the beginning of the fiscal year of adoption. The adoption of this update is not expected to have a material impact on the Company’s
consolidated financial position or results of operations.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842)
. The guidance supersedes existing guidance on accounting for leases with the main difference being that operating
leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured
at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make
an accounting policy election not to recognize lease assets and liabilities. For public business entities, the guidance is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the
guidance is permitted. In transition, entities are required to recognize and measure leases at the beginning of the earliest period
presented using a modified retrospective approach. The adoption of this update is not expected to have a material impact on the
Company’s consolidated financial position or results of operations.
FIRST CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9 – continued)
In March 2016, the FASB issued ASU No. 2016-09,
Compensation
– Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting
. The guidance is intended
to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification
of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the
guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early
adoption is permitted. The adoption of this update is not expected to have a material impact on the Company’s consolidated
financial position or results of operations.
In June 2016, the FASB issued ASU No. 2016-13,
Financial
Instruments – Credit Losses (Topic 326)
. The update 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 are effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted
as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently
assessing the impact the guidance will have upon adoption.
In August 2016, the FASB issued ASU No. 2016-15,
Statement
of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments
. The update addresses eight specific
cash flow issues with the objective of reducing diversity in practice in how certain cash receipts and cash payments are presented
and classified in the statement of cash flows. The amendments in the update are effective for public business entities for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. If an entity adopts the amendments in an interim period, any adjustments should be reflected as
of the beginning of the fiscal year that includes that interim period, and all amendments must be adopted in the same period. The
adoption of this update is not expected to have a material impact on the Company’s consolidated financial position or results
of operations.
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
Safe Harbor Statement for Forward-Looking Statements
This Quarterly Report on Form 10-Q may contain
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not
historical facts nor guarantees of future performance; rather they are statements based on the Company’s current expectations
regarding its business strategies and their intended results and its future performance. Forward-looking statements can be identified
by use of the words “expects,” “believes,” “anticipates,” “intends,” “could”
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,
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, 2015 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 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, 2016,
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, 2015.
Financial Condition
Total assets increased $26.3 million from $715.8
million at December 31, 2015 to $742.1 million at September 30, 2016, an increase of 3.7%.
Net loans receivable (excluding loans held for
sale) increased $7.2 million from $359.2 million at December 31, 2015 to $366.4 million at September 30, 2016. Commercial real
estate, other consumer loans and home equity and second mortgage loans increased $9.3 million, $5.2 million and $3.6 million, respectively,
during the nine months ended September 30, 2016, while residential mortgage loans decreased $14.0 million during the period.
Securities available for sale increased $60.5
million from $186.8 million at December 31, 2015 to $247.3 million at September 30, 2016, as management continues to invest excess
liquidity obtained in the Peoples acquisition in securities available for sale. Purchases of $159.3 million of securities classified
as available for sale were made during the nine months ended September 30, 2016 and consisted primarily of U.S. government agency
notes and bonds and mortgage-backed securities and municipal bonds. Maturities and principal repayments of available for sale securities
totaled $82.3 million and $13.2 million, respectively, during the nine months ended September 30, 2016. Municipal bonds with a
value of $4.6 million were sold during the same period.
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
Cash and cash equivalents decreased from $109.2
million at December 31, 2015 to $70.4 million at September 30, 2016, primarily due to a decrease of $38.0 million in federal funds
sold as excess liquidity is invested in investment securities.
Total deposits increased 3.4% from $637.2 million
at December 31, 2015 to $658.7 million at September 30, 2016. Interest-bearing demand and savings accounts increased $31.7 million
during the nine months ended September 30, 2016 primarily due to normal fluctuations in accounts of local municipalities, new accounts
and current time deposit accountholders transferring funds to non-maturity deposits as customers opt not to lock in to longer terms
in the current low-rate environment. This also contributed to a decrease in time deposits of $9.3 million during the period.
