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FIRST CAPITAL INC - Quarter Report: 2004 June (Form 10-Q)

Form 10-Q
Table of Contents

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, 2004

 

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

incorporation or organization)

 

(I.R.S. Employer

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    NO  x

 

The Registrant had 2,817,097 shares of common stock, par value $0.01 per share, outstanding as of July 30, 2004.

 



Table of Contents

FIRST CAPITAL, INC.

 

INDEX

 

         Page

Part I   Financial Information     
        Item 1. Consolidated Financial Statements     
             Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 (unaudited)    3
   

Consolidated Statements of Income for the three months and six months ended June 30, 2004 and 2003 (unaudited)

   4
   

Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited)

   5
             Notes to consolidated financial statements (unaudited)    6
   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   10
        Item 3. Quantitative and Qualitative Disclosures About Market Risk    15
        Item 4. Controls and Procedures    17
Part II   Other Information     
        Item 1. Legal Proceedings    18
        Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities    18
        Item 3. Defaults Upon Senior Securities    19
        Item 4. Submission of Matters to a Vote of Security Holders    19
        Item 5. Other Information    19
        Item 6. Exhibits and Reports on Form 8-K    19
Signatures    21

 

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Table of Contents

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     June 30,
2004


   

December 31,

2003


 
     (In thousands)  

ASSETS

                

Cash and due from banks

   $ 7,961     $ 12,190  

Interest bearing deposits with banks

     1,449       1,371  

Securities available for sale, at fair value

     66,406       66,244  

Securities held-to-maturity

     1,289       1,507  

Loans held for sale

     490       —    

Loans

     316,087       304,200  

Federal Home Loan Bank stock, at cost

     3,287       3,094  

Foreclosed real estate

     514       225  

Premises and equipment

     10,125       10,291  

Accrued interest receivable:

                

Loans

     1,371       1,407  

Securities

     721       767  

Cash value of life insurance

     1,249       1,228  

Goodwill

     5,386       5,386  

Core deposit intangibles

     572       609  

Other assets

     933       619  
    


 


Total Assets

   $ 417,840     $ 409,138  
    


 


LIABILITIES

                

Deposits:

                

Noninterest-bearing

   $ 32,100     $ 30,535  

Interest-bearing

     275,393       271,933  
    


 


Total Deposits

     307,493       302,468  

Retail repurchase agreements

     697       520  

Advances from Federal Home Loan Bank

     62,988       60,242  

Accrued interest payable

     1,191       1,160  

Accrued expenses and other liabilities

     1,619       853  
    


 


Total Liabilities

     373,988       365,243  
    


 


STOCKHOLDERS’ EQUITY

                

Preferred stock of $.01 par value per share; authorized 1,000,000 shares; none issued

     —         —    

Common stock of $.01 par value per share; authorized 5,000,000 shares; issued 2,843,863 shares (2,843,763 shares in 2003)

     28       28  

Additional paid-in capital

     19,214       19,183  

Retained earnings-substantially restricted

     25,953       25,092  

Unearned ESOP shares

     (369 )     (400 )

Unearned stock compensation

     (38 )     (73 )

Accumulated other comprehensive income

     (438 )     380  

Less treasury stock, at cost - 26,766 shares (18,639 shares in 2003)

     (498 )     (315 )
    


 


Total Stockholders’ Equity

     43,852       43,895  
    


 


Total Liabilities and Stockholders’ Equity

   $ 417,840     $ 409,138  
    


 


See accompanying notes to consolidated financial statements.

 

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Table of Contents

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

    

Three Months Ended

June 30,


     Six Months Ended
June 30,


 
     2004

    2003

     2004

    2003

 
     (In thousands, except per share data)  

INTEREST INCOME

                                 

Loans receivable, including fees

   $ 4,745     $ 4,847      $ 9,486     $ 8,763  

Securities

                                 

Taxable

     475       570        976       1,158  

Tax-exempt

     147       128        291       253  

Federal Home Loan Bank dividends

     33       38        72       75  

Interest bearing deposits with banks

     18       55        32       97  
    


 

    


 


Total interest income

     5,418       5,638        10,857       10,346  

INTEREST EXPENSE

                                 

Deposits

     1,428       1,512        2,858       2,839  

Retail repurchase agreements

     1       1        1       1  

Advances from Federal Home Loan Bank

     804       738        1,600       1,473  
    


 

    


 


Total interest expense

     2,233       2,251        4,459       4,313  

Net interest income

     3,185       3,387        6,398       6,033  

Provision for loan losses

     120       175        245       325  
    


 

    


 


