Business Overview and History

First Capital, Inc. (FCAP) is a bank holding company that serves the financial needs of its local communities through its wholly-owned subsidiary, First Harrison Bank. With a history spanning over a century, First Capital has firmly established itself as a trusted financial institution, weathering economic storms and adapting to the evolving banking landscape.

First Capital, Inc. was founded in 1998 as a financial holding company for First Harrison Bank, an Indiana-chartered commercial bank. The company was formed through the reorganization of First Harrison Bank into a holding company structure. Since its establishment, First Capital, Inc. has grown to become a significant regional player in the banking industry.

In 2015, the company expanded its footprint through the acquisition of Peoples Bancorp, Inc. of Bullitt County and its wholly-owned bank subsidiary, Peoples Bank of Bullitt County, headquartered in Shepherdsville, Kentucky. This strategic move allowed First Capital to enter the Kentucky market and broaden its customer base.

One of First Capital's key milestones was the establishment of its captive insurance subsidiary, FHB Risk Mitigation Services, Inc., in 2009. This captive provided property and casualty insurance coverage to the company, the bank, and the bank's subsidiaries, as well as reinsurance to nine other third-party insurance captives. The captive subsidiary was formally dissolved at the end of 2023 due to regulatory changes.

Today, First Harrison Bank operates 18 branches across Indiana and Kentucky, serving communities with a wide range of banking services, including personal and business banking, mortgage lending, and wealth management. The bank has a strong presence in its local markets, with a reputation for personalized customer service and community involvement.

Financial Performance and Ratios

In the fiscal year ended December 31, 2023, First Capital reported net income of $12.79 million, or $3.82 per diluted share, compared to $11.9 million, or $3.57 per diluted share, in 2024. The company's revenue for 2023 was $42.22 million, up from $43.4 million in 2024. Annual operating cash flow for 2023 was $14.16 million, with annual free cash flow of $13.54 million.

For the third quarter of 2024, First Capital reported revenue of $10.93 million and net income of $2.9 million. This represents a 2.9% increase in revenue and a 7.6% decrease in net income compared to Q3 2023. The decrease in net income was primarily due to a $173,000 increase in the provision for credit losses and a $147,000 decrease in noninterest income, partially offset by a $415,000 increase in net interest income after provision for credit losses.

The company's financial ratios demonstrate its stability and prudent management. As of September 30, 2024, First Capital's current ratio and quick ratio both stood at 1.73, indicating a strong ability to meet short-term obligations. The debt-to-equity ratio of 0.20 suggests a low level of leverage, highlighting the company's financial strength.

Liquidity

First Capital maintains a strong liquidity position, as evidenced by its high current and quick ratios. The company's ability to meet short-term obligations and maintain financial flexibility is crucial for its ongoing operations and potential growth opportunities.

As of September 30, 2024, First Capital had $33.62 million in borrowings outstanding under the Federal Reserve's Bank Term Funding Program (BTFP). The company did not have any outstanding advances from the Federal Home Loan Bank (FHLB) at that time.

Navigating Challenges and Adapting to Change

Over the years, First Capital has faced its share of challenges, including the 2008 financial crisis and the COVID-19 pandemic. However, the company's resilience and adaptability have been instrumental in navigating these turbulent times.

During the pandemic, First Capital quickly pivoted to address the needs of its customers, offering loan deferment programs, small business assistance, and digital banking solutions. The company's proactive approach and commitment to its communities helped it emerge from the crisis in a strong position.

In addition to weathering external events, First Capital has also navigated internal changes. In 2023, the company experienced a change in leadership, with Michael C. Frederick assuming the role of President and Chief Executive Officer. Under his guidance, First Capital has continued to build on its legacy of excellence, focusing on strategic growth and innovative product offerings.

Regulatory Landscape and Risk Factors

As a financial institution, First Capital operates in a highly regulated environment. The company must adhere to various federal and state banking regulations, which can impact its operations and profitability. Changes in these regulations, such as increases in capital requirements or stricter lending standards, could pose challenges for the company.

Additionally, First Capital faces risks common to the banking industry, including interest rate fluctuations, credit risk, and competition from larger financial institutions. The company's ability to manage these risks effectively will be crucial to its long-term success.

Geographical Diversification and Revenue Breakdown

First Capital's geographical footprint extends across Indiana and Kentucky, with 18 branches serving its local communities. This diversification helps mitigate the company's exposure to regional economic conditions and provides a more balanced revenue stream. The company operates primarily in Indiana and does not have a significant presence outside of the United States.

In terms of revenue breakdown, First Capital generates income from various sources, including net interest income, service charges on deposit accounts, ATM and debit card fees, and gain on sale of loans. While net interest income remains the primary driver, the company has demonstrated its ability to diversify its revenue streams, reducing its reliance on any single source.

First Capital's loan portfolio is the primary revenue-generating asset, consisting of several loan categories. As of September 30, 2024, the total loan portfolio, net of deferred fees and the allowance for credit losses, was $630.61 million, up from $614.41 million at the end of 2023. The 1-4 family residential mortgage and commercial real estate loan segments make up the largest portions of the loan portfolio at $141.22 million and $176.42 million, respectively.

The company closely monitors the credit quality of its loan portfolio, with non-performing loans totaling $4.48 million, or 0.70% of total loans, as of September 30, 2024. First Capital maintains an allowance for credit losses of $8.96 million, or 1.40% of total loans, to cover estimated probable losses inherent in the portfolio.

First Capital's investment securities portfolio totaled $415.47 million as of September 30, 2024, consisting of $408.47 million in available-for-sale securities and $7.00 million in held-to-maturity securities. The available-for-sale portfolio is primarily composed of agency mortgage-backed securities, agency notes and bonds, Treasury securities, and municipal obligations. The held-to-maturity portfolio contains corporate notes.

Non-interest income sources, including service charges on deposit accounts, ATM and debit card fees, commission and fee income, and increases in the cash surrender value of bank-owned life insurance, contributed $5.72 million, or 18.7%, of the company's total revenue for the first nine months of 2024.

Outlook and Future Considerations

As First Capital looks to the future, the company remains focused on strategic growth, both organically and through potential acquisitions. The company has a strong capital position and a track record of prudent risk management, positioning it well to capitalize on opportunities in its markets.

However, the banking industry continues to face headwinds, such as low interest rates, increased competition from fintech companies, and evolving customer preferences. First Capital's ability to adapt to these changing dynamics and invest in technology and digital capabilities will be crucial to its long-term success.

The banking industry has seen increasing competitive pressure for deposits and rising interest rates in recent periods, which has impacted the company's cost of funds and net interest margin. However, First Capital has been able to grow its loan portfolio and manage credit risk effectively.

Conclusion

First Capital, Inc. (FCAP) is a resilient community bank with a long and storied history. The company's commitment to its local markets, strong financial position, and adaptability to changing conditions have been instrumental in its success. As First Capital navigates the challenges and opportunities of the banking industry, investors may find the company's stability and growth potential worthy of further consideration. The company's financial metrics remain solid, though the decreases in profitability in the most recent quarter are worth monitoring going forward. Overall, First Capital appears to be a well-run community bank that is navigating the current industry environment reasonably well.