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What changed in FIRST CAPITAL INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of FIRST CAPITAL INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+346 added−300 removedSource: 10-K (2024-03-29) vs 10-K (2023-03-22)

Top changes in FIRST CAPITAL INC's 2023 10-K

346 paragraphs added · 300 removed · 224 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

117 edited+37 added−38 removed144 unchanged
Biggest changeYear Ended December 31, 2022 2021 2020 (Dollars in thousands) Allowance at beginning of period $ 6,083 $ 6,625 $ 5,061 Provision (credit) for loan losses 950 (325 ) 1,801 7,033 6,300 6,862 Recoveries: Residential mortgage loans 10 5 51 Land loans - - - Commercial real estate loans - - - Construction loans - - - Home equity / second mortgage loans 2 8 11 Other consumer loans 223 214 212 Commercial business 9 10 - Total recoveries 244 237 274 Charge-offs: Residential mortgage loans 48 35 72 Land loans - 9 - Commercial real estate loans - - - Construction loans - - - Home equity / second mortgage loans - 10 - Other consumer loans 448 400 407 Commercial business 9 - 32 Total charge-offs 505 454 511 Net (charge-offs) recoveries (261 ) (217 ) (237 ) Balance at end of period $ 6,772 $ 6,083 $ 6,625 Ratio of allowance for loan losses to total loans outstanding at the end of the period 1.20 % 1.25 % 1.31 % Ratio of nonaccrual loans to total loans outstanding at the end of the period 0.25 % 0.27 % 0.28 % Ratio of allowance for loan losses to nonaccrual loans at the end of the period 482.68 % 458.40 % 471.19 % Ratio of net charge-offs to average loans outstanding during the period Residential mortgage loans 0.03 % 0.02 % 0.02 % Land loans 0.00 % 0.05 % 0.00 % Commercial real estate loans 0.00 % 0.00 % 0.00 % Construction loans 0.00 % 0.00 % 0.00 % Home equity / second mortgage loans 0.00 % 0.00 % -0.02 % Other consumer loans 0.36 % 0.30 % 0.30 % Commercial business 0.00 % -0.02 % 0.04 % Total net charge-offs to average loans outstanding during the period 0.05 % 0.04 % 0.05 % 13 During the year ended December 31, 2020, the Company adjusted the qualitative factors due to economic uncertainties related to the ongoing COVID-19 pandemic.
Biggest changeYear Ended December 31, 2023 2022 2021 (In thousands) Beginning balance, prior to adoption of ASC 326 $ 6,772 $ 6,083 $ 6,625 Impact of adopting ASC 326 561 - - Provision for (recapture of) credit losses 1,141 950 (325 ) 8,474 7,033 6,300 Recoveries: 1-4 Family Residential Mortgage 21 5 5 Multifamily Residential - - - Commercial Real Estate - - - 1-4 Family Residential Construction - - - Other Construction, Development and Land - 5 - Home Equity and Second Mortgage 2 2 8 Commercial Business 9 - 33 Consumer and Other 180 232 191 Total recoveries 212 244 237 Charge-offs: 1-4 Family Residential Mortgage 31 48 31 Multifamily Residential - - - Commercial Real Estate - - - 1-4 Family Residential Construction - - - Other Construction, Development and Land - - 14 Home Equity and Second Mortgage 15 - 9 Commercial Business 205 - 23 Consumer and Other 430 457 377 Total charge-offs 681 505 454 Net (charge-offs) recoveries (469 ) (261 ) (217 ) Balance at end of period $ 8,005 $ 6,772 $ 6,083 Ratio of allowance to total loans outstanding at the end of the period 1.29 % 1.25 % 1.25 % Ratio of nonaccrual loans to total loans 0.28 % 0.25 % 0.27 % Allowance as a % of nonperforming loans 457.17 % 454.50 % 458.40 % Ratio of net charge-offs to average loans outstanding during the period: 1-4 Family Residential Mortgage 0.01 % 0.04 % 0.03 % Multifamily Residential 0.00 % 0.00 % 0.00 % Commercial Real Estate 0.00 % 0.00 % 0.00 % 1-4 Family Residential Construction 0.00 % 0.00 % 0.00 % Other Construction, Development and Land 0.00 % -0.01 % 0.04 % Home Equity and Second Mortgage 0.02 % 0.00 % 0.00 % Commercial Business 0.29 % 0.00 % -0.01 % Consumer and Other 0.45 % 0.40 % 0.33 % Total net charge-offs to average loans outstanding during the period 0.08 % 0.05 % 0.04 % 10 ACL on Loans Analysis.
Other Regulations The Bank’s operations are also subject to federal laws applicable to credit transactions, including the: ● Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; ● Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; ● Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; ● Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; ● Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and ● Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
Other Regulations The Bank’s operations are also subject to federal laws applicable to credit transactions, including the: ● Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; 24 ● Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; ● Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; ● Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; ● Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and ● Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
In general, these regulations require that any such transaction by the Bank (or its subsidiaries) with an affiliate must be secured by designated amounts of specified collateral and must be limited to certain thresholds on an individual and aggregate basis. 25 The Sarbanes-Oxley Act of 2002 generally prohibits loans by the Company to its executive officers and directors.
In general, these regulations require that any such transaction by the Bank (or its subsidiaries) with an affiliate must be secured by designated amounts of specified collateral and must be limited to certain thresholds on an individual and aggregate basis. The Sarbanes-Oxley Act of 2002 generally prohibits loans by the Company to its executive officers and directors.
The orders and legislation may change banking statutes and our operating environment in substantial and unpredictable ways by increasing or decreasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance among banks, savings associations, credit unions, and other financial institutions. 27 FEDERAL AND STATE TAXATION Federal Taxation General.
The orders and legislation may change banking statutes and our operating environment in substantial and unpredictable ways by increasing or decreasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance among banks, savings associations, credit unions, and other financial institutions. FEDERAL AND STATE TAXATION Federal Taxation General.
There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are subject to additional limitations based on the type of loan involved. Enforcement.
There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are subject to additional limitations based on the type of loan involved. 23 Enforcement.
As such, the Bank was required to use the specific charge-off method to compute bad debt deductions beginning in 2016 and its bad debt reserves calculated using the experience reserve method were recaptured in taxable income over the four-year period ending December 31, 2019. Potential Recapture of Base Year Bad Debt Reserve.
As such, the Bank was required to use the specific charge-off method to compute bad debt deductions beginning in 2016 and its bad debt reserves calculated using the experience reserve method were recaptured in taxable income over the four-year period ending December 31, 2019. 25 Potential Recapture of Base Year Bad Debt Reserve.
The construction loan documents require the disbursement of the loan proceeds in increments as construction progresses. Disbursements are based on periodic on-site inspections by an independent appraiser. Construction lending is inherently riskier than residential mortgage lending. Construction loans, on average, generally have higher loan balances than residential mortgage loans.
The construction loan documents require the disbursement of the loan proceeds in increments as construction progresses. Disbursements are based on periodic on-site inspections by an independent appraiser. 4 Construction lending is inherently riskier than residential mortgage lending. Construction loans, on average, generally have higher loan balances than residential mortgage loans.
The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserve. 28 State Taxation Indiana. Effective July 1, 2013, Indiana amended its tax code to provide for reductions in the franchise tax rate.
The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserve. State Taxation Indiana. Effective July 1, 2013, Indiana amended its tax code to provide for reductions in the franchise tax rate.
The Regulatory Relief Act also exempted bank holding companies under $100 billion in total assets from the Dodd-Frank Act requirements for supervisory stress tests and company-run stress-tests. The Company will continue to evaluate the potential impacts of the Dodd-Frank Act and the Regulatory Relief Act. 20 Activities Restrictions.
The Regulatory Relief Act also exempted bank holding companies under $100 billion in total assets from the Dodd-Frank Act requirements for supervisory stress tests and company-run stress-tests. The Company will continue to evaluate the potential impacts of the Dodd-Frank Act and the Regulatory Relief Act. Activities Restrictions.
These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes. 16 The following table sets forth the balances of deposits in the various types of accounts offered by the Bank at the dates indicated.
These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes. The following table sets forth the balances of deposits in the various types of accounts offered by the Bank at the dates indicated.
Notwithstanding the availability of funds for dividends, however, a banking regulator may prohibit the payment of dividends by the Bank if it determines such payment would constitute an unsafe or unsound practice. 21 Repurchase or Redemption of Shares .
Notwithstanding the availability of funds for dividends, however, a banking regulator may prohibit the payment of dividends by the Bank if it determines such payment would constitute an unsafe or unsound practice. Repurchase or Redemption of Shares .
In addition, banks must have procedures to verify the identity of their customers. 22 The Bank has established an anti‑money laundering program pursuant to the BSA and a customer identification program pursuant to the Patriot Act.
In addition, banks must have procedures to verify the identity of their customers. The Bank has established an anti‑money laundering program pursuant to the BSA and a customer identification program pursuant to the Patriot Act.
As a general matter, the FRB has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if: (i) the company's net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company's capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
As a general matter, the Federal Reserve Board has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if: (i) the company's net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company's capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
However, at December 31, 2022, the Bank had no commitments required to be accounted for at fair value, as all mortgage loan commitments were best efforts commitments where specific loans were committed to be delivered if and when the loans were sold. Fair value is estimated based on fees that would be charged on commitments with similar terms. Delinquencies.
However, at December 31, 2023, the Bank had no commitments required to be accounted for at fair value, as all mortgage loan commitments were best efforts commitments where specific loans were committed to be delivered if and when the loans were sold. Fair value is estimated based on fees that would be charged on commitments with similar terms. Delinquencies.
The Bank accrues interest on loans over 90 days past due when, in the opinion of management, the estimated value of collateral and collection efforts are deemed sufficient to ensure full recovery. The Bank did not recognize any interest income on nonaccrual loans for the fiscal year ended December 31, 2022.
The Bank accrues interest on loans over 90 days past due when, in the opinion of management, the estimated value of collateral and collection efforts are deemed sufficient to ensure full recovery. The Bank did not recognize any interest income on nonaccrual loans for the fiscal year ended December 31, 2023.
If the Company’s annual revenues exceed $100 million in a given fiscal year, its category will change back to “accelerated filer”. The categorization of “accelerated” or “large accelerated filer” drives the requirement for a public company to obtain an auditor attestation of its internal control over financial reporting.
If the Company’s annual revenues exceed $100 million in a given fiscal year, its category will change back to “accelerated filer.” The categorization of “accelerated” or “large accelerated filer” drives the requirement for a public company to obtain an auditor attestation of its internal control over financial reporting.
The Bank was in compliance with this requirement with an investment in FHLB stock at December 31, 2022 of $1.7 million. The FHLBs were previously required to provide funds for the resolution of insolvent thrifts in the late 1980s and contribute funds for affordable housing programs.
The Bank was in compliance with this requirement with an investment in FHLB stock at December 31, 2023 of $1.7 million. The FHLBs were previously required to provide funds for the resolution of insolvent thrifts in the late 1980s and contribute funds for affordable housing programs.
The Bank had $1.2 million of net deferred loan costs at December 31, 2022. Mortgage Banking Activities. Mortgage loans originated and funded by the Bank and intended for sale in the secondary market are carried at the lower of aggregate cost or market value.
The Bank had $1.2 million of net deferred loan costs at December 31, 2023. Mortgage Banking Activities. Mortgage loans originated and funded by the Bank and intended for sale in the secondary market are carried at the lower of aggregate cost or market value.
If a loan continues in a delinquent status for 90 days or more, the Bank generally initiates foreclosure or other litigation proceedings. See Note 4 in the accompanying Notes to Consolidated Financial Statements for additional information regarding delinquent loans. 9 Nonperforming Assets.
If a loan continues in a delinquent status for 90 days or more, the Bank generally initiates foreclosure or other litigation proceedings. See Note 4 in the accompanying Notes to Consolidated Financial Statements for additional information regarding delinquent loans. 7 Nonperforming Assets.
The relevant capital measures are the total risk-based capital ratio, the Tier 1 risk-based capital ratio, the common equity Tier 1 risk-based capital ratio, and the leverage ratio. 23 A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 risk-based capital ratio of 6.5% or greater and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a common equity Tier 1 risk-based capital ratio of 4.5% or greater and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a common equity Tier 1 risk-based capital ratio of less than 4.5%, or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a common equity Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets.
A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 risk-based capital ratio of 6.5% or greater and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a common equity Tier 1 risk-based capital ratio of 4.5% or greater and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a common equity Tier 1 risk-based capital ratio of less than 4.5%, or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a common equity Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets.
Specific changes from the former capital rules impacting the Company’s determination of risk-weighted assets include, among other things: ● Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans; ● Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due; ● Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%); and ● Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the risk weight category of the underlying collateral securing the transaction.
Specific changes from the former capital rules impacting the Company’s determination of risk-weighted assets include, among other things: ● Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans; ● Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due; ● Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%); and ● Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the risk weight category of the underlying collateral securing the transaction. 17 Holding Company Regulation General.
As of December 31, 2022, all of the Bank’s mortgage-backed securities had fixed rates. The Bank also invests in collateralized mortgage obligations (“CMOs”) issued by Ginnie Mae, Fannie Mae and Freddie Mac, as well as private issuers.
As of December 31, 2023, all of the Bank’s mortgage-backed securities had fixed rates. The Bank also invests in collateralized mortgage obligations (“CMOs”) issued by Ginnie Mae, Fannie Mae and Freddie Mac, as well as private issuers.
The Bank generally reviews its deposit mix and pricing weekly. The following table presents the maturity distribution of time deposits that are in excess of the FDIC insurance limit (currently $250,000) as of December 31, 2022.
The Bank generally reviews its deposit mix and pricing weekly. The following table presents the maturity distribution of time deposits that are in excess of the FDIC insurance limit (currently $250,000) as of December 31, 2023.
In reviewing applications seeking approval for mergers and other acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the Community Reinvestment Act and the effectiveness of the subject organizations in combating money laundering activities.
In reviewing applications seeking approval for mergers and other acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the Community Reinvestment Act and the effectiveness of the subject organizations in combating money laundering activities. 19 Federal Banking Regulation Business Activities.
The BHC Act requires the prior approval of the FRB before a bank holding company may acquire more than a 5% voting interest or substantially all the assets of any bank or bank holding company. Banks must also seek prior approval from their primary state and federal regulators for any such acquisitions.
The BHC Act requires the prior approval of the Federal Reserve Board before a bank holding company may acquire more than a 5% voting interest or substantially all the assets of any bank or bank holding company. Banks must also seek prior approval from their primary state and federal regulators for any such acquisitions.
In addition, bank holding companies that qualify and elect to be financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB) or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as determined by the FRB), without prior approval of the FRB.
In addition, bank holding companies that qualify and elect to be financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the Federal Reserve Board ) or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as determined by the Federal Reserve Board ), without prior approval of the Federal Reserve Board.
