FIRST CAPITAL INC

Previous wording

The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with GAAP. The preparation of the Company's financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes involve the most complex and subjective estimates and judgments and have the most effect on the Company's reported financial position and results of operations are described as critical accounting policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. During the nine months ended September 30, 2024, there was no significant change in the Company’s critical account policies or the application of critical accounting policies as disclosed in the Company’s Annual report on Form 10-K for the year ended December 31, 2023.

Current wording

The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements that have been prepared in accordance with GAAP. The preparation of the Company's financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes involve the most complex and subjective estimates and judgments and have the most effect on the Company's reported financial position and results of operations are described as critical accounting policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2024. During the three months ended March 31, 2025, there was no significant change in the Company’s critical account policies or the application of critical accounting policies as disclosed in the Company’s Annual report on Form 10-K for the year ended December 31, 2024.

Previous wording

Total assets increased $31.4 million from $1.16 billion at December 31, 2023 to $1.19 billion at September 30, 2024.

Current wording

Total assets increased $27.0 million from $1.19 billion at December 31, 2024 to $1.21 billion at March 31, 2025.

Previous wording

Net loans receivable (excluding loans held for sale) increased $16.2 million from $614.4 million at December 31, 2023 to $630.6 million at September 30, 2024. Commercial real estate, 1-4 family residential mortgage, and other construction, development and land loan increases of $7.8 million, $7.6 million, and $6.4 million, respectively, were partially offset by decreases of $4.8 million and $3.6 million in commercial business and 1-4 family residential construction, respectively, during the nine months ended September 30, 2024.

Current wording

Net loans receivable (excluding loans held for sale) increased $11.7 million from $631.2 million at December 31, 2024 to $642.9 million at March 31, 2025. Multifamily residential, commercial real estate, 1-4 family residential construction, and 1-4 family residential mortgage loan increases of $9.1 million, $4.5 million, $2.3 million, and $1.9 million, respectively, were partially offset by decreases of $5.7 million and $1.3 million in other construction, development and land and consumer and other loans, respectively, during the three months ended March 31, 2025.

Previous wording

Cash and cash equivalents increased from $38.7 million at December 31, 2023 to $89.9 million at September 30, 2024 primarily due to maturities of available for sale securities, increased borrowings under the FRB’s BTFP and net deposit inflows at the Bank.

Current wording

Cash and cash equivalents increased from $105.9 million at December 31, 2024 to $116.6 million at March 31, 2025 primarily due to net deposit inflows at the Bank.

Previous wording

Securities available for sale decreased $28.8 million from $437.3 million at December 31, 2023 to $408.5 million at September 30, 2024. Purchases of $47.8 million of securities classified as available for sale were made during the nine months ended September 30, 2024 and consisted primarily of U.S. government agency CMOs and municipal bonds. Principal payments and maturities of available for sale securities totaled $17.8 million and $46.2 million, respectively, during the nine months ended September 30, 2024. Securities classified as available for sale totaling $19.2 million were sold during the nine months ended September 30, 2024 and consisted primarily of municipal bonds. In addition, there was an unrealized gain of $7.3 million on the securities available for sale portfolio during the nine month period ended September 30, 2024 due primarily to decreasing market interest rates.

Current wording

Securities available for sale increased $2.5 million from $389.2 million at December 31, 2024 to $391.7 million at March 31, 2025. Purchases of $30.8 million of securities classified as available for sale were made during the three months ended March 31, 2025 and consisted primarily of U.S. government agency CMOs and mortgage-backed securities and municipal bonds. Principal payments and maturities of available for sale securities totaled $6.6 million and $15.4 million, respectively, during the three months ended March 31, 2025. Securities classified as available for sale totaling $11.2 million were sold during the three months ended March 31, 2025 and consisted primarily of municipal and U.S. government agency notes and bonds. In addition, there was an unrealized gain of $4.1 million on the securities available for sale portfolio during the three month period ended March 31, 2025 due primarily to decreasing market interest rates.

