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EX-32.2 - EXHIBIT 32.2 - FIRST CAPITAL INCexh_322.htm
EX-32.1 - EXHIBIT 32.1 - FIRST CAPITAL INCexh_321.htm
EX-31.2 - EXHIBIT 31.2 - FIRST CAPITAL INCexh_312.htm
EX-31.1 - EXHIBIT 31.1 - FIRST CAPITAL INCexh_311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

OR

 

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from_____________________ to__________________

 

Commission File No. 0-25023

 

First Capital, Inc.

(Exact name of registrant as specified in its charter)

 

Indiana 35-2056949
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

 

220 Federal Drive NW, Corydon, Indiana 47112

(Address of principal executive offices) (Zip Code)

 

Registrant's telephone number including area code 1-812-738-2198

 

  Not applicable  
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    X      No ___

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    X      No ____

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

(Check one): Large Accelerated Filer ___ Accelerated Filer ___
 
  Non-accelerated Filer ___ Smaller Reporting Company    X   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___   No    X   

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 3,337,552 shares of common stock were outstanding as of July 29, 2016.

 

 
 

FIRST CAPITAL, INC.

 

 

INDEX

 

Part I Financial Information Page
     
  Item 1.    Consolidated Financial Statements  
     
  Consolidated Balance Sheets as of June 30, 2016
and December 31, 2015 (unaudited)
3
     
  Consolidated Statements of Income for the three months
and six months ended June 30, 2016 and 2015 (unaudited)
4
     
  Consolidated Statements of Comprehensive Income for the three
and six months ended June 30, 2016 and 2015 (unaudited)
5
     
  Consolidated Statements of Changes in Stockholders’ Equity
for the six months ended June 30, 2016 and 2015 (unaudited)
6
     
  Consolidated Statements of Cash Flows for the six months
ended June 30, 2016 and 2015 (unaudited)
7
     
  Notes to Consolidated Financial Statements (unaudited) 8-40
     
  Item 2.    Management’s Discussion and Analysis of Financial
Condition and Results of Operations
41-45
     
  Item 3.    Quantitative and Qualitative Disclosures About
Market Risk
47-50
     
  Item 4.    Controls and Procedures 51
     
Part II Other Information  
     
  Item 1.    Legal Proceedings 52
     
  Item 1A.    Risk Factors 52
     
  Item 2.    Unregistered Sales of Equity Securities and
Use of Proceeds
52
     
  Item 3.    Defaults Upon Senior Securities 53
     
  Item 4.    Mine Safety Disclosures 53
     
  Item 5.    Other Information 53
     
  Item 6.    Exhibits 53
     
     
     
Signatures 54

 

 - 2 - 

 

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   June 30,  December 31,
   2016  2015
   (In thousands)
ASSETS          
Cash and due from banks  $20,375   $14,756 
Interest bearing deposits with banks   1,490    3,635 
Federal funds sold   48,663    90,783 
Total cash and cash equivalents   70,528    109,174 
           
Interest-bearing time deposits   16,035    16,655 
Securities available for sale, at fair value   249,604    186,751 
Securities-held to maturity   3    4 
Loans, net   362,129    359,166 
Loans held for sale   1,191    3,081 
Federal Home Loan Bank and other stock, at cost   1,650    1,650 
Foreclosed real estate   4,252    4,890 
Premises and equipment   14,341    13,936 
Accrued interest receivable   2,342    2,244 
Cash value of life insurance   7,001    6,899 
Goodwill   6,472    6,472 
Core deposit intangible   1,332    1,406 
Other assets   2,464    3,499 
           
Total Assets  $739,344   $715,827 
           
LIABILITIES          
Deposits:          
Noninterest-bearing  $118,985   $125,059 
Interest-bearing   538,472    512,118 
Total deposits   657,457    637,177 
           
Accrued interest payable   145    167 
Accrued expenses and other liabilities   3,727    3,975 
Total liabilities   661,329    641,319 
           
EQUITY          
Preferred stock of $.01 par value per share          
Authorized 1,000,000 shares; none issued   0    0 
Common stock of $.01 par value per share          
Authorized 5,000,000 shares; issued 3,762,933 shares; outstanding 3,337,612 shares (3,338,603 in 2015)   38    38 
Additional paid-in capital   39,515    39,515 
Retained earnings-substantially restricted   44,954    42,991 
Unearned stock compensation   (343)   (382)
Accumulated other comprehensive income   2,041    497 
Less treasury stock, at cost -425,321 shares (424,330 in 2015)   (8,295)   (8,263)
Total First Capital, Inc. stockholders' equity   77,910    74,396 
           
Noncontrolling interest in subsidiary   105    112 
Total equity   78,015    74,508 
           
Total Liabilities and Equity  $739,344   $715,827 

 

See accompanying notes to consolidated financial statements.

 

 - 3 - 

 

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
   2016  2015  2016  2015
INTEREST INCOME  (In thousands, except per share data)
Loans, including fees  $5,018   $3,963   $10,166   $7,893 
Securities:                    
Taxable   812    268    1,563    530 
Tax-exempt   296    244    583    490 
Federal Home Loan Bank dividends   17    30    33    52 
Federal funds sold and interest bearing deposits with banks   146    50    290    86 
Total interest income   6,289    4,555    12,635    9,051 
INTEREST EXPENSE                    
Deposits   456    239    956    482 
Total interest expense   456    239    956    482 
Net interest income   5,833    4,316    11,679    8,569 
Provision for loan losses   150    50    225    50 
Net interest income after provision for loan losses   5,683    4,266    11,454    8,519 
NONINTEREST INCOME                    
Service charges on deposit accounts   998    856    1,922    1,630 
Commission income   69    85    194    184 
Gain on sale of securities   176    0    176    0 
Gain on sale of loans   268    178    518    486 
Mortgage brokerage fees   0    33    0    46 
Increase in cash surrender value of life insurance   68    34    103    67 
Other income   36    28    70    165 
Total noninterest income   1,615    1,214    2,983    2,578 
NONINTEREST EXPENSE                    
Compensation and benefits   2,620    1,971    5,337    3,981 
Occupancy and equipment   347    312    775    623 
Data processing   597    406    1,134    830 
Professional fees   245    380    437    581 
Advertising   83    79    175    148 
Other operating expenses   952    613    1,976    1,277 
Total noninterest expense   4,844    3,761    9,834    7,440 
Income before income taxes   2,454    1,719    4,603    3,657 
Income tax expense   667    487    1,231    956 
Net Income   1,787    1,232    3,372    2,701 
Less: net income attributable to noncontrolling interest in subsidiary   4    4    7    7 
Net Income Attributable to First Capital, Inc.  $1,783   $1,228   $3,365   $2,694 
                     
Earnings per common share attributable to First Capital, Inc.                    
Basic  $0.53   $0.45   $1.01   $0.98 
Diluted  $0.53   $0.45   $1.01   $0.98 
                     
Dividends per share  $0.21   $0.21   $0.42   $0.42 

 

See accompanying notes to consolidated financial statements.

