-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SpsNU90WkpnyPN/T556yE1vP1alrSWM8PO1aic7SSyA2kQrnoRtRf+eG3hBHI1jK CPYCEKiGWSomX8qdmzNKpg== 0000899243-99-001088.txt : 19990517 0000899243-99-001088.hdr.sgml : 19990517 ACCESSION NUMBER: 0000899243-99-001088 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST CAPITAL INC CENTRAL INDEX KEY: 0001070296 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] STATE OF INCORPORATION: IN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 333-76543 FILM NUMBER: 99624585 BUSINESS ADDRESS: STREET 1: 220 FEDERAL DRIVE N W CITY: CORYDON STATE: IN ZIP: 47112 BUSINESS PHONE: 8127382198 MAIL ADDRESS: STREET 1: 220 FEDERAL DRIVE N W CITY: CORYDON STATE: IN ZIP: 47112 10QSB 1 FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (Mark One) ---------- (X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 1999 -------------- 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 Check whether the issuer (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[ ] APPLICABLE ONLY TO CORPORATE ISSUERS; Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 1,291,824 shares of common stock were outstanding as of April 30, 1999. FIRST CAPITAL, INC. INDEX
PART I FINANCIAL INFORMATION PAGE ---- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets as of March 31, 1999 (unaudited) and June 30, 1998 3 Consolidated Statements of Income for the three months and nine months ended March 31, 1999 and 1998 (unaudited) 4 Consolidated Statements of Cash Flows for the nine months ended March 31, 1999 and 1998 (unaudited) 5 Notes to consolidated financial statements (unaudited) 6-8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-14 PART II. OTHER INFORMATION 15-16 SIGNATURES 17
-2- PART I - FINANCIAL INFORMATION FIRST CAPITAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30, --------- -------- 1999 1998 ---- ---- (Unaudited) * ASSETS (In Thousands) Cash and due from banks $ 1,365 $ 895 Interest bearing deposits with banks 4,221 5,240 Securities available for sale, at fair value 20,665 4,848 Securities-held to maturity: Mortgage-backed securities 826 1,473 Other debt securities 4,000 1,580 Loans receivable, net 79,877 74,887 Federal Home Loan Bank stock, at cost 612 589 Foreclosed real estate - 104 Premises and equipment 3,356 2,601 Accrued interest receivable 620 532 Cash value of life insurance 1,073 1,038 Other assets 220 171 -------------------------------- TOTAL ASSETS $ 116,835 $ 93,958 ================================ LIABILITIES Deposits $ 85,903 $ 77,462 Advances from Federal Home Loan Bank 12,250 5,250 Advance payments by borrowers for taxes and insurance 65 34 Accrued interest payable on deposits 539 373 Accrued expenses and other liabilities 576 498 -------------------------------- Total Liabilities 99,333 83,617 -------------------------------- 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 1,291,824 shares 13 13 Additional paid-in capital 9,444 2,154 Retained earnings-substantially restricted 8,751 8,171 Unearned ESOP shares (595) - Accumulated other comprehensive income-net unrealized gain on securities available for sale (111) 3 -------------------------------- Total Stockholders' Equity 17,502 10,341 -------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 116,835 $ 93,958 ================================
* Derived from audited financial statements 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 NINE MONTHS ENDED MARCH 31, MARCH 31, --------- --------- 1999 1998 1999 1998 ---- ---- ---- ---- INTEREST INCOME (In Thousands, except per share data) Loans receivable $ 1,623 $ 1,554 $ 4,852 $ 4,622 Mortgage-backed securities 55 28 106 91 Other securities 235 58 512 227 Federal Home Loan Bank dividends 11 11 35 34 Interest bearing deposits with banks 53 38 149 130 --------------------- ---------------------- Total interest income 1,977 1,689 5,654 5,104 INTEREST EXPENSE Deposits 992 949 2,986 2,846 Advances from Federal Home Loan Bank 97 56 248 232 --------------------- ---------------------- Total interest expense 1,089 1,005 3,234 3,078 Net interest income 888 684 2,420 2,026 Provision for loan losses 11 - 29 - --------------------- ---------------------- Net interest income after provision for loan losses 877 684 2,391 2,026 NON-INTEREST INCOME Loan fees and service charges 9 11 38 29 Gain on sale of premises and equipment - - - 169 Service charges on deposit accounts 40 31 121 89 Other income 22 25 57 58 --------------------- ---------------------- Total non-interest income 71 67 216 345 --------------------- ---------------------- NON-INTEREST EXPENSE Compensation and benefits 275 214 758 647 Occupancy and equipment 107 74 291 231 Deposit insurance premiums 12 11 34 33 Other operating expenses 121 85 330 280 --------------------- ---------------------- Total non-interest expense 515 384 1,413 1,191 --------------------- ---------------------- Income before income taxes 433 367 1,194 1,180 Income tax expense 165 140 457 447 --------------------- ---------------------- NET INCOME 268 227 737 733 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Unrealized gain (loss) on securities: Unrealized holding gains (losses) arising during the period (134) - (114) 10 Less: reclassification adjustment - - - - --------------------- ---------------------- Other comprehensive income (loss) (134) - (114) 10 --------------------- ---------------------- COMPREHENSIVE INCOME $ 134 $ 227 $ 623 $ 743 ===================== ====================== NET INCOME PER COMMON SHARE, BASIC $ 0.21 $ 0.18 $ 0.57 $ 0.57 ===================== ====================== NET INCOME PER COMMON SHARE, DILUTED $ 0.21 $ 0.18 $ 0.57 $ 0.57 ===================== ======================