Net interest income after provision for loan losses

     3,065       3,212        6,153       5,708  

NON-INTEREST INCOME

                                 

Service charges on deposit accounts

     496       478        929       848  

Commission income

     84       85        183       145  

Gain on sale of securities

     —         —          —         51  

Gain on sale of mortgage loans

     37       14        37       14  

Mortgage brokerage fees

     32       —          70       —    

Other income

     59       18        77       46  
    


 

    


 


Total non-interest income

     708       595        1,296       1,104  
    


 

    


 


NON-INTEREST EXPENSE

                                 

Compensation and benefits

     1,420       1,218        2,844       2,247  

Occupancy and equipment

     257       256        511       450  

Data processing

     179       180        381       377  

Other operating expenses

     593       612        1,152       1,110  
    


 

    


 


Total non-interest expense

     2,449       2,266        4,888       4,184  
    


 

    


 


Income before income taxes

     1,324       1,541        2,561       2,628  

Income tax expense

     463       541        867       907  
    


 

    


 


Net Income

   $ 861     $ 1,000      $ 1,694     $ 1,721  

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

                                 

Unrealized gain (loss) on securities:

                                 

Unrealized holding gains (losses) arising during the period

     (1,023 )     262        (819 )     113  

Less: reclassification adjustment

     —         —          —         (31 )
    


 

    


 


Other comprehensive income (loss)

     (1,023 )     262        (819 )     82  
    


 

    


 


Comprehensive Income (Loss)

   $ (162 )   $ 1,262      $ 875     $ 1,803  
    


 

    


 


Net income per common share, basic

   $ 0.31     $ 0.36      $ 0.61     $ 0.65  
    


 

    


 


Net income per common share, diluted

   $ 0.31     $ 0.36      $ 0.60     $ 0.64  
    


 

    


 


 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    

Six Months Ended

June 30,


 
     2004

    2003

 
     (In thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES

                

Net income

   $ 1,694     $ 1,721  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Amortization of premiums and accretion of discounts

     132       199  

Depreciation and amortization expense

     396       322  

Deferred income taxes

     35       361  

ESOP compensation expense

     71       44  

Stock compensation expense

     35       35  

Increase in cash value of life insurance

     (21 )     (27 )

Provision for loan losses

     245       325  

Net gain on sale of securities available for sale

     —         (51 )

Mortgage loans originated for sale

     (490 )     —    

Stock dividends on Federal Home Loan Bank stock

     (75 )     (39 )

(Increase) decrease in accrued interest receivable

     82       (76 )

Increase (decrease) in accrued interest payable

     31       (147 )

Net change in other assets/liabilities

     946       (27 )
    


 


Net Cash Provided By Operating Activities

     3,081       2,640  
    


 


CASH FLOWS FROM INVESTING ACTIVITIES

                

Net (increase) decrease in interest bearing deposits with banks

     (78 )     19,090  

Purchase of securities available for sale

     (15,214 )     (23,172 )

Proceeds from maturities of securities available for sale

     11,070       10,500  

Proceeds from maturities of securities held to maturity

     154       107  

Proceeds from sale of securities available for sale

     —         2,551  

Principal collected on mortgage-backed securities

     2,558       6,094  

Net increase in loans receivable

     (12,453 )     (5,836 )

Purchase of Federal Home Loan Bank stock

     (118 )     (64 )

Proceeds from sale of Federal Reserve Bank stock

     —         180  

Proceeds from sale of foreclosed real estate

     32       —    

Purchase of premises and equipment

     (194 )     (1,092 )

Net cash paid in acquisition of Hometown Bancshares, Inc.

     —         (5,726 )
    


 


Net Cash Provided (Used) By Investing Activities

     (14,243 )     2,632  
    


 


CASH FLOWS FROM FINANCING ACTIVITIES

                

Net increase (decrease) in deposits

     5,025       (2,221 )

Net increase in advances from Federal Home Loan Bank

     2,746       357  

Net increase (decrease) in retail repurchase agreements

     177       (36 )

Exercise of stock options

     1       47  

Purchase of treasury stock

     (183 )     (146 )

Dividends paid

     (833 )     (714 )
    


 


Net Cash Provided (Used) By Financing Activities

     6,933       (2,713 )
    


 


Net Increase (Decrease) in Cash and Due From Banks

     (4,229 )     2,559  

Cash and due from banks at beginning of period

     12,190       6,610  
    


 


Cash and Due From Banks at End of Period

   $ 7,961     $ 9,169  
    


 


 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

FIRST CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Presentation of Interim Information

 

First Capital, Inc. (the “Company”) is the holding company for First Harrison Bank (the “Bank”). The information presented in this report relates primarily to the Bank’s operations.

