EX-13 4 dex13.txt EXHIBIT 13 EXHIBIT 13.0 ANNUAL REPORT TO STOCKHOLDERS -------------------------------------------------------------------------------- FIRST CAPITAL, INC. -------------------------------------------------------------------------------- TABLE OF CONTENTS Page Letter to Stockholders................................................... 2 Selected Financial and Other Data........................................ 3-4 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 5-13 Independent Auditor's Report............................................. 14 Consolidated Financial Statements........................................ 15-18 Notes to Consolidated Financial Statements............................... 19-39 Board of Directors....................................................... 40 Corporate Information.................................................... 41-42 BUSINESS OF THE COMPANY First Capital, Inc. (the Company) is the thrift holding company of First Harrison Bank (formerly First Federal Bank, a Federal Savings Bank) (the Bank). The Company became the holding company for the Bank on December 31, 1998 in connection with the conversion of the Bank's former mutual holding company, First Capital, Inc., MHC (the MHC), from the mutual to stock form of organization and the simultaneous reorganization of the Bank as a wholly-owned subsidiary of the Company (the Conversion and Reorganization). The Bank's deposit accounts are insured up to applicable legal limits by the Federal Deposit Insurance Corporation through the Savings Association Insurance Fund. The Bank is a member of the Federal Home Loan Bank System. The Bank conducts its operations through its nine locations in Southern Indiana. The Bank's main office is located at 220 Federal Drive, N.W., Corydon, Indiana. The telephone number is (812) 738-2198. The Bank is a community-oriented financial institution offering traditional financial services primarily to residents of Harrison County, Indiana, and contiguous counties. The Bank's primary business is attracting deposits from the general public and using those funds to originate one-to-four family residential mortgage loans. The Bank also originates multi-family and commercial real estate loans primarily secured by properties located in Southern Indiana. To a lesser extent, the Bank originates commercial and consumer loans. The Bank's wholly-owned subsidiary, First Harrison Financial Services, Inc., sells property and casualty insurance and non-deposit investment products. -1- [LOGO OF FIRST CAPITAL, INC.] Dear Shareholders: First Capital, Inc. had a record year; we would like to thank our shareholders, customers, and staff for helping achieve our goals. Your continued confidence in the company is appreciated and reflected in an increased stock price, ending the year at $14.40 per share. Management focused on four major goals in 2001. Our first goal was to continue to grow First Capital, Inc., while tightly managing our expenses. Our efficiency ratio of 54.79% ranks us among the top performers for Indiana Thrift Institutions. The efficiency ratio is the amount of non-interest expense it takes to make one dollar of gross income. We are confident we can continue to improve our efficiency ratio as we manage our planned loan growth and expansion. Our second goal was to continue to look for ways to efficiently use our capital. We had very good loan growth in 2001. We expect continued positive growth; however we realize that economic conditions could impact the level of loan growth, as we strive to maintain strong asset quality. Our deposits grew 10.12% over last year. Credit should go to our branch staffs and our Pricing Committee for this excellent growth. Many banks have struggled with deposit growth. Our branch staffs and marketing efforts have helped us grow, while maintaining our net interest margin and our profitability objectives. Our third goal was and is to deliver the best customer service in all the markets we serve. To this end, we will be making a major investment in technology in 2002. This will speed up delivery of information to customers, allow us to better sell services to customers and non-customers, and support further growth without adding people. We will complete this project by late 2002. Our last goal will always be our continued long-standing tradition of supporting our communities with our time and our money. In 2001, we funded a scholarship at Ivy Tech, we were a major contributor to our new YMCA, we sponsored the Economic Forum and Forecast at Indiana University Southeast, and our staff led the community in major donations to United Way, Relay for Life, American Heart Walk, and many others. Our staff also gave of their time working at the Harrison County Fair, reading books to youth at our adopted school, New Middletown School, worked with the County on a reading program to improve literacy and many other programs. As you can see, your company stands for many things and you should be proud to be a shareholder of First Capital, Inc. We are proud to have you as a shareholder and appreciate your continued support. Sincerely, /s/ WILLIAM W. HARROD /s/ J. GORDON PENDLETON ----------------------- ----------------------- William W. Harrod J. Gordon Pendleton President and CEO Chairman of the Board -2- -------------------------------------------------------------------------------- SELECTED FINANCIAL AND OTHER DATA -------------------------------------------------------------------------------- The financial data presented below is qualified in its entirety by the more detailed financial data appearing elsewhere in this report, including the Company's audited financial statements. The following tables set forth certain information concerning the financial position and results of operations of the Company at the dates indicated. FINANCIAL CONDITION DATA:
At December 31, ------------------------------ 2001 2000 1999 -------- -------- -------- (In thousands) Total assets $282,823 $248,582 $222,797 Cash and interest-bearing deposits (1) 12,382 11,469 9,522 Federal funds sold -- -- 4,000 Securities available for sale 54,891 34,779 30,097 Securities held to maturity 1,836 11,229 12,325 Loans receivable, net 201,730 179,304 154,982 Deposits 204,122 185,368 175,342 Advances from Federal Home Loan Bank 42,825 30,074 16,750 Stockholders' equity, substantially restricted 33,481 31,108 28,877
OPERATING DATA:
For the Year Ended December 31, ------------------------------- 2001 2000 1999 -------- -------- -------- (In thousands) Interest income $ 18,960 $ 17,363 $ 15,101 Interest expense 9,842 9,267 7,566 -------- -------- -------- Net interest income 9,118 8,096 7,535 Provision for loan losses 66 48 142 -------- -------- -------- Net interest income after provision for loan losses 9,052 8,048 7,393 -------- -------- -------- Noninterest income 1,675 1,219 1,031 Noninterest expense (2) 5,914 5,629 5,574 -------- -------- -------- Income before income taxes 4,813 3,638 2,850 Income tax expense 1,714 1,180 1,080 -------- -------- -------- Net Income $ 3,099 $ 2,458 $ 1,770 ======== ======== ======== PER SHARE DATA: Net income - basic $ 1.26 $ 1.00 $ 0.72 Net income - diluted 1.25 1.00 0.71 Dividends 0.48 0.41 0.35 Dividends of pooled affiliate N/A N/A 0.39
-------------------------------------------------------------------------------- (1) Includes interest-bearing deposits in other depository institutions. (2) Includes merger related expenses of $439,000 in 1999. -3- -------------------------------------------------------------------------------- SELECTED FINANCIAL AND OTHER DATA - CONTINUED --------------------------------------------------------------------------------
At or For the Year Ended December 31, ----------------------------- 2001 2000 1999 ------- ------- ------- SELECTED FINANCIAL RATIOS: Performance Ratios: Return on assets (1) 1.17% 1.05% 0.84% Return on average equity (2) 9.49% 8.27% 6.05% Dividend payout ratio 38.52% 41.40% 51.38% Average equity to average assets 12.31% 12.64% 13.95% Interest rate spread (3) 2.99% 2.97% 3.27% Net interest margin (4) 3.71% 3.73% 3.97% Non-interest expense to average assets 2.23% 2.39% 2.66% Average interest earning assets to average interest bearing liabilities 118.41% 118.30% 118.01% Regulatory Capital Ratios: Tier I - adjusted total assets 11.25% 11.92% 12.13% Tier I - risk based 19.67% 19.97% 19.64% Total risk-based 20.36% 20.63% 19.64% Asset Quality Ratios: Nonperforming loans as a percent of loans receivable, net (5) 0.62% 0.32% 0.13% Nonperforming assets as a percent of total assets (6) 0.52% 0.28% 0.21% Allowance for loan losses as a percent of gross loans receivable 0.54% 0.64% 0.75%
-------------------------------------------------------------------------------- (1) Net income divided by average assets. (2) Net income divided by average equity. (3) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities (taxable equivalent basis). (4) Net interest income as a percentage of average interest-earning assets (taxable equivalent basis). (5) Nonperforming loans consist of loans accounted for on a nonaccrual basis and accruing loans 90 days or more past due. (6) Nonperforming assets consist of nonperforming loans and real estate acquired in settlement of loans, but exclude restructured loans. -4- -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- 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 by its authorized officers. The Company assumes no obligation to update any forward-looking statements. General The Bank's results of operations depend primarily on net interest income, which is the difference between the income earned on its interest-earning assets, such as loans and investments, and the cost of its interest-bearing liabilities, consisting of deposits and borrowings from the Federal Home Loan Bank of Indianapolis. The Bank's net income is also affected by, among other things, fee income, provisions for loan losses, operating expenses and income tax provisions. The Bank's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government legislation and policies concerning monetary and fiscal affairs, housing and financial institutions and the intended actions of the regulatory authorities. Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company and the Bank. The information contained in this section should be read in conjunction with the consolidated financial statements and the accompanying notes to consolidated financial statements included elsewhere in this report. Operating Strategy The Company is the parent company to an independent community-oriented financial institution that delivers quality customer service and offers a wide range of deposit, loan and investment products to its customers. The Company has no other material income other than that generated by the Bank and the Bank's wholly-owned subsidiary, First Harrison Financial Services, Inc., which sells property and casualty insurance and non-deposit investment products. The Bank's primary business strategy is attracting deposits from the general public and using those funds to originate one-to-four family residential mortgage loans. The Bank's lending activity also includes multi-family residential loans, commercial real estate and business loans and consumer loans. The Bank invests excess liquidity primarily in interest-bearing deposits with the Federal Home Loan Bank of Indianapolis and other financial institutions, U.S. government and agency securities, local municipal obligations and, to a lesser extent, mortgage-backed securities. -5- In recent years, the Company's operating strategy has also included enhancing profitability by increasing sources of non-interest income and improving operating efficiency while managing its capital and limiting its credit risk and interest rate risk exposures. To accomplish these objectives, the Company has focused on the following: . Control credit risk by focusing on the origination of one-to-four family residential mortgage loans and consumer loans, consisting primarily of home equity loans and lines of credit while increasing the market share of commercial real estate and small business loans. . Provide quality customer service by expanding and upgrading the branch offices, introducing internet banking and broadening its commercial deposit and loan products. . Increase fee income from non-deposit investment products and providing property and casualty insurance. . Continue to invest in technology to increase productivity and efficiency. . Engage in a capital management strategy to repurchase Company stock and pay dividends to enhance shareholder value. Merger with HCB Bancorp On January 12, 2000, the Company completed the plan of merger with HCB Bancorp (HCB), a bank holding company located in Palmyra, Indiana. HCB was the parent company of Harrison County Bank, a state-chartered commercial bank, which was merged with and into the Bank. The merger provided for an exchange of 15.5 shares of the Company's common stock for each outstanding share of HCB common stock. The merger was accounted for as a pooling of interests and the consolidated financial statements give effect to the merger as if the merger had been consummated as of the earliest date presented. See the accompanying notes to