 

 - 4 - 

 

 

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
   2016  2015  2016  2015
   (In thousands)  (In thousands)
             
Net Income  $1,787   $1,232   $3,372   $2,701 
                     
OTHER COMPREHENSIVE INCOME (LOSS)                    
Unrealized gains (losses) on securities available for sale:                    
Unrealized holding gains (losses) arising during the period   1,641    (1,073)   2,719    (637)
Income tax (expense) benefit   (639)   418    (1,059)   248 
Net of tax amount   1,002    (655)   1,660    (389)
                     
Less:reclassification adjustment for realized gains included                    
in net income   (176)   0    (176)   0 
Income tax expense   60    0    60    0 
Net of tax amount   (116)   0    (116)   0 
                     
Other Comprehensive Income (Loss), net of tax   886    (655)   1,544    (389)
                     
Comprehensive Income   2,673    577    4,916    2,312 
Less:comprehensive income attributable to the noncontrolling interest in subsidiary   4    4    7    7 
                     
Comprehensive Income Attributable to First Capital, Inc.  $2,669   $573   $4,909   $2,305 

 

See accompanying notes to consolidated financial statements.

 

 - 5 - 

 

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands, except share and per share data)

 

   Common
Stock
  Additional
Paid-in
Capital
  Retained
Earnings
  Unearned
Stock
Compensation
  Accumulated
Other
Comprehensive
Income (Loss)
  Treasury
Stock
  Noncontrolling
Interest
  Total
Balances at January 1, 2015  $32   $24,313   $40,229   $0   $800   $(8,253)  $112   $57,233 
Net income   0    0    2,694    0    0    0    7    2,701 
Other comprehensive loss   0    0    0    0    (389)   0    0    (389)
Cash dividends   0    0    (1,155)   0    0    0    (14)   (1,169)
Restricted stock grants, net of forfeitures   0    453    0    (453)   0    0    0    0 
Stock compensation expense   0    0    0    38    0    0    0    38 
Balances at June 30, 2015  $32   $24,766   $41,768   $(415)  $411   $(8,253)  $105   $58,414 
                                         
Balances at January 1, 2016  $38   $39,515   $42,991   $(382)  $497   $(8,263)  $112   $74,508 
Net income   0    0    3,365    0    0    0    7    3,372 
Other comprehensive income   0    0    0    0    1,544    0    0    1,544 
Cash dividends   0    0    (1,402)   0    0    0    (14)   (1,416)
Stock compensation expense   0    0    0    39    0    0    0    39 
Purchase of treasury shares   0    0    0    0    0    (32)   0    (32)
Balances at June 30, 2016  $38   $39,515   $44,954   $(343)  $2,041   $(8,295)  $105   $78,015 

 

See accompanying notes to consolidated financial statements.

 

 - 6 - 

 

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Six Months Ended
June 30,
   2016  2015
CASH FLOWS FROM OPERATING ACTIVITIES  (In thousands)
Net income  $3,372   $2,701 
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:          
Amortization of premiums and accretion of discounts on securities, net   472    349 
Depreciation and amortization expense   579    349 
Deferred income taxes   162    263 
Stock compensation expense   39    38 
Increase in cash value of life insurance   (103)   (67)
Gain on life insurance   0    (110)
Gain on sale of securities   (176)   0 
Provision for loan losses   225    50 
Proceeds from sales of loans   22,858    16,586 
Loans originated for sale   (20,450)   (16,165)
Gain on sale of loans   (518)   (486)
Decrease (increase) in accrued interest receivable   (98)   42 
Decrease in accrued interest payable   (22)   (33)
Net change in other assets/liabilities   (312)   (735)
Net Cash Provided By Operating Activities   6,028    2,782 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Investment in interest-bearing time deposits   (495)   (1,490)
Proceeds from maturities and sales of interest-bearing time deposits   1,115    245 
Purchase of securities available for sale   (138,801)   (15,366)
Proceeds from maturities of securities available for sale   66,150    10,264 
Proceeds from sales of securities available for sale   4,583    0 
Principal collected on mortgage-backed obligations   7,402    6,016 
Net (increase) decrease in loans receivable   (3,345)   1,125 
Proceeds from redemption of Federal Home Loan Bank stock   0    691 
Proceeds from sale of foreclosed real estate   795    74 
Purchase of premises and equipment   (910)   (379)
Net Cash Provided By (Used In) Investing Activities   (63,506)   1,180 
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net increase in deposits   20,280    3,611 
Purchase of treasury stock   (32)   0 
Dividends paid   (1,416)   (1,169)
Net Cash Provided By Financing Activities   18,832    2,442 
           
Net Increase (Decrease) in Cash and Cash Equivalents   (38,646)   6,404 
Cash and cash equivalents at beginning of period   109,174    33,243 
Cash and Cash Equivalents at End of Period  $70,528   $39,647 

 

See accompanying notes to consolidated financial statements.

 

 - 7 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.Presentation of Interim Information

 

First Capital, Inc. (“Company”) is the savings and loan holding company for First Harrison Bank (“Bank”). The information presented in this report relates primarily to the Bank's operations. First Harrison Investments, Inc. and First Harrison Holdings, Inc. are wholly-owned Nevada corporate subsidiaries of the Bank that jointly own First Harrison, LLC, a Nevada limited liability corporation that holds and manages an investment portfolio. First Harrison REIT, Inc. (“REIT”) was incorporated as a wholly-owned subsidiary of First Harrison Holdings, Inc. to hold a portion of the Bank’s real estate mortgage loan portfolio. On January 21, 2009, the REIT issued 105 shares of 12.5% redeemable cumulative preferred stock with an aggregate liquidation value of $105,000 in a private placement offering in order to satisfy certain ownership requirements to qualify as a real estate investment trust. At June 30, 2016, this noncontrolling interest represented 0.2% ownership of the REIT. FHB Risk Mitigation Services, Inc. (“Captive”) is a wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company, the Bank and the Bank’s subsidiaries, and reinsurance to eight other third party insurance captives for which insurance may not be currently available or economically feasible in the insurance marketplace. Heritage Hill, LLC is a wholly-owned subsidiary of the Bank that holds and manages certain foreclosed real estate properties.

 

In the opinion of management, the unaudited consolidated financial statements include all adjustments considered necessary to present fairly the financial position as of June 30, 2016, and the results of operations for the three months and six months ended June 30, 2016 and 2015 and the cash flows for the six months ended June 30, 2016 and 2015. All of these adjustments are of a normal, recurring nature. Such adjustments are the only adjustments included in the unaudited consolidated financial statements. Interim results are not necessarily indicative of results for a full year or any other period.

 

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and are presented as permitted by the instructions to Form 10-Q. Accordingly, they do not contain certain information included in the Company’s annual audited consolidated financial statements and related footnotes for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K.

 

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

 

 - 8 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.Acquisition of Peoples Bancorp, Inc. of Bullitt County

 

On December 4, 2015, the Company completed its acquisition of Peoples Bancorp, Inc. of Bullitt County (“Peoples”) and its wholly owned subsidiary The Peoples Bank of Bullitt County (“Peoples Bank”), headquartered in Shepherdsville, Kentucky, pursuant to an Agreement and Plan of Merger dated June 4, 2015 (the “Merger Agreement”). Under the Merger Agreement, Peoples merged with and into the Company, with the Company as the surviving corporation, and Peoples Bank merged with and into the Bank, with the Bank as the surviving financial institution. The acquisition expanded the Company’s presence into Bullitt County, Kentucky and its overall presence in the greater Louisville, Kentucky metropolitan market. The Company expects to benefit from growth in this new market area as well as from expansion of the banking services provided to the existing customers of Peoples Bank. Cost savings are also expected for the combined bank through economies of scale and the consolidation of business operations.