 

In the opinion of management, the unaudited consolidated financial statements include all normal adjustments considered necessary to present fairly the financial position as of June 30, 2004, and the results of operations for the three and six months ended June 30, 2004 and 2003 and cash flows for the six months ended June 30, 2004 and 2003. 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.

 

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with generally accepted accounting principles 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, 2003 included in the Form 10-K.

 

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

 

2. Comprehensive Income

 

Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income for the Company includes net income and other comprehensive income representing the net unrealized gains and losses on securities available for sale. The following tables set forth the components of other comprehensive income and the allocated tax amounts for the three and six months ended June 30, 2004 and 2003:

 

     Three Months Ended
June 30,


    Six Months Ended
June 30,


 
     2004

    2003

    2004

    2003

 
     (In thousands)  

Unrealized gains (losses) on securities:

                        

Unrealized holding gains (losses) arising during the period

   $(1,694 )   $   434     $(1,356 )   $  187  

Income tax (expense) benefit

   671     (172 )   537     (74 )
    

 

 

 

Net of tax amount

   (1,023 )   262     (819 )   113  
    

 

 

 

Less: reclassification adjustment for gains included in net income

   —       —       —       (51 )

Income tax benefit

   —       —       —       20  
    

 

 

 

Net of tax amount

   —       —       —       (31 )
    

 

 

 

Other comprehensive income (loss)

   $(1,023 )   $  262     $   (819 )   $    82  
    

 

 

 

 

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Table of Contents

FIRST CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3. Merger with Hometown Bancshares, Inc.

 

On March 20, 2003, the Company consummated its acquisition of Hometown Bancshares, Inc. (“Hometown”), a bank holding company located in New Albany, Indiana, pursuant to an Agreement and Plan of Merger dated September 25, 2002. Hometown is the parent company of Hometown National Bank, which was merged with and into the Bank. The acquisition was made for the purpose of expanding the Company’s presence in the New Albany and Floyd County, Indiana market area and the Company expects to benefit from growth in this market area, as well as from expansion of the banking services provided to the existing customers of Hometown.

 

Pursuant to the terms of the merger agreement, Hometown stockholders who elected to receive Company stock received 2.487 shares of Company common stock and Hometown shareholders who elected to receive cash received $46.50 in cash for each share of Hometown common stock. Hometown stockholders who did not submit properly completed election forms within the required timeframe received 0.773 shares of Company common stock and $32.05 in cash for each share of Hometown common stock. The Company issued 285,446 shares of common stock and paid approximately $5.4 million in cash consideration to former Hometown stockholders. The value assigned to the common shares issued in the transaction was approximately $6.1 million determined by the average closing price of the Company’s common stock over a twenty- day period ending March 17, 2003. The transaction was accounted for under the purchase method of accounting. Accordingly, the results of operations of Hometown have been included in the Company’s results of operations since the date of acquisition. Under the purchase method of accounting, the purchase price is allocated to the respective 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 net assets acquired of approximately $5.4 million has been recorded as goodwill.

 

4. Supplemental Disclosure for Earnings Per Share

 

     Three Months Ended

   Six Months Ended

     6/30/2004

   6/30/2003

   6/30/2004

   6/30/2003

     (Dollars in thousands, except for share and per share data)
Basic                            

Earnings:

                           

Net income

   $ 861    $ 1,000    $ 1,694    $ 1,721
    

  

  

  

Shares:

                           

Weighted average common shares outstanding

     2,773,463      2,770,392      2,774,654      2,642,998
    

  

  

  

Net income per common share, basic

   $ 0.31    $ 0.36    $ 0.61    $ 0.65
    

  

  

  

Diluted

                           

Earnings:

                           

Net income

   $ 861    $ 1,000    $ 1,694    $ 1,721
    

  

  

  

Shares:

                           

Weighted average common shares outstanding

     2,773,463      2,770,392      2,774,654      2,642,998

Add: Dilutive effect of outstanding options

     33,906      32,005      33,453      32,819

Add: Dilutive effect of restricted stock

     2,582      4,095      2,593      4,146
    

  

  

  

Weighted average common shares outstanding, as adjusted

     2,809,951      2,806,492      2,810,700      2,679,963
    

  

  

  

Net income per common share, diluted

   $ 0.31    $ 0.36    $ 0.60    $ 0.64
    

  

  

  

 

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Table of Contents

FIRST CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5. Stock Option Plan

 

The Company accounts for its stock option plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the stock option plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

 

     Three Months Ended
June 30,


           Six Months Ended    
June 30,


 
     2004

    2003

       2004

    2003

 
     (In thousands, except per share data)  