consolidated financial statements for additional information. Comparison of Financial Condition at December 31, 2001 and 2000 Total assets increased 13.8% from $248.6 million at December 31, 2000 to $282.8 million at December 31, 2001, primarily as a result of increases in investment securities and loans receivable, net, which were funded by growth in deposits and advances from the Federal Home Loan Bank of Indianapolis. Loans receivable, net, were $179.3 million at December 31, 2000 compared to $201.7 million at December 31, 2001, a 12.5% increase. The loan growth is attributable primarily to a 19.5% growth in residential mortgage and construction loans and a 15.5% growth in commercial business loans offset by a 22.4% decrease in commercial real estate loans. Residential mortgage and construction loans were $119.5 million at December 31, 2000, compared to $142.8 million at December 31, 2001 and commercial business loans increased from $9.8 million at December 31, 2000 to $11.3 million at December 31, 2001. Commercial real estate loans decreased from $20.4 million at December 31, 2000 to $15.8 million at December 31, 2001. Consumer loans grew slightly during the year from $30.6 million at December 31, 2000 to $31.3 million at December 31, 2001. Securities available for sale, at fair value, consisting primarily of federal agency mortgage-backed certificates, notes and bonds, and municipal obligations, increased $20.1 million or 57.8% from $34.8 million at December 31, 2000 to $54.9 million at December 31, 2001 as a result of purchases of $42.7 million net of maturities and repayments of $23.4 million. The investment in securities held to maturity, consisting of federal agency mortgage-backed certificates and municipal obligations, decreased from $11.2 million at December 31, 2000 to $1.8 million at December 31, 2001 as a result of maturities and repayments of $9.4 million and sales and transfers of $523,000 offset by purchases of $500,000. Cash and interest-bearing deposits with banks increased from $11.5 million at December 31, 2000 to $12.4 million at December 31, 2001 as a result of excess liquidity funded by growth in deposits. -6- Total deposits increased from $185.4 million at December 31, 2000 to $204.1 million at December 31, 2001, a 10.1% increase. The increase in deposits resulted from growth in all categories of deposit accounts. Interest-bearing demand deposits increased $3.9 million in 2001, while noninterest-bearing demand deposits increased $1.5 million in 2001. Savings and money market accounts increased $4.4 million from $46.3 million at December 31, 2000 to $50.7 million at December 31, 2001. Time deposits increased $9.0 million from $95.1 million at December 31, 2000 to $104.1 million at December 31, 2001. Management attributes the growth in deposits to the Company's marketing efforts and the weakened stock market as customers look to safer investments with a guaranteed rate of return. Total stockholders' equity increased from $31.1 million at December 31, 2000 to $33.5 million at December 31, 2001 primarily as a result of retained net income of $1.9 million and a net unrealized gain on securities available for sale of $377,000. Allowance for Loan Losses Loans are the Company's largest concentration of assets and continue to represent the most significant potential risk. In originating loans, the Bank recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral. The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance for loan losses represents management's estimate of probable loan losses based on information available as of the date of the financial statements. The allowance for loan losses is based on management's evaluation of the loan portfolio, including historical loan loss experience, delinquencies, known and inherent risks in the nature and volume of the loan portfolio, information about specific borrower situations, estimated collateral values, and economic conditions. The loan portfolio is reviewed quarterly by management to evaluate the adequacy of the allowance for loan losses to determine the amount of any adjustment required after considering the loan charge-offs and recoveries for the quarter. Management applies a systematic methodology that incorporates it current judgments about the credit quality of the loan portfolio. In addition, the Office of Thrift Supervision (OTS), as an integral part of their examination process, periodically review the Bank's allowance for loan losses and may require the Bank to make additional provisions for estimated losses based on their judgments about information available to them at the time of their examination. 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 effect the loss rates. Specific allowances related to impaired loans and other classified loans are established where management has identified significant conditions or circumstances related to a loan that management believes indicate that a loss has been incurred. The identification of these loans results from the loan review process that identifies and monitors credits with weaknesses or conditions which call into question the full collection of the contractual payments due under the terms of the loan agreement. Factors considered by management include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. For loans evaluated on a group basis, management applies loss factors to groups of loans with common risk characteristics (i.e. residential mortgage loans, home equity loans, credit card loans). The loss factors are derived from the Bank's historical loss experience or, where the Bank does not have loss experience, the peer group loss experience. Peer group loss experience is used after evaluating the attributes of the Bank's loan portfolio as compared to the peer group. Loss factors are adjusted for significant environmental factors that, in management's judgment, affect the collectibility of the loan portfolio segment. The significant environmental factors include the levels and trends in charge-offs and recoveries, trends in volume and terms of loans, levels and trends in delinquencies, the effects of changes in underwriting standards and other lending practices or procedures, the experience and depth of the lending management and staff, effects of changes in credit concentration, changes in industry and market conditions and national and local economic trends and conditions. Management evaluates these conditions on a quarterly basis and evaluates and modifies the assumptions used in establishing the loss factors. -7- The allowance for loan losses was $1.1 million at December 31, 2001 and $1.2 million at