Previous wording

Total deposits increased $5.0 million but remained at $1.03 billion at December 31, 2023 and September 30 2024, respectively. Interest-bearing checking accounts, savings accounts and non-interest-bearing checking accounts decreased $19.4 million, $12.4 million and $5.7 million, respectively, during the nine months ended September 30, 2024, while time deposits increased $42.6 million during the period. Deposit inflows and outflows are influenced by prevailing market interest rates, competition, local and national economic conditions, and fluctuations in our customers' own liquidity needs and may also be influenced by recent developments in the financial services industry. Significant competition for deposits driven by high interest rate alternatives for depositors is currently impacting deposit fluctuations and increasing our cost of deposits.

Current wording

Total deposits increased $17.5 million from $1.07 billion at December 31, 2024 to $1.08 billion at March 31, 2025. Savings accounts, non-interest-bearing checking accounts and time deposits increased $5.4 million, $5.8 million and $8.8 million, respectively, during the three months ended March 31, 2025, while interest bearing deposits decreased $2.5 million during the period. Deposit inflows and outflows are influenced by prevailing market interest rates, competition, local and national economic conditions, and fluctuations in our customers' own liquidity needs and may also be influenced by recent developments in the financial services industry. Significant competition for deposits remains and the deposit growth during the quarter ended March 31, 2025 was accompanied by increased costs to attract those deposits.

Previous wording

Total stockholders' equity attributable to the Company increased from $105.2 million at December 31, 2023 to $116.8 million at September 30, 2024, due to a $5.9 million increase in retained net income as well as a $5.5 million net unrealized gain on available for sale securities. The net unrealized gain on available for sale securities during the period is primarily due to decreased market interest rates.

Current wording

Total stockholders' equity attributable to the Company increased from $114.6 million at December 31, 2024 to $120.1 million at March 31, 2025, due to a $2.3 million increase in retained net income as well as a $3.2 million net unrealized gain on available for sale securities. The net unrealized gain on available for sale securities during the period is primarily due to decreased market interest rates.

Previous wording

Net income. ** **Net income attributable to the Company was $2.9 million ($0.87 per diluted share) for the three months ended September 30, 2024 compared to $3.1 million ($0.94 per diluted share) for the three months ended September 30, 2023.

Current wording

Net income. ** **Net income attributable to the Company was $3.2 million ($0.97 per diluted share) for the three months ended March 31, 2025 compared to $3.0 million ($0.88 per diluted share) for the three months ended March 31, 2024.

Previous wording

Net interest income. ** **Net interest income after provision for credit losses increased $415,000 for the three months ended September 30, 2024 as compared to the same period in 2023.

Current wording

Net interest income. ** **Net interest income after provision for credit losses increased $923,000 for the three months ended March 31, 2025 as compared to the same period in 2024.

Previous wording

Total interest expense increased $5.0 million as the average cost of interest-bearing liabilities increased from 0.98% for the nine months ended September 30, 2023 to 1.72% for the same period in 2024, in addition to an increase in the average balance of interest-bearing liabilities from $805.1 million for the first nine months of 2023 to $846.8 million for the same period of 2024. The Company had average outstanding advances from the FHLB of $2.3 million and $2.6 million with an average rate of 5.69% and 5.49% during the nine months ended September 30, 2024 and 2023, respectively. The Company had average outstanding borrowings under the Federal Reserve Bank’s BTFP of $33.1 million and $6.4 million with an average rate of 4.84% and 5.03% during the nine months ended September 30, 2024 and 2023, respectively.

Current wording

Total interest expense increased $528,000 as the average cost of interest-bearing liabilities increased from 1.55% for the quarter ended March 31, 2024 to 1.71% for the same period in 2025, in addition to an increase in the average balance of interest-bearing liabilities from $833.7 million for the quarter ended March 31, 2024 to $881.6 million for the same period in 2025.

Previous wording

As a result of the changes in interest-earning assets and interest-bearing liabilities, the net interest margin increased from 3.02% for the quarter ended September 30, 2023 to 3.12% for the same period in 2024.