Net income, as reported

   $   861     $1,000        $1,694     $1,721  

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

   (6 )   (2 )      (11 )   (5 )
    

 

    

 

Pro forma net income

   $   855     $   998        $1,683     $1,716  
    

 

    

 

Earnings per share:

                           

Basic - as reported

   $  0.31     $  0.36        $  0.61     $  0.65  

Basic - pro forma

   $  0.31     $  0.36        $  0.61     $  0.65  

Diluted - as reported

   $  0.31     $  0.36        $  0.60     $  0.64  

Diluted - pro forma

   $  0.31     $  0.36        $  0.60     $  0.64  

 

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Table of Contents

FIRST CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6. Supplemental Disclosures of Cash Flow Information

 

     Six Months Ended
June 30,


     2004

   2003

     (In thousands)

Cash payments for:

             

Interest

   $ 4,427    $ 4,231

Taxes

     656      809

Noncash investing activities:

             

Transfers from loans to real estate acquired through foreclosure

     274      261

Acquisition of Hometown Bancshares, Inc. (Note 3)

             

Assets acquired

     —        96,885

Liabilities assumed

     —        85,122
    

  

Net assets acquired

   $ —      $ 11,763
    

  

Cash paid

   $ —      $ 5,626

Stock issued

     —        6,137
    

  

Total purchase price

   $ —      $ 11,763
    

  

 

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Table of Contents

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC. AND SUBSIDIARY

 

Safe Harbor Statement for Forward-Looking Statements

 

This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, rather statements based on the Company’s current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

 

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance and achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; and other factors disclosed periodically in the Company’s filings with the Securities and Exchange Commission.

 

Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by the Company or on its behalf. Except as required by applicable law or regulation, the Company assumes no obligation to update any forward-looking statements.

 

Financial Condition

 

Total assets increased from $409.1 million at December 31, 2003 to $417.8 million at June 30, 2004, an increase of 2.1%. When compared to June 30, 2003, the growth in assets was $19.3 million.

 

Net loans receivable increased $12.4 million from $304.2 million at December 31, 2003 to $316.6 million at June 30, 2004. The primary growth occurred in residential mortgages, increasing $4.6 million. Nontaxable commercial loans and home equity lines of credit also increased $3.9 million and $2.8 million, respectively.

 

Securities available for sale changed little from December 31, 2003 to June 30, 2004, increasing $162,000. The Bank had purchases of $15.2 million offset by maturities of $11.1 million and principal payments of $2.5 million. The portfolio also experienced an unrealized loss of $1.0 million during the period due to an increase in market rates and, therefore, a decrease in security prices.

 

Investment securities held-to-maturity decreased $218,000 primarily due to maturities of $154,000 and principal repayments of $63,000.

 

Cash and short-term investments decreased from $13.6 million at December 31, 2003 to $9.4 million at June 30, 2004. These funds were used to facilitate loan growth.

 

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Table of Contents

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC. AND SUBSIDIARY

 

Total deposits increased 1.7%, from $302.5 million at December 31, 2003 to $307.5 million at June 30, 2004. Checking and savings accounts increased $8.1 million during the period while time deposits decreased $3.1 million. Hometown National Bank had a large number of customers with jumbo certificates and no other deposit relationship. The Bank made a strategic decision not to give a rate premium on these jumbo certificates without attracting the customers’ primary deposit accounts. This decision has helped attract new savings and checking deposits while better managing interest expense by not paying a premium for jumbo certificates without other deposit relationships.

 

Federal Home Loan Bank borrowings increased $2.7 million to $63.0 million at June 30, 2004. New advances of $9.7 million were partially offset by principal payments of $7.0 million.

 

Total stockholders’ equity decreased $43,000 during the period to $43.9 million at June 30, 2004. This was primarily the result of retained net income of $861,000 offset by a net unrealized loss of $818,000 on securities available for sale and payments of $183,000 for treasury stock.

 

Results of Operations

 

Net Income for the six-month periods ended June 30, 2004 and 2003. Net income was $1.7 million ($0.60 per share diluted) for the six months ended June 30, 2004 compared to $1.7 million ($0.64 per share diluted) for the six months ended June 30, 2003. The Company experienced increases in net interest income after the provision for loan losses and noninterest income, offset by an increase in noninterest expenses.

 

Net Income for the three-month periods ended June 30, 2004 and 2003. Net income was $861,000 ($0.31 per share diluted) for the three months ended June 30, 2004 compared to $1.0 million ($0.36 per share diluted) for the same period in 2003. An increase in noninterest income was offset by a decrease in net interest income after the provision for loan losses and an increase in noninterest expenses.