See accompanying notes to consolidated financial statements. -4- PART I - FINANCIAL INFORMATION FIRST CAPITAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED MARCH 31, 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES (In Thousands) Net income $ 737 $ 733 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of premiums and accretion of discounts (2) - Depreciation expense 146 125 Gain on sale of premises and equipment - (169) Deferred income taxes 2 1 ESOP compensation expense 21 - Provision for loan losses 29 - ( Increase) decrease in accrued interest receivable (88) 94 Increase in accrued interest payable 166 299 Net change in other assets/liabilities 136 110 ----------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,147 1,193 ----------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net decrease in interest bearing deposits with banks 1,019 1,515 Purchase of securities available for sale (22,195) - Proceeds from maturities of securities available for sale 6,195 - Proceeds from maturities of securities held to maturity 1,580 2,785 Purchase of securities held to maturity (4,000) - Principal collected on mortgage-backed securities 647 - Net increase in loans receivable (4,915) (4,014) Purchase of Federal Home Loan Bank stock (23) - Proceeds from sale of premises and equipment - 425 Purchase of premises and equipment (901) (582) Increase in cash value of life insurance (35) (36) ----------------------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (22,628) 93 ----------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 8,441 3,808 Net increase in advances from Federal Home Loan Bank 7,000 (5,000) Net proceeds from issuance of common stock 6,667 - Exercise of stock options - 22 Dividends paid (157) (107) ----------------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 21,951 (1,277) ----------------------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 470 9 Cash and due from banks at beginning of period 895 1,245 ----------------------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 1,365 $ 1,254 =======================
See accompanying notes to consolidated financial statements. -5- FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. PRESENTATION OF INTERIM INFORMATION First Capital, Inc. ("Company") was incorporated by First Federal Bank, a Federal Savings Bank ("Bank") in September 1998 in connection with the conversion from the mutual holding company form of organization to the stock holding company form of organization. Upon consummation of the conversion on December 31, 1998, the Company became the holding company for the Bank and the former mutual holding company, First Capital, Inc., M.H.C. ("MHC") was merged with and into the Bank. Accordingly, the information presented in this report relates primarily to the Bank's operations. In the opinion of the management, the unaudited consolidated financial statements include all normal adjustments considered necessary to present fairly the financial position as of March 31, 1999, and the results of operations for the three months and nine months ended March 31, 1999 and 1998 and cash flows for the nine months ended March 31, 1999 and 1998. All of these adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements and notes are presented as permitted by Form 10-QSB, and do not contain certain information included in the Company's annual audited consolidated financial statements. The consolidated financial statements include the accounts of the Company and the Bank. All material intercompany balances and transactions have been eliminated in consolidation. 2. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Nine Months Ended March 31, --------- 1999 1998 ---- ---- (In Thousands) Cash payments for: Interest $ 3,072 $ $2,779 Taxes 405 330 Noncash investing activity: Proceeds from sales of foreclosed real estate financed through loans 104 -
3. CONVERSION AND STOCK OFFERING On December 31, 1998, the MHC and Bank completed a conversion and stock offering whereby the MHC was merged with and into the Bank with the Bank becoming a wholly-owned subsidiary of the Company which offered common stock to certain current and former depositor and borrower customers of the Bank in a subscription offering. The Company issued 768,767 shares of common stock for gross proceeds of $7,687,670 as a result of the offering. Total expenses in connection with the conversion and offering amounted to $405,854 and were charged against the proceeds from the offering. The Company also issued 523,057 common shares in exchange for the 204,015 common shares held by the public stockholders of the Bank pursuant to an exchange ratio resulting in the public stockholders of the Bank owning in the aggregate approximately 40.5% of First Capital, Inc. after the conversion and offering. The conversion was accounted for as a pooling of interests and accordingly, the June 30, 1998 balance sheet has been restated. -6- FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 3. CONVERSION AND STOCK OFFERING - CONTINUED In connection with the conversion, the Bank has established a leveraged employee stock ownership plan (ESOP) which acquired 8% of the common stock issued in the offering (61,501 common shares) funded by a term loan from the Company. The Bank will make annual contributions to the ESOP equal to the debt service requirements of the term loan. The ESOP shares are pledged as collateral for the loan and as the debt is repaid shares are released from collateral and allocated to participants. The ESOP shares pledged as collateral are reported as unearned ESOP shares in the balance sheet and the Company reports compensation cost equal to the current fair value of the ESOP shares released from collateral. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest. 4. COMPREHENSIVE INCOME The Company adopted FASB Statement No. 130, "Reporting Comprehensive Income," effective July 1, 1998. This Statement established standards for reporting and displaying comprehensive income and its components. 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 unrealized gains and losses on securities available for sale. The following tables set forth the components of other comprehensive income and the allocated income tax amounts for the three and nine months ended March 31, 1999 and 1998:
THREE MONTHS ENDED NINE MONTHS ENDED March 31, MARCH 31, --------- --------- 1999 1998 1999 1998 -------- -------- -------- -------- Unrealized gains on securities: Unrealized holding gains (losses) arising during the period $(222) $ - $(188) $ 16 Income tax expense (benefit) (88) - (74) 6 ----- -------- ----- ----- Net of tax amount (134) - (114) 10 ----- -------- ----- ----- Less: reclassification adjustment for (gains) losses included in net income - - - - Income tax expense (benefit) - - - - ----- -------- ----- ----- Other comprehensive income (loss) $(134) $ - $(114) $ 10 ===== ======== ===== =====
-7- FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 5. SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in Thousands, except per share data) Basic: Earnings: Net income $ 269 $ 227 $ 737 $ 733 ----------------------------- --------------------------- Shares: Weighted average common shares outstanding 1,291,824 1,291,824 1,291,824 1,291,824 ----------------------------- --------------------------- Net income per common share, basic $ 0.21 $ 0.18 $ 0.57 $ 0.57 ============================= =========================== Diluted: Earnings: $ 269 $ 227 $ 737 $ 733 ----------------------------- --------------------------- Shares: Weighted average common shares outstanding 1,291,824 1,291,824 1,291,824 1,291,824 Add: Dilutive effect of outstanding options 8,329 4,263 5,408 4,263 ----------------------------- --------------------------- Weighted average common shares outstanding, as adjusted 1,300,153 1,296,087 1,297,232 1,296,087 ----------------------------- --------------------------- Net income per common share, diluted $ 0.21 $ 0.18 $ 0.57 $ 0.57 ============================= ===========================
-8- 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; the Company's ability to remedy any computer malfunctions that may result from the advent of the Year 2000; 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. The Company assumes no obligation to update any forward-looking statements. FINANCIAL CONDITION Total assets increased 24.3% from $94.0 million at June 30, 1998 to $116.8 million at March 31, 1999, primarily as a result of increases in cash, investment securities and loans receivable, net, which was funded primarily by the net proceeds from the issuance of common stock in the conversion, growth in deposits and an increase in advances from the Federal Home Loan Bank of Indianapolis. Loans receivable, net, were $74.9 million at June 30, 1998, compared to $79.9 million at March 31, 1999, a 6.7% increase. The investment in mortgage-backed securities held-to-maturity decreased from $1.5 million at June 30, 1998 to $826,000 at March 31, 1999 as a result of repayments of $647,000. Other debt securities held to maturity increased from $1.6 million at June 30, 1998 to $4.0 million at March 31, 1999. During the nine month period ended March 31, 1999, the Company purchased other debt securities of $4.0 million and had maturities of other debt securities with a carrying value of $1.6 million. Securities available for sale increased $15.9 million from $4.8 million at June 30, 1998 to $20.7 million at March 31, 1999 as a result of purchases of $22.2 million and maturities of $6.2 million. Cash and interest bearing deposits with banks decreased from $6.1 million at June 30, 1998 to $5.6 million at March 31, 1999 as a result of the investment in loans and investment securities. -9- PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST CAPITAL, INC. AND SUBSIDIARY Total deposits increased from $77.5 million at June 30, 1998 to $85.9 million at March 31, 1999. The increase in deposits resulted primarily from growth in demand and savings deposit accounts, which management attributes primarily to its promotional efforts to attract lower cost accounts. Total stockholders' equity increased from $10.3 million at June 30, 1998 to $17.5 million at March 31, 1999 as a result of retained net income of $580,000 and net proceeds from issuance of common stock of $6.7 million. RESULTS OF OPERATIONS NET