Current wording

As a result of the changes in interest-earning assets and interest-bearing liabilities, the tax equivalent net interest margin increased from 3.14% for the quarter ended March 31, 2024 to 3.34% for the same period in 2025.

Previous wording

Provision for credit losses. Based on management’s analysis of the ACL on loans and unfunded loan commitments, the provision for credit losses increased from $290,000 for the quarter ended September 30, 2023 to $463,000 for the quarter ended September 30, 2024. The increase was due to loan growth during the period, the increase in nonperforming assets during the quarter, as well as management’s consideration of macroeconomic uncertainty. The Bank recognized net charge-offs of $64,000 and $19,000 for the quarters ended September 30, 2024 and 2023, respectively.

Current wording

Provision for credit losses. Based on management’s analysis of the ACL on loans and unfunded loan commitments, the provision for credit losses increased from $280,000 for the quarter ended March 31, 2024 to $338,000 for the quarter ended March 31, 2025. The increase was due to loan growth during the period as well as management’s consideration of macroeconomic uncertainty. The Bank recognized net charge-offs of $84,000 and $55,000 for the quarters ended March 31, 2025 and 2024, respectively.

Previous wording

Noninterest income. Noninterest income decreased $147,000 for the quarter ended September 30, 2024 as compared to the same period in 2023. The Company recognized a $196,000 loss on equity securities for the quarter ended September 30, 2024 compared to a loss of $131,000 for the same quarter in 2023. The Company did not sell any securities during the quarter ended September 30, 2024. The Company recognized a net $63,000 gain on sale of securities during the quarter ended September 30, 2023. During the quarter ended September 30, 2023, the Company sold securities available for sale with a market value of $9.4 million and an amortized cost basis of $9.5 million resulting in a net loss of $94,000. The net loss was more than offset by the $157,000 gain on sale of the Company’s VISA Class B stock in September 2023. In addition, other income decreased $54,000 during the quarter. These were partially offset by increases of $17,000 and $13,000 in ATM and debit card fees and service charges on deposit accounts, respectively.

Current wording

Noninterest income. Noninterest income decreased $51,000 for the quarter ended March 31, 2025 as compared to the quarter ended March 31, 2024 primarily due to the Company recognizing a $55,000 loss on sale of available for sale securities for the quarter ended March 31, 2025 compared to a $32,000 gain on sale of available for sale securities for the quarter ended March 31, 2024. The Company also recognized decreases of $38,000 and $24,000 in other income and ATM and debit card fees, respectively, when comparing the two periods. These were partially offset by the Company recognizing an $18,000 gain on equity securities during the quarter ended March 31, 2025 compared to a loss of $68,000 during the same period in 2024.

Previous wording

**Noninterest expense.**Noninterest expense increased $543,000 for the quarter ended September 30, 2024 as compared to the same period in 2023, due primarily to increases in professional fees and compensation and benefits of $213,000 and $160,000, respectively. The increase in professional fees is primarily due to increased costs associated with the Company’s annual audit and fees being accrued for the Company’s ongoing core contract negotiations. The increase in compensation and benefits is due to standard increases in salary and wages as well as increases in the cost of Company-provided health insurance benefits. In addition, data processing, advertising, and occupancy and equipment expenses increased $51,000, $45,000, and $41,000, respectively.

Current wording

Noninterest expense. ** **Noninterest expenses increased $424,000 for the quarter ended March 31, 2025 as compared to the same period in 2024. This was primarily due to increases in compensation and benefits and occupancy and equipment expenses of $259,000 and $160,000, respectively, when comparing the two periods. The increase in compensation and benefits is due to increases in salary and wages associated with annual cost of living and performance related adjustments as well as increases in the cost of Company-provided health insurance benefits. The increase in occupancy and equipment expenses is primarily due to costs associated with snow removal across the Company’s branch network given the historic storms in our communities as well as a loss on the disposal of premises and equipment.