 

The Company paid cash consideration of $14.7 million in the transaction and issued 580,017 shares of Company common stock, with a total fair value of $14.8 million. As part of the merger, the Company acquired foreclosed real estate with an estimated fair value of $3.75 million (the “Contingent Assets”). Under the terms of the Merger Agreement, if the Company sells the Contingent Assets within 24 months after the effective date of the merger or has entered into a written contract for the sale of the Contingent Assets which are then sold within 60 days after the expiration of that 24-month period, the Company will distribute additional cash consideration of 50% of the sale proceeds in excess of $3.75 million on a pro rata basis to the former shareholders of Peoples. Currently, there is no written contract for the sale of the Contingent Assets and no contingent consideration is anticipated.

 

The transaction was accounted for using the acquisition method of accounting. Accordingly, the results of operations of Peoples have been included in the Company’s results of operations since the date of acquisition. Under the acquisition method of accounting, the purchase price was assigned to the assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. The excess of cost over the fair value of the acquired net assets of $1.1 million was recorded as goodwill. The goodwill arising from the acquisition consisted largely of the synergies and economies of scale expected from combining the operations of the Company and Peoples. No amount of the goodwill arising in the acquisition is deductible for income tax purposes.

 

Acquisition-related costs of approximately $214,000 and $267,000 are included in noninterest expense in the accompanying consolidated statement of income for the three and six months, respectively, ended June 30, 2015. There were no acquisition-related costs for the three or six months ended June 30, 2016.

 

Additional information regarding the Peoples acquisition can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

 - 9 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.Investment Securities

 

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent. Investment securities at June 30, 2016 and December 31, 2015 are summarized as follows:

 

(In thousands)  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
             
June 30, 2016            
Securities available for sale:                    
Agency mortgage-backed securities  $86,056   $644   $35   $86,665 
Agency CMO   17,092    135    19    17,208 
Other debt securities:                    
Agency notes and bonds   86,846    192    20    87,018 
Municipal obligations   52,310    2,345    2    54,653 
Subtotal - debt securities   242,304    3,316    76    245,544 
                     
Mutual funds   4,060    0    0    4,060 
                     
Total securities available for sale  $246,364   $3,316   $76   $249,604 
                     
Securities held to maturity:                    
Agency mortgage-backed securities  $3   $0   $0   $3 
                     
Total securities held to maturity  $3   $0   $0   $3 
                     
December 31, 2015                    
Securities available for sale:                    
Agency mortgage-backed securities  $42,158   $123   $271   $42,010 
Agency CMO   9,391    41    101    9,331 
Other debt securities:                    
Agency notes and bonds   84,797    11    355    84,453 
Municipal obligations   49,527    1,372    60    50,839 
Subtotal - debt securities   185,873    1,547    787    186,633 
                     
Mutual funds   118    0    0    118 
                     
Total securities available for sale  $185,991   $1,547   $787   $186,751 
                     
Securities held to maturity:                    
Agency mortgage-backed securities  $4   $0   $0   $4 
                     
Total securities held to maturity  $4   $0   $0   $4 

 

 - 10 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3 – continued)

 

Agency notes and bonds, agency mortgage-backed securities and agency collateralized mortgage obligations (CMO) include securities issued by the Government National Mortgage Association (GNMA), a U.S. government agency, and the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Bank (FHLB), which are government-sponsored enterprises.

 

The amortized cost and fair value of debt securities as of June 30, 2016, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.

 

   Securities Available for Sale  Securities Held to Maturity
   Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
(In thousands)            
             
Due in one year or less  $2,939   $2,949   $0   $0 
Due after one year through five years   87,145    87,476    0    0 
Due after five years through ten years   17,626    18,072           
Due after ten years   31,446    33,174    0    0 
    139,156    141,671    0    0 
Mortgage-backed securities and                    
CMO   103,148    103,873    3    3 
                     
   $242,304   $245,544   $3   $3 

 

Information pertaining to investment securities available for sale with gross unrealized losses at June 30, 2016, aggregated by investment category and the length of time that individual investment securities have been in a continuous position, follows:

 

   Number of
Investment
Positions
  Fair
Value
  Gross
Unrealized
Losses
(Dollars in thousands)         
          
Continuous loss position less than twelve months:               
Agency notes and bonds   4   $18,987   $20 
Agency CMO   2    1,736    9 
Agency mortgage-backed securities   6    17,533    30 
Muncipal obligations   2    930    2 
                
Total less than twelve months   14    39,186    61 
                
Continuous loss position more than twelve months:               
Agency CMO   5    2,959    10 
Agency mortgage-backed securities   2    1,241    5 
                
Total more than twelve months   7    4,200    15 
                
Total securities available for sale   21   $43,386   $76 

 

 - 11 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

 

Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recover in fair value.

 

At June 30, 2016, the U.S. government agency debt securities, including agency notes and bonds, mortgage-backed securities and CMO, and municipal obligations in a loss position had depreciated approximately 0.2% from the amortized cost basis. All of the U.S. government agency securities and municipal obligations are issued by U.S. government agencies, government-sponsored enterprises and municipal governments, or are secured by first mortgage loans and municipal project revenues. These unrealized losses related principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As the Company has the ability to hold the debt securities until maturity, or the foreseeable future if classified as available for sale, no declines are deemed to be other-than-temporary.

 

While management does not anticipate any credit-related impairment losses at June 30, 2016, additional deterioration in market and economic conditions may have an adverse impact on credit quality in the future.

 

During the three and six months ended June 30, 2016, the Company realized gross gains on sales of available for sale municipal securities of $176,000. During the three and six months ended June 30, 2015, the Company did not have any security sales.

 

In June 2014, the Company acquired an additional 31,750 shares of common stock in another financial institution, in addition to the 100,000 shares acquired in December 2013, representing approximately 9% of the outstanding common stock of the entity, for a total investment of $711,000. The investment is accounted for using the cost method of accounting and is included in other assets in the consolidated balance sheet. The Company’s investment was sold for $856,000 in July 2016, resulting in a gain of $145,000 to be recognized in the quarter ending September 30, 2016.

 

4.Loans and Allowance for Loan Losses

 

The Company’s loan and allowance for loan loss policies are as follows:

 

Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses. The Company grants real estate mortgage, commercial business and consumer loans. A substantial portion of the loan portfolio is represented by mortgage loans to customers in the Louisville, Kentucky metropolitan statistical area (MSA). The ability of the Company’s customers to honor their loan agreements is largely dependent upon the real estate and general economic conditions in this area.

 

Loan origination and commitment fees, as well as certain direct costs of underwriting and closing loans, are deferred and amortized as a yield adjustment to interest income over the lives of the related loans using the interest method. Amortization of net deferred loan fees is discontinued when a loan is placed on nonaccrual status.

 

 - 12 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4 – continued)

 

The recognition of income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments become ninety (90) days past due unless, in the opinion of management, the outstanding interest remains collectible. Past due status is determined based on contractual terms. Generally, by applying the cash receipts method, interest income is subsequently recognized only as received until the loan is returned to accrual status. The cash receipts method is used when the likelihood of further loss on the loan is remote. Otherwise, the Company applies the cost recovery method and applies all payments as a reduction of the unpaid principal balance until the loan qualifies for return to accrual status. Interest income on impaired loans is recognized using the cost recovery method, unless the likelihood of further loss on the loan is remote.

 

A loan is restored to accrual status when all principal and interest payments are brought current and the borrower has demonstrated the ability to make future payments of principal and interest as scheduled, which generally requires that the borrower demonstrate a period of performance of at least six consecutive months.