Total stockholders' equity attributable to the
Company increased from $74.4 million at December 31, 2015 to $78.6 million at September 30, 2016 primarily due to retained net
income of $3.0 million and a net increase of $1.2 million in the net unrealized gain on securities available for sale for the nine
months ended September 30, 2016. The increase in unrealized gains on available for sale securities during the period is primarily
due to changes in long-term market interest rates.
Results of Operations
Net income for the nine-month periods ended
September 30, 2016 and 2015.
Net income attributable to the Company was $5.1 million ($1.53 per share) for the nine months
ended September 30, 2016 compared to $4.1 million ($1.49 per share) for the same time period in 2015. The increase is primarily
due to increases in net interest income after provision for loan losses and noninterest income partially offset by an increase
in noninterest expense.
Net income for the three-month periods ended
September 30, 2016 and 2015.
Net income attributable to the Company was $1.8 million ($0.53 per share) for the three months
ended September 30, 2016 compared to $1.4 million ($0.51 per share) for the three months ended September 30, 2015. Again, the increase
is primarily due to increases in net interest income after provision for loan losses and noninterest income partially offset by
an increase in noninterest expense.
Net interest income for the nine-month periods
ended September 30, 2016 and 2015.
Net interest income increased $4.6 million for the nine months ended September 30, 2016
compared to the same period in 2015 primarily due to an increase in interest-earning assets, partially offset by a decrease in
the interest rate spread.
Total interest income increased $5.2 million
for the nine months ended September 30, 2016 compared to the same period in 2015. For the nine months ended September 30, 2016,
the average balance of interest-earning assets and their tax-equivalent yield were $682.3 million and 3.78%, respectively. During
the same period in 2015, the average balance of those assets was $437.6 million and the tax-equivalent yield was 4.29%. Both the
increase in average balance of interest-earning assets and the decrease in the average tax-equivalent yield for the nine months
ended September 30, 2016 are primarily attributable to the Peoples acquisition. Through the acquisition, the Company acquired loans,
investment securities, interest-bearing deposits with banks and federal funds sold with fair values of approximately $56 million,
$132 million, $5 million and $28 million, respectively. The high concentration of investment securities, interest-bearing deposits
with banks and federal funds sold, which generally provide a lower yield than loans, led to the decrease in the overall tax-equivalent
yield on interest-earning assets for 2016.
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
Total interest expense increased $668,000 for
the nine months ended September 30, 2016 compared to the same period in 2015. The average rate paid on interest-bearing liabilities
increased from 0.28% for the nine months ended September 30, 2015 to 0.35% for the same period in 2016. The average balance of
interest-bearing liabilities increased from $339.6 million for 2015 to $527.6 million for 2016 primarily due to the Peoples acquisition,
with the Company assuming deposit liabilities with a fair value of $209 million. As a result of the changes in interest-earning
assets and interest-bearing liabilities, the interest rate spread decreased from 4.01% for the nine months ended September 30,
2015 to 3.43% for the same period in 2016.
Net interest income for the three-month periods
ended September 30, 2016 and 2015.
Net interest income increased $1.5 million for the three months ended September 30, 2016
compared to the three months ended September 30, 2015 primarily due to an increase in interest-earning assets, partially offset
by a decrease in the interest rate spread.
Total interest income increased $1.7 million
for the three months ended September 30, 2016 compared to the same period in 2015. For the three months ended September 30, 2016,
the average balance of interest-earning assets and their tax-equivalent yield were $684.8 million and 3.72%, respectively. During
the same period in 2015, the average balance of those assets was $433.2 million and the tax-equivalent yield was 4.34%. The changes
in balances and yields are primarily due to the Peoples acquisition as previously described.
Total interest expense increased $194,000 for
the three months ended September 30, 2016 compared to the three months ended September 30, 2015. The average balance of interest-bearing
liabilities increased from $333.1 million to $531.9 million when comparing the two periods and the average rate paid on those liabilities
increased from 0.26% for the three months ended September 30, 2015 to 0.31% for the same period in 2016. As a result, the tax-equivalent
interest rate spread decreased from 4.08% for the three months ended September 30, 2015 to 3.41% for the three months ended September
30, 2016.