INCOME. Net income was $737,000 ($.57 per share diluted) for the nine months ended March 31, 1999 compared to $733,000 ($.57 per share diluted) for the nine months ended March 31, 1998. The results for 1998 included a one-time gain of $105,000, net of tax, associated with the sale of the Bank's old main office property. Excluding this one-time gain, net income increased $109,000 for 1999 compared to 1998 primarily from an increase in net interest income offset by an increase in non-interest expenses. Net income for the three months ended March 31, 1999 was $268,000 compared to $227,000 for the three months ended March 31, 1998. The increase in net income for 1999 compared to 1998 resulted primarily from an increase in net interest income offset by an increase in non-interest expenses. NET INTEREST INCOME FOR THE NINE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998. Net interest income increased 19.4% from $2.0 million in 1998 to $2.4 million in 1999 as a result of the increase in interest-earning assets during 1999 and a decrease in the average cost of funds in 1999 compared to the same period in 1998. Total interest income increased $550,000, or 10.8%, to $5.7 million for the nine months ended March 31, 1999 compared to $5.1 million in the prior year as a result of a higher balance of interest-earning assets. Interest on loans receivable increased $230,000 and interest on other debt securities increased $285,000 as a result of a higher average balance in 1999. Total interest expense increased $156,000, or 5.7%, to $3.2 million for the nine months ended March 31, 1999 compared to $3.1 million for the nine months ended March 31, 1998 as a result of the growth in deposits and an increase in average borrowings from the Federal Home Loan Bank. The average yield on interest-earnings assets decreased from 8.16% in 1998 to 7.95% in 1999 while the average cost of interest-bearing liabilities decreased from 5.48% in 1998 to 5.09% in 1999 because of lower market interest rates. NET INTEREST INCOME FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998. Net interest income increased from $684,000 for 1998 to $888,000 for 1999 primarily as a result of the increase in interest-earning assets during the three months ended March 31, 1999 compared to 1998. Total interest income increased $288,000, or 17.1%, to $2.0 million for the three months ended March 31, 1999 compared to $1.7 million for the three months ended March 31, 1998. -10- PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST CAPITAL, INC. AND SUBSIDIARY Total interest expense increased $84,000, or 8.4%, to $1.1 million for the three months ended March 31, 1999 compared to $1.0 million for the three months ended March 31, 1998 due to the growth in deposits. PROVISION FOR LOAN LOSSES. The provision for loan losses was $11,000 for the three month period ending March 31, 1999 and $29,000 for the nine month period ending March 31, 1999. There was no provision for loan losses for the comparable periods in 1998 because the allowance for loan losses was considered adequate based upon management's evaluation. Provisions for loan losses are charged to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for estimated 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. The Bank made provisions of $29,000 for the nine months ended March 31, 1999 to increase the allowance for loan losses to an amount considered reasonable by management based on an evaluation as of March 31, 1999. The allowance was increased due to an increase in commercial real estate and unsecured personal loans, which possess a higher inherent risk of loss than one-to-four family residential mortgage loans. 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 its allowance for loan losses at a level which 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. NON-INTEREST INCOME. Non-interest income decreased 37% to $216,000 for the nine months ended March 31, 1999 compared to $345,000 for the nine months ended March 31, 1998. The decrease is primarily the result of a one-time gain of $169,000 in 1998 associated with the sale of the Bank's old main office property. Service charges on deposit accounts increased $32,000 for the nine month period in 1999 compared to 1998 due to the growth in transaction accounts during 1999. NON-INTEREST EXPENSE. Non-interest expense increased by $222,000 for the nine month period ended March 31, 1999. The increase results primarily from increases in compensation and benefits and occupancy and equipment expenses. Compensation and benefits expense increased $111,000 due to normal compensation increases and additional staff in the loan department in 1999. Occupancy and equipment costs have increased in 1999 compared to 1998 as a result of increased depreciation charges on the new main office and expenses related to the Year 2000 issue. The Bank also experienced higher costs due to the opening of a new facility in New Salisbury, Indiana in March 1999. The Bank had been operating a temporary facility in New Salisbury since November 1998. INCOME TAX EXPENSE. Income tax expense for the nine month period ended March 31, 1999 was $457,000, compared to $447,000 for the same period in 1998. The effective tax rate for 1999 is 38.3% compared to 37.9% for 1998. -11- PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST CAPITAL, INC. AND SUBSIDIARY 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 March 31, 1999, the Bank had cash and interest- bearing deposits with banks of $5.6 million and securities available-for-sale with a fair value of $14.8 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. 