December 31, 2000. Management has deemed these amounts as adequate on those dates based on its evaluation methodology. At December 31, 2001, nonperforming loans totaled $1.3 million or 0.45% of total assets. Included in nonperforming loans are loans over 90 days past due secured by one-to-four family residential real estate in the amount of $375,000 and consumer loans in the amount 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. Comparison of Operating Results for the Years Ended December 31, 2001 and 2000 Net Income. Net income was $3.1 million ($1.25 per share diluted) for the year ended December 31, 2001 compared to $2.5 million ($1.00 per share diluted) for the year ended December 31, 2000. The increase was attributable to increases in net interest income of $1.0 million and noninterest income of $456,000 offset by increases in noninterest expenses of $285,000 and income taxes of $534,000. Net Interest Income. Net interest income increased $1.0 million or 12.6% to $9.1 million in 2001 compared to $8.1 million in 2000 primarily due to an increase in average interest-earning assets during 2001 and an increase in the interest rate spread offset by an increase in average interest-bearing liabilities. Total interest income increased $1.6 million, or 9.2%, to $19.0 million for 2001 compared to $17.4 million in 2000 primarily due to a higher average balance of interest-earning assets. Interest on loans receivable increased $1.5 million and interest on investment securities increased $121,000 as a result of higher average balances in 2001. The average balance of interest-earning assets increased from $222.2 million in 2000 to $251.2 million in 2001. The average yield on interest-earnings assets decreased from 7.90% in 2000 to 7.63% in 2001 due to decreases in market rates. During 2001, the Federal Reserve Bank lowered the discount rate by 4.75%. While a majority of the loan and securities portfolios are fixed rate in nature, the Bank does hold variable rate investments and loans which have repriced during the year leading to a lower overall effective yield. Also, loan refinancings triggered by lower market interest rates have reduced the loan portfolio average yield. Total interest expense increased $575,000, or 6.2%, to $9.8 million for 2001 compared to $9.3 million for 2000 primarily due to the growth in deposits and an increase in average borrowings from the Federal Home Loan Bank. The average balances of interest-bearing deposits and advances from the Federal Home Loan Bank were $177.1 million and $34.9 million, respectively, for 2001 compared to $168.7 million and $19.2 million for 2000. The average cost of funds decreased from 4.93% in 2000 to 4.64% in 2001 due to lower market interest rates. For further information see "Average Balance Sheets" below. The changes in interest income and interest expense resulting from changes in volume and changes in rates for 2001 and 2000 are shown in the schedule captioned "Rate/Volume Analysis" included herein. Provision for Loan Losses. The provision for loan losses was $66,000 for 2001 compared to $48,000 for 2000. During 2001, the net loan portfolio growth was $22.4 million. Commercial and residential real estate loans, consumer installment loans, and commercial business loans increased $19.8 million, $730,000, and $1.5 million, respectively, during this period. The consistent application of management's allowance methodology did not result in an increase in the level of the allowance for loan losses due to lower levels of estimated inherent credit losses in residential and commercial real estate loans. The provisions were recorded to bring the allowance to the level determined in applying the allowance methodology after reduction for net charge-offs during the quarters. See "Allowance for Loan Losses". 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 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. -8- Noninterest income. Noninterest income increased $456,000 or 37.4% to $1.7 million for 2001 compared to $1.2 million for 2000. The increase is primarily attributable to an increase in service charges on deposit accounts of $361,000 due to growth in transaction accounts and changes in the fee schedule during 2001, an increase in commission income of $44,000 relating primarily to credit life insurance commissions, and an increase in the gain on sale of mortgage loans of $36,000 resulting from the sale of $5.4 million of residential mortgages into the secondary market during 2001. Noninterest expense. Noninterest expense increased $285,000 or 5.1% to $5.9 million for 2001 compared to $5.6 million in 2000. The increase results primarily from increases in compensation and benefits, data processing expenses, and other operating expenses. Compensation and benefits expense increased $166,000 due to normal salary increases and the increased cost of providing employee health insurance. Data processing expenses increased $43,000 primarily due to increased automated teller machine processing fees and expenses related to internet banking. Other operating expenses increased $102,000 primarily due to increases in loan administration expenses and charitable contributions. Loan administration expenses increased in 2001 as loan originations increased and management offered promotional incentives designed to attract new loans. The charitable contributions include endowing a scholarship at Ivy Tech Vocational School and making a significant contribution towards the establishment of a YMCA in Harrison County, Indiana Income tax expense. Income tax expense for the year ended December 31, 2001 was $1.7 million, compared to $1.2 million for the same period in 2000. The effective tax rate for 2001 was 35.6% compared to 32.4 % for 2000. The higher effective tax rate for 2001 compared to 2000 resulted from a decrease in tax exempt income in 2001 and a retroactive change in state tax law in 2000. See Note 10 in the accompanying Notes to Consolidated Financial Statements. -9- -------------------------------------------------------------------------------- AVERAGE BALANCE SHEETS -------------------------------------------------------------------------------- The following table sets forth certain information for the periods indicated regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earnings assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average historical cost balances of assets or liabilities, respectively, for the periods presented and do not give effect to changes in fair value that are included as a separate component of stockholders' equity. Average balances are derived from daily balances.