CMOs are complex mortgage-backed securities that restructure the cash flows and risks of the underlying mortgage collateral. 14 The following table sets forth the securities portfolio at the dates indicated.
CMOs are complex mortgage-backed securities that restructure the cash flows and risks of the underlying mortgage collateral. 11 The following table sets forth the securities portfolio at the dates indicated.
A bank holding company is generally required to give the FRB prior written notice of any purchase or redemption of its own then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company's consolidated net worth.
A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of its own then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company's consolidated net worth.
Demand loans, which are loans having neither a stated schedule of repayments nor a stated maturity, and overdrafts are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned income and allowance for loan losses.
Demand loans, which are loans having neither a stated schedule of repayments nor a stated maturity, and overdrafts are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned income and allowance for credit losses (“ACL”) on loans.
Any change in such regulatory requirements and policies, whether by the IDFI, FDIC, FRB or Congress, could have a material adverse impact on the Company, the Bank and their operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) made extensive changes to the regulation of the Bank.
Any change in such regulatory requirements and policies, whether by the IDFI, FDIC, Federal Reserve Board or Congress, could have a material adverse impact on the Company, the Bank and their operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) made extensive changes to the regulation of the Bank.
When an insured institution classifies problem assets as “loss,” it is required either to establish an allowance for losses equal to 100% of the amount of the assets, or charge off the classified asset. The amount of its valuation allowance is subject to review by the banking regulators, which can order the establishment of additional general loss allowances.
When an insured institution classifies problem assets as “loss,” it is required either to establish an ACL equal to 100% of the amount of the assets, or charge off the classified asset. The amount of its valuation allowance is subject to review by the banking regulators, which can order the establishment of additional loss allowances.
Generally, the FRB takes formal enforcement actions against the above entities and individuals for violations of laws, rules, or regulations, unsafe or unsound practices, breaches of fiduciary duty, and violations of final orders. Formal enforcement actions include cease and desist orders, written agreements, prompt corrective action directives, removal and prohibition orders, and orders assessing civil money penalties.
Generally, the Federal Reserve Board takes formal enforcement actions against the above entities and individuals for violations of laws, rules, or regulations, unsafe or unsound practices, breaches of fiduciary duty, and violations of final orders. Formal enforcement actions include cease and desist orders, written agreements, prompt corrective action directives, removal and prohibition orders, and orders assessing civil money penalties.
The Dodd-Frank Act also requires the FRB to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries, except that bank holding companies with less than $1 billion in assets are exempt from these capital requirements. Prompt Corrective Regulatory Action.
The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries, except that bank holding companies with less than $1 billion in assets are exempt from these capital requirements. Prompt Corrective Regulatory Action.
“Covered transactions” include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the FRB) from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.
“Covered transactions” include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve Board) from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.
The FRB has primary enforcement responsibility over the Company and has authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution.
The Federal Reserve Board has primary enforcement responsibility over the Company and has authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution.
Additionally, the FRB possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and their holding companies.
Additionally, the Federal Reserve Board possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and their holding companies.
The regulations also provide for a “special mention” category, described as assets which do not currently expose the institution to sufficient risk to warrant adverse classification, but have potential weaknesses that deserve management’s close attention. At December 31, 2022, the Bank had $1.4 million in doubtful/nonaccrual loans and $2.1 million in substandard loans.
The regulations also provide for a “special mention” category, described as assets which do not currently expose the institution to sufficient risk to warrant adverse classification, but have potential weaknesses that deserve management’s close attention. At December 31, 2023, the Bank had $1.8 million in doubtful/nonaccrual loans and $1.8 million in substandard loans.
The Company has no trust preferred securities. 19 The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.
The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.
The BHC Act generally limits the business in which a bank holding company and its subsidiaries may engage to banking or managing or controlling banks and those activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto.
The BHC Act generally limits the business in which a bank holding company and its subsidiaries may engage to banking or managing or controlling banks and those activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto.
The FRB’s policy is that a bank holding company experiencing earnings weakness should not pay cash dividends exceeding its net income or which could only be funded in ways that weaken the bank holding company's financial health, such as by borrowing.
The Federal Reserve Board’s policy is that a bank holding company experiencing earnings weakness should not pay cash dividends exceeding its net income or which could only be funded in ways that weaken the bank holding company's financial health, such as by borrowing.
At December 31, 2022, the Bank had no outstanding federal funds purchased under the lines of credit and the Bank had no borrowings under the lines of credit during 2022. 17 Subsidiary Activities The Bank is a subsidiary and is wholly-owned by the Company.
At December 31, 2023, the Bank had no outstanding federal funds purchased under the lines of credit and the Bank had no borrowings under the lines of credit during 2023. Subsidiary Activities The Bank is a subsidiary and is wholly-owned by the Company.
The IDFI and FDIC are the agencies that are primarily responsible for the regulation and supervision of Indiana chartered commercial banks, such as the Bank however, the Dodd-Frank Act created a new Consumer Financial Protection Bureau as an independent bureau of the FRB.
The IDFI and FDIC are the agencies that are primarily responsible for the regulation and supervision of Indiana chartered commercial banks, such as the Bank however, the Dodd-Frank Act created a new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board.
The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
The Federal Reserve Board has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve Board has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
At December 31, 2022 2021 Weighted Weighted Fair Amortized Percent of Average Fair Amortized Percent of Average Value Cost Portfolio Yield (1) Value Cost Portfolio Yield (1) (Dollars in thousands) SECURITIES AVAILABLE FOR SALE U.S.
At December 31, At December 31, 2023 2022 Weighted Weighted Fair Amortized Percent of Average Fair Amortized Percent of Average Value Cost Portfolio Yield (1) Value Cost Portfolio Yield (1) (Dollars in thousands) SECURITIES AVAILABLE FOR SALE Debt securities: U.S.
The Basel III Capital Rules also preclude certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out.
The Basel III Capital Rules also preclude certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out. The Company has no trust preferred securities.
The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB.
The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board .
The FRB has issued regulations requiring a bank holding company to serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support to their subsidiary depository institutions in times of financial stress. Dividends.
The Federal Reserve Board has issued regulations requiring a bank holding company to serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support to their subsidiary depository institutions in times of financial stress. Dividends.
In addition, the Bank offers unsecured consumer loans. Consumer loans are generally originated at fixed interest rates and for terms not to exceed seven years. The largest portion of the Bank’s consumer loan portfolio consists of home equity and second mortgage loans followed by automobile and truck loans. Automobile and truck loans are originated on both new and used vehicles.
Consumer loans are generally originated at fixed interest rates and for terms not to exceed seven years. The largest portion of the Bank’s consumer loan portfolio consists of home equity and second mortgage loans followed by automobile and truck loans. Automobile and truck loans are originated on both new and used vehicles.
With some limited exceptions, the BHC Act requires the prior approval of the FRB to acquire more than a 5% voting interest of any bank or bank holding company. Source of Strength.
With some limited exceptions, the BHC Act requires the prior approval of the Federal Reserve Board to acquire more than a 5% voting interest of any bank or bank holding company. Source of Strength.
Weighted average yields are calculated using average prepayment rates for the most recent three-month period. (2) Securities held to maturity are carried at amortized cost. (3) The expected maturities of mortgage-backed securities and CMOs may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty. 15 Deposit Activities and Other Sources of Funds General.
Weighted average yields are calculated using average prepayment rates for the most recent three-month period. (2) Securities held to maturity are carried at amortized cost. (3) The expected maturities of mortgage-backed securities and CMOs may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.
The Company is registered as a bank holding company and has elected to be a financial holding company. It is subject to the supervision and regulation of the FRB under the Bank Holding Company Act of 1956, as amended (the “BHC Act”).
The Company is registered as a bank holding company and has elected to be a financial holding company. It is subject to the supervision and regulation of the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “BHC Act”).
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.
New appraisals are generally obtained for all significant properties when a loan is individually evaluated for credit losses, 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.
At December 31, 2022, the Bank had commitments to originate $656,000 in fixed-rate mortgage loans intended for sale in the secondary market after the loans are closed.
At December 31, 2023, the Bank had commitments to originate $535,000 in fixed-rate mortgage loans intended for sale in the secondary market after the loans are closed.
At December 31, 2022, the Bank had approved speculative construction loans, a construction loan for which there is not a commitment for permanent financing in place at the time the construction loan was originated, with total commitments of $9.6 million and outstanding balances of $4.9 million.
At December 31, 2023, the Bank had approved speculative construction loans, a construction loan for which there is not a commitment for permanent financing in place at the time the construction loan was originated, with total commitments of $8.6 million and outstanding balances of $5.6 million.
Such commitments are made in writing on specified terms and conditions and are honored for up to 60 days from the date of application, depending on the type of transaction. The Bank had outstanding loan commitments of approximately $29.2 million at December 31, 2022.
Such commitments are made in writing on specified terms and conditions and are honored for up to 60 days from the date of application, depending on the type of transaction. The Bank had outstanding loan commitments of approximately $21.4 million at December 31, 2023.
The Bank also has an unsecured federal funds purchased line of credit through The Bankers Bank of Kentucky with a maximum borrowing amount of $5.0 million and a $2.0 million revolving line of credit with Stock Yards Bank & Trust Company.
The Bank also has an unsecured federal funds purchased line of credit through Independent Correspondent Bankers’ Bank with a maximum borrowing amount of $5.0 million and a $2.0 million revolving line of credit with Stock Yards Bank & Trust Company.
Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the FHLB’s assessment of the institution’s creditworthiness.
Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the FHLB’s assessment of the institution’s creditworthiness.
As an accommodation to its commercial business loan borrowers, the Bank issues standby letters of credit or performance bonds usually in favor of municipalities for whom its borrowers are performing services. At December 31, 2022, the Bank had outstanding letters of credit of $484,000. Loan Origination and Other Fees.
As an accommodation to its commercial business loan borrowers, the Bank issues standby letters of credit or performance bonds usually in favor of municipalities for whom its borrowers are performing services. At December 31, 2023, the Bank had outstanding letters of credit of $1.9 million. Loan Origination and Other Fees.
The Basel III Capital Rules, among other things: ● introduce a new capital measure called “Common Equity Tier 1” (“CET1”); ● specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements; ● define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and ● expand the scope of the deductions/adjustments as compared to existing regulations.
The Basel III Capital Rules became effective on January 1, 2015 (subject to a phase-in period). 16 The Basel III Capital Rules, among other things: ● introduce a new capital measure called “Common Equity Tier 1” (“CET1”); ● specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements; ● define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and ● expand the scope of the deductions/adjustments as compared to existing regulations.
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.
In instances where it is not deemed necessary to obtain a new appraisal, management bases its evaluation and ACL on loans 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.
First Harrison REIT, Inc. is a wholly-owned subsidiary of First Harrison Holdings, Inc., incorporated to hold a portion of the Bank's real estate mortgage loan portfolio. Heritage Hill, LLC is a wholly-owned subsidiary of the Bank acquired in connection with the acquisition of Peoples that holds and operates certain foreclosed real estate properties. FHB Risk Mitigation Services, Inc.
First Harrison REIT, Inc. is a wholly-owned subsidiary of First Harrison Holdings, Inc., incorporated to hold a portion of the Bank's real estate mortgage loan portfolio. Heritage Hill, LLC is a wholly-owned subsidiary of the Bank acquired in connection with the acquisition of Peoples that is currently inactive. FHB Risk Mitigation Services, Inc.
Holding Company Regulation General. The Company is a financial holding company within the meaning of federal law. As such, the Company is registered with the FRB and subject to FRB regulations, examination, supervision and reporting requirements.
The Company is a financial holding company within the meaning of federal law. As such, the Company is registered with the Federal Reserve Board and subject to Federal Reserve Board regulations, examination, supervision and reporting requirements.
Commercial business loans are generally originated with loan-to-value ratios not exceeding 75%. 6 Aside from lines of credit, commercial business loans are generally originated for terms not to exceed seven years with variable interest rates based on the prime lending rate. Approved credit lines totaled $55.8 million at December 31, 2022, of which $19.8 million was outstanding.
Commercial business loans are generally originated with loan-to-value ratios not exceeding 75%. Aside from lines of credit, commercial business loans are generally originated for terms not to exceed seven years with variable interest rates based on the prime lending rate. Approved credit lines totaled $43.1 million at December 31, 2023, of which $12.7 million was outstanding.
Under its current credit policies, the FHLB generally limits advances to 20% of a member’s assets, and short-term borrowing of less than one year may not exceed 10% of the institution’s assets. The FHLB determines specific lines of credit for each member institution. The Bank had no borrowed funds under the FHLB advance program during 2022.
Under its current credit policies, the FHLB generally limits advances to 20% of a member’s assets, and short-term borrowing of less than one year may not exceed 10% of the institution’s assets. The FHLB determines specific lines of credit for each member institution.
“Substandard” assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected.
There are three classifications for problem assets: substandard, doubtful and loss. “Substandard” assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected.
To commence any new activity permitted by the BHC Act or to acquire a company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act.
As a qualified financial holding company, the Company is eligible to engage in, or acquire companies engaged in, the broader range of activities that are permitted by the GLB Act. 18 To commence any new activity permitted by the BHC Act or to acquire a company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act.
Specific allowances related to impaired loans and other classified loans are established where the present value of the loan’s discounted cash flows, observable market price or collateral value (for collateral dependent loans) is lower than the carrying value of the loan.
Specific allocations of the ACL on loans related to individually evaluated loans are established where the present value of the loan’s discounted cash flows, observable market price or collateral value (for collateral dependent loans) is lower than the carrying value of the loan.
The Bank relies upon advances from the FHLB to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB are secured by certain first mortgage loans. The Bank also uses retail repurchase agreements as a source of borrowings. The FHLB functions as a central reserve bank providing credit for member financial institutions.
The Bank relies upon advances from the FHLB and other sources to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB are secured by certain investment securities and first mortgage loans. The Bank also uses retail repurchase agreements as a source of borrowings.
Such loans are generally originated at fixed interest rates for terms up to five years and at loan-to-value ratios up to 90% of the blue book value in the case of used vehicles and 90% of the purchase price in the case of new vehicles.
Such loans are generally originated at fixed interest rates for terms up to five years and at loan-to-value ratios up to 90% of the blue book value in the case of used vehicles and 90% of the purchase price in the case of new vehicles. 5 The Bank originates variable-rate home equity and fixed-rate second mortgage loans generally for terms not to exceed ten years.
The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, regulatory examiners have the authority to identify additional problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss.
The IDFI and FDIC have adopted various regulations regarding problem assets of financial institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, regulatory examiners have the authority to identify additional problem assets and, if appropriate, require them to be classified.
As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its mortgage loans provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different programs.
The FHLB functions as a central reserve bank providing credit for member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its mortgage loans provided certain standards related to creditworthiness have been met.