 

For portfolio segments other than consumer loans, the Company’s practice is to charge-off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or for other reasons. A partial charge-off is recorded on a loan when the uncollectibility of a portion of the loan has been confirmed, such as when a loan is discharged in bankruptcy, the collateral is liquidated, a loan is restructured at a reduced principal balance, or other identifiable events that lead management to determine the full principal balance of the loan will not be repaid. A specific reserve is recognized as a component of the allowance for estimated losses on loans individually evaluated for impairment. Partial charge-offs on nonperforming and impaired loans are included in the Company’s historical loss experience used to estimate the general component of the allowance for loan losses as discussed below. Specific reserves are not considered charge-offs in management’s analysis of the allowance for loan losses because they are estimates and the outcome of the loan relationship is undetermined. At June 30, 2016, the Company had 11 loans on which partial charge-offs of $471,000 had been recorded.

 

Consumer loans not secured by real estate are typically charged off at 90 days past due, or earlier if deemed uncollectible, unless the loans are in the process of collection. Overdrafts are charged off after 45 days past due. Charge-offs are typically recorded on loans secured by real estate when the property is foreclosed upon.

 

The allowance for loan losses reflects management’s judgment of probable loan losses inherent in the loan portfolio at the balance sheet date. Additions to the allowance for loan losses are made by the provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

 - 13 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4 – continued)

 

The Company uses a disciplined process and methodology to evaluate the allowance for loan losses on at least a quarterly basis that is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated for impairment or loans otherwise classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

 

The general component covers non-classified loans and classified loans that are found, upon individual evaluation, to not be impaired. Such loans are pooled by segment and losses are modeled using annualized historical loss experience adjusted for qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent twelve calendar quarters unless the historical loss experience is not considered indicative of the level of risk in the remaining balance of a particular portfolio segment, in which case an adjustment is determined by management. The Company’s historical loss experience is then adjusted by an overall loss factor weighting adjustment based on a qualitative analysis prepared by management and reviewed on a quarterly basis. The overall loss factor considers changes in underwriting standards, economic conditions, changes and trends in past due and classified loans and other internal and external factors.

 

Management also applies additional loss factor multiples to loans classified as watch, special mention and substandard that are not individually evaluated for impairment. The loss factor multiples for classified loans are based on management’s assessment of historical trends regarding losses experienced on classified loans in prior periods. See below for additional discussion of the overall loss factor and loss factor multiples for classified loans as of June 30, 2016 and December 31, 2015.

 

Management exercises significant judgment in evaluating the relevant historical loss experience and the qualitative factors. Management also monitors the differences between estimated and actual incurred loan losses for loans considered impaired in order to evaluate the effectiveness of the estimation process and make any changes in the methodology as necessary.

 

Management utilizes the following portfolio segments in its analysis of the allowance for loan losses: residential real estate, land, construction, commercial real estate, commercial business, home equity and second mortgage, and other consumer loans. Additional discussion of the portfolio segments and the risks associated with each segment can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

 - 14 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4 – continued)

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

Values for collateral dependent loans are generally based on appraisals obtained from independent licensed real estate appraisers, with adjustments applied for estimated costs to sell the property, costs to complete unfinished or repair damaged property and other factors. New appraisals are generally obtained for all significant properties when a loan is identified as impaired, and a property is considered significant if the value of the property is estimated to exceed $200,000. Subsequent appraisals are obtained as needed or if management believes there has been a significant change in the market value of the property. In instances where it is not deemed necessary to obtain a new appraisal, management bases its impairment and allowance for loan loss analysis on the original appraisal with adjustments for current conditions based on management’s assessment of market factors and management’s inspection of the property.

 

At June 30, 2016, the recorded investments in loans secured by residential real estate properties for which formal foreclosure proceedings are in process was $742,000.

 

Loans at June 30, 2016 and December 31, 2015 consisted of the following:

 

 - 15 - 

 

(In thousands)  June 30,
2016
  December 31,
2015
       
Real estate mortgage loans:
Residential  $138,445   $147,933 
Land   12,585    12,962 
Residential construction   17,357    16,391 
Commercial real estate   93,508    84,493 
Commercial real estate construction   2,536    1,090 
Commercial business loans   23,185    23,095 
Consumer loans:          
Home equity and second mortgage loans   40,987    38,476 
Automobile loans   31,831    28,828 
Loans secured by savings accounts   1,924    2,096 
Unsecured loans   3,827    4,350 
Other consumer loans   7,838    7,210 
Gross loans   374,023    366,924 
Less undisbursed portion of loans in process   (9,396)   (4,926)
           
Principal loan balance   364,627    361,998 
           
Deferred loan origination fees, net   691    583 
Allowance for loan losses   (3,189)   (3,415)
           
Loans, net  $362,129   $359,166 

 

 - 16 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4 – continued)

 

The following table provides the components of the Company’s recorded investment in loans at June 30, 2016:

 

   Residential
Real Estate
  Land  Construction  Commercial
Real Estate
  Commercial
Business
  Home Equity  &
2nd Mtg
  Other
Consumer
  Total
   (In thousands)
Recorded Investment in Loans:                                        
Principal loan balance  $138,476   $12,585   $10,497   $93,477   $23,185   $40,987   $45,420   $364,627 
                                         
Accrued interest receivable   499    42    31    307    71    134    184    1,268 
                                         
Net deferred loan origination fees and costs   70    11    0    (37)   (7)   654    0    691 
                                         
Recorded investment in loans  $139,045   $12,638   $10,528   $93,747   $23,249   $41,775   $45,604   $366,586 
                                         
                                         
Recorded Investment in Loans as Evaluated for Impairment:                     
Individually evaluated for impairment  $2,185   $0   $0   $4,105   $63   $63   $30   $6,446 
Collectively evaluated for impairment   136,383    12,638    10,528    89,349    23,186    41,712    45,574    359,370 
Acquired with deteriorated credit quality   477    0    0    293    0    0    0    770 
                                         
Ending balance  $139,045   $12,638   $10,528   $93,747   $23,249   $41,775   $45,604   $366,586 

 

 - 17 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4 – continued)

 

The following table provides the components of the Company’s recorded investment in loans at December 31, 2015:

 

   Residential
Real Estate
  Land  Construction  Commercial
Real Estate
  Commercial
Business
  Home Equity  &
2nd Mtg
  Other
Consumer
  Total
   (In thousands)
Recorded Investment in Loans:                                        
Principal loan balance  $147,933   $12,962   $12,555   $84,493   $23,095   $38,476   $42,484   $361,998 
                                         
Accrued interest receivable   584    70    61    281    64    130    171    1,361 
                                         
Net deferred loan origination fees and costs   58    6    0    (46)   (6)   571    0    583 
                                         
Recorded investment in loans  $148,575   $13,038   $12,616   $84,728   $23,153   $39,177   $42,655   $363,942 
                                         
                                         
Recorded Investment in Loans as Evaluated for Impairment:                     
Individually evaluated for impairment  $1,996   $24   $0   $3,623   $167   $136   $0   $5,946 
Collectively evaluated for impairment   145,695    13,014    12,616    80,639    22,986    39,041    42,655    356,646 
Acquired with deteriorated credit quality   884    0    0    466    0    0    0    1,350 
                                         
Ending balance  $148,575   $13,038   $12,616   $84,728   $23,153   $39,177   $42,655   $363,942 

 

 - 18 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4 – continued)

 

An analysis of the allowance for loan losses as of June 30, 2016 is as follows:

 

   Residential
Real Estate
  Land  Construction  Commercial
Real Estate
  Commercial
Business
  Home Equity &
2nd Mtg
  Other
Consumer
  Total
   (In thousands)
Ending allowance balance attributable to loans:                     
                                         