Year ended At December 31, ----------------------------------------------------------------- 2001 2000 ------------------------------ ------------------------------- Average Average (Dollars in thousands) Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost -------- -------- ------- -------- -------- ------- Interest-earning assets: Loans receivable (1) $189,916 $ 15,462 8.14% $167,981 $ 13,994 8.33% Investment securities: Taxable (2) 45,321 2,730 6.02% 40,580 2,608 6.43% Tax-exempt (3) 7,609 568 7.46% 7,325 570 7.78% -------- ------ -------- ------ Total investment securities 52,930 3,298 6.23% 47,905 3,178 6.63% -------- ------ -------- ------ Federal funds sold -- -- -- 533 33 6.19% Interest-bearing deposits with banks 8,310 393 4.73% 5,794 352 6.08% -------- ------ -------- ------ Total interest-earning assets 251,156 19,153 7.63% 222,213 17,557 7.90% -------- ------ -------- ------ Noninterest-earning assets 14,101 12,964 -------- -------- Total assets $265,257 $235,177 ======== ======== Interest-bearing liabilities: Savings and interest-bearing demand deposits $ 76,445 $ 1,966 2.57% $ 75,231 $ 2,735 3.64% Time deposits 100,681 5,714 5.68% 93,450 5,300 5.67% -------- ------ -------- ------ Total deposits 177,126 7,680 4.34% 168,681 8,035 4.76% -------- ------ -------- ------ Retail repurchase agreements 92 3 3.26% -- -- -- FHLB advances 34,885 2,159 6.19% 19,159 1,232 6.43% -------- ------ -------- ------ Total interest-bearing liabilities 212,103 9,842 4.64% 187,840 9,267 4.93% -------- ------ -------- ------ Noninterest-bearing liabilities: Noninterest-bearing deposits 18,205 15,243 Other liabilities 2,295 2,376 -------- -------- Total liabilities 232,603 205,459 Stockholders' equity 32,654 29,718 -------- -------- Total liabilities and stockholders' equity $265,257 $235,177 ======== ======== Net interest income $ 9,311 $ 8,290 ======== ======== Interest rate spread 2.99% 2.97% ====== ====== Net interest margin 3.71% 3.73% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities 118.41% 118.30% ====== ======
-------------------------------------------------------------------------------- (1) Average loans receivable includes nonperforming loans. (2) Includes taxable debt and equity securities and Federal Home Loan Bank Stock. (3) Tax-exempt income has been adjusted to a tax-equivalent basis using the federal marginal tax rate of 34%. -10- -------------------------------------------------------------------------------- RATE/VOLUME ANALYSIS -------------------------------------------------------------------------------- The following table sets forth the effects of changing rates and volumes on net interest income and interest expense. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) effects attributable to changes in rate and volume (changes in rate multplied by changes in volume). Tax exempt income has been adjusted to a tax-equivalent basis using the federal marginal tax rate of 34%.