At December 31, 2022, all impaired loans were considered to be collateral dependent for the purposes of determining fair value. 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.
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.
The Bank regularly reviews the loan portfolio to determine whether any loans require classification in accordance with applicable regulations. Foreclosed Real Estate. Foreclosed real estate held for sale is carried at fair value minus estimated costs to sell. Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized.
The Bank regularly reviews the loan portfolio to determine whether any loans require classification in accordance with applicable regulations. 8 Foreclosed Real Estate. Foreclosed real estate held for sale is carried at fair value minus estimated costs to sell.
Maturity Period Balance (In thousands) Three months or less $ 301 Three through six months 373 Six through twelve months 1,250 Over twelve months 3,346 Total $ 5,270 Uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit (currently $250,000), were approximately $393.7 million and $413.0 million at December 31, 2022 and 2021, respectively.
Maturity Period Balance (In thousands) Three months or less $ 14,578 Three through six months 10,556 Six through twelve months 2,942 Over twelve months 1,852 Total $ 29,928 Uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limit (currently $250,000), were approximately $319.5 million and $393.7 million at December 31, 2023 and 2022, respectively.
The summary of statutory provisions and regulations applicable to banks and their holding companies set forth below and elsewhere in this document does not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Company and is qualified in its entirety by reference to the actual laws and regulations. 18 Basel III Capital Rules In July 2013, the federal banking agencies published the Basel III Capital Rules establishing a new comprehensive capital framework for U.S. banking organizations.
The summary of statutory provisions and regulations applicable to banks and their holding companies set forth below and elsewhere in this document does not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Company and is qualified in its entirety by reference to the actual laws and regulations.
Deposit insurance is currently $250,000 per depositor, per FDIC-insured institution, per ownership category. Under the FDIC’s risk-based assessment system, insured institutions are assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned, and certain adjustments specified by FDIC regulations.
The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Deposit insurance is currently $250,000 per depositor, per FDIC-insured institution, per ownership category. Under the FDIC’s risk-based assessment system, insured institutions are assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors.
Therefore, the Company’s independent registered public accounting firm was not required for SEC reporting purposes to attest on internal control over financial reporting as of December 31, 2022.
Therefore, the Company’s independent registered public accounting firm was not required for SEC reporting purposes to attest on internal control over financial reporting as of December 31, 2023. Federal Securities Laws The Company’s common stock is registered with the SEC under the Securities Exchange Act of 1934, as amended.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan.
A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes. 21 The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan.
Agency notes and bonds: Due in one year or less $ 17,702 $ 18,022 3.50 % 1.92 % $ 1,375 $ 1,371 0.31 % 2.05 % Due after one year through five years 119,578 132,373 25.73 % 1.04 % 118,245 119,620 26.75 % 0.95 % Due after five years through ten years 701 748 0.15 % 3.16 % 9,476 9,650 2.16 % 1.19 % Due after ten years - - 0.00 % 0.00 % - - 0.00 % 0.00 % U.S.
Agency notes and bonds: Due in one year or less $ 16,110 $ 16,363 3.44 % 2.33 % $ 17,702 $ 18,022 3.50 % 1.92 % Due after one year through five years 110,124 118,563 24.93 % 0.92 % 119,578 132,373 25.73 % 1.04 % Due after five years through ten years 3,271 3,248 0.68 % 4.92 % 701 748 0.15 % 3.16 % Due after ten years - - 0.00 % 0.00 % - - 0.00 % 0.00 % U.S.
In addition, the IDFI and FDIC, as an integral part of the examination process, periodically review the Bank’s allowance for loan losses and may require the Bank to make additional provisions for estimated losses based on its judgments about information available to it at the time of its examination. 11 The methodology used in determining the allowance for loan losses includes segmenting the loan portfolio by identifying risk characteristics common to pools 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 pools of loans with similar characteristics by applying loss factors that consider the qualitative factors which may affect the loss rates.
The methodology used in determining the ACL on loans includes segmenting the loan portfolio by identifying risk characteristics common to pools 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 pools of loans with similar characteristics by applying loss factors that consider the qualitative factors which may affect the loss rates.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeAs inflation increases and market interest rates rise, the value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments. In addition, inflation generally increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our noninterest expenses.
Biggest changeRecently, there have been market indicators of a pronounced rise in inflation and the FRB has raised certain benchmark interest rates in an effort to combat inflation. As inflation increases and market interest rates rise, the value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments.
In addition, the following factors may cause the market price for shares of the Company’s common stock to fluctuate: 34 ● announcements of developments related to the Company’s business; ● fluctuations in the Company’s results of operations; ● changes in accounting standards, policies, guidance, interpretations or principles; ● sales or purchases of substantial amounts of the Company’s securities in the marketplace; ● general conditions in the Company’s banking niche or the worldwide economy; ● a shortfall or excess in revenues or earnings compared to securities analysts’ expectations; ● changes in analysts’ recommendations or projections; and ● the Company’s announcement of new acquisitions or other projects.
In addition, the following factors may cause the market price for shares of the Company’s common stock to fluctuate: ● announcements of developments related to the Company’s business; ● fluctuations in the Company’s results of operations; ● changes in accounting standards, policies, guidance, interpretations or principles; ● sales or purchases of substantial amounts of the Company’s securities in the marketplace; ● general conditions in the Company’s banking niche or the worldwide economy; ● a shortfall or excess in revenues or earnings compared to securities analysts’ expectations; ● changes in analysts’ recommendations or projections; and ● the Company’s announcement of new acquisitions or other projects.
As cyber threats continue to evolve, we may also be required to spend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. 31 We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
As cyber threats continue to evolve, we may also be required to spend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
During any period of lower trading volume of the Company’s common stock, significant sales of shares of the Company’s common stock, or the expectation of these sales could cause the Company’s common stock price to fall. The Company ’ s Articles of Incorporation, Indiana law, and certain banking laws may have an anti-takeover effect.
During any period of lower trading volume of the Company’s common stock, significant sales of shares of the Company’s common stock, or the expectation of these sales could cause the Company’s common stock price to fall. 34 The Company ’ s Articles of Incorporation, Indiana law, and certain banking laws may have an anti-takeover effect.
Our regulators may subject us to supervisory and enforcement actions, such as the imposition of certain restrictions on our operations, requirements that we take remedial action, the classification of our assets and the determination of the level of our allowance for loan losses, that are aimed at protecting the insurance fund and the depositors and borrowers of the Bank but that are detrimental to holders of the Company’s common stock.
Our regulators may subject us to supervisory and enforcement actions, such as the imposition of certain restrictions on our operations, requirements that we take remedial action, the classification of our assets and the determination of the level of our ACL on loans, that are aimed at protecting the insurance fund and the depositors and borrowers of the Bank but that are detrimental to holders of the Company’s common stock.
Major disruptions in the capital markets and significant increases in market interest rates experienced in recent years have adversely affected investor demand for all classes of securities, excluding U.S. Treasury securities, and resulted in volatility in the fair values of our investment securities.
Turmoil in the financial markets could result in lower fair values for our investment securities. Major disruptions in the capital markets and significant increases in market interest rates experienced in recent years have adversely affected investor demand for all classes of securities, excluding U.S. Treasury securities, and resulted in volatility in the fair values of our investment securities.
If the issuer defaults on its payments, it may result in the recognition of OTTI or total loss, which could have a material adverse effect on our financial condition and results of operations. Strong competition within the Bank ’ s market area could hurt the Company ’ s profitability and growth.
If the issuer defaults on its payments, it may result in the recognition of a partial credit loss through a valuation allowance or total loss, which could have a material adverse effect on our financial condition and results of operations. Strong competition within the Bank ’ s market area could hurt the Company ’ s profitability and growth.
As a result, such non-bank competitors may have advantages over us in providing certain products and services. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our earnings and financial condition.
As a result, such non-bank competitors may have advantages over us in providing certain products and services. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our earnings and financial condition. We continually encounter technological change.
Our continued success and growth depend in large part on the efforts of these key personnel, the support of the Company’s Board of Directors, and ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees to complement and succeed to our core senior management team.
Our continued success and growth depend in large part on the efforts of these key personnel, the support of the Company’s Board of Directors, and ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees to complement and succeed to our core senior management team. 35 Our internal controls may be ineffective.
Finally, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. Our allowance for loan losses at any particular date may not be sufficient to cover future loan losses.
In addition, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. Our ACL on loans and unfunded commitments at any particular date may not be sufficient to cover future loan losses.
Significant prolonged reduced investor demand could manifest itself in lower fair values for these securities and may result in recognition of an other-than-temporary impairment (“OTTI”), which could have a material adverse effect on our financial condition and results of operations. Municipal securities can also be impacted by the business environment of their geographic location.
Significant prolonged reduced investor demand could manifest itself in lower fair values for these securities and may result in recognition of a credit loss through a valuation allowance, which could have a material adverse effect on our financial condition and results of operations. Municipal securities can also be impacted by the business environment of their geographic location.
Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors. 32 Our financial results may also be negatively impacted by periods of increased inflation.
Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; or a combination of these or other factors.
Business – Lending Activities – Commercial Business Loans .” Commercial real estate lending may expose the Company to increased lending risks. At December 31, 2022, the Bank’s commercial real estate loan portfolio amounted to $161.4 million, or 26.6% of total loans. Commercial real estate lending is inherently riskier than residential mortgage lending.
Business – Lending Activities – Commercial Business Loans .” Commercial real estate lending may expose the Company to increased lending risks. At December 31, 2023, the Bank’s commercial real estate loan portfolio amounted to $168.8 million, or 27.2% of total loans. Commercial real estate lending is inherently riskier than residential mortgage lending.
For example, in a rising interest rate environment, borrowers with adjustable-rate loans could see their payments increase. There may be a significant increase in the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance.
There may be a significant increase in the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance.
In addition to better meeting customer needs, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that enhance customer convenience and that create additional efficiencies in our operations.
Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that enhance customer convenience and that create additional efficiencies in our operations.
Risks Related to the Banking Industry Our business may be adversely affected by conditions in the financial markets and economic conditions generally. Our financial performance depends to a large extent on the business environment in our geographically concentrated five-county market area, the nearby suburban metropolitan Louisville market, the states of Indiana and Kentucky, and the U.S. as a whole.
Our financial performance depends to a large extent on the business environment in our geographically concentrated five-county market area, the nearby suburban metropolitan Louisville market, the states of Indiana and Kentucky, and the U.S. as a whole.
Information security risks have generally increased in recent years because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial and other transactions and the increased sophistication and activities of perpetrators of cyber-attacks and mobile phishing directed at our customers and our personnel.
The occurrence of operational interruption, cyber incident, or a deficiency in the cyber security of our technology systems (internal or outsourced) could negatively impact our financial condition or results of operations. 29 Information security risks have generally increased in recent years because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial and other transactions and the increased sophistication and activities of perpetrators of cyber-attacks and mobile phishing directed at our customers and our personnel.
However, it is likely that the provisions of the Dodd-Frank Act will have an adverse impact on our operations, particularly through increased regulatory burden and compliance costs.
However, it is likely that the provisions of the Dodd-Frank Act will have an adverse impact on our operations, particularly through increased regulatory burden and compliance costs. We face a risk of noncompliance and enforcement action with the BSA and other anti-money laundering statutes and regulations.
The Bank’s loan portfolio includes a significant amount of loans with fixed rates of interest. At December 31, 2022, $266.3 million, or 43.8% of the Bank’s total loans receivable, had fixed interest rates all of which were held for investment. The Bank offers ARM loans and fixed-rate loans.
At December 31, 2023, $302.0 million, or 48.6% of the Bank’s total loans receivable, had fixed interest rates all of which were held for investment. The Bank offers ARM loans and fixed-rate loans.
At December 31, 2022, the Bank’s commercial business loan portfolio amounted to $60.8 million, or 10.0% of total loans. Subject to market conditions and other factors, the Bank intends to expand its commercial business lending activities within its primary market area. Commercial business lending is inherently riskier than residential mortgage lending.
Subject to market conditions and other factors, the Bank intends to expand its commercial business lending activities within its primary market area. Commercial business lending is inherently riskier than residential mortgage lending.
New or acquired branch facilities and other facilities may not be profitable. We may not be able to correctly identify profitable locations for new branches. The costs to start up new branch facilities or to acquire existing branches, and the additional costs to operate these facilities, may increase our noninterest expense and decrease earnings in the short term.
The costs to start up new branch facilities or to acquire existing branches, and the additional costs to operate these facilities, may increase our noninterest expense and decrease earnings in the short term. It may be difficult to adequately and profitably manage growth through the establishment of these branches.
It requires subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans. We might underestimate the loan losses inherent in our loan portfolio and have loan losses exceeding the amount reserved. We might increase the allowance because of changing economic conditions.
The process for determining the amount of the allowance is critical to our financial results and condition. It requires subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans.
We reserve for loan losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of loan losses inherent in our loan portfolio. The process for determining the amount of the allowance is critical to our financial results and condition.
When we loan, or commit to loan, money we incur the risk that our borrowers do not repay their loans. We reserve for credit losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of credit losses inherent in our loan portfolio.
It may be difficult to adequately and profitably manage growth through the establishment of these branches. In addition, we can provide no assurance that these branch sites will successfully attract enough deposits to offset the expenses of operating these branch sites.
In addition, we can provide no assurance that these branch sites will successfully attract enough deposits to offset the expenses of operating these branch sites. Any new or acquired branches will be subject to regulatory approval, and there can be no assurance that we will succeed in securing such approvals.
Any one or a combination of these factors could negatively impact our business, financial condition and results of operations and prospects. Risks Related to Our Business Above average interest rate risk associated with fixed-rate loans may have an adverse effect on our financial position or results of operations.
Liquidity and Interest Rate Risk Above average interest rate risk associated with fixed-rate loans may have an adverse effect on our financial position or results of operations. The Bank’s loan portfolio includes a significant amount of loans with fixed rates of interest.
Business – Lending Activities – Commercial Real Estate Loans .” Our information systems may experience an interruption or breach in security. The Bank relies heavily on internal and outsourced digital technologies, communications, and information systems to conduct its business.
If the Bank is unable to pay dividends to us, we may not have the resources or cash flow to pay or meet all of our obligations. Operational Risk Our information systems may experience an interruption or breach in security. The Bank relies heavily on internal and outsourced digital technologies, communications, and information systems to conduct its business.
We are subject to federal regulations that seek to protect the Deposit Insurance Fund and the depositors and borrowers of the Bank, and our federal regulators may impose restrictions on our operations that are detrimental to holders of the Company ’ s common stock. 33 We are subject to extensive regulation, supervision and examination by the FRB, IDFI and FDIC, our primary regulators.
Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on our business, financial condition, and results of operations. 32 Regulatory, Compliance, Legal, and Reputational Risk We are subject to federal regulations that seek to protect the Deposit Insurance Fund and the depositors and borrowers of the Bank, and our federal regulators may impose restrictions on our operations that are detrimental to holders of the Company ’ s common stock.