Previous wording

Income tax expense. Income tax expense decreased $238,000 for the nine months ended September 30, 2024 as compared to the same period in 2023 resulting in an effective tax rate of 15.0% for the nine months ended September 30, 2024, compared to 15.4% for the same period in 2023.

Current wording

**Income tax expense.**Income tax expense increased $165,000 for the quarter ended March 31, 2025 as compared to the same period in 2024 resulting in an effective tax rate of 17.2% for the quarter ended March 31, 2025, compared to 14.6% for the same period in 2024.

Previous wording

The Bank’s primary sources of funds are customer deposits, proceeds from loan repayments, maturing securities and borrowings from the FHLB or FRB. While loan repayments and maturities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. At September 30, 2024, the Bank had cash and cash equivalents of $89.9 million and securities available-for-sale with a fair value of $408.5 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB, FRB, collateral eligible for repurchase agreements and unsecured federal funds purchased lines of credit with other financial institutions.

Current wording

The Bank’s primary sources of funds are customer deposits, proceeds from loan repayments, maturing securities and borrowings from the FHLB or FRB. While loan repayments and maturities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. At March 31, 2025, the Bank had cash and cash equivalents of $116.6 million and securities available-for-sale with a fair value of $391.7 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB, FRB, collateral eligible for repurchase agreements and unsecured federal funds purchased lines of credit with other financial institutions.

Previous wording

The Bank is required to maintain specific amounts of capital pursuant to regulatory requirements. Beginning in 2020, qualifying community banks with assets of less than $10 billion are eligible to opt in to the Community Bank Leverage Ratio (“CBLR”) framework. The CBLR is the ratio of a bank’s tangible equity capital to average total consolidated assets. A qualifying community bank that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new CBLR at not less than 8% and not more than 10%, and has set the minimum ratio at 9% effective January 1, 2022. A financial institution that falls below the minimum CBLR generally has a two quarter grace period to get back into compliance as long as it maintains a minimum CBLR of 8%. A financial institution can elect to be subject to or opt out of the CBLR framework at any time. As a qualified community bank, the Bank had opted into the CBLR framework as of September 30, 2024 and December 31, 2023 and its CBLR was 10.24% and 9.92% as of those dates, respectively. Management believes that the Bank met all capital adequacy requirements to which it was subject as of September 30, 2024. At both September 30, 2024 and December 31, 2023, the Bank was considered “well-capitalized” under applicable regulatory guidelines.

Current wording

The Bank is required to maintain specific amounts of capital pursuant to regulatory requirements. Beginning in 2020, qualifying community banks with assets of less than $10 billion are eligible to opt in to the Community Bank Leverage Ratio (“CBLR”) framework. The CBLR is the ratio of a bank’s tangible equity capital to average total consolidated assets. A qualifying community bank that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new CBLR at not less than 8% and not more than 10%, and has set the minimum ratio at 9% effective January 1, 2022. A financial institution that falls below the minimum CBLR generally has a two quarter grace period to get back into compliance as long as it maintains a minimum CBLR of 8%. A financial institution can elect to be subject to or opt out of the CBLR framework at any time. As a qualified community bank, the Bank had opted into the CBLR framework as of March 31, 2025 and December 31, 2024 and its CBLR was 10.61% and 10.57% as of those dates, respectively. Management believes that the Bank met all capital adequacy requirements to which it was subject as of March 31, 2025. At both March 31, 2025 and December 31, 2024, the Bank was considered “well-capitalized” under applicable regulatory guidelines.

Previous wording

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded on the Company’s financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are primarily used to manage customers’ requests for funding and take the form of loan commitments and letters of credit. A further presentation of the Company’s off-balance sheet arrangements is presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. The Company adopted ASU 2016-13 effective January 1, 2023 which requires an ACL on off-balance sheet credit exposures. See Note 4 for additional information.

Current wording

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded on the Company’s financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are primarily used to manage customers’ requests for funding and take the form of loan commitments and letters of credit. A further presentation of the Company’s off-balance sheet arrangements is presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024. See Note 4 of this quarterly report for additional information regarding the ACL for these off-balance sheet arrangements.