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. Current OTS regulations require savings institutions to maintain an average daily balance of liquid assets (cash and eligible investments) equal to at least 4.0% of the average daily balance of its net withdrawable deposits and short- term borrowings. Historically, the Bank has maintained liquidity levels in excess of regulatory requirements. At March 31, 1999, the Bank's liquidity was 11.8%. The Bank is required to maintain specific amounts of capital pursuant to OTS requirements. As of March 31, 1999, 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 12.36%, 12.36% and 23.88%, respectively. The regulatory requirements at that date were 1.5%, 3.0% and 8.0%, respectively. YEAR 2000 ISSUES The Bank is a user of computers, computer software, and equipment utilizing embedded microcontrollers that will be affected by the Year 2000 ("Y2K") issue. The Y2K issue exists because many computer systems and applications use two- digit date fields to designate a year. As the century date change occurs, date sensitive systems may incorrectly recognize the year 2000. This inability to recognize or properly treat the Y2K issue may cause systems to process financial and operational information incorrectly. The Y2K issue presents several potential risks to the Bank: 1. The banking transactions of the Bank's customers are processed by one or more computer systems, either internal or external to the Bank. The failure of one or more of those systems to function as a result of the Y2K date change could result in the Bank's inability to properly process customer transactions. If that were to occur, the Bank could lose customers to other financial institutions, resulting in a loss of revenue. -12- PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST CAPITAL, INC. AND SUBSIDIARY 2. A number of the Bank's borrowers utilize computers and computer software to varying degrees in conjunction with the operation of their businesses. The customers and suppliers of those businesses may utilize computers as well. Should the Bank's borrowers, or the businesses on which they depend, experience Y2K related computer problems, such borrowers' cash flow could be disrupted, adversely affecting their ability to repay their loans with the Bank. 3. Concern on the part of certain depositors that the Y2K related problems could impair access to their deposit account balances following the Y2K date change could result in the Bank experiencing a deposit outflow prior to December 31, 1999. 4. The Bank contracts with several outside third parties for certain of its data processing and account servicing functions. Should the systems of one or more of those third parties fail to function properly after December 31, 1999, the Bank could be adversely affected. 5. Should the Y2K related problems occur which cause any of the Bank's systems, or the systems of the third parties upon which the Bank depends, to become inoperative, increased personnel costs could be incurred if additional staff is required to perform functions that the inoperative systems would have otherwise performed. 6. Certain utility services, such as electrical power and telecommunication services, could be disrupted if those services experience Y2K related problems. The Bank's Y2K contingency plan will address such possible situations. Management believes it is not possible to estimate the potential lost revenue due to the Y2K issue, as the extent and longevity of such potential problems cannot be predicted. The Bank adopted a Y2K Action Plan in November 1998 to assess all systems to insure that they will function properly in the Y2K. This process involves separate phases which include: awareness, assessment, renovation, validation, and implementation. During 1997, the Bank completed the systems assessment phase, identifying each internal system that could potentially be affected by the Y2K issue. Those systems include the Bank's in-house microcomputer systems and third party providers as well as equipment such as the alarm system, vault locks, telephone system, etc., that may contain embedded microprocessors. For each such system, an action plan was created to set forth the process for determining whether or not the system is Y2K compliant. Those determinations involved obtaining Y2K compliant certifications from vendors wherever possible, and by the Bank conducting its own validation testing. The Bank has identified major commercial borrowers to assess their Y2K readiness and has requested information from those borrowers. The Bank expects to receive responses and evaluate those borrowers by June 30, 1999. When the results of the Bank's validation testing programs have revealed that a particular system is not Y2K compliant, a contingency plan is formulated to either upgrade the system in order to meet the Y2K compliance requirements or replace the system with one that is certified as Y2K compliant. The Bank is currently in the validation and implementation phases of this process. -13- PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST CAPITAL, INC. AND SUBSIDIARY Other third parties upon which the Bank depends for processing include the Bank's automated teller machine network processor, correspondent banks, brokerage firms, and the pension plan administrator. These third parties have indicated their compliance or intended compliance with the Y2K. Should the testing of any third-party system or service reveal that such system or service is not Y2K compliant, a specific deadline will be set by which time the system or service must be brought into Y2K compliance. Should Y2K compliance not be achieved by the specified deadlines, the Bank has developed a contingency plan for each such external system or service. Those contingency plans document the action the Bank will take for each such non-compliant system. In certain cases, such as the potential loss of electrical power or telecommunication services due to Y2K problems, testing by the Bank is either not practical or not possible. In those cases, contingency plans have been designed that specify how the Bank will deal with such potential situations. For example, the Bank is considering the purchase or lease of an electrical power generator with sufficient capacity to allow the Bank to maintain critical functions in the event power from the electric utility is interrupted. The Bank, as a federally chartered thrift institution, is regulated by the Office of Thrift Supervision. The federal regulators have established specific guidelines and time tables to follow in addressing the Y2K issue. The Bank is currently in compliance with the federally mandated Y2K guidelines and time tables. As of March 31, 1999, the Bank is on schedule with its internal Y2K preparation efforts. All internal systems identified in the assessment phase of the project that are considered "mission critical" have either been tested for Y2K compliance or will be tested by June 30, 1999. The Bank's in-house computer system, its most critical processing system, has been certified by its respective hardware and software vendors as being Y2K compliant. The Bank has begun testing the system for Y2K compatibility and the testing to date has indicated that the system is Y2K compliant. All systems that have been determined to be Y2K compliant will be retested during 1999 following any material upgrades or enhancements. The Bank has replaced non-compliant microcomputer equipment and has installed and tested the related software for Y2K compliance. Other equipment containing embedded microprocessors have been certified as Y2K compliant by the applicable vendors. The Bank's estimated total cost to replace computer equipment, software programs, or other equipment containing embedded microprocessors that were not Y2K compliant, is approximately $65,000. As of March 31, 1999, approximately $30,000 has been incurred. System maintenance or modification costs are being expensed as incurred, while the cost of new hardware, software, or other equipment, is capitalized and amortized over their estimated useful lives. -14- PART II OTHER INFORMATION FIRST CAPITAL, INC. ITEM 1. 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 it's financial condition or operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit ------- 3.1 Articles of Incorporation of First Capital, Inc. (incorporated by reference to Exhibit 3.1 of Registration Statement on Form SB-2, as amended, File No. 333-63515) 3.2 Bylaws of First Capital, Inc. (incorporated by reference to Exhibit 3.2 of Registration Statement on Form SB-2, as amended, File No. 333-63515) 8.1 Employment Agreement with James G. Pendleton (incorporated by reference to Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998) 8.2 Employment Agreement with Samuel E. Uhl (incorporated by reference to Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998) 8.3 Employment Agreement with M. Chris Frederick (incorporated by reference to Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998) -15- PART II OTHER INFORMATION FIRST CAPITAL, INC. 8.4 Employment Agreement with Joel E. Voyles (incorporated by reference to Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998) 8.5 Employee Severance Compensation Plan (incorporated by reference to Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998) 27 Financial Data Schedule No reports on Form 8-K were filed during the period covered by this report. -16- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. FIRST CAPITAL, INC. (Registrant) Dated May 11, 1999 BY: /s/James G. Pendleton__ ------------------- -------------------------- James G. Pendleton Chairman and CEO Dated May 11, 1999 BY: /s/ Michael C. Frederick ------------------- --------------------------- Michael C. Frederick Senior Vice President and Treasurer -17- EX-27 2 FINANCIAL DATA SCHEDULE
9 This schedule contains financial information extracted from the consolidated financial statements of First Capital, Inc. for the nine months ended March 31, 1999 and is qualified in its entirety by reference to such financial statements. (Dollars in thousands.) 9-MOS JUN-30-1999 JUL-01-1998 MAR-31-1999 1,365 4,221 0 0 20,665 4,826 4,810 79,877 467 116,835 85,903 12,250 1,180 0 0 0 9,457 8,045 116,835 4,852 653 149 5,654 2,986 3,234 2,420 29 0 1,413 1,194 1,194 0 0 737 0.57 0.57 7.95 0 0 0 0 516 78 0 467 467 0 0
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