Provision for
loan losses
.
The provision for loan losses increased from $50,000 for the nine-month period
ended September 30, 2015 to $425,000 for the same period in 2016. The provision for loan losses was $200,000 for the three months
ended September 30, 2016, but no provision for loan losses was recorded for the same period in 2015. The Bank recognized net charge-offs
of $520,000 for the nine months ended September 30, 2016 compared to $1.4 million during the same period in 2015. The net charge-offs
recognized in 2015 primarily related to a $1.2 million charge-off on a commercial loan that had been fully reserved for in prior
periods.
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.
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
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 $3.3 million
at September 30, 2016 and $3.4 million at December 31, 2015. 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. At September 30, 2016, nonperforming loans amounted
to $3.6 million compared to $4.6 million at December 31, 2015. Included in nonperforming loans at September 30, 2016 are loans
90 days or more past due and still accruing interest of $204,000. These loans are accruing interest because the estimated value
of the collateral and collection efforts are deemed sufficient to ensure full recovery. At September 30, 2016 and December 31,
2015, nonaccrual loans amounted to $3.4 million and $4.2 million, respectively.
Noninterest income for the nine-month periods
ended September 30, 2016 and 2015
. Noninterest income for the nine months ended September 30, 2016 increased $929,000 compared
to the nine months ended September 30, 2015. The increase was primarily due to increases in service charges on deposit accounts,
gains on the sale of loans and gains on the sale of securities of $441,000, $272,000 and $176,000, respectively, when comparing
the two periods. The increase in service charges on deposit accounts was primarily due to fees earned on the acquired Peoples accounts.
Noninterest income for the three-month periods
ended September 30, 2016 and 2015
. Noninterest income for the quarter ended September 30, 2016 increased $524,000 to $1.8 million
compared to $1.2 million for the quarter ended September 30, 2015. The increase was primarily due to increases in gains on the
sale of loans, services charges on deposit accounts and other income of $240,000, $149,000 and $153,000, respectively. The increase
in other income was primarily due to the sale of the Company’s investment in another financial institution in July 2016,
resulting in a gain of $145,000.
Noninterest expense for the nine-month periods
ended September 30, 2016 and 2015
. Noninterest expense for the nine months ended September 30, 2016 increased $3.7 million
compared to the same period in 2015 due primarily to the increased expenses associated with operating the five offices acquired
from Peoples. Compensation and benefits increased $2.2 million when comparing the two periods due to normal salary increases and
the retained Peoples personnel. Other operating expense, data processing expense and occupancy and equipment expense also increased
$924,000, $513,000 and $282,000, respectively, when comparing the two periods.
Noninterest expense for the three-month periods
ended September 30, 2016 and 2015
. Noninterest expense for the quarter ended September 30, 2016 increased $1.3 million compared
to the quarter ended September 30, 2015. Compensation and benefits, other operating expense and data processing expense increased
$796,000, $225,000 and $209,000, respectively, when comparing the two periods, due primarily to the Peoples acquisition.
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC.
Income tax expense.
Income tax expense
for the nine-month period ended September 30, 2016 was $1.9 million, for an effective tax rate of 27.0%, compared to $1.5 million,
for an effective tax rate of 26.3%, for the same period in 2015. For the three-month period ended September 30, 2016, income tax
expense and the effective tax rate were $666,000 and 27.4%, respectively, compared to $507,000 and 26.6%, respectively, for the
same period in 2015.
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, 2016, the Bank had cash and cash equivalents of $70.4 million and securities
available-for-sale with a fair value of $247.3 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.