Acquisitions and the addition of branch facilities may not produce revenue enhancements or cost savings at levels or within timeframes originally anticipated and may result in unforeseen integration difficulties and dilution to existing shareholder value. We regularly explore opportunities to establish branch facilities and acquire other banks or financial institutions.
Future economic conditions in our market will depend on factors outside of our control such as political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government, military and fiscal policies. 31 Acquisitions and the addition of branch facilities may not produce revenue enhancements or cost savings at levels or within timeframes originally anticipated and may result in unforeseen integration difficulties and dilution to existing shareholder value.
Any new or acquired branches will be subject to regulatory approval, and there can be no assurance that we will succeed in securing such approvals. Risks Related to the Company ’ s Stock An investment in the Company ’ s Common Stock is not an insured deposit.
If we become subject to such regulatory actions, our business, results of operations, and financial condition may be adversely affected. Risks Related to the Company ’ s Stock An investment in the Company ’ s Common Stock is not an insured deposit.
The Board may, at its discretion, further reduce or eliminate dividends or change its dividend policy in the future. General Risk Factors We continually encounter technological change. The banking and financial services industry continually undergoes technological changes, with frequent introductions of new technology-driven products and services.
The Board may, at its discretion, further reduce or eliminate dividends or change its dividend policy in the future. General Risk Factors We may not be able to attract and retain skilled people. The Bank’s success depends on its ability to attract and retain skilled people.
Increased inflation can lead to decreases in the value of assets or reduced income from investments in the future as inflation decreases the value of money. Recently, there have been market indicators of a pronounced rise in inflation and the FRB has raised certain benchmark interest rates in an effort to combat inflation.
Our financial results may also be negatively impacted by periods of increased inflation. Increased inflation can lead to decreases in the value of assets or reduced income from investments in the future as inflation decreases the value of money.
Such disruption or breach of security may have a material adverse effect on our financial condition and results of operations. Recessionary conditions could result in increases in our level of nonperforming loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings.
Such disruption or breach of security may have a material adverse effect on our financial condition and results of operations. 30 Our framework for managing risks may not be effective in mitigating risk and loss to us. Our risk management framework seeks to mitigate risk and loss to us.
Removed
ITEM 1A. RISK FACTORS Risks Related to COVID-19 The pandemic has impacted our business and that of many customers. The ultimate impact is uncertain and will depend on future action largely outside of our control. The COVID-19 pandemic adversely impacted the business and financial results for the Company and many of our customers.
Added
ITEM 1A. RISK FACTORS An investment in our common stock is subject to risks inherent to our business. Before making an investment decision, you should carefully read and consider the following risks and uncertainties.
Removed
While local and global economies and communities have begun to recover, lingering adverse impacts of the pandemic persist. These impacts include labor shortages and supply chain disruptions.
Added
We may encounter risks in addition to those described below, including risks and uncertainties not currently known to us or those we currently deem to be immaterial. The risks described below, as well as such additional risks and uncertainties, may impair or materially and adversely affect our business, results of operations, and financial condition.
Removed
Labor shortages and supply chain disruptions coupled with increasing demand for goods and services have also created inflationary pressures and a rising risk of recession, both of which may negatively impact us and our customers.
Added
The risks are organized in the following categories: ● Credit Risk ● Liquidity and Interest Rate Risk ● Operational Risk ● Strategic and External Risk ● Regulatory, Compliance, Legal, and Reputational Risk ● Risks Related to the Company’s Stock ● General Risk Factors Credit Risk We may not be able to measure and limit our credit risk adequately, which could adversely affect our profitability.
Removed
Other factors that may potentially have an adverse effect on our results of operations include: ● risks to the capital markets due to the volatility in financial markets that may impact the performance of our investment securities portfolio; ● declines in demand for loans and other banking services and products due to the effects of COVID-19 in the markets we serve; ● collateral values may be negatively impacted due to increased property vacancy rates which could affect our ability to liquidate real estate collateral securing real estate loans and maintain loan origination volume; ● allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect net income; ● the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments; ● effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the Company’s financial reporting and internal controls; ● the Bank could be required to pay significantly higher FDIC premiums in the future if losses further deplete the Deposit Insurance Fund; ● cyber security risks are increased as the result of employees working remotely at least part of the time; and ● cyber security risks are increased as the result of customers working remotely or being unable to visit our branches and not having appropriately secured remote networks. 29 The extent to which the COVID-19 pandemic will ultimately affect our financial condition and results of operations is unknown and will depend, among other things, on the duration of the pandemic, the actions undertaken by national, state and local governments and health officials to contain the virus or mitigate its effects, the safety and effectiveness of the vaccines that have been developed and the ability of pharmaceutical companies and governments to continue to manufacture and distribute those vaccines, and changes to interest rates.
Added
Our business depends on our ability to successfully measure and manage credit risk. As a lender, we are exposed to the risk that the principal of, or interest on, a loan will not be paid timely or at all or that the value of any collateral supporting a loan will be insufficient to cover our outstanding exposure.
Removed
For a discussion of the Bank’s loan portfolio, see “ Item 1. Business – Lending Activities .” Higher loan losses could require the Company to increase its allowance for loan losses through a charge to earnings. When we loan money we incur the risk that our borrowers do not repay their loans.
Added
In addition, we are exposed to risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual loans and borrowers.
Removed
In addition, pandemic related assistance programs resulted in increased levels of deposits for our business and consumer borrowers. As these deposits decline, businesses and consumers may experience reduced ability to repay their loans resulting in additional losses.
Added
The creditworthiness of a borrower is affected by many factors, including local market conditions and general economic conditions. Many of our loans are made to small to medium-sized businesses that are less able to withstand competitive, economic and financial pressures than larger borrowers.
Removed
We may be required to increase our allowance for loan losses, thus reducing earnings. The FASB has adopted a new accounting standard that is referred to as Current Expected Credit Loss, or CECL. The implementation of CECL has been delayed for smaller reporting companies, such as the Company, until January 2023.
Added
If the overall economic climate in the United States, generally, or in our market specifically, experiences material disruption, our borrowers may experience difficulties in repaying their loans, the collateral we hold may decrease in value or become illiquid, and the level of nonperforming loans, charge-offs and delinquencies could rise and require significant additional provisions for credit losses.
Removed
CECL will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses.
Added
Additional factors related to the credit quality of multifamily residential, real estate construction and other commercial real estate loans include the quality of management of the business and tenant vacancy rates.
Removed
This will change the current method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and to greatly increase the types of data we will need to collect and review to determine the appropriate level of the allowance for loan losses.
Added
Our risk management practices, such as monitoring the concentration of our loans within specific markets and our credit approval, review and administrative practices, may not adequately reduce credit risk, and our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of the loan portfolio.
Removed
Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations. 30 Commercial business lending may expose the Company to increased lending risks.
Added
A failure to effectively measure and limit the credit risk associated with our loan portfolio may result in loan defaults, foreclosures and additional charge-offs, and may necessitate that we significantly increase our ACL on loans, each of which could adversely affect our net income.
Removed
The occurrence of operational interruption, cyber incident, or a deficiency in the cyber security of our technology systems (internal or outsourced) could negatively impact our financial condition or results of operations.
Added
As a result, our inability to successfully manage credit risk could have an adverse effect on our business, financial condition and results of operations. Higher loan losses could require the Company to increase its ACL on loans and unfunded commitments through a charge to earnings.
Removed
Recessionary conditions and/or continued negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability.
Added
We might underestimate the credit losses inherent in our loan portfolio and have credit losses exceeding the amount reserved. We might increase the allowance because of changing economic conditions. For example, in a rising interest rate environment, borrowers with adjustable-rate loans could see their payments increase.
Removed
Declines in real estate values and sales volumes and increased unemployment levels may result in higher than expected loan delinquencies, increases in our levels of nonperforming and classified assets and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.
Added
We may be required to increase our ACL on loans and unfunded commitments, thus reducing earnings. 27 Commercial business lending may expose the Company to increased lending risks. At December 31, 2023, the Bank’s commercial business loan portfolio amounted to $68.2 million, or 11.0% of total loans.
Removed
Future economic conditions in our market will depend on factors outside of our control such as political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government, military and fiscal policies. Turmoil in the financial markets could result in lower fair values for our investment securities.
Added
Business – Lending Activities – Commercial Real Estate Loans .” Non-performing assets take significant time to resolve, adversely affect our results of operations and financial condition, and could result in losses. At December 31, 2023, our non-performing assets, consisting entirely of non-performing loans, totaled $1.8 million, or 0.28% of our gross loans and 0.15% of our total assets.
Removed
Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on our business, financial condition, and results of operations. 35 We may not be able to attract and retain skilled people. The Bank’s success depends on its ability to attract and retain skilled people.
Added
Our non-performing loans adversely affect our net income in various ways. We do not record interest income on non-accrual loans, thereby adversely affecting our net income and returns on assets and equity, increasing our loan administration costs, and adversely affecting our efficiency ratio.
Added
When we take collateral in repossession and similar proceedings, we are required to mark the collateral to its then net realizable value, less estimated selling costs, which may result in a loss. These non-performing loans and repossessed assets also increase our risk profile and the capital our regulators believe is appropriate in light of such risks.
Added
The resolution of non-performing assets requires significant time commitments from management and can be detrimental to the performance of their other responsibilities.
Added
If we experience increases in non-performing loans and non-performing assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which may adversely affect our business, results of operations, and financial condition.
Added
For a discussion of the Bank’s loan portfolio, see “Item 1. Business– Lending Activities.” 28 Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations. Our ability to implement our business strategy will depend on our liquidity and ability to obtain funding for loan originations, working capital, and other general purposes.
Added
An inability to raise funds through deposits, borrowings, the sale of loans, and other sources could have a substantial negative effect on our liquidity. Our preferred source of funds consists of consumer and commercial deposits, which we supplement with other sources, such as wholesale deposits made up of brokered deposits.
Added
Such account and deposit balances can decrease when customers perceive alternative investments as providing a better risk/return profile. If clients move money out of bank deposits and into other investments, we may increase our utilization of wholesale deposits, FHLB advances, FRB borrowing facilities and other wholesale funding sources necessary to fund desired growth levels.
Added
Because these funds generally are more sensitive to interest rate changes than our targeted in-market deposits, they are more likely to move to the highest rate available. In addition, the use of brokered deposits without regulatory approval is limited to banks that are “well capitalized” according to regulation.
Added
If the Bank is unable to maintain its capital levels at “well capitalized” minimums, we could lose a significant source of funding, which would force us to utilize different wholesale funding or potentially sell assets at a time when pricing may be unfavorable, increasing our funding costs and reducing our net interest income and net income.
Added
Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
Added
Community banks generally have less access to the capital markets than do national, regional, and super-regional banks because of their smaller size and limited analyst coverage. During periods of economic turmoil or decline, the financial services industry and the credit markets generally may be materially and adversely affected by declines in asset values and by diminished liquidity.
Added
Under such circumstances, the liquidity issues are often particularly acute for community banks, as larger financial institutions may curtail their lending to regional and community banks to reduce their exposure to the risks of other banks. Correspondent lenders may also reduce or even eliminate federal funds lines for their correspondent clients in difficult economic times.
Added
As a result, we rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities to ensure that we have adequate liquidity to fund our operations.
Added
Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to our shareholders, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse effect on our business, results of operations, and financial condition.
Added
The Company is a bank holding company and its sources of funds necessary to meet its obligations are limited. The Company is a bank holding company and its operations are primarily conducted by the Bank, which is subject to significant federal and state regulation.
Added
Cash available to pay dividends to our shareholders, pay our obligations, and meet our debt service requirements is derived primarily from dividends received from the Bank. Future dividend payments by the Bank to us will require the generation of future earnings by the Bank and are subject to certain regulatory guidelines.
Added
We have established processes and procedures intended to identify, measure, monitor, control, and analyze the types of risk to which we are subject, including liquidity risk, credit risk, market risk, interest rate risk, operational risk, information and cyber security risk, compensation risk, legal and compliance risk, and reputational risk, among others.
Added
However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. Our ability to successfully identify and manage risks facing us is an important factor that can significantly impact our results.
Added
If our risk management framework proves ineffective, we could suffer unexpected losses which could adversely affect our business, results of operations, and financial condition. We are subject to changes in accounting principles, policies, or guidelines. Our financial performance is impacted by accounting principles, policies, and guidelines.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeApproximate Year Net Book Owned/ Square Location Opened Value (1) Leased Footage (Dollars in thousands) Main Office: 220 Federal Drive, NW Corydon, Indiana 47112 1997 1,292 Owned 12,000 Branch Offices: 391 Old Capital Plaza, NE Corydon, Indiana 47112 1997 68 Leased (2) 425 8095 State Highway 135, NW New Salisbury, Indiana 47161 1999 394 Owned 3,500 710 Main Street Palmyra, Indiana 47164 1991 656 Owned 6,000 9849 Highway 150 Greenville, Indiana 47124 1986 205 Owned 2,484 5100 State Road 64 Georgetown, Indiana 47122 2008 937 Owned 4,988 4303 Charlestown Crossing New Albany, Indiana 47150 1999 649 Owned 3,500 3131 Grant Line Road New Albany, Indiana 47150 2003 1,225 Owned 12,200 5609 Williamsburg Station Road Floyds Knobs, Indiana 47119 2003 510 Owned 4,160 2744 Allison Lane Jeffersonville, Indiana 47130 2003 938 Owned 4,090 1312 S.
Biggest changeApproximate Year Net Book Owned/ Square Location Opened Value (1) Leased Footage (Dollars in thousands) Main Office: 220 Federal Drive, NW Corydon, Indiana 47112 1997 1,356 Owned 12,000 Branch Offices: 391 Old Capital Plaza, NE Corydon, Indiana 47112 1997 64 Leased (2) 425 8095 State Highway 135, NW New Salisbury, Indiana 47161 1999 399 Owned 3,500 710 Main Street Palmyra, Indiana 47164 1991 671 Owned 6,000 9849 Highway 150 Greenville, Indiana 47124 1986 207 Owned 2,484 5100 State Road 64 Georgetown, Indiana 47122 2008 948 Owned 4,988 4303 Charlestown Crossing New Albany, Indiana 47150 1999 639 Owned 3,500 3131 Grant Line Road New Albany, Indiana 47150 2003 1,198 Owned 12,200 5609 Williamsburg Station Road Floyds Knobs, Indiana 47119 2003 491 Owned 4,160 2744 Allison Lane Jeffersonville, Indiana 47130 2003 911 Owned 4,090 1312 S.
ITEM 2. PROPERTIES The following table sets forth certain information regarding the Bank’s offices as of December 31, 2022.
ITEM 2. PROPERTIES The following table sets forth certain information regarding the Bank’s offices as of December 31, 2023.