2001 Compared to 2000 Increase (Decrease) Due to -------------------------------- Rate/ Rate Volume Volume Net ----- ------ ------ ------ (In thousands) Interest-earning assets: Loans receivable $(319) $1,829 $(42) $1,468 Investment securities: Taxable (166) 307 (19) 122 Tax-exempt (22) 21 (1) (2) ----- ------ ---- ------ Total investment securities (188) 328 (20) 120 ----- ------ ---- ------ Federal funds sold (33) (33) 33 (33) Interest-bearing deposits with banks (78) 153 (34) 41 ----- ------ ---- ------ Total net change in income on interest-earning assets (618) 2,277 (63) 1,596 ----- ------ ---- ------ Interest-bearing liabilities: Interest-bearing deposits (708) 388 (35) (355) Retail repurchase agreements -- -- 3 3 FHLB advances (46) 1,011 (38) 927 ----- ------ ---- ------ Total net change in expense on interest-bearing liabilities (754) 1,399 (70) 575 ----- ------ ---- ------ Net change in net interest income $ 136 $ 878 $ 7 $1,021 ===== ====== ==== ======
-11- Liquidity and Capital Resources The Bank's primary sources of funds are deposits and proceeds from loan repayments and prepayments, and from the sale and maturity of securities. The Bank may also borrow from the Federal Home Loan Bank of Indianapolis. While loan repayments and maturities and sales of securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. At December 31, 2001, the Bank had cash and interest-bearing deposits with banks of $12.4 million and securities available for sale with a fair value of $54.9 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the Federal Home Loan Bank 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, commercial business 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. At December 31, 2001, the Bank had total commitments to extend credit of $28.2 million. See Note 14 of Notes to Consolidated Financial Statements. At December 31, 2001, the Bank had certificates of deposit scheduled to mature within one year of $60.0 million. 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 regulations. As of December 31, 2001, 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 11.3%, 11.3% and 20.4%, respectively. Effect of Inflation and Changing Prices The financial statements and related financial data presented in this report have been prepared in accordance with generally accepted accounting principles, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, virtually all the assets and liabilities of the financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the financial institutions performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Market Risk Analysis 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. -12- The Bank uses interest rate sensitivity analysis to measure its interest rate risk by computing changes in NPV(net portfolio value) 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 which measures interest rate risk by modeling the change in NPV (net portfolio value) 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 table is provided by the OTS and sets forth the change in the Bank's NPV at December 31, 2001, 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 at December 31, 2001, the table provides information for only a sustained 100 basis point decrease in market interest rates.
At December 31, 2001 ------------------------------------------------------------------------ Net Portfolio Value Net Portfolio Value as a --------------------------------- ---------------------------------- Change Dollar Dollar Percent Percent of Present Value of Assets ------ ------ ------ ------- ---------------------------------- In Rates Amount Change Change NPV Ratio Change -------- ------ ------ ------ --------- ------ (Dollars in thousands) 300 bp $ 28,433 $(13,234) (32)% 10.25% (378)bp 200 bp 32,971 (8,696) (21) 11.62 (241)bp 100 bp 37,563 (4,104) (10) 12.93 (110)bp -- bp 41,667 -- -- 14.03 -- bp (100)bp 43,495 1,828 4 14.43 40 bp
The above table indicates that in the event of a sudden and sustained increase in prevailing market interest rates, the Bank's NPV would be expected to decrease, and that in the event of a sudden and sustained decrease in prevailing market interest rates, the Bank's NPV would be expected to increase. The differing scenarios are primarily attributable to the relatively high percentage of fixed-rate loans in the Company's loan portfolio. At December 31, 2001, approximately 78.3% 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 which 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 could deviate significantly from those assumed in calculating the table. -13- [LOGO OF MONROE SHINE] Independent Auditor's Report The Board of Directors First Capital, Inc. Corydon, Indiana We have audited the accompanying consolidated balance sheets of First Capital, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 2001 and 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Capital, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ MONROE SHINE New Albany, Indiana January 11, 2002 -14- FIRST CAPITAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000
2001 2000 ---- ---- ASSETS Cash and due from banks $ 7,183,882 $ 6,010,281 Interest-bearing deposits with banks 5,198,423 5,458,413 Securities available for sale, at fair value 54,891,268 34,778,541 Securities held to maturity (fair value of $1,850,258 in 2001; $11,161,645 in 2000) 1,835,651 11,229,045 Loans receivable, net of allowance for loan losses of $1,102,653 in 2001 and $1,183,638 in 2000 201,730,217 179,304,270 Federal Home Loan Bank stock, at cost 2,178,800 1,503,800 Foreclosed real estate 212,293 118,640 Premises and equipment 5,940,291 6,227,746 Accrued interest receivable: Loans 1,043,391 1,154,869 Securities 797,854 790,552 Cash value of life insurance 1,214,260 1,160,985 Other assets 597,015 844,990 ------------- -------------- Total Assets $ 282,823,345 $ 248,582,132 ============= ============= LIABILITIES Deposits: Noninterest-bearing $ 18,629,242 $ 17,123,415 Interest-bearing 185,492,942 168,244,737 ------------- -------------- Total deposits 204,122,184 185,368,152 Retail repurchase agreements 284,221 - Advances from Federal Home Loan Bank 42,824,645 30,074,207 Accrued interest payable 1,252,736 1,306,006 Other liabilities 858,894 726,070 ------------- ------------- Total Liabilities 249,342,680 217,474,435 ------------- ------------- COMMITMENTS AND CONTINGENCIES 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 2,545,961 shares (2,537,324 shares in 2000) 25,460 25,373 Additional paid-in capital 12,878,050 12,811,494 Retained earnings-substantially restricted 21,127,319 19,221,842 Accumulated other comprehensive income 231,153 (145,398) Unearned stock compensation (212,083) (282,854) Unearned ESOP shares (481,760) (522,760) Less treasury stock, at cost - 7,146 shares (87,474) - ------------- -------------- Total Stockholders' Equity 33,480,665 31,107,697 ------------- -------------- Total Liabilities and Stockholders' Equity $ 282,823,345 $ 248,582,132 ============= ==============