Individually evaluated for impairment  $20   $0   $0   $0   $0   $13   $6   $39 
Collectively evaluated for impairment   382    47    42    1,473    162    778    260    3,144 
Acquired with deteriorated credit quality   6    0    0    0    0    0    0    6 
                                         
Ending balance  $408   $47   $42   $1,473   $162   $791   $266   $3,189 

 

An analysis of the allowance for loan losses as of December 31, 2015 is as follows:

 

   Residential
Real Estate
  Land  Construction  Commercial
Real Estate
  Commercial
Business
  Home Equity &
2nd Mtg
  Other
Consumer
  Total
   (In thousands)
Ending allowance balance attributable to loans:                     
                                         
Individually evaluated for impairment  $6   $0   $0   $49   $100   $11   $0   $166 
Collectively evaluated for impairment   521    157    47    1,492    161    615    256    3,249 
Acquired with deteriorated credit quality   0    0    0    0    0    0    0    0 
                                         
Ending balance  $527   $157   $47   $1,541   $261   $626   $256   $3,415 

 

 - 19 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4 – continued)

 

An analysis of the changes in the allowance for loan losses for the three months and six months ended June 30, 2016 is as follows:

 

   Residential
Real Estate
  Land  Construction  Commercial
Real Estate
  Commercial
Business
  Home Equity &
2nd Mtg
  Other
Consumer
  Total
   (In thousands)
Allowance for loan losses:                                        
Changes in Allowance for Loan Losses for the three-months ended June 30, 2016               
Beginning balance  $470   $84   $45   $1,468   $273   $721   $258   $3,319 
Provisions for loan losses   (13)   (37)   (3)   73    (13)   66    77    150 
Charge-offs   (54)   0    0    (82)   (100)   0    (95)   (331)
Recoveries   5    0    0    14    2    4    26    51 
                                         
Ending balance  $408   $47   $42   $1,473   $162   $791   $266   $3,189 
                                         
                                         
Changes in Allowance for Loan Losses for the six-months ended June 30, 2016               
Beginning balance  $527   $157   $47   $1,541   $261   $626   $256   $3,415 
Provisions for loan losses   (42)   (101)   (5)   (4)   12    192    173    225 
Charge-offs   (94)   (9)   0    (82)   (114)   (36)   (220)   (555)
Recoveries   17    0    0    18    3    9    57    104 
                                         
Ending balance  $408   $47   $42   $1,473   $162   $791   $266   $3,189 

 

 - 20 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4 – continued)

 

An analysis of the changes in the allowance for loan losses for the three months and six months ended June 30, 2015 is as follows:

 

   Residential
Real Estate
  Land  Construction  Commercial
Real Estate
  Commercial
Business
  Home Equity &
2nd Mtg
  Other
Consumer
  Total
   (In thousands)
Allowance for loan losses:                                        
Changes in Allowance for Loan Losses for the three-months ended June 30, 2015                     
Beginning balance  $672   $197   $65   $1,462   $239   $716   $283   $3,634 
Provisions for loan losses   (39)   (24)   (14)   204    (58)   (38)   19    50 
Charge-offs   0    0    0    0    (22)   (31)   (72)   (125)
Recoveries   1    0    0    3    2    1    34    41 
                                         
Ending balance  $634   $173   $51   $1,669   $161   $648   $264   $3,600 
                                         
                                         
Changes in Allowance for Loan Losses for the six-months ended June 30, 2015                     
Beginning balance  $609   $201   $60   $1,501   $1,480   $720   $275   $4,846 
Provisions for loan losses   42    (28)   (9)   156    (117)   (45)   51    50 
Charge-offs   (20)   0    0    0    (1,205)   (33)   (124)   (1,382)
Recoveries   3    0    0    12    3    6    62    86 
                                         
Ending balance  $634   $173   $51   $1,669   $161   $648   $264   $3,600 

 

 - 21 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4 – continued)

 

At June 30, 2016 and December 31, 2015, management applied specific qualitative factor adjustments to the residential real estate, construction, commercial real estate, commercial business, land, and home equity and second mortgage portfolio segments as they determined that the historical loss experience was not indicative of the level of risk in the remaining balance of those portfolio segments. These adjustments increased the loss factors by 0.25% to 20% for certain loan groups, and increased the estimated allowance for loan losses related to those portfolio segments by approximately $1.3 million and $1.4 million at June 30, 2016 and December 31, 2015, respectively. These changes were made to reflect management’s estimates of inherent losses in these portfolio segments at June 30, 2016 and December 31, 2015.

 

At June 30, 2016 and December 31, 2015, for each loan portfolio segment, management applied an overall qualitative factor of 1.18 to the Company’s historical loss factors. The overall qualitative factor is derived from management’s analysis of changes and trends in the following qualitative factors: underwriting standards, economic conditions, past due loans and other internal and external factors. Each of the four factors above was assigned an equal weight to arrive at an average for the overall qualitative factor of 1.18 at June 30, 2016 and December 31, 2015, respectively. The effect of the overall qualitative factor was to increase the estimated allowance for loan losses by $499,000 and $457,000 at June 30, 2016 and December 31, 2015, respectively. Additional discussion of the overall qualitative factor can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. There were no changes in management’s assessment of the overall qualitative factor components from December 31, 2015 to June 30, 2016.

 

Management also adjusts the historical loss factors for loans classified as watch, special mention and substandard that are not individually evaluated for impairment. The adjustments consider the increased likelihood of loss on classified loans based on the Company’s separate historical experience for classified loans. The effect of the adjustments for classified loans was to increase the estimated allowance for loan losses by $630,000 and $410,000 at June 30, 2016 and December 31, 2015, respectively. During the period from December 31, 2015 to June 30, 2016, management adjusted these factors to compensate for the acquisition of the Peoples loan portfolio.

 

 - 22 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4 – continued)

 

The following table summarizes the Company’s impaired loans as of June 30, 2016 and for the three months and six months ended June 30, 2016. The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the three or six month periods ended June 30, 2016:

 

   At June 30, 2016  Three Months Ended June 30, 2016  Six  Months Ended June 30, 2016
   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
  Average
Recorded
Investment
  Interest
Income
Recognized
   (In thousands)
Loans with no related allowance recorded:                                   
Residential  $2,044   $2,395   $0   $1,898   $8   $1,911   $14 
Land   0    0    0    0    0    8    0 
Construction   0    0    0    0    0    0    0 
Commercial real estate   4,075    4,432    0    3,602    18    3,531    37 
Commercial business   63    66    0    63    0    64    0 
Home equity/2nd mortgage   50    58    0    53    1    54    1 
Other consumer   10    28    0    5    0    3    0 
                                    
    6,242    6,979    0    5,621    27    5,571    52 
                                    
Loans with an allowance recorded:                                   
Residential   141    148    20    176    0    136    0 
Land   0    0    0    0    0    0    0 
Construction   0    0    0    0    0    0    0 
Commercial real estate   30    58    0    131    0    165    0 
Commercial business   0    0    0    50    0    67    0 
Home equity/2nd mortgage   13    14    13    14    0    36    0 
Other consumer   20    20    6    34    0    23    0 
                                    
    204    240    39    405    0    427    0 
                                    
Total:                                   
Residential   2,185    2,543    20    2,074    8    2,047    14 
Land   0    0    0    0    0    8    0 
Construction   0    0    0    0    0    0    0 
Commercial real estate   4,105    4,490    0    3,733    18    3,696    37 
Commercial business   63    66    0    113    0    131    0 
Home equity/2nd mortgage   63    72    13    67    1    90    1 
Other consumer   30    48    6    39    0    26    0 
                                    