 

Net interest income for the six-month periods ended June 30, 2004 and 2003. Net interest income increased 6.1% from $6.0 million in 2003 to $6.4 million in 2004 due to an increase in interest-earning assets, partially offset by a decrease in the tax-equivalent interest rate spread.

 

Total interest income increased $511,000 to $10.9 million during the six months ended June 30, 2004 compared to the same period in 2003. The average balance of interest-earning assets increased from $335.9 million in 2003 to $386.4 million in 2004 while the average tax-equivalent yield on these assets decreased from 6.24% in 2003 to 5.71% in 2004. The decline in yield can be primarily attributed to the continued refinancing of residential mortgages and, to a lesser extent, the repricing of the investment portfolio at lower interest rates.

 

Total interest expense increased $146,000 during the six months ended June 30, 2004 compared to the six months ended June 30, 2003. Interest on Federal Home Loan Bank advances and on deposits increased $127,000 and $19,000, respectively. The average balance of interest-bearing liabilities increased from $291.4 million in 2003 to $336.7 million in 2004 while the average rate on these liabilities decreased from 2.96% in 2003 to 2.65% in 2004. As a result, the Bank’s tax-equivalent interest rate spread decreased from 3.28% during the first six months of 2003 to 3.06% for the same period in 2004.

 

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Table of Contents

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC. AND SUBSIDIARY

 

Net interest income for the three-month periods ended June 30, 2004 and 2003. Net interest income decreased from $3.4 million for the three months ended June 30, 2003 to $3.2 million for the same period in 2004 primarily due to a decrease in the tax-equivalent interest rate spread.

 

Total interest income decreased $220,000 for the three months ended June 30, 2004 compared to the same period in 2003. The decrease was caused by a decrease in the average tax-equivalent yield on interest-earning assets from 6.15% for the quarter ended June 30, 2003 to 5.65% for the quarter ended June 30, 2004. This decrease was partially offset by an increase in the average balance of interest-earning assets from $371.0 million in 2003 compared to $389.5 million in 2004.

 

Total interest expense decreased $18,000 for the three months ended June 30, 2004 compared to the same period in 2003. While the average balance of interest-bearing liabilities increased from $325.3 million in 2003 to $339.0 million in 2004, the average cost of these liabilities decreased from 2.77% in 2003 to 2.63% in 2004. The result was a decrease in the interest rate spread from 3.38% in 2003 to 3.02% in 2004.

 

Provision for loan losses. The provision for loan losses was $245,000 for the six month period ended June 30, 2004 as compared to $325,000 for the same period in 2003. During 2004, gross loans receivable increased $12.5 million. A significant portion of that growth is attributable to a $4.0 million short-term loan to a local municipality for which the source of repayment is tax revenues. Other significant increases include residential mortgages and home equity lines of credit, increasing $4.6 million and $2.8 million, respectively. However, the consistent application of management’s allowance methodology resulted in a slight decrease in the provision for loan losses due to the lower levels of nonperforming loans at June 30, 2004 compared to December 31, 2003.

 

Provisions for loan losses are charges to earnings to maintain the total allowance for loan losses at a level considered reasonable by management to provide for probable known and inherent loan losses based on management’s evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specified impaired loans and economic conditions. Although management uses the best information available, future adjustments to the allowance may be necessary due to changes in economic, operating, regulatory and other conditions that may be beyond the Bank’s control. While the Bank maintains the allowance for loan losses at a level that it considers adequate to provide for estimated losses, there can be no assurance that further additions will not be made to the allowance for loan losses and that actual losses will not exceed the estimated amounts.

 

The methodology used in determining the allowance for loan losses includes segmenting the loan portfolio by identifying risk characteristics common to groups of loans, determining and measuring impairment of individual loans based on the present value of expected future cash flows or the fair value of collateral, and determining and measuring impairment for groups of loans with similar characteristics by applying loss factors that consider the qualitative factors which may affect the loss rates.

 

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Table of Contents

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC. AND SUBSIDIARY

 

The allowance for loan losses was $2.5 million at June 30, 2004 compared to $2.4 million at December 31, 2003. Management has deemed these amounts as adequate on those dates based on its best estimate of probable known and inherent loan losses. At June 30, 2004, nonperforming loans amounted to $4.3 million compared to $5.2 million at December 31, 2003. Included in nonperforming loans are loans over 90 days past due secured by commercial mortgages in the amount of $647,000, residential mortgages of $568,000, consumer loans amounting to $153,000 and commercial loans of $97,000. These loans are accruing interest as the estimated value of the collateral and collection efforts are deemed sufficient to ensure full recovery. At June 30, 2004, nonaccrual loans amounted to $2.9 million compared to $2.6 million at December 31, 2003.