Buckman Street Shepherdsville, Kentucky 40165 1962 250 Owned 3,840 550 John Harper Highway Shepherdsville, Kentucky 40165 1999 1,487 Owned 6,648 100 S. Bardstown Road Mount Washington, Kentucky 40047 1991 974 Owned 5,169 140 S. Poplar Street Lebanon Junction, Kentucky 40150 1973 141 Owned 2,795 (1) Represents the net value of land, buildings, furniture, fixtures and equipment owned by the Bank.
Buckman Street Shepherdsville, Kentucky 40165 1962 242 Owned 3,840 550 John Harper Highway Shepherdsville, Kentucky 40165 1999 1,430 Owned 6,648 100 S. Bardstown Road Mount Washington, Kentucky 40047 1991 925 Owned 5,169 140 S. Poplar Street Lebanon Junction, Kentucky 40150 1973 142 Owned 2,795 (1) Represents the net value of land, buildings, furniture, fixtures and equipment owned by the Bank.
Jackson Street Salem, Indiana 47167 2007 652 Owned 3,400 2420 Barron Avenue, NW Lanesville, Indiana 47136 2010 625 Owned 1,450 7735 Highway 62 Charlestown, Indiana 47111 2017 1,396 Owned 2,500 1612 Highway 44 East Shepherdsville, Kentucky 40165 1980 2,269 Owned 11,892 130 S.
Jackson Street Salem, Indiana 47167 2007 662 Owned 3,400 2420 Barron Avenue, NW Lanesville, Indiana 47136 2010 623 Owned 1,450 7735 Highway 62 Charlestown, Indiana 47111 2017 1,347 Owned 2,500 1612 Highway 44 East Shepherdsville, Kentucky 40165 1980 2,158 Owned 11,892 130 S.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeITEM 3. LEGAL PROCEEDINGS At December 31, 2022, neither the Company nor the Bank was involved in any pending legal proceedings believed by management to be material to the Company’s financial condition or results of operations. From time to time, the Bank is involved in legal proceedings occurring in the ordinary course of business.
Biggest changeITEM 3. LEGAL PROCEEDINGS At December 31, 2023, neither the Company nor the Bank was involved in any pending legal proceedings believed by management to be material to the Company’s financial condition or results of operations. From time to time, the Bank is involved in legal proceedings occurring in the ordinary course of business.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

5 edited+1 added−1 removed2 unchanged
Biggest changeHigh Low Market price Sale Sale Dividends end of period 2022: First Quarter $ 41.67 $ 38.51 $ 0.26 $ 39.20 Second Quarter 39.10 26.51 0.26 27.09 Third Quarter 31.77 25.70 0.26 25.71 Fourth Quarter 27.60 22.97 0.26 24.90 2021: First Quarter $ 61.61 $ 47.45 $ 0.26 $ 48.71 Second Quarter 52.50 42.57 0.26 43.36 Third Quarter 46.11 40.00 0.26 40.78 Fourth Quarter 43.80 39.00 0.26 40.50 Dividend Policy It has been our policy to pay quarterly dividends to holders of our common stock, and we intend to continue paying dividends.
Biggest changeMarket Price High Sale Low Sale Dividends end of Period 2023: First Quarter $ 28.99 $ 23.48 $ 0.27 $ 25.65 Second Quarter 31.50 22.85 0.27 30.80 Third Quarter 37.90 26.00 0.27 27.75 Fourth Quarter 29.99 22.95 0.27 27.90 2022: First Quarter $ 41.67 $ 38.51 $ 0.26 $ 39.20 Second Quarter 39.10 26.51 0.26 27.09 Third Quarter 31.77 25.70 0.26 25.71 Fourth Quarter 27.60 22.97 0.26 24.90 Dividend Policy It has been our policy to pay quarterly dividends to holders of our common stock, and we intend to continue paying dividends.
The following table lists quarterly market price and dividend information per common share for the years ended December 31, 2022 and 2021 as reported by NASDAQ.
The following table lists quarterly market price and dividend information per common share for the years ended December 31, 2023 and 2022 as reported by NASDAQ.
Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other factors that our board of directors may deem relevant. 38 Purchases of Equity Securities On August 19, 2008, the board of directors authorized the repurchase of up to 240,467 shares of the Company’s outstanding common stock.
Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other factors that our board of directors may deem relevant. 39 Unregistered Sales and Repurchases of Equity Securities On August 19, 2008, the board of directors authorized the repurchase of up to 240,467 shares of the Company’s outstanding common stock.
The stock repurchase program will expire upon the purchase of the maximum number of shares authorized under the program, unless the board of directors terminates the program earlier. There were no shares purchased under the stock repurchase program during the quarter ended December 31, 2022. The maximum number of shares that may yet be purchased under the plan is 135,680.
The stock repurchase program will expire upon the purchase of the maximum number of shares authorized under the program, unless the board of directors terminates the program earlier. There were no shares purchased under the stock repurchase program during the quarter ended December 31, 2023. The maximum number of shares that may yet be purchased under the plan is 115,828.
ITEM 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The common shares of the Company are traded on The NASDAQ Capital Market under the symbol “FCAP.” As of December 31, 2022, the Company had 913 stockholders of record and 3,371,362 common shares outstanding.
ITEM 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The common shares of the Company are traded on The NASDAQ Capital Market under the symbol “FCAP.” As of December 31, 2023, the Company had 892 stockholders of record and 3,350,660 common shares outstanding.
Removed
Equity Compensation Plan Information as of December 31, 2022 Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders - N/A 162,350 Equity compensation plans not approved by security holders - N/A - Total - N/A 162,350 The Company does not maintain any equity compensation plans that have not been approved by security holders.
Added
Period (a) Total Number of Shares Purchased (b) Average Price Paid Per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs October 1 through October 31, 2023 - N/A - 115,828 November 1 through November 30, 2023 - N/A - 115,828 December 1 through December 31, 2023 - N/A - 115,828 Total - N/A - Equity Compensation Plan Information See Item 12 of this report for disclosure regarding securities authorized for issuance and equity compensation plans required by Item 201(d) of Regulation S-K.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeTax-exempt income on loans and investment securities has been adjusted to a tax equivalent basis using the federal marginal tax rate of 21%. 47 Year Ended December 31, 2022 2021 2020 Average Average Average (Dollars in thousands) Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost Interest-earning assets: Loans (1) (2) (3): Taxable $ 521,945 $ 24,768 4.75 % $ 489,803 $ 23,571 4.81 % $ 492,947 $ 24,389 4.95 % Tax-exempt 8,214 240 2.92 % 8,680 255 2.94 % 5,262 170 3.23 % Total loans 530,159 25,008 4.72 % 498,483 23,826 4.78 % 498,209 24,559 4.93 % Investment securities: Taxable (4) 348,431 4,509 1.29 % 241,444 2,660 1.10 % 170,610 2,613 1.53 % Tax-exempt 147,215 4,056 2.76 % 122,506 3,423 2.79 % 85,501 2,714 3.17 % Total investment securities 495,646 8,565 1.73 % 363,950 6,083 1.67 % 256,111 5,327 2.08 % Federal funds sold 91,982 1,137 1.24 % 149,864 189 0.13 % 80,584 183 0.23 % Other interest-earning assets (5) 7,918 132 1.67 % 12,414 135 1.09 % 11,366 184 1.62 % Total interest-earning assets 1,125,705 34,842 3.10 % 1,024,711 30,233 2.95 % 846,270 30,253 3.57 % Noninterest-earning assets 28,849 61,048 62,287 Total assets $ 1,154,554 $ 1,085,759 $ 908,557 Interest-bearing liabilities: Interest-bearing demand deposits $ 466,476 $ 928 0.20 % $ 427,381 $ 508 0.12 % $ 352,327 $ 591 0.17 % Savings accounts 282,455 357 0.13 % 245,142 167 0.07 % 197,267 239 0.12 % Time deposits 53,851 309 0.57 % 62,008 453 0.73 % 66,216 731 1.10 % Total deposits 802,782 1,594 0.20 % 734,531 1,128 0.15 % 615,810 1,561 0.25 % Total interest-bearing liabilities 802,782 1,594 0.20 % 734,531 1,128 0.15 % 615,810 1,561 0.25 % Noninterest-bearing liabilities: Noninterest-bearing deposits 255,113 232,196 180,904 Other liabilities 5,591 6,487 6,735 Total liabilities 1,063,486 973,214 803,449 Stockholders' equity (6) 91,068 112,545 105,108 Total liabilities and stockholders' equity $ 1,154,554 $ 1,085,759 $ 908,557 Net interest income (tax equivalent basis) $ 33,248 $ 29,105 $ 28,692 Less: tax equivalent adjustment (902 ) (773 ) (606 ) Net interest income $ 32,346 $ 28,332 $ 28,086 Interest rate spread 2.90 % 2.80 % 3.32 % Net interest margin 2.95 % 2.84 % 3.39 % Ratio of average interest-earning assets to average interest-bearing liabilities 140.23 % 139.51 % 137.42 % (1) Interest income on loans includes fee income of $925,000, $2.8 million and $1.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Biggest changeTax-exempt income on loans and investment securities has been adjusted to a tax equivalent basis using the federal marginal tax rate of 21%. 48 Year ended December 31, 2023 2022 2021 Average Average Average (Dollars in thousands) Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost Interest-earning assets: Loans (1) (2) (3): Taxable $ 582,465 $ 33,153 5.69 % $ 521,945 $ 24,768 4.75 % $ 489,803 $ 23,571 4.81 % Tax-exempt 8,144 249 3.06 % 8,214 240 2.92 % 8,680 255 2.94 % Total loans 590,609 33,402 5.66 % 530,159 25,008 4.72 % 498,483 23,826 4.78 % Investment securities: Taxable (4) 358,860 5,635 1.57 % 348,431 4,509 1.29 % 241,444 2,660 1.10 % Tax-exempt 147,667 4,236 2.87 % 147,215 4,056 2.76 % 122,506 3,423 2.79 % Total investment securities 506,527 9,871 1.95 % 495,646 8,565 1.73 % 363,950 6,083 1.67 % Federal funds sold 19,512 989 5.07 % 91,982 1,137 1.24 % 149,864 189 0.13 % Other interest-earning assets (5) 7,079 285 4.03 % 7,918 132 1.67 % 12,414 135 1.09 % Total interest-earning assets 1,123,727 44,547 3.96 % 1,125,705 34,842 3.10 % 1,024,711 30,233 2.95 % Noninterest-earning assets 20,139 28,849 61,048 Total assets $ 1,143,866 $ 1,154,554 $ 1,085,759 Interest-bearing liabilities: Interest-bearing demand deposits $ 447,895 $ 4,652 1.04 % $ 466,476 $ 928 0.20 % $ 427,381 $ 508 0.12 % Savings accounts 255,126 917 0.36 % 282,455 357 0.13 % 245,142 167 0.07 % Time deposits 91,423 2,672 2.92 % 53,851 309 0.57 % 62,008 453 0.73 % Total deposits 794,444 8,241 1.04 % 802,782 1,594 0.20 % 734,531 1,128 0.15 % FHLB advances 6,084 340 5.59 % - - 0.00 % - - 0.00 % BTFP advances 8,632 436 5.05 % - - 0.00 % - - 0.00 % Total borrowings 14,716 776 5.27 % - - 0.00 % - - 0.00 % Total interest-bearing liabilities 809,160 9,017 1.11 % 802,782 1,594 0.20 % 734,531 1,128 0.15 % Noninterest-bearing liabilities: Noninterest-bearing deposits 236,471 255,113 232,196 Other liabilities 7,056 5,591 6,487 Total liabilities 1,052,687 1,063,486 973,214 Stockholders' equity (6) 91,179 91,068 112,545 Total liabilities and stockholders' equity $ 1,143,866 $ 1,154,554 $ 1,085,759 Net interest income (tax equivalent basis) $ 35,530 $ 33,248 $ 29,105 Less: tax equivalent adjustment (942 ) (902 ) (773 ) Net interest income $ 34,588 $ 32,346 $ 28,332 Interest rate spread 2.85 % 2.90 % 2.80 % Net interest margin 3.16 % 2.95 % 2.84 % Ratio of average interest-earning assets to average interest-bearing liabilities 138.88 % 140.23 % 139.51 % (1) Interest income on loans includes fee income of $961,000, $925,000, and $2.8 million for the years ended December 31, 2023, 2022, and 2021, respectively.
The Bank’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government legislation and policies concerning monetary and fiscal affairs, housing and financial institutions and the intended actions of the regulatory authorities. 39 Management uses various indicators to evaluate the Company’s financial condition and results of operations.
The Bank’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government legislation and policies concerning monetary and fiscal affairs, housing and financial institutions and the intended actions of the regulatory authorities. Management uses various indicators to evaluate the Company’s financial condition and results of operations.
To accomplish these objectives, the Company has focused on the following: 40 ● Monitoring asset quality and credit risk in the loan and investment portfolios, with an emphasis on those heavily impacted by the pandemic, and originating high-quality commercial and consumer loans.
To accomplish these objectives, the Company has focused on the following: ● Monitoring asset quality and credit risk in the loan and investment portfolios, with an emphasis on those heavily impacted by the pandemic, and originating high-quality commercial and consumer loans.
In 2023, management will continue to focus on maintaining the reduced level of nonperforming assets through improved collection efforts and underwriting on nonperforming loans. ● Being active in the local community, particularly through our efforts with local schools, to uphold our high standing in our community and marketing to our next generation of customers. ● Improving profitability by expanding our product offerings to customers and leveraging recent investments in technology to increase the productivity and efficiency of our staff.
In 2024, management will continue to focus on maintaining the reduced level of nonperforming assets through improved collection efforts and underwriting on nonperforming loans. ● Being active in the local community, particularly through our efforts with local schools, to uphold our high standing in our community and marketing to our next generation of customers. ● Improving profitability by expanding our product offerings to customers and leveraging recent investments in technology to increase the productivity and efficiency of our staff.
Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Market Risk Analysis Qualitative Aspects of Market Risk .
Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 52 Market Risk Analysis Qualitative Aspects of Market Risk .
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 December 31, 2022 and 2021 financial information.
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 December 31, 2023 and 2022 financial information.
Results of the Company’s simulation modeling, which assumes an immediate and sustained parallel shift in market interest rates, project that the Company’s EVE could change as follows, relative to the Company’s base case scenario, based on December 31, 2022 and 2021 financial information.
Results of the Company’s simulation modeling, which assumes an immediate and sustained parallel shift in market interest rates, project that the Company’s EVE could change as follows, relative to the Company’s base case scenario, based on December 31, 2023 and 2022 financial information.
However, for those items for which market-based prices do not exist and an independent pricing service is not readily available, management utilizes significant estimates and assumptions to value such items. Examples of these items include goodwill and other intangible assets, acquired loans and deposits, foreclosed and other repossessed assets, impaired loans, stock-based compensation and certain other financial investments.