   $6,446   $7,219   $39   $6,026   $27   $5,998   $52 

 

 - 23 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4 – continued)

 

The following table summarizes the Company’s impaired loans for the three months and six months ended June 30, 2015. The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the three or six month periods ended June 30, 2015:

 

   Three Months Ended June 30, 2015  Six  Months Ended June 30, 2015
   Average
Recorded
Investment
  Interest
Income
Recognized
  Average
Recorded
Investment
  Interest
Income
Recognized
    
Loans with no related allowance recorded:                    
Residential  $1,235   $5   $1,204   $10 
Land   20    0    18    0 
Construction   0    0    0    0 
Commercial real estate   1,773    19    1,774    38 
Commercial business   13    0    9    0 
Home equity/2nd mortgage   65    0    67    1 
Other consumer   0    0    0    0 
                     
    3,106    24    3,072    49 
                     
Loans with an allowance recorded:                    
Residential   254    0    259    0 
Land   0    0    0    0 
Construction   0    0    0    0 
Commercial real estate   39    0    40    0 
Commercial business   18    0    559    0 
Home equity/2nd mortgage   80    0    80    0 
Other consumer   0    0    0    0 
                     
    391    0    938    0 
                     
Total:                    
Residential   1,489    5    1,463    10 
Land   20    0    18    0 
Construction   0    0    0    0 
Commercial real estate   1,812    19    1,814    38 
Commercial business   31    0    568    0 
Home equity/2nd mortgage   145    0    147    1 
Other consumer   0    0    0    0 
                     
   $3,497   $24   $4,010   $49 

 

 - 24 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4 – continued)

 

The following table summarizes the Company’s impaired loans as of December 31, 2015:

 

   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
   (In thousands)
Loans with no related allowance recorded:               
Residential  $1,938   $2,330   $0 
Land   24    27    0 
Construction   0    0    0 
Commercial real estate   3,389    3,706    0 
Commercial business   67    67    0 
Home equity/2nd mortgage   56    65    0 
Other consumer   0    0    0 
                
    5,474    6,195    0 
                
Loans with an allowance recorded:               
Residential   58    62    6 
Land   0    0    0 
Construction   0    0    0 
Commercial real estate   234    260    49 
Commercial business   100    100    100 
Home equity/2nd mortgage   80    81    11 
Other consumer   0    0    0 
                
    472    503    166 
                
Total:               
Residential   1,996    2,392    6 
Land   24    27    0 
Construction   0    0    0 
Commercial real estate   3,623    3,966    49 
Commercial business   167    167    100 
Home equity/2nd mortgage   136    146    11 
Other consumer   0    0    0 
                
   $5,946   $6,698   $166 

 

 - 25 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4 – continued)

 

Nonperforming loans consists of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at June 30, 2016 and December 31, 2015:

 

   June 30, 2016  December 31, 2015
   Nonaccrual
Loans
  Loans 90+ Days
Past Due
Still Accruing
  Total
Nonperforming
Loans
  Nonaccrual
Loans
  Loans 90+ Days
Past Due
Still Accruing
  Total
Nonperforming
Loanss
   (In thousands)
                   
Residential  $1,733   $109   $1,842   $1,648   $271   $1,919 
Land   0    0    0    24    75    99 
Construction   0    0    0    0    0    0 
Commercial real estate   1,741    0    1,741    2,267    0    2,267 
Commercial business   63    0    63    167    0    167 
Home equity/2nd mortgage   44    12    56    116    0    116 
Other consumer   30    2    32    0    9    9 
                               
   Total  $3,611   $123   $3,734   $4,222   $355   $4,577 

 

 

The following table presents the aging of the recorded investment in loans at June 30, 2016:

 

   30-59 Days
Past Due
  60-89 Days
Past Due
  90 Days or More
Past Due
  Total
Past Due
  Current  Purchased
Credit
Impaired Loans
  Total
Loans
   (In thousands)
                      
Residential  $3,176   $489   $975   $4,640   $133,928   $477   $139,045 
Land   132    0    0    132    12,506    0    12,638 
Construction   0    0    0    0    10,528    0    10,528 
Commercial real estate   23    0    730    753    92,701    293    93,747 
Commercial business   82    0    0    82    23,167    0    23,249 
Home equity/2nd mortgage   262    0    12    274    41,501    0    41,775 
Other consumer   231    23    32    286    45,318    0    45,604 
                                    
   Total  $3,906   $512   $1,749   $6,167   $359,649   $770   $366,586 

 

 - 26 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4 – continued)

 

The following table presents the aging of the recorded investment in loans at December 31, 2015:

 

   30-59 Days
Past Due
  60-89 Days
Past Due
  90 Days or More
Past Due
  Total
Past Due
  Current  Purchased
Credit
Impaired Loans
  Total
Loans
   (In thousands)
                      
Residential  $3,078   $786   $1,256   $5,120   $142,571   $884   $148,575 
Land   55    26    99    180    12,858    0    13,038 
Construction   71    0    0    71    12,545    0    12,616 
Commercial real estate   435    773    396    1,604    82,658    466    84,728 
Commercial business   0    100    67    167    22,986    0    23,153 
Home equity/2nd mortgage   365    6    80    451    38,726    0    39,177 
Other consumer   464    13    9    486    42,169    0    42,655 
                                    
   Total  $4,468   $1,704   $1,907   $8,079   $354,513   $1,350   $363,942 

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:

 

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the institution’s books as an asset is not warranted.

 

Loans not meeting the criteria above that are analyzed individually as part of the described process are considered to be pass rated loans.

 

 - 27 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4 – continued)

 

The following table presents the recorded investment in loans by risk category as of the date indicated:

 

   Residential
Real Estate
  Land  Construction  Commercial
Real Estate
  Commercial
Business
  Home Equity  &
2nd Mtg
  Other
Consumer
  Total
   (In thousands)
June 30, 2016                                        
Pass  $134,210   $12,445   $10,120   $81,437   $22,376   $41,557   $45,525   $347,670 
Special Mention   1,368    121    408    4,325    810    159    49    7,240 
Substandard   1,359    72    0    5,079    0    15    0    6,525 
Doubtful   2,108    0    0    2,906    63    44    30    5,151 
Loss   0    0    0    0    0    0    0    0 
                                         
Total  $139,045   $12,638   $10,528   $93,747   $23,249   $41,775   $45,604   $366,586 
                                         
December 31, 2015                                        
Pass  $140,438   $10,077   $12,286   $76,389   $22,365   $38,956   $42,553   $343,064 
Special Mention   3,657    125    330    4,446    471    0    53    9,082 
Substandard   1,948    2,812    0    1,195    150    105    49    6,259 
Doubtful   2,532    24    0    2,698    167    116    0    5,537 
Loss   0    0    0    0    0    0    0    0 
                                         
Total  $148,575   $13,038   $12,616   $84,728   $23,153   $39,177   $42,655   $363,942 

 

 - 28 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4 – continued)

 

The following table summarizes the Company’s troubled debt restructurings (TDRs) by accrual status as of June 30, 2016 and December 31, 2015:

 

   June 30, 2016  December 31, 2015
   Accruing  Nonaccrual  Total  Related Allowance
for Loan Losses
  Accruing  Nonaccrual  Total  Related Allowance
for Loan Losses
   (In thousands)
Troubled debt restructurings:                                        
Residential real estate  $338   $328   $666   $0   $342   $315   $657   $0 
Commercial real estate   1,327    249    1,576    0    1,348    294    1,642    0 
Home equity and 2nd mortgage   19    0    19    0    20    0    20    0 
                                         
   Total  $1,684   $577   $2,261   $0   $1,710   $609   $2,319   $0 

 

At June 30, 2016 and December 31, 2015, there were no commitments to lend additional funds to debtors whose loan terms have been modified in a TDR.