 

Noninterest income for the six-month periods ended June 30, 2004 and 2003. Noninterest income increased 17.4% to $1.3 million for the six months ended June 30, 2004 compared to $1.1 million for the six months ended June 30, 2003. Service charges on deposits increased $81,000 when comparing the two periods, primarily due to the increase in the number of transaction accounts. Mortgage brokerage fees and commission income increased $70,000 and $38,000, respectively, when comparing the two periods. During the six months ended June 30, 2003, the Bank recognized a gain of $51,000 on the sale of securities. No securities were sold during the same period of 2004.

 

Noninterest income for the three-month periods ended June 30, 2004 and 2003. Noninterest income for the quarter ended June 30, 2004 increased 19.0% to $708,000 compared to $595,000 for the quarter ended June 30, 2003. During this period in 2004, the Bank recognized a gain of $43,000 on the sale of property adjacent to the New Salisbury office. Mortgage brokerage fees for the second quarter of 2004 were $32,000. The Bank did not engage in mortgage brokerage activity during the same period of 2003.

 

Noninterest expense for the six-month periods ended June 30, 2004 and 2003. Noninterest expense increased 16.8% to $4.9 million for the six months ended June 30, 2004 compared to the same period in 2003. When comparing the two periods, compensation and benefits increased $597,000, primarily from the additional staff from three new offices, the two Hometown National Bank locations (see Note 3) and the new Jeffersonville, Indiana office that opened in May of 2003. This resulted in an increase of over 20% in the number of employees.

 

Occupancy and equipment expenses increased $61,000 comparing the first quarter of 2004 to the same period in 2003. The three additional facilities were the primary factor behind this increase. Other operating expenses were $42,000 higher in 2004 when comparing the same two periods. Fees for professional services and the amortization of the core deposit intangible related to the Hometown acquisition were the primary factors behind this increase.

 

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Table of Contents

PART I - ITEM 2

 

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC. AND SUBSIDIARY

 

Noninterest expense for the three-month periods ended June 30, 2004 and 2003. Noninterest expense increased 8.1% to $2.4 million for the three months ended June 30, 2004 compared to $2.3 million for the three months ended June 30, 2003. Compensation and benefits increased by $202,000 to account for the entire increase, primarily due to a reduction in compensation and benefit costs deferred in connection with loan originations.

 

The low interest rates of 2003 and corresponding large number of mortgage refinancings led to a reduction of compensation and benefits expense of $164,000 during the quarter ended June 30, 2003. For the same period in 2004, the Bank recorded deferrals of direct loan origination costs of $99,000 as the pace of loan originations declined. Other factors resulting in an increase in compensation and benefits include an increase in staff, insurance costs and the acceleration of the employee stock ownership plan benefits.

 

Income tax expense. Income tax expense for the six-month period ended June 30, 2004 was $867,000, compared to $907,000 for the same period in 2003. The effective tax rate decreased from 34.5% in 2003 to 33.9% in 2004. Income tax expense for the three-month period ended June 30, 2004 was $463,000, compared to $541,000 for the same quarter in 2003. The effective tax rate was 35.1% for the second quarter 2003 compared to 35.0% for the same period in 2004.

 

Liquidity and Capital Resources

 

The Bank’s primary sources of funds are customer deposits, proceeds from loan repayments, maturing securities and FHLB advances. While loan repayments and maturities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. At June 30, 2004, the Bank had cash and interest-bearing deposits with banks of $9.4 million and securities available-for-sale with a fair value of $66.4 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB of Indianapolis and collateral eligible for repurchase agreements.

 

The Bank’s primary investing activity is the origination of one-to-four family mortgage loans and, to a lesser extent, consumer, multi-family, commercial real estate and residential construction loans. The Bank also invests in U.S. Government and agency securities and mortgage-backed securities issued by U.S. Government agencies.

 

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

 

The Bank is required to maintain specific amounts of capital pursuant to OTS requirements. As of June 30, 2004, the Bank was in compliance with all regulatory capital requirements, which were effective as of such date with tangible, core and risk-based capital ratios of 9.0%, 9.0% and 14.0%, respectively. The regulatory requirements at that date were 1.5%, 3.0% and 8.0%, respectively.