See notes to consolidated financial statements. -15- FIRST CAPITAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001 AND 2000
Accumulated Additional Other Unearned Unearned Common Paid-in Retained Comprehensive Stock ESOP Stock Capital Earnings Income Compensation Shares ---------- ------------ ----------- ------------- ------------ ---------- Balances at January 1, 2000 $ 25,066 $ 12,445,776 $17,781,325 $ (811,737) $ -- $ (563,760) COMPREHENSIVE INCOME Net income -- -- 2,458,157 -- -- -- Other comprehensive income: Change in unrealized loss on securities available for sale, net of deferred income tax expense of $437,055 -- -- -- 666,339 -- -- Less: reclassification adjustment -- -- -- -- -- -- Total comprehensive income Cash dividends ($0.41 per share) -- -- (1,017,640) -- -- -- Restricted stock grants 307 353,318 -- -- (353,625) -- Shares released by ESOP trust -- 12,400 -- -- -- 41,000 Stock compensation expense -- -- -- -- 70,771 -- ---------- ------------ ----------- ----------- ----------- ---------- Balances at December 31, 2000 25,373 12,811,494 19,221,842 (145,398) (282,854) (522,760) COMPREHENSIVE INCOME Net income -- -- 3,099,243 -- -- -- Other comprehensive income: Change in unrealized loss on securities available for sale, net of deferred income tax expense of $246,981 -- -- -- 376,551 -- -- Less: reclassification adjustment -- -- -- -- -- -- Total comprehensive income Cash dividends ($0.48 per share) -- -- (1,193,766) -- -- -- Exercise of stock options 87 50,283 -- -- -- -- Shares released by ESOP trust -- 16,273 -- -- -- 41,000 Stock compensation expense -- -- -- -- 70,771 -- Purchase of treasury stock (7,146 shares) -- -- -- -- -- -- ---------- ------------ ----------- ----------- ----------- ---------- Balances at December 31, 2001 $ 25,460 $12,878,050 $21,127,319 $ 231,153 $ (212,083) $ (481,760) ========== =========== =========== =========== =========== ==========
Treasury Stock Total -------- ----------- Balances at January 1, 2000 $ -- $28,876,670 COMPREHENSIVE INCOME Net income -- 2,458,157 Other comprehensive income: Change in unrealized loss on securities available for sale, net of deferred income tax expense of $437,055 -- 666,339 Less: reclassification adjustment -- -- ----------- Total comprehensive income 3,124,496 ----------- Cash dividends ($0.41 per share) -- (1,017,640) Restricted stock grants -- -- Shares released by ESOP trust -- 53,400 Stock compensation expense -- 70,771 -------- ----------- Balances at December 31, 2000 -- 31,107,697 COMPREHENSIVE INCOME Net income -- 3,099,243 Other comprehensive income: Change in unrealized loss on securities available for sale, net of deferred income tax expense of $246,981 -- 376,551 Less: reclassification adjustment -- -- ----------- Total comprehensive income 3,475,794 ----------- Cash dividends ($0.48 per share) -- (1,193,766) Exercise of stock options -- 50,370 Shares released by ESOP trust -- 57,273 Stock compensation expense -- 70,771 Purchase of treasury stock (7,146 shares) (87,474) (87,474) -------- ----------- Balances at December 31, 2001 $(87,474) $33,480,665 ======== ===========
See notes to consolidated financial statements. -16- FIRST CAPITAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000 ---- ---- INTEREST INCOME Loans, including fees $15,462,139 $13,993,666 Securities: Taxable 2,600,194 2,500,061 Tax-exempt 374,889 375,888 Federal funds sold - 32,555 Federal Home Loan Bank dividends 130,078 108,522 Interest-bearing deposits in banks 392,708 352,076 ----------- ----------- Total interest income 18,960,008 17,362,768 ----------- ----------- INTEREST EXPENSE Deposits 7,679,827 8,035,010 Retail repurchase agreements 2,831 - Advances from Federal Home Loan Bank 2,159,527 1,231,762 ----------- ----------- Total interest expense 9,842,185 9,266,772 ----------- ----------- Net interest income 9,117,823 8,095,996 Provision for loan losses 66,000 48,000 ----------- ----------- Net interest income after provision for loan losses 9,051,823 8,047,996 ----------- ----------- NONINTEREST INCOME Service charges on deposit accounts 1,230,002 868,591 Commission income 244,644 201,002 Gain on sale of securities 15,555 - Gain on sale of mortgage loans 123,591 87,266 Other income 61,495 62,437 ----------- ----------- Total noninterest income 1,675,287 1,219,296 ----------- ----------- NONINTEREST EXPENSE Compensation and benefits 3,197,793 3,032,101 Occupancy and equipment 741,007 745,879 Data processing 455,566 412,933 Merger related expenses - 20,453 Other expenses 1,519,079 1,417,558 ----------- ----------- Total noninterest expense 5,913,445 5,628,924 ----------- ----------- Income before income taxes 4,813,665 3,638,368 Income tax expense 1,714,422 1,180,211 ----------- ----------- Net Income $ 3,099,243 $ 2,458,157 =========== =========== Net income per common share, basic $ 1.26 $ 1.00 =========== =========== Net income per common share, diluted $ 1.25 $ 1.00 =========== ===========