However, for those items for which market-based prices do not exist and an independent pricing service is not readily available, management utilizes significant estimates and assumptions to value such items. Examples of these items include goodwill and other intangible assets, acquired loans and deposits, foreclosed and other repossessed assets, collateral dependent loans, stock-based compensation and certain other financial investments.
The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Company’s results of operations. Note 19 of the accompanying Notes to Consolidated Financial Statements describes the methodologies used to determine the fair value of investment securities, impaired loans, loans held for sale and foreclosed real estate.
The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Company’s results of operations. Note 19 of the accompanying Notes to Consolidated Financial Statements describes the methodologies used to determine the fair value of investment securities, collateral dependent loans, loans held for sale and foreclosed real estate.
As of December 31, 2022 the Bank was in compliance with all regulatory capital requirements which were effective as of such date with a CBLR of 9.18%. See Note 18 in the accompanying Notes to Consolidated Financial Statements. On September 24, 2020, the Company filed an automatic shelf registration statement with the SEC.
As of December 31, 2023 the Bank was in compliance with all regulatory capital requirements which were effective as of such date with a CBLR of 9.92%. See Note 18 in the accompanying Notes to Consolidated Financial Statements. On September 24, 2020, the Company filed an automatic shelf registration statement with the SEC.
There were no changes in the valuation techniques and related inputs used during the year ended December 31, 2022. 42 Selected Financial Data. The consolidated financial data presented below is qualified in its entirety by the more detailed financial data appearing elsewhere in this report, including the Company's audited consolidated financial statements.
There were no changes in the valuation techniques and related inputs used during the year ended December 31, 2023. Selected Financial Data. The consolidated financial data presented below is qualified in its entirety by the more detailed financial data appearing elsewhere in this report, including the Company's audited consolidated financial statements.
Our focus in 2023 will be to continue the enhancement and expansion of our customer relationships in these and surrounding markets. ● Ensuring that the Company attracts and retains talented personnel and that an optimal level of performance and customer service is promoted at all levels of the Company. 41 Critical Accounting Policies and Estimates The accounting and reporting policies of the Company comply with U.S.
Our focus in 2024 will be to continue the enhancement and expansion of our customer relationships in these and surrounding markets. ● Ensuring that the Company attracts and retains talented personnel and that an optimal level of performance and customer service is promoted at all levels of the Company. 42 Critical Accounting Policies and Estimates The accounting and reporting policies of the Company comply with U.S.
Tax expense increased $80,000 for 2022 to $2.3 million primarily due to an increase in pre-tax income. As a result, the effective tax rate decreased slightly from 16.4% for 2021 to 16.3% for 2022. See Note 12 of the accompanying Notes to Consolidated Financial Statements for additional details on the Company’s income tax expense.
Tax expense increased $80,000 for 2022 to $2.3 million primarily due to an increase in pre-tax income. As a result, the effective tax rate decreased slightly from 16.4% for 2021 to 16.3% for 2022. See Note 12 of the accompanying Notes to Consolidated Financial Statements for additional details on the Company’s income tax expense. Average Balances and Yields .
At December 31, 2022, an immediate and sustained decrease in rates of 1.00% or 2.00% would also increase the Company’s net interest income over a one year horizon compared to a flat rates scenario.
At December 31, 2023 and 2022, an immediate and sustained decrease in rates of 1.00% would also increase the Company’s net interest income over a one year horizon compared to a flat rates scenario.
Of the total originations for 2022, $15.8 million paid off existing loans in the Bank’s portfolio, the majority of which were construction loans. Originating mortgage loans for sale in the secondary market allows the Bank to better manage its interest rate risk, while offering a full line of mortgage products to prospective customers.
Of the total originations for 2023, $9.8 million paid off existing loans in the Bank’s portfolio, the majority of which were construction loans. Originating mortgage loans for sale in the secondary market allows the Bank to better manage its interest rate risk, while offering a full line of mortgage products to prospective customers.
The Bank’s net income is also affected by, among other things, fee income, provisions for loan losses, operating expenses and income tax provisions.
The Bank’s net income is also affected by, among other things, fee income, provisions for credit losses, operating expenses and income tax provisions.
The Bank’s results of operations depend primarily on net interest income, which is the difference between the income earned on its interest-earning assets, such as loans and investments, and the cost of its interest-bearing liabilities, consisting primarily of deposits, retail repurchase agreements and borrowings from the FHLB.
The Bank’s results of operations depend primarily on net interest income, which is the difference between the income earned on its interest-earning assets, such as loans and investments, and the cost of its interest-bearing liabilities, consisting primarily of deposits and borrowings from the FHLB and BTFP.
Indicators include the following: ● Net income and earnings per share – Net income attributable to the Company was $11.9 million, or $3.55 per diluted share for 2022 compared to $11.4 million, or $3.41 per diluted share for 2021 or $10.1 million, or $3.02 per diluted share for 2020. ● Return on average assets and return on average equity – Return on average assets for 2022 was 1.03% compared to 1.05% for 2021 and 1.12% for 2020, and return on average equity for 2022 was 13.07% compared to 10.15% for 2021 and 9.64% for 2020. ● Efficiency ratio – The Company’s efficiency ratio (defined as noninterest expenses divided by net interest income plus noninterest income) was 62.3% for 2022 compared to 64.8% for 2021 and 62.8% for 2020. ● Asset quality – Net loan charge-offs totaled $237,000 for 2020, $217,000 for 2021 and $261,000 for 2022, and the ratio of net charge-offs to average loans outstanding remained virtually unchanged at 0.05% for 2020, 0.04% for 2021 and 0.05% for 2022.
Indicators include the following: ● Net income and earnings per share – Net income attributable to the Company was $12.8 million, or $3.82 per diluted share for 2023 compared to $11.9 million, or $3.55 per diluted share for 2022 and $11.4 million, or $3.41 per diluted share for 2021. ● Return on average assets and return on average equity – Return on average assets for 2023 was 1.12% compared to 1.03% for 2022 and 1.05% for 2021, and return on average equity for 2023 was 14.03% compared to 13.07% for 2022 and 10.15% for 2021. ● Efficiency ratio – The Company’s efficiency ratio (defined as noninterest expenses divided by net interest income plus noninterest income) was 61.6% for 2023 compared to 62.3% for 2022 and 64.8% for 2021. ● Asset quality – Net loan charge-offs totaled $217,000 for 2021, $261,000 for 2022 and $469,000 for 2023, and the ratio of net charge-offs to average loans outstanding remained virtually unchanged at 0.04% for 2021, 0.05% for 2022 and 0.08% for 2023.
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. At December 31, 2022, the Bank had total commitments to extend credit of $193.2 million. See Note 16 in the accompanying Notes to Consolidated Financial Statements.
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. At December 31, 2023, the Bank had total commitments to extend credit of $181.7 million. See Note 16 in the accompanying Notes to Consolidated Financial Statements.
If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB, collateral eligible for repurchase agreements and unsecured federal funds purchased lines of credit with other financial institutions.
If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB, the FRB’s BTFP through the pledging of additional eligible collateral securities, collateral eligible for repurchase agreements and unsecured federal funds purchased lines of credit with other financial institutions.
At December 31, 2022, the Bank had certificates of deposit scheduled to mature within one year of $26.3 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. The Company is a separate legal entity from the Bank and must provide for its own liquidity.
At December 31, 2023, the Bank had certificates of deposit scheduled to mature within one year of $110.7 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. The Company is a separate legal entity from the Bank and must provide for its own liquidity.
The total return for the three-year period was -61.7%. Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company and the Bank.
The total return for the three-year period was -48.9%. Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company and the Bank.
(8) Nonperforming assets consist of nonperforming loans and real estate acquired in settlement of loans. 44 Results of Operations for the Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021 Net Income.
(8) Nonperforming assets consist of nonperforming loans and real estate acquired in settlement of loans. 45 Results of Operations for the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022 Net Income.
At December 31, 2022, the Company (on an unconsolidated basis) had liquid assets of $2.7 million. The Bank is required to maintain specific amounts of capital pursuant to regulations. As previously mentioned in this report, in 2020 the Bank elected to opt in to the CBLR framework.
At December 31, 2023, the Company (on an unconsolidated basis) had liquid assets of $3.8 million. The Bank is required to maintain specific amounts of capital pursuant to regulations. As previously mentioned in this report, in 2020 the Bank elected to opt in to the CBLR framework.
(2) Per share data excludes net income attributable to noncontrolling interests. 43 At or For the Year Ended SELECTED FINANCIAL RATIOS: December 31, 2022 2021 2020 2019 2018 Performance Ratios: Return on assets (1) 1.03 % 1.05 % 1.12 % 1.26 % 1.19 % Return on average equity (2) 13.07 % 10.15 % 9.64 % 11.13 % 11.46 % Dividend payout ratio (3) 29.30 % 30.50 % 31.68 % 30.65 % 33.09 % Average equity to average assets 7.89 % 10.37 % 11.57 % 11.36 % 10.37 % Interest rate spread (4) 2.90 % 2.80 % 3.32 % 3.93 % 3.72 % Net interest margin (5) 2.95 % 2.84 % 3.39 % 4.02 % 3.79 % Non-interest expense to average assets 2.17 % 2.26 % 2.54 % 2.85 % 2.77 % Average interest earning assets to average interest bearing liabilities 140.23 % 139.51 % 137.42 % 134.04 % 132.29 % Regulatory Capital Ratios (Bank only): Community Bank Leverage Ratio (6) 9.18 % 8.84 % 9.37 % 10.01 % 9.57 % Tier 1 risk-based capital ratio 14.03 % 13.87 % Common equity tier 1 capital ratio 14.03 % 13.87 % Total risk-based capital ratio 14.90 % 14.62 % Asset Quality Ratios: Nonperforming loans as a percent of net loans (7) 0.27 % 0.28 % 0.29 % 0.38 % 0.70 % Nonperforming assets as a percent of total assets (8) 0.13 % 0.12 % 0.14 % 0.24 % 0.78 % Allowance for loan losses as a percent of gross loans receivable 1.20 % 1.25 % 1.31 % 1.08 % 0.93 % (1) Net income attributable to First Capital, Inc. divided by average assets.
(2) Per share data excludes net income attributable to noncontrolling interests. 44 At or For the Year Ended SELECTED FINANCIAL RATIOS: December 31, 2023 2022 2021 2020 2019 Performance Ratios: Return on assets (1) 1.12 % 1.03 % 1.05 % 1.12 % 1.26 % Return on average equity (2) 14.03 % 13.07 % 10.15 % 9.64 % 11.13 % Dividend payout ratio (3) 28.27 % 29.30 % 30.50 % 31.68 % 30.65 % Average equity to average assets 7.97 % 7.89 % 10.37 % 11.57 % 11.36 % Interest rate spread (4) 2.85 % 2.90 % 2.80 % 3.32 % 3.93 % Net interest margin (5) 3.16 % 2.95 % 2.84 % 3.39 % 4.02 % Non-interest expense to average assets 2.28 % 2.17 % 2.26 % 2.54 % 2.85 % Average interest earning assets to average interest bearing liabilities 138.88 % 140.23 % 139.51 % 137.42 % 134.04 % Regulatory Capital Ratios (Bank only): Community bank leverage ratio (6) 9.92 % 9.18 % 8.84 % 9.37 % 10.01 % Tier 1 risk-based capital ratio 14.03 % Common equity tier 1 capital ratio 14.03 % Total risk-based capital ratio 14.90 % Asset Quality Ratios: Nonperforming loans as a percent of net loans (7) 0.28 % 0.27 % 0.28 % 0.29 % 0.38 % Nonperforming assets as a percent of total assets (8) 0.15 % 0.13 % 0.12 % 0.14 % 0.24 % Allowance for credit losses as a percent of gross loans receivable 1.29 % 1.20 % 1.25 % 1.31 % 1.08 % (1) Net income attributable to First Capital, Inc. divided by average assets.
Alternatively, at December 31, 2021, an immediate and sustained decrease in rates of 1.00% or 2.00% would decrease the Company’s net interest income over a one year horizon compared to a flat interest rate scenario.
Alternatively, at December 31, 2023, an immediate and sustained decrease in rates of 2.00% would decrease the Company’s net interest income over a one year horizon compared to a flat interest rate scenario compared to an increase in the Company’s net interest income over a one year horizon compared to a flat interest rate scenario at December 31, 2022.
As of December 31, 2022, the Company had repurchased 104,787 shares of the 240,467 shares authorized by the Board of Directors under the current stock repurchase program which was announced in August 2008 and 433,321 shares since the original repurchase program began in 2001. 50 Liquidity and Capital Resources Liquidity refers to the ability of a financial institution to generate sufficient cash flow to fund current loan demand, meet deposit withdrawals and pay operating expenses.
As of December 31, 2023, the Company had repurchased 124,639 shares of the 240,467 shares authorized by the Board of Directors under the current stock repurchase program which was announced in August 2008 and 453,173 shares since the original repurchase program began in 2001. 51 Liquidity and Capital Resources Liquidity refers to the ability of a financial institution to generate sufficient cash flow to fund current loan demand, meet deposit withdrawals and pay operating expenses.
In addition, total nonperforming assets (consisting of nonperforming loans and foreclosed real estate) increased slightly from $1.4 million, or 0.12% of total assets, at December 31, 2021 to $1.5 million, or 0.13% of total assets, at December 31, 2022.
In addition, total nonperforming assets (consisting of nonperforming loans and foreclosed real estate) increased slightly from $1.5 million, or 0.13% of total assets, at December 31, 2022 to $1.8 million, or 0.15% of total assets, at December 31, 2023.
The Bank continued to sell the majority of newly originated fixed-rate residential mortgage loans in the secondary market. The Bank originated $49.2 million in residential mortgages for sale in the secondary market during 2022 compared to $128.4 million in 2021.
The Bank continued to sell the majority of newly originated fixed-rate residential mortgage loans in the secondary market. The Bank originated $31.6 million in residential mortgages for sale in the secondary market during 2023 compared to $49.2 million in 2022.
Significant accounting policies, including the impact of recent accounting pronouncements, are discussed in Note 1 of the accompanying Notes to Consolidated Financial Statements. Those policies considered to be critical accounting policies are described below. Allowances for Loan Losses.
Significant accounting policies, including the impact of recent accounting pronouncements, are discussed in Note 1 of the accompanying Notes to Consolidated Financial Statements. Those policies considered to be critical accounting policies are described below. ACL on Loans.
At December 31, 2022, the company would expect an increase in its EVE in the event of a sudden and sustained 100 basis point decrease in prevailing interest rates as compared to a decrease under the same scenario as of December 31, 2021.
At December 31, 2022, the Company would expect an increase in its EVE in the event of a sudden and sustained 100 basis point decrease in prevailing interest rates.
A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. Note 1 and Note 4 of the accompanying Notes to Consolidated Financial Statements describe the methodology used to determine the allowance for loan losses.