 

There were no TDRs that were restructured during either the three and six months ended June 30, 2016 or June 30, 2015.

 

There were no principal charge-offs recorded as a result of TDRs and there was no specific allowance for loan losses related to TDRs modified during the three and six months ended June 30, 2016 or June 30, 2015.

 

There were no TDRs modified within the previous 12 months for which there was a subsequent payment default (defined as the loan becoming more than 90 days past due, being moved to nonaccrual status, or the collateral being foreclosed upon) during the three and six months ended June 30, 2016 and 2015. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan.

 

 - 29 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4 – continued)

 

Purchased Credit Impaired (PCI) Loans

 

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. Such loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit score, loan type and date of origination. In determining the estimated fair value of purchased loans or pools, management considers a number of factors including the remaining life, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows expected to be received, among others. Purchased loans that have evidence of credit deterioration since origination for which it is deemed probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-30. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. The difference between the expected cash flows and the fair value at acquisition is recorded as interest income over the remaining life of the loan or pool of loans and is referred to as the accretable yield. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which is recognized as future interest income.

 

The following table presents the carrying amount of PCI loans accounted for under ASC 310-30 at June 30, 2016 and December 31, 2015:

 

(In thousands)  June 30,
2016
  December 31,
2015
           
Residential real estate  $477   $884 
Commercial real estate   293    466 
Carrying amount   770    1,350 
Allowance for loan losses   (6)   - 
           
Carrying amount, net of allowance  $764   $1,350 

 

The outstanding balance of PCI loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties was $951,000 and $1.6 million at June 30, 2016 and December 31, 2015, respectively.

 

The allowance for loan losses related to PCI loans was $6,000 at June 30, 2016. There was no allowance for loan losses related to PCI loans at December 31, 2015. Provisions for loan losses of $6,000 related to PCI loans were recognized for the six-month period ended June 30, 2016. There were no provisions for loan loss related to PCI loans for the three months ended June 30, 2016 nor for the three and six months ended June 30, 2015. There were no reductions of the allowance for loan losses on PCI loans for the three and six months ended June 30, 2016 and 2015.

 

 - 30 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4 – continued)

 

Accretable yield, or income expected to be collected, is as follows for the three and six month periods ended June 30, 2016:

 

(In thousands)  Three Months
Ended
June 30, 2016
  Six Months
Ended
June 30, 2016
       
Balance at beginning of period  $145   $319 
New loans purchased   -    - 
Accretion to income   (19)   (44)
Disposals and other adjustments   (21)   (74)
Reclassification (to) from nonaccretable difference   60    (36)
           
Balance at end of period  $165   $165 

 

 

5.Supplemental Disclosure for Earnings Per Share

 

   Three Months Ended  Six Months Ended
   6/30/2016  6/30/2015  6/30/2016  6/30/2015
             
Basic  (Dollars in thousands, except for share and per share data)
Earnings:                    
Net income attributable to First Capital, Inc.  $1,783   $1,228   $3,365   $2,694 
                     
Shares:                    
Weighted average common shares outstanding   3,339,063    2,740,689    3,339,082    2,740,596 
                     
Net income attributable to First Capital, Inc. per common share, basic  $0.53   $0.45   $1.01   $0.98 
                     
Diluted                    
Earnings:                    
Net income attributable to First Capital, Inc.  $1,783   $1,228   $3,365   $2,694 
                     
Shares:                    
Weighted average common shares outstanding   3,339,063    2,740,689    3,339,082    2,740,596 
Add: Dilutive effect of restricted stock   2,244    506    1,536    156 
                     
Weighted average common shares outstanding, as adjusted   3,341,307    2,741,195    3,340,618    2,740,752 
                     
Net income attributable to First Capital, Inc. per common share, diluted  $0.53   $0.45   $1.01   $0.98 

 

Nonvested restricted stock shares are not considered as outstanding for purposes of computing weighted average common shares outstanding.

 

 - 31 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6.Stock Option Plan

 

On May 20, 2009, the Company adopted the 2009 Equity Incentive Plan (the Plan). The Plan provides for the award of stock options, restricted stock, performance shares and stock appreciation rights. The aggregate number of shares of the Company’s common stock available for issuance under the Plan may not exceed 223,000 shares. The Company may grant both non-statutory and statutory stock options which may not have a term exceeding ten years. In the case of incentive stock options, the aggregate fair value of the stock (determined at the time the incentive stock option is granted) for which any optionee may be granted incentive options which are first exercisable during any calendar year shall not exceed $100,000. Option prices may not be less than the fair market value of the underlying stock at the date of the grant. An award of a performance share is a grant of a right to receive shares of the Company’s common stock which is contingent upon the achievement of specific performance criteria or other objectives set at the grant date. Stock appreciation rights are equity or cash settled share-based compensation arrangements whereby the number of shares that will ultimately be issued or the cash payment is based upon the appreciation of the Company’s common stock. Awards granted under the Plan may be granted either alone, in addition to, or in tandem with, any other award granted under the Plan.

 

The fair market value of stock options granted is estimated at the date of grant using an option pricing model. Expected volatilities are based on historical volatility of the Company's stock. The expected term of options granted represents the period of time that options are expected to be outstanding and is based on historical trends. The risk free rate for the expected life of the options is based on the U.S. Treasury yield curve in effect at the time of grant. As of June 30, 2016, no stock options had been granted under the Plan.

 

On February 17, 2015, the Company granted 19,500 restricted stock shares to directors, officers and key employees at a grant-date price of $24.50 per share for a total of $478,000. The restricted stock vests ratably from the grant date through July 1, 2020, with 20% of the shares vesting each year on July 1 beginning July 1, 2016. Compensation expense is measured based on the fair market value of the restricted stock at the grant date and is recognized ratably over the period during which the shares are earned (the vesting period). Compensation expense related to restricted stock recognized for the three-month and six-month periods ended June 30, 2016 amounted to $19,000 and $39,000, respectively.

 

A summary of the Company’s nonvested restricted shares under the Plan as of June 30, 2016 and changes during the six-month period then ended is presented below.

 

   Number
of
Shares
  Weighted
Average
Grant Date
Fair Value
       
Nonvested at January 1, 2016   18,000   $24.50 
Granted   -    - 
Vested   500   $24.50 
Forfeited   -    - 
           
Nonvested at June 30, 2016   17,500   $24.50 

 

 

 - 32 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(6 – continued)

 

Upon the retirement of a director, 500 restricted shares vested during the six-month period ended June 30, 2016. The total fair value of restricted shares that vested during the six-month period ended June 30, 2016 was $16,000. At June 30, 2016, there was $343,000 of total unrecognized compensation expense related to nonvested restricted shares. The compensation expense is expected to be recognized over the remaining vesting period of 4.0 years.