The Bank’s primary investing activity
is the origination of one-to-four family mortgage loans and, to a lesser extent, consumer, multi-family, commercial real estate
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 Office of the Comptroller of the Currency (“OCC”) but with prior notice to the OCC, cannot exceed net income
for that year to date plus retained net income (as defined in the applicable OCC regulations) for the preceding two calendar years.
On a stand-alone basis, the Company had liquid assets of $608,000 at September 30, 2016.
The Bank is required to maintain specific amounts
of capital pursuant to regulatory requirements. As of September 30, 2016, the Bank was in compliance with all regulatory capital
requirements that were effective as of such date with Tier 1 capital to average assets, common equity Tier 1 capital to risk-weighted
assets, Tier 1 capital to risk-weighted assets and total capital to risk-weighted assets ratios of 9.3%, 14.6%, 14.6% and 15.3%,
respectively. The regulatory requirements at that date to be considered “well-capitalized” under applicable regulations
were 5.0%, 6.5%, 8.0% and 10.0%, respectively. At September 30, 2016, 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, 2015.
For the nine months ended September 30, 2016,
the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company’s
financial condition, results of operations or cash flows.
PART I – ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
FIRST CAPITAL, INC.
Qualitative Aspects of Market Risk
. Market
risk is the risk that the estimated fair value of the Company’s assets and liabilities will decline as a result of changes
in interest rates or financial market volatility, or that the Company’s net income will be significantly reduced by interest
rate changes.
The Company’s principal financial objective
is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Company has sought
to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and
liability maturities and interest rates. In order to reduce the exposure to interest rate fluctuations, the Company has developed
strategies to manage its liquidity, shorten its effective maturities of certain interest-earning assets and decrease the interest
rate sensitivity of its asset base. Management has sought to decrease the average maturity of its assets by emphasizing the origination
of short-term commercial and consumer loans, all of which are retained by the Company for its portfolio. The Company relies on
retail deposits as its primary source of funds. Management believes retail deposits, compared to brokered deposits, reduce the
effects of interest rate fluctuations because they generally represent a more stable source of funds.
Quantitative Aspects of Market Risk
.
The Company does not maintain a trading account for any class of financial instrument nor does the Company engage in hedging activities
or purchase high-risk derivative instruments. Furthermore, the Company is not subject to foreign currency exchange rate risk or
commodity price risk.
Potential cash flows, sales, or replacement
value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general
level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits, extending
loans and investing in investment securities. Many factors affect the Company’s exposure to changes in interest rates, such
as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics
of financial instruments. The Company’s earnings can also be affected by the monetary and fiscal policies of the U.S. Government
and its agencies, particularly the Federal Reserve Board.
An element in the Company’s ongoing process
is to measure and monitor interest rate risk using a Net Interest Income at Risk simulation to model the interest rate sensitivity
of the balance sheet and to quantify the impact of changing interest rates on the Company. The model quantifies the effects of
various possible interest rate scenarios on projected net interest income over a one-year horizon. The model assumes a semi-static
balance sheet and measures the impact on net interest income relative to a base case scenario of hypothetical changes in interest
rates over twelve months and provides no effect given to any steps that management might take to counter the effect of the interest
rate movements. The scenarios include prepayment assumptions, changes in the level of interest rates, the shape of the yield curve,
and spreads between market interest rates in order to capture the impact from re-pricing, yield curve, option, and basis risks.
PART I – ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
FIRST CAPITAL, INC.
Results of the Company’s simulation modeling,
which assumes an immediate and sustained parallel shift in market interest rates, project that the Company’s net interest
income could change as follows over a one-year horizon, relative to our base case scenario, based on September 30, 2016 and December
31, 2015 financial information:
|
|
At September 30, 2016
|
|
At December 31, 2015
|
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
|
|
$
|
188
|
|
|
|
0.82
|
%
|
|
$
|
903
|
|
|
|
3.79
|
%
|
200bp
|
|
|
199
|
|
|
|
0.87
|
|
|
|
756
|
|
|
|
3.18
|
|
100bp
|
|
|
81
|
|
|
|
0.35
|
|
|
|
442
|
|
|
|
1.86
|
|
Static
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
(100)bp
|
|
|
(632
|
)
|
|
|
(2.75
|
)
|
|
|
(1,296
|
)
|
|
|
(5.44
|
)
|
At September 30, 2016 and December 31, 2015,
the Company’s simulated exposure to a change in interest rates shows that 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.