A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. Note 1 and Note 4 of the accompanying Notes to Consolidated Financial Statements describe the methodology used to determine the ACL on loans. 43 Valuation Methodologies .
FINANCIAL CONDITION DATA: At December 31, 2022 2021 2020 2019 2018 (In thousands) Total assets $ 1,151,400 $ 1,156,603 $ 1,017,551 $ 827,496 $ 794,162 Cash and cash equivalents (1) 66,298 172,509 175,888 51,360 41,112 Securities available for sale 460,819 447,335 283,502 254,562 261,841 Securities held to maturity 7,000 2,000 - - - Interest-bearing time deposits 3,677 4,839 6,396 6,490 7,710 Net loans 557,958 483,287 500,331 466,494 434,260 Deposits 1,060,396 1,035,562 900,461 722,177 701,646 Stockholders' equity, net of noncontrolling interest in subsidiary 85,158 113,828 110,639 98,836 85,844 For the Year Ended OPERATING DATA: December 31, 2022 2021 2020 2019 2018 (In thousands) Interest income $ 33,940 $ 29,460 $ 29,647 $ 32,054 $ 28,886 Interest expense 1,594 1,128 1,561 1,960 1,611 Net interest income 32,346 28,332 28,086 30,094 27,275 Provision (credit) for loan losses 950 (325 ) 1,801 1,425 1,168 Net interest income after provision (credit) for loan losses 31,396 28,657 26,285 28,669 26,107 Noninterest income 7,927 9,551 8,599 6,926 6,168 Noninterest expense 25,088 24,531 23,048 23,270 21,615 Income before income taxes 14,235 13,677 11,836 12,325 10,660 Income tax expense 2,320 2,240 1,692 1,987 1,394 Net Income 11,915 11,437 10,144 10,338 9,266 Less: net income attributable to noncontrolling interest in subsidiary 13 13 13 13 13 Net Income attributable to First Capital Inc. $ 11,902 $ 11,424 $ 10,131 $ 10,325 $ 9,253 PER SHARE DATA (2): Net income - basic $ 3.55 $ 3.41 $ 3.03 $ 3.10 $ 2.78 Net income - diluted 3.55 3.41 3.02 3.09 2.77 Dividends 1.04 1.04 0.96 0.95 0.92 (1) Includes cash and due from banks, interest-bearing deposits in other depository institutions and federal funds sold.
FINANCIAL CONDITION DATA: At December 31, 2023 2022 2021 2020 2019 (In thousands) Total assets $ 1,157,880 $ 1,151,400 $ 1,156,603 $ 1,017,551 $ 827,496 Cash and cash equivalents (1) 38,670 66,298 172,509 175,888 51,360 Securities available for sale 437,271 460,819 447,335 283,502 254,562 Securities held to maturity 7,000 7,000 2,000 - - Interest-bearing time deposits 3,920 3,677 4,839 6,396 6,490 Net loans 614,409 557,958 483,287 500,331 466,494 Deposits 1,025,211 1,060,396 1,035,562 900,461 722,177 Borrowings 21,500 - - - - Stockholders' equity, net of noncontrolling interest in subsidiary 105,233 85,158 113,828 110,639 98,836 For the Year Ended OPERATING DATA: December 31, 2023 2022 2021 2020 2019 (In thousands) Interest income $ 43,605 $ 33,940 $ 29,460 $ 29,647 $ 32,054 Interest expense 9,017 1,594 1,128 1,561 1,960 Net interest income 34,588 32,346 28,332 28,086 30,094 Provision for (recapture of) credit losses 1,141 950 (325 ) 1,801 1,425 Net interest income after provision for (recapture of) credit losses 33,447 31,396 28,657 26,285 28,669 Noninterest income 7,632 7,927 9,551 8,599 6,926 Noninterest expense 26,028 25,088 24,531 23,048 23,270 Income before income taxes 15,051 14,235 13,677 11,836 12,325 Income tax expense 2,248 2,320 2,240 1,692 1,987 Net Income 12,803 11,915 11,437 10,144 10,338 Less: net income attributable to noncontrolling interest in subsidiary 13 13 13 13 13 Net Income attributable to First Capital Inc. $ 12,790 $ 11,902 $ 11,424 $ 10,131 $ 10,325 PER SHARE DATA (2): Net income - basic $ 3.82 $ 3.55 $ 3.41 $ 3.03 $ 3.10 Net income - diluted 3.82 3.55 3.41 3.02 3.09 Dividends 1.08 1.04 1.04 0.96 0.95 (1) Includes cash and due from banks, interest-bearing deposits in other depository institutions and federal funds sold.
In addition, the IDFI and FDIC, as an integral part of their examination process, periodically reviews our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination.
In addition, the IDFI and FDIC, as an integral part of their examination process, periodically review our ACL on loans and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
Securities available for sale, at fair value, consisting primarily of U.S. agency mortgage-backed securities and collateralized mortgage obligations, U.S. agency notes and bonds, Treasury notes and bonds and municipal obligations, increased from $447.3 million at December 31, 2021 to $460.8 million at December 31, 2022. Purchases of securities available for sale totaled $94.3 million in 2022.
Securities available for sale, at fair value, consisting primarily of U.S. agency mortgage-backed securities and collateralized mortgage obligations, U.S. agency notes and bonds, Treasury notes and bonds and municipal obligations, decreased from $460.8 million at December 31, 2022 to $437.3 million at December 31, 2023.
Due to increasing market rates during 2022, the Company also modeled an immediate and sustained decrease of 3.00% at December 31, 2022 which resulted in a decrease in the Company’s net interest income over a one year horizon compared to a flat interest rate scenario.
Due to increasing market rates during 2022, the Company began modeling an immediate and sustained decrease of 3.00% and at both December 31, 2023 and 2022 the results would be a decrease in the Company’s net interest income over a one year horizon compared to a flat interest rate scenario.
Other interest income increased $944,000 for 2022 as compared to 2021 primarily due to the tax equivalent yield of federal funds sold increasing from 0.13% to 1.24% when comparing the two periods, partially offset by a decrease in the average balance of federal funds sold from $149.9 million for 2021 to $92.0 million for 2022.
Other interest income increased $6,000 for 2023 as compared to 2022 primarily due to the tax equivalent yield of federal funds sold increasing from 1.24% to 5.07% when comparing the two periods, almost entirely offset by a decrease in the average balance of federal funds sold from $92.0 million for 2022 to $19.5 million for 2023.
The net unrealized loss on available for sale securities during 2022 is primarily due to increases in market interest rates.
The net unrealized gain on available for sale securities during 2023 is primarily due to decreases in market interest rates.
At December 31, 2022 At December 31, 2021 Immediate Change One Year Horizon One Year Horizon in the Level Dollar Percent Dollar Percent of Interest Rates Change Change Change Change (Dollars in thousands) 300bp $ 4,012 11.28 % $ 885 3.19 % 200bp 2,683 7.54 1,853 6.68 100bp 1,345 3.78 908 3.27 Static - - - - (100)bp 2,945 8.28 (743 ) (2.68 ) (200)bp 1,117 3.14 (2,004 ) (7.23 ) (300)bp (798 ) (2.25 ) At December 31, 2022 and 2021, the Company’s simulated exposure to an increase in interest rates shows that an immediate and sustained increase in rates of 1.00%, 2.00% or 3.00% would increase the Company’s net interest income over a one year horizon compared to a flat interest rate scenario.
At December 31, 2023 At December 31, 2022 Immediate Change One Year Horizon One Year Horizon in the Level Dollar Percent Dollar Percent of Interest Rates Change Change Change Change (Dollars in thousands) 300bp $ 503 1.44 % $ 4,012 11.28 % 200bp 354 1.01 2,683 7.54 100bp 199 0.57 1,345 3.78 Static - - - - (100)bp 72 0.21 2,945 8.28 (200)bp (48 ) (0.13 ) 1,117 3.14 (300)bp (734 ) (2.10 ) (798 ) (2.25 ) 53 At December 31, 2023 and 2022, the Company’s simulated exposure to an increase in interest rates shows that an immediate and sustained increase in rates of 1.00%, 2.00% or 3.00% would increase the Company’s net interest income over a one year horizon compared to a flat interest rate scenario.
The Bank’s primary sources of funds are new deposits, proceeds from loan repayments and prepayments and proceeds from the maturity of securities. The Bank may also borrow from the FHLB. While loan repayments and maturities of securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition.
The Bank’s primary sources of funds are customer deposits, proceeds from loan repayments, maturing securities and borrowings from the FHLB or FRB. 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.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation.
Management reviews the level of the ACL on loans at least quarterly. Although we believe that we use the best information available to establish the ACL on loans, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation.
The Company has no other material income other than that generated by the Bank and its subsidiaries. The Bank’s primary business strategy is attracting deposits from the general public and using those funds to originate residential mortgage loans, multi-family residential loans, commercial real estate and business loans and consumer loans.
The Bank’s primary business strategy is attracting deposits from the general public and using those funds to originate residential mortgage loans, multi-family residential loans, commercial real estate and business loans and consumer loans.
Total interest expense increased $466,000, from $1.1 million for 2021 to $1.6 million for 2022, due to increases in the average cost of interest-bearing liabilities from 0.15% for 2021 to 0.20% for 2022 and in the average balance of interest-bearing liabilities from $734.5 million for 2021 to $802.8 million for 2022.
Total interest expense increased $7.4 million, from $1.6 million for 2022 to $9.0 million for 2023, due to increases in the average cost of interest-bearing liabilities from 0.20% for 2022 to 1.11% for 2023 and in the average balance of interest-bearing liabilities from $802.8 million for 2022 to $809.2 million for 2023.
The allowance for loan losses was 1.20% of total outstanding loans and 454.5% of nonperforming loans at December 31, 2022 compared to 1.25% of total outstanding loans and 457.4% of nonperforming loans at December 31, 2021. ● Shareholder return – Total annual shareholder return, including the decrease in the Company’s stock price from $40.50 at December 31, 2021 to $24.90 at December 31, 2022 and dividends of $1.04 per share, was -36.0% for 2022 compared to -31.4% for 2021 and -15.7% for 2020.
The ACL on loans was 1.29% of total outstanding loans and 457.2% of nonaccrual loans at December 31, 2023 compared to 1.20% of total outstanding loans and 454.5% of nonaccrual loans at December 31, 2022. ● Shareholder return – Total annual shareholder return, including the increase in the Company’s stock price from $24.90 at December 31, 2022 to $27.90 at December 31, 2023 and dividends of $1.08 per share, was 16.4% for 2023 compared to -36.0% for 2022 and -31.4% for 2021.
Total stockholders’ equity attributable to the Company decreased $28.7 million from $113.8 million at December 31, 2021 to $85.2 million at December 31, 2022. This decrease is primarily the result of a $37.5 million net unrealized loss on available for sale securities partially offset by a $8.4 million increase in retained net income.
Total stockholders’ equity attributable to the Company increased $20.1 million from $85.2 million at December 31, 2022 to $105.2 million at December 31, 2023. This increase is primarily the result of a $11.7 million net unrealized gain on available for sale securities and the $8.6 million increase in retained net income.
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.
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.
Market risk is the risk that the estimated fair value of our assets and liabilities will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes. 51 The Company’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates by operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.
The Company’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates by operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.
At December 31, 2022 Immediate Change Economic Value of Equity Economic Value of Equity as a in the Level Dollar Dollar Percent Percent of Present Value of Assets of Interest Rates Amount Change Change EVE Ratio Change (Dollars in thousands) 300bp $ 322,611 $ 25,242 8.49 % 30.96 % 464bp 200bp 319,861 22,492 7.56 29.87 355bp 100bp 311,941 14,572 4.90 28.36 204bp Static 297,369 - - 26.32 0bp (100)bp 306,021 8,652 2.91 26.36 4bp (200)bp 271,270 (26,099 ) (8.78 ) 22.76 (356)bp (300)bp 227,786 (69,583 ) (23.40 ) 18.62 (770)bp At December 31, 2021 Immediate Change Economic Value of Equity Economic Value of Equity as a in the Level Dollar Dollar Percent Percent of Present Value of Assets of Interest Rates Amount Change Change EVE Ratio Change (Dollars in thousands) 300bp $ 214,645 $ 46,620 27.75 % 20.18 % 555bp 200bp 211,155 43,130 25.67 19.36 473bp 100bp 191,558 23,533 14.01 17.13 250bp Static 168,025 - - 14.63 0bp (100)bp 136,411 (31,614 ) (18.82 ) 11.57 (306)bp (200)bp 97,661 (70,364 ) (41.88 ) 8.11 (652)bp The previous tables indicate that at December 31, 2022 and 2021 the Company would expect an increase in its EVE in the event of a sudden and sustained 100, 200 or 300 basis point increase in prevailing interest rates and a decrease in its EVE in the event of a sudden and sustained 200 basis point decrease in prevailing interest rates.
At December 31, 2023 Immediate Change Economic Value of Equity Economic Value of Equity as a in the Level Dollar Dollar Percent Percent of Present Value of Assets of Interest Rates Amount Change Change EVE Ratio Change (Dollars in thousands) 300bp $ 206,434 $ (4,405 ) (2.09 )% 19.65 % 111bp 200bp 209,839 (1,000 ) (0.47 ) 19.45 91bp 100bp 211,505 666 0.32 19.09 55bp Static 210,839 - - 18.54 0bp (100)bp 209,270 (1,569 ) (0.74 ) 17.94 (60)bp (200)bp 204,705 (6,134 ) (2.91 ) 17.10 (144)bp (300)bp 191,171 (19,668 ) (9.33 ) 15.61 (293)bp At December 31, 2022 Immediate Change Economic Value of Equity Economic Value of Equity as a in the Level Dollar Dollar Percent Percent of Present Value of Assets of Interest Rates Amount Change Change EVE Ratio Change (Dollars in thousands) 300bp $ 322,611 $ 25,242 8.49 % 30.96 % 464bp 200bp 319,861 22,492 7.56 29.87 355bp 100bp 311,941 14,572 4.90 28.36 204bp Static 297,369 - - 26.32 0bp (100)bp 306,021 8,652 2.91 26.36 4bp (200)bp 271,270 (26,099 ) (8.78 ) 22.76 (356)bp (300)bp 227,786 (69,583 ) (23.40 ) 18.62 (770)bp 54 The previous tables indicate that at December 31, 2023 and 2022 the Company would expect an increase in its EVE in the event of a sudden and sustained 100 basis point increase in prevailing interest rates and a decrease in its EVE in the event of a sudden and sustained 200 and 300 basis point decrease in prevailing interest rates.
These purchases were partially offset by principal repayments of $22.2 million and maturities of $7.9 million in 2022. There was also an unrealized loss of $48.8 million on the securities available for sale portfolio during 2022 due primarily to increasing market rates during the year. No securities were sold during 2022.