 

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Table of Contents

PART I – ITEM 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

FIRST CAPITAL, INC. AND SUBSIDIARY

 

Qualitative Aspects of Market Risk. The Bank’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Bank has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. In order to reduce the exposure to interest rate fluctuations, the Bank has developed strategies to manage its liquidity, shorten its effective maturities of certain interest-earning assets and decrease the interest rate sensitivity of its asset base. Management has sought to decrease the average maturity of its assets by emphasizing the origination of short-term commercial and consumer loans, all of which are retained by the Bank for its portfolio. The Bank relies on retail deposits as its primary source of funds. Management believes retail deposits, compared to brokered deposits, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds.

 

Quantitative Aspects of Market Risk. The Bank does not maintain a trading account for any class of financial instrument nor does the Bank engage in hedging activities or purchase high-risk derivative instruments. Furthermore, the Bank is not subject to foreign currency exchange rate risk or commodity price risk.

 

The Bank uses interest rate sensitivity analysis to measure its interest rate risk by computing changes in net portfolio value (“NPV”) of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or decrease in market interest rates with no effect given to any steps that management might take to counter the effect of that interest rate movement. Using data compiled by the OTS, the Bank receives a report that measures interest rate risk by modeling the change in NPV over a variety of interest rate scenarios. This procedure for measuring interest rate risk was developed by the OTS to replace the “gap” analysis (the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a specific time period).

 

The following tables are provided by the OTS and set forth the change in the Bank’s NPV at December 31, 2003 and March 31, 2004, based on OTS assumptions that would occur in the event of an immediate change in interest rates, with no effect given to any steps that management might take to counteract that change. Due to the level of market interest rates over these time periods, the tables provide information for only a sustained 100 basis point decrease in market interest rates. Given the timing of the release of this information by the OTS, information as of June 30, 2004 is unavailable for inclusion in this report.

 

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Table of Contents

PART I – ITEM 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

FIRST CAPITAL, INC. AND SUBSIDIARIES

 

    At December 31, 2003

    Net Portfolio Value

    Net Portfolio Value as a

Change

In Rates


 

Dollar

    Amount    


 

Dollar

    Change    


   

Percent

    Change    


    Percent of Present Value of Assets

            NPV Ratio    

        Change    

    (Dollars in thousands)

300bp

  $34,141   $(12,197 )   (26 )%   8.60 %   (240)bp

200bp

  38,863   (7,474 )   (16 )   9.58     (142)bp

100bp

  43,158   (3,179 )   (7 )   10.43     (57)bp

Static

  46,337   —       —       11.00     —  bp

(100)bp

  45,463   (874 )   (2 )   10.70     (30)bp
    At March 31, 2004

    Net Portfolio Value

    Net Portfolio Value as a

Change

In Rates


 

Dollar

Amount


 

Dollar

Change


   

Percent

Change


    Percent of Present Value of Assets

        NPV Ratio

    Change

    (Dollars in thousands)

300bp

  $35,529   $(10,541 )   (23 )%   8.79 %   (200)bp

200bp

  40,205   (5,865 )   (13 )   9.74     (105)bp

100bp

  44,105   (1,965 )   (4 )   10.48     (30)bp

Static

  46,070   —       —       10.78     —  bp

(100)bp

  43,856   (2,214 )   (5 )   10.20     (58)bp

 

The preceding tables indicate that in the event of a sudden and sustained increase or decrease in prevailing market interest rates, the Bank’s NPV would be expected to decrease. The expected decrease in the Bank’s NPV is primarily attributable to the relatively high percentage of fixed-rate loans in the Bank’s loan portfolio. At June 30, 2004, approximately 70% of the loan portfolio consisted of fixed-rate loans.

 

Certain assumptions utilized by the OTS in assessing the interest rate risk of savings associations within its region were utilized in preparing the preceding table. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under differing interest rate scenarios, among others.

 

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the table.

 

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Table of Contents

PART I - ITEM 4

 

CONTROLS AND PROCEDURES

FIRST CAPITAL, INC. AND SUBSIDIARY

 

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

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Table of Contents

PART II

OTHER INFORMATION

FIRST CAPITAL, INC.

 

Item 1. Legal Proceedings

 

The Company is not a party to any legal proceedings. Periodically, there have been various claims and lawsuits involving the Bank, mainly as a plaintiff, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank’s business. The Bank is not a party to any pending legal proceedings that it believes would have a material adverse affect on its financial condition or operations.

 

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

Issuer Purchases of Equity Securities

 

The following table provides certain information with regard to shares repurchased by the company in the second quarter of 2004.