Alternatively, at September 30, 2016 and December 31, 2015, an immediate and sustained increase in rates of 1.00%, 2.00% or 3.00%
would increase the Company’s net interest income compared to a flat interest rate scenario.
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, 2016 and December 31, 2015 financial information:
|
|
At September 30, 2016
|
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
|
|
$
|
78,495
|
|
|
$
|
(18,764
|
)
|
|
|
(19.29
|
)%
|
|
|
11.29
|
%
|
|
|
(173
|
)bp
|
200bp
|
|
|
87,937
|
|
|
|
(9,322
|
)
|
|
|
(9.59
|
)
|
|
|
12.35
|
|
|
|
(67
|
)bp
|
100bp
|
|
|
93,571
|
|
|
|
(3,688
|
)
|
|
|
(3.79
|
)
|
|
|
12.83
|
|
|
|
(19
|
)bp
|
Static
|
|
|
97,259
|
|
|
|
0
|
|
|
|
0
|
|
|
|
13.02
|
|
|
|
0
|
bp
|
(100)bp
|
|
|
103,827
|
|
|
|
6,568
|
|
|
|
6.73
|
|
|
|
13.59
|
|
|
|
57
|
bp
|
|
|
At December 31, 2015
|
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
|
|
$
|
84,935
|
|
|
$
|
(16,474
|
)
|
|
|
(16.25
|
)%
|
|
|
12.72
|
%
|
|
|
(151
|
)bp
|
200bp
|
|
|
95,621
|
|
|
|
(5,788
|
)
|
|
|
(5.71
|
)
|
|
|
14.01
|
|
|
|
(22
|
)bp
|
100bp
|
|
|
102,349
|
|
|
|
940
|
|
|
|
0.93
|
|
|
|
14.67
|
|
|
|
44
|
bp
|
Static
|
|
|
101,409
|
|
|
|
0
|
|
|
|
0
|
|
|
|
14.23
|
|
|
|
0
|
bp
|
(100)bp
|
|
|
98,469
|
|
|
|
(2,940
|
)
|
|
|
(2.90
|
)
|
|
|
13.55
|
|
|
|
(68
|
)bp
|
The previous tables indicate that at September 30, 2016
and December 31, 2015, the Company would expect a decrease in its EVE in the event of a sudden and sustained 200 to 300 basis point
increase in prevailing interest rates. At September 30, 2016, the Company would expect a decrease in its EVE in the event of a
sudden and sustained 100 basis point increase in prevailing interest rates and an increase in its EVE in the event of a sudden
and sustained 100 basis point decrease in prevailing interest rates. Alternatively, at December 31, 2015, the Company would expect
an increase in its EVE in the event of a sudden and sustained 100 basis point increase and a decrease in its EVE in the event of
a sudden and sustained 100 basis point decrease in prevailing interest rates.
PART I – ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
FIRST CAPITAL, INC.
The models are driven by expected behavior
in various interest rate scenarios and many factors besides market interest rates affect the Company’s net interest income
and EVE. For this reason, the Company models many different combinations of interest rates and balance sheet assumptions to understand
its overall sensitivity to market interest rate changes. Therefore, as with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing tables and it is recognized that the model outputs
are not guarantees of actual results. For example, although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may
lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those
assumed in the modeling scenarios.
PART I - ITEM 4
CONTROLS AND PROCEDURES
FIRST CAPITAL, INC.
Controls and Procedures
The Company’s management, including the
Company’s principal executive officer and principal financial officer, have 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, 2016 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.