  

7.Supplemental Disclosures of Cash Flow Information

 

   Six Months Ended
June 30,
   2016     2015   
   (In thousands)
Cash payments for:          
Interest  $978   $516 
Taxes (net of refunds received)   54    1,035 
           
Noncash investing activities:          
Transfers from loans to real estate acquired through foreclosure   446    562 

 

 

8.Fair Value Measurements

 

FASB ASC Topic 820, Fair Value Measurements, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are described as follows:

 

  Level 1:   Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets
       
  Level 2:   Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs that are derived principally from or can be corroborated by observable market data by correlation or other means.
       
  Level 3:   Inputs to the valuation methodology are unobservable and significant to the fair value measurement.  Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth on the following page. These valuation methodologies were applied to all of the Company’s financial and nonfinancial assets carried at fair value or the lower of cost or fair value. The table below presents the balances of assets measured at fair value on a recurring and nonrecurring basis as of June 30, 2016 and December 31, 2015. The Company had no liabilities measured at fair value as of June 30, 2016 or December 31, 2015.

 

 - 33 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(8 – continued)

 

   Carrying Value
(In thousands)  Level 1  Level 2  Level 3  Total
             
June 30, 2016                    
Assets Measured on a Recurring Basis                    
Securities available for sale:                    
Agency mortgage-backed securities  $0   $86,665   $0   $86,665 
Agency CMO   0    17,208    0    17,208 
Agency notes and bonds   0    87,018    0    87,018 
Municipal obligations   0    54,653    0    54,653 
Mutual funds   4,060    0    0    4,060 
Total securities available for sale  $4,060   $245,544   $0   $249,604 
                     
Assets Measured on a Nonrecurring Basis                    
Impaired loans:                    
Residential real estate  $0   $0   $2,165   $2,165 
Commercial real estate   0    0    4,105    4,105 
Commercial business   0    0    63    63 
Home equity and second mortgage   0    0    50    50 
Other consumer   0    0    24    24 
Total impaired loans  $0   $0   $6,407   $6,407 
                     
Loans held for sale  $0   $1,191   $0   $1,191 
                     
Foreclosed real estate:                    
Residential real estate  $0   $0   $582   $582 
Commercial real estate   0    0    3,670    3,670 
Total foreclosed real estate  $0   $0   $4,252   $4,252 
                     
December 31, 2015                    
Assets Measured on a Recurring Basis                    
Securities available for sale:                    
Agency mortgage-backed securities  $0   $42,010   $0   $42,010 
Agency CMO   0    9,331    0    9,331 
Agency notes and bonds   0    84,453    0    84,453 
Municipal obligations   0    50,839    0    50,839 
Mutual funds   118    0    0    118 
Total securities available for sale  $118   $186,633   $0   $186,751 
                     
Assets Measured on a Nonrecurring Basis                    
Impaired loans:                    
Residential real estate  $0   $0   $1,990   $1,990 
Land   0    0    24    24 
Commercial real estate   0    0    3,574    3,574 
Commercial business   0    0    67    67 
Home equity and second mortgage   0    0    125    125 
Total impaired loans  $0   $0   $5,780   $5,780 
                     
Loans held for sale  $0   $3,081   $0   $3,081 
                     
Foreclosed real estate:                    
Residential real estate  $0   $0   $557   $557 
Land   0    0    203    203 
Commercial real estate   0    0    4,130    4,130 
Total foreclosed real estate  $0   $0   $4,890   $4,890 

 

 - 34 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(8 – continued)

 

Fair value is based upon quoted market prices, where available. If quoted market prices are not available, fair value is based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

 

Securities Available for Sale. Securities classified as available for sale are reported at fair value on a recurring basis.  These securities are classified as Level 1 of the valuation hierarchy where quoted market prices from reputable third-party brokers are available in an active market. If quoted market prices are not available, the Company obtains fair value measurements from an independent pricing service.  These securities are reported using Level 2 inputs and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. Changes in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect.

 

Impaired Loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of impaired loans is classified as Level 3 in the fair value hierarchy.

 

Impaired loans are carried at the present value of estimated future cash flows using the loan's effective interest rate or the fair value of collateral less estimated costs to sell if the loan is collateral dependent. At June 30, 2016 and December 31, 2015, all impaired loans were considered to be collateral dependent for the purpose of determining fair value. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable. The fair value of the collateral is generally determined based on real estate appraisals or other independent evaluations by qualified professionals, adjusted for estimated costs to sell the property, costs to complete or repair the property and other factors to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral. At June 30, 2016, the significant unobservable inputs used in the fair value measurement of impaired loans included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the collateral ranging from 30% to 60%, with a weighted average discount of 48%. At December 31, 2015, the discount from appraised value ranged from 10% to 59%, with a weighted average discount of 16%. The Company recognized provisions for loan losses of $106,000 and $82,000 for the six months ended June 30, 2016 and 2015, respectively, for impaired loans. The Company recognized provisions for loan losses of $47,000 for the three months ended June 30, 2015 for impaired loans. The Company did not recognize any provisions for loan losses for impaired loans for the three months ended June 30, 2016.

 

 - 35 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(8 – continued)

 

Loans Held for Sale. Loans held for sale are carried at the lower of cost or market value. The portfolio is comprised of residential real estate loans and fair value is based on specific prices of underlying contracts for sales to investors.  These measurements are classified as Level 2.

 

Foreclosed Real Estate. Foreclosed real estate is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of foreclosed real estate is classified as Level 3 in the fair value hierarchy.

 

Foreclosed real estate is reported at fair value less estimated costs to dispose of the property. The fair values are determined by real estate appraisals which are then discounted to reflect management’s estimate of the fair value of the property given current market conditions and the condition of the collateral. At June 30, 2016, the significant unobservable inputs used in the fair value measurement of foreclosed real estate included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the property ranging from 0% to 42%, with a weighted average of 39%. At December 31, 2015, the discount from appraised value ranged from 9% to 43%, with a weighted average of 30%. The Company recognized losses of $83,000 to write down foreclosed real estate for the three months and six months ended June 30, 2016. There were no charges to write down foreclosed real estate recognized in income for the three months and six months ended June 30, 2015.

 

There have been no changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and nonrecurring basis during the six month periods ended June 30, 2016 and 2015. There were no transfers into or out of the Company’s Level 3 financial assets for the six month periods ended June 30, 2016 and 2015. In addition, there were no transfers into or out of Levels 1 and 2 of the fair value hierarchy during the six month periods ended June 30, 2016 and 2015.

 

 - 36 - 

 

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(8 – continued)

 

GAAP requires disclosure of the fair value of financial assets and financial liabilities, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The estimated fair values of the Company's financial instruments are as follows:

 

   Carrying  Fair  Fair Vale Measurements Using
(In thousands)  Value  Value  Level 1  Level 2  Level 3
                
June 30, 2016                         
Financial assets:                         
Cash and cash equivalents  $70,528   $70,528   $70,528   $0   $0 
Interest-bearing time deposits   16,035    16,077    0    16,077    0 
Securities available for sale   249,604    249,604    4,060    245,544    0 
Securities held to maturity   3    3    0    3    0 
Loans held for sale   1,191    1,220    0    1,220    0 
Loans, net   362,129    371,939    0    0    371,939 
FHLB and other stock   1,650    1,650    0    1,650    0 
Accrued interest receivable   2,342    2,342    0    2,342    0 
Cost method investment (included in other assets)   711    711    0    711    0 
                          
Financial liabilities:                         
Deposits   657,457    657,181    0    0    657,181 
Accrued interest payable   145    145    0    145    0 
                          
December 31, 2015:                         
Financial assets:                         
Cash and cash equivalents  $109,174   $109,174   $109,174