 

Period


   (a) Total
Number
of Shares
Purchased


  

(b) Average
Price

Paid

Per Share


  

(c) Total
Number

of Shares

Purchased
as Part of
Publicly
Announced
Plans or
Programs


   (d) Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs


April 1 through April 30, 2004

   77    23.10    77    319,647

May 1 through May 31, 2004

   1,405    23.48    1,405    318,242

June 1 through June 30, 2004

   —      —      —      318,242

Total

   1,482    23.46    1,482    318,242

 

On January 4, 2001, the Company announced a stock repurchase program to purchase up to 101,000 shares of its outstanding common stock. On September 30, 2002, the Board of Directors authorized an increase in the stock repurchase program in connection with the merger of Hometown Bancshares whereby the Company would purchase up to 345,000 shares of its outstanding common stock. The stock repurchase program expires upon the purchase of the maximum number of shares authorized under the program.

 

The Company has purchased eight shares of its common stock from the First Harrison Bank Employee Stock Ownership Plan representing the aggregate amount of fractional shares of terminated participants.

 

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Table of Contents

PART II

OTHER INFORMATION

FIRST CAPITAL, INC.

 

Item 3. Defaults upon Senior Securities

 

Not applicable.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

The Annual Meeting of Stockholders of the Company was held on April 21, 2004. There were 2,818,527 shares entitled to vote at the time of the annual meeting. Holders of 2,141,665 shares were represented at the meeting. The results of the vote on the matters presented at the meeting were as follows:

 

  1. The following individuals were elected as directors:

 

Name


  

Vote

For


   Vote
Withheld


   Term to
Expire


Samuel E. Uhl

   2,071,631    70,034    2007

Mark D. Shireman

   2,101,547    40,034    2007

Michael L. Shireman

   2,098,265    43,400    2007

James S. Burden

   2,101,960    39,705    2007

James E. Nett

   2,101,960    39,705    2007

 

The terms of directors J. Gordon Pendleton, Gerald L. Uhl, Dennis L. Huber, William W. Harrod, John W. Buschemeyer, Kenneth R. Saulman and Kathryn W. Ernstberger continued after the annual meeting.

 

  2. The appointment of Monroe Shine & Co., Inc. as auditors for the Company for the fiscal year ending December 31, 2004 was ratified by stockholders by the following vote:

 

For 2,106,152; Against 21,929; Abstain 13,584

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits and Reports on Form 8-K

 

(a) Exhibits

 

  3.1 Articles of Incorporation of First Capital, Inc. (1)

 

  3.2 Second Amended and Restated Bylaws of First Capital, Inc. (6)

 

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Table of Contents

PART II

OTHER INFORMATION

FIRST CAPITAL, INC.

 

Item 6. Exhibits and Reports on Form 8-K - (continued)

 

  10.1 Employment Agreement with James G. Pendleton (3)

 

  10.2 Employment Agreement with Samuel E. Uhl (2)

 

  10.3 Employment Agreement with M. Chris Frederick (2)

 

  10.4 Employment Agreement with Joel E. Voyles (2)

 

  10.5 Employee Severance Compensation Plan (3)

 

  10.6 First Federal Bank, A Federal Savings Bank 1994 Stock Option Plan (as assumed by First Capital, Inc. effective December 31, 1998) (4)

 

  10.7 First Capital, Inc. 1999 Stock-Based Incentive Plan (5)

 

  10.8 1998 Officers’ and Key Employees’ Stock Option Plan for HCB Bancorp (5)

 

  10.9 Employment Agreement with William W. Harrod (2)

 

  11.0 Statement Regarding Computation of Per Share Earnings (incorporated by reference to Note 4 of the Unaudited Consolidated Financial contained herein)

 

  31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

 

  31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

 

  32.1 Section 1350 Certification of Chief Executive Officer

 

  32.2 Section 1350 Certification of Chief Financial Officer

 

(b) Reports on Form 8-K

 

On April 26, 2004, the Company filed a Form 8-K to announce its earnings for the quarter ended March 31, 2004.


(1) Incorporated by reference from the Exhibits filed with the Registration Statement on Form SB-2, and any amendments thereto, Registration No. 333-63515.
(2) Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 1999.
(3) Incorporated by reference to the Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998.
(4) Incorporated by reference from the Exhibits filed with the Registration Statement on Form S-8, and any amendments thereto, Registration Statement No. 333-76543.
(5) Incorporated by reference from the Exhibits filed with the Registration Statement on Form S-8, and any amendments thereto, Registration Statement No. 333-95987.
(6) Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 2001.

 

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Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    FIRST CAPITAL, INC.
    (Registrant)
Dated August 16, 2004   BY:  

/s/ William W. Harrod


        William W. Harrod
        President and CEO
Dated August 16, 2004   BY:  

/s/ Michael C. Frederick


        Michael C. Frederick
        Senior Vice President
        and Treasurer

 

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