Principal repayments of $15.8 million, maturities of $38.0 million and sales of $20.6 million during 2023 were only partially offset by purchases of $37.2 million of securities. There was also an unrealized gain of $15.3 million on the securities available for sale portfolio during 2023 due primarily to stabilizing market rates during the year.
Tax exempt income on loans and investment securities has been adjusted to a tax-equivalent basis using the federal marginal tax rate of 21%. 2022 Compared to 2021 2021 Compared to 2020 Increase (Decrease) Due to Increase (Decrease) Due to Rate/ Rate/ Rate Volume Volume Net Rate Volume Volume Net (In thousands) Interest-earning assets: Loans: Taxable $ (298 ) $ 1,514 $ (19 ) $ 1,197 $ (672 ) $ (150 ) $ 4 $ (818 ) Tax-exempt (2 ) (13 ) - (15 ) (15 ) 110 (10 ) 85 Total loans (300 ) 1,501 (19 ) 1,182 (687 ) (40 ) (6 ) (733 ) Investment securities: Taxable 462 1,184 203 1,849 (734 ) 1,086 (305 ) 47 Tax-exempt (38 ) 678 (7 ) 633 (325 ) 1,175 (141 ) 709 Total investment securities securities 424 1,862 196 2,482 (1,059 ) 2,261 (446 ) 756 Federal funds sold 1,665 (75 ) (642 ) 948 (82 ) 157 (69 ) 6 Other interest-earning assets 72 (49 ) (26 ) (3 ) (60 ) 17 (6 ) (49 ) Total net change in income on interest- earning assets 1,861 3,239 (491 ) 4,609 (1,888 ) 2,395 (527 ) (20 ) Interest-bearing liabilities: Interest-bearing deposits 337 95 34 466 (612 ) 298 (119 ) (433 ) Total net change in expense on interest- bearing liabilities 337 95 34 466 (612 ) 298 (119 ) (433 ) Net change in net interest income (tax equivalent basis) $ 1,524 $ 3,144 $ (525 ) $ 4,143 $ (1,276 ) $ 2,097 $ (408 ) $ 413 49 Comparison of Financial Condition at December 31, 2022 and 2021 Total assets decreased from $1.16 billion at December 31, 2021 to $1.15 billion at December 31, 2022 primarily due to a decrease in federal funds sold partially offset by an increase in net loans receivable.
Tax exempt income on loans and investment securities has been adjusted to a tax-equivalent basis using the federal marginal tax rate of 21%. 2023 Compared to 2022 2022 Compared to 2021 Increase (Decrease) Due to Increase (Decrease) Due to Rate/ Rate/ Rate Volume Volume Net Rate Volume Volume Net (In thousands) Interest-earning assets: Loans: Taxable $ 4,941 $ 2,875 $ 569 $ 8,385 $ (298 ) $ 1,514 $ (19 ) $ 1,197 Tax-exempt 11 (2 ) - 9 (2 ) (13 ) - (15 ) Total loans 4,952 2,873 569 8,394 (300 ) 1,501 (19 ) 1,182 Investment securities: Taxable 962 135 29 1,126 462 1,184 203 1,849 Tax-exempt 168 12 - 180 (38 ) 678 (7 ) 633 Total investment securities securities 1,130 147 29 1,306 424 1,862 196 2,482 Federal funds sold 3,527 (899 ) (2,776 ) (148 ) 1,665 (75 ) (642 ) 948 Other interest-earnings assets 187 (14 ) (20 ) 153 72 (49 ) (26 ) (3 ) Total net change in income on interest-earning assets 9,796 2,107 (2,198 ) 9,705 1,861 3,239 (491 ) 4,609 Interest-bearing liabilities: Interest-bearing deposits 6,734 (17 ) (70 ) 6,647 337 95 34 466 Borrowed funds - - 776 776 - - - - Total net change in expense on interest-bearing liabilities 6,734 (17 ) 706 7,423 337 95 34 466 Net change in net interest income (tax equivalent basis) $ 3,062 $ 2,124 $ (2,904 ) $ 2,282 $ 1,524 $ 3,144 $ (525 ) $ 4,143 50 Comparison of Financial Condition at December 31, 2023 and 2022 Total assets increased from $1.15 billion at December 31, 2022 to $1.16 billion at December 31, 2023 primarily due to an increase in net loans receivable partially offset by decreases in total cash and cash equivalents and securities available for sale.
Net income attributable to the Company was $11.4 million ($3.41 per share diluted; weighted average common shares outstanding of 3,346,495, as adjusted) for the year ended December 31, 2021 compared to $10.1 million ($3.02 per share diluted; weighted average common shares outstanding of 3,349,277, as adjusted) for the year ended December 31, 2020. Net Interest Income.
Net income attributable to the Company was $12.8 million ($3.82 per share diluted; weighted average common shares outstanding of 3,347,341, as adjusted) for the year ended December 31, 2023 compared to $11.9 million ($3.55 per share diluted; weighted average common shares outstanding of 3,355,023, as adjusted) for the year ended December 31, 2022. Net Interest Income.
During the year ended December 31, 2022, the Company updated the betas on deposits to better reflect the market and also updated the deposit decay rates to levels indicated in a third-party study of customer accounts. 52 The Company also has longer term interest rate risk exposure, which may not be appropriately measured by Net Interest Income at Risk modeling.
During the year ended December 31, 2023, management evaluated and adjusted deposit rate betas in its scenarios to better reflect the increasing rate environment and increased competitive pressure for deposits. The Company also has longer term interest rate risk exposure, which may not be appropriately measured by Net Interest Income at Risk modeling.
Net interest income increased $246,000, or 0.9%, from $28.1 million for 2020 to $28.3 million for 2021 primarily due to an increase in the average balance of interest-earning assets, partially offset by a decrease in the interest rate spread, the difference between the average tax-equivalent yield on interest-earning assets and the average cost of interest-bearing liabilities.
Net interest income increased $2.2 million, or 6.9%, from $32.3 million for 2022 to $34.6 million for 2023 primarily due to increases in the average tax-equivalent yield on interest-earning assets partially offset by increases in the average balance and cost of interest-bearing liabilities. Total interest income increased $9.7 million for 2023 as compared to 2022.
Interest and dividends on investment securities (including FHLB stock) increased $607,000 for 2021 compared to 2020 due to an increase in the average balance of investment securities from $256.1 million for 2020 to $364.0 million for 2021 partially offset by a decrease in the tax equivalent yield on investment securities from 2.08% in 2020 to 1.67% in 2021.
Interest and dividends on investment securities (including FHLB stock) increased $1.3 million for 2023 compared to 2022 due to an increase in the average balance of investment securities from $495.6 million for 2022 to $506.5 million for 2023 in addition to an increase in the tax-equivalent yield on investment securities from 1.73% in 2022 to 1.95% in 2023.
At December 31, 2022, the Bank had cash and interest-bearing deposits with banks (including interest-bearing time deposits) of $68.2 million and securities available for sale with a fair value of $459.8 million.
At December 31, 2023, the Bank had cash and cash equivalents of $38.7 million and securities available-for-sale with a fair value of $437.3 million.
Cash and cash equivalents decreased from $172.5 million at December 31, 2021 to $66.3 million at December 31, 2022, as excess liquidity was used to fund loan growth and purchase investment securities. Total deposits increased $24.8 million to $1.06 billion at December 31, 2022.
Cash and cash equivalents decreased from $66.3 million at December 31, 2022 to $38.7 million at December 31, 2023, as liquidity was used to fund loan growth and the Bank experienced net deposit outflows. Total deposits decreased $35.2 million to $1.03 billion at December 31, 2023.
During 2022, noninterest-bearing demand deposits, savings accounts and interest-bearing demand deposit accounts (including money market accounts) increased $12.2 million, $11.2 million and $9.3 million, respectively. Time deposits decreased by $7.8 million during 2022. There were no outstanding borrowings at December 31, 2022 or 2021.
During 2023, noninterest-bearing demand deposits, savings accounts and interest-bearing demand deposit accounts (including money market accounts) decreased $49.3 million, $42.4 million and $19.2 million, respectively. Time deposits increased by $75.7 million during 2023. At December 31, 2023, the Company had $21.5 million in borrowings outstanding from the FRB under the BTFP.
Operating Strategy The Company is the parent company of an independent community-oriented financial institution that delivers quality customer service and offers a wide range of deposit, loan and investment products to its customers. The commitment to customer needs, the focus on providing consistent customer service, and community service and support are the keys to the Bank’s past and future success.
The information contained in this section should be read in conjunction with the consolidated financial statements and the accompanying Notes to Consolidated Financial Statements included in this report. 41 Operating Strategy The Company is the parent company of an independent community-oriented financial institution that delivers quality customer service and offers a wide range of deposit, loan and investment products to its customers.
Due to increasing market rates during 2022, the Company also modeled a sudden and sustained 300 basis point decrease in prevailing interest rates as of December 31, 2022, which resulted in a decrease in its EVE.
At December 31, 2023, the Company would also expect decreases in its EVE in the event of sudden and sustained 200 and 300 basis points increases in prevailing interest rates as well as a sudden and sustained decrease of 100 basis points in prevailing interest rates.
Other interest income decreased $43,000 for 2021 as compared to 2020 primarily due to the tax equivalent yield of federal funds sold and interest-bearing deposits with banks decreasing from 0.40% to 0.20% when comparing the two periods, partially offset by an increase in the average balance of other interest-earning assets from $92.0 million for 2020 to $162.3 million for 2021.
Other interest income increased $944,000 for 2022 as compared to 2021 primarily due to the tax equivalent yield of federal funds sold increasing from 0.13% to 1.24% when comparing the two periods, partially offset by a decrease in the average balance of federal funds sold from $149.9 million for 2021 to $92.0 million for 2022. 47 Total interest expense increased $466,000, from $1.1 million for 2021 to $1.6 million for 2022, due to increases in the average cost of interest-bearing liabilities from 0.15% for 2021 to 0.20% for 2022 and in the average balance of interest-bearing liabilities from $734.5 million for 2021 to $802.8 million for 2022.
Results of Operations for the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020 Net Income.
See Note 12 of the accompanying Notes to Consolidated Financial Statements for additional details on the Company’s income tax expense. Results of Operations for the Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021 Net Income.
(3) Interest income on loans includes net accretion on acquired loans of $10,000, $1,000 and $36,000 for the years ended December 31, 2022, 2021 and 2020, respectively. (4) Includes taxable debt and equity securities and FHLB stock. (5) Includes interest-bearing deposits with banks and interest-bearing time deposits. (6) Stockholders' equity attributable to First Capital, Inc. 48 Rate/Volume Analysis .
(4) Includes taxable debt and equity securities and FHLB Stock. (5) Includes interest-bearing deposits with banks, federal funds sold and interest-bearing time deposits. (6) Stockholders' equity attributable to First Capital, Inc. 49 Rate/Volume Analysis . The following table sets forth the effects of changing rates and volumes on net interest income and interest expense computed on a tax-equivalent basis.
As a result of the changes in interest-earning assets and interest-bearing liabilities, the interest rate spread (tax equivalent basis) decreased from 3.32% for 2020 to 2.80% for 2021. Provision for Loan Losses .
There were no outstanding borrowed funds during 2022. As a result of the changes in interest-earning assets and interest-bearing liabilities, the interest rate spread (tax equivalent basis) decreased from 2.90% for 2022 to 2.85% for 2023. For further information, see “ Average Balances and Yields ” below.
Loan fee income includes fees related to PPP loans of $34,000, $2.0 million and $791,000 for 2022, 2021 and 2020 , respectively. (2) Average loan balances include loans held for sale and nonperforming loans.
(2) Average loan balances include loans held for sale and nonperforming loans. (3) Interest income on loans includes net accretion on acquired loans of $10,000 and $1,000 for the the years ended December 31, 2022 and 2021, respectively. There was no net accretion of acquired loans for the year ended December 31, 2023.
Net loans receivable increased from $483.3 million at December 31, 2021 to $558.0 million at December 31, 2022. All loan categories increased during 2022, but the primary loan types behind the growth were residential mortgage loans, commercial real estate loans, commercial business loans and construction loans which increased by $24.7 million, $23.5 million, $9.0 million and $8.9 million, respectively.
Net loans receivable increased from $558.0 million at December 31, 2022 to $614.4 million at December 31, 2023. Increases in other construction, development and land, 1-4 family residential mortgage and commercial real estate loans of $29.1 million, $17.2 million and $7.4 million were only partially offset by a $908,000 decrease in 1-4 family residential construction loans.
Removed
The information contained in this section should be read in conjunction with the consolidated financial statements and the accompanying Notes to Consolidated Financial Statements included in this report.
Added
The commitment to customer needs, the focus on providing consistent customer service, and community service and support are the keys to the Bank’s past and future success. The Company has no other material income other than that generated by the Bank and its subsidiaries.
Removed
The acquisition of Peoples in December 2015 expanded our market area into Bullitt County, Kentucky, where Peoples was the leader in deposit account market share among FDIC-insured institutions.
Added
The ACL is a valuation account that is deducted from an asset’s amortized cost basis to present the net amount expected to be collected on the asset. Loans are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed.
Removed
The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment.
Added
Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged-off.
Removed
Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change.
Added
The Company utilizes a combination of methods in determining expected future credit losses, including the Open Pool/Snapshot method, which starts with a loan portfolio’s composition at a point in time and tracks that portfolio’s performance in subsequent periods until final disposition, and the Weighted Average Remaining Maturity method, which uses average annual charge-off rates and the remaining life of the loan to estimate the ACL.
Removed
Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio.
Added
For the Company’s loan portfolios, the remaining contractual life for each loan is adjusted by the expected scheduled payments and estimated prepayments. The average annual charge-off rate is applied to the amortization adjusted remaining life of the loan to determine the unadjusted lifetime historical charge-off rate.
Removed
The Company has not made any substantive changes to its methodology for determining the allowance for loan losses during the year ended December 31, 2022, but management does review (and modify as necessary) the qualitative factors used in the estimate of the allowance for loan losses on a quarterly basis. Valuation Methodologies .
Added
The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company estimates the ACL on loans using relevant available information from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts. Historical loss experience provides the basis for the estimation of expected credit losses.
Removed
While the Bank maintains the allowance for loan losses at a level that it considers adequate to provide for estimated losses, there can be no assurance that further additions will not be made to the allowance for loan losses and that actual losses will not exceed the estimated amounts. 45 Noninterest income .
Added
Qualitative adjustments to historical loss information are made for losses reflected by peers, changes in underwriting standards, changes in economic conditions, changes in delinquency levels, collateral values and other factors. Qualitative adjustments reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience.
Removed
Total interest income decreased $187,000 for 2021 as compared to 2020. This decrease was primarily due to a decrease in the tax-equivalent yield on interest-earning assets from 3.57% for 2020 to 2.95% for 2021, partially offset by an increase in the average balance of interest-earning assets from $846.3 million for 2020 to $1.02 billion for 2021.

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