See notes to consolidated financial statements. -17- FIRST CAPITAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,099,243 $ 2,458,157 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of premium and accretion of discount on securities, net 30,847 (7,651) Depreciation expense 463,264 488,948 Deferred income taxes 18,971 (134,075) ESOP and stock compensation expense 128,044 124,171 Increase in cash value of life insurance (53,275) (50,398) Provision for loan losses 66,000 48,000 Gain on sale of securities (15,555) - Proceeds from the sale of mortgage loans 5,488,218 3,671,898 Mortgage loans originated for sale (5,364,627) (3,584,632) Gain on sale of mortgage loans (123,591) (87,266) (Increase) decrease in accrued interest receivable 104,176 (366,953) Increase (decrease) in accrued interest payable (53,270) 287,105 Net change in other assets/liabilities 114,848 (16,645) ------------ ------------ Net Cash Provided By Operating Activities 3,903,293 2,830,659 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in interest-bearing deposits with banks 259,990 (1,756,760) Decrease in federal funds sold - 4,000,000 Purchase of securities available for sale (42,716,013) (6,957,369) Purchase of securities held to maturity (500,000) - Proceeds from maturities of securities available for sale 21,938,000 2,800,000 Proceeds from maturities of securities held to maturity 9,270,100 981,600 Proceeds from sale of securities held to maturity 356,432 - Principal collected on mortgage-backed securities 1,540,387 700,700 Net increase in loans receivable (22,618,022) (24,308,654) Purchase of Federal Home Loan Bank stock (675,000) (251,400) Proceeds from sale of foreclosed real estate 32,422 75,488 Purchase of premises and equipment (175,809) (257,530) ------------ ------------ Net Cash Used By Investing Activities (33,287,513) (24,973,925) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 18,754,032 10,026,643 Net increase in retail repurchase agreements 284,221 - Advances from Federal Home Loan Bank 16,000,000 42,000,000 Repayment of advances from Federal Home Loan Bank (3,249,562) (28,675,793) Exercise of stock options 50,370 - Purchase of treasury stock (87,474) - Dividends paid (1,193,766) (1,017,640) ------------ ------------ Net Cash Provided By Financing Activities 30,557,821 22,333,210 ------------ ------------ Net Increase in Cash and Due From Banks 1,173,601 189,944 Cash and due from banks at beginning of year 6,010,281 5,820,337 ------------ ------------ Cash and Due From Banks at End of Year $ 7,183,882 $ 6,010,281 ============ ============
See notes to consolidated financial statements. -18- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations First Capital, Inc. (the Company) is the thrift holding company of First Harrison Bank (the Bank), a wholly-owned subsidiary. The Bank is a federally-chartered savings bank which provides a variety of banking services to individuals and business customers through nine locations in Southern Indiana. The Bank's primary source of revenue is single-family residential loans. The Bank's wholly-owned subsidiary, First Harrison Financial Services, Inc., sells property and casualty insurance and non-deposit investment products. Basis of Presentation and Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Statements of Cash Flows For purposes of the statements of cash flows, the Bank has defined cash and cash equivalents as those amounts included in the balance sheet caption "Cash and due from banks." Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of foreclosed real estate. In connection with the determination of estimated losses on loan and foreclosed real estate, management obtains appraisals for significant properties. While management uses available information to recognize losses on loans and foreclosed real estate, further reductions in the carrying amounts of loans and foreclosed assets may be necessary based on changes in local economic conditions. In addition, as an integral part of their examination process, regulatory agencies periodically review the estimated losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible the estimated losses on loans and foreclosed real estate may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated. -19- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (1 - continued) Securities Available for Sale Securities available for sale consist of debt and equity securities and are stated at fair value. Amortization of premium and accretion of discount are recognized in interest income using the interest method over the remaining period to maturity, adjusted for anticipated prepayments. Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. Unrealized gains and losses, net of tax, on securities available for sale are reported as a separate component of stockholders' equity until realized. Realized gains and losses on the sale of securities available for sale are determined using the specific identification method. Securities Held to Maturity Debt securities for which the Bank has the positive intent and ability to hold to maturity are carried at cost, adjusted for amortization of premium and accretion of discount using the interest method over the remaining period to maturity, adjusted for anticipated prepayments. Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. Loans Loans receivable are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses. The Bank's real estate loan portfolio consists primarily of long-term loans, collateralized by first mortgages on single-family residences and multi-family residential properties located in the southern Indiana area and commercial real estate loans. In addition to real estate loans, the Bank makes commercial loans and consumer loans. Loan origination fees and certain direct costs of underwriting and closing loans are deferred and the net fee or cost is recognized as an adjustment to interest income over the contractual life of the loans using the interest method. The accrual of interest is discontinued on a loan when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. The Bank does not accrue interest on loans past due 90 days or more except when the estimated value of collateral and collection efforts are deemed sufficient to ensure full recovery. When a loan is placed on non accrual status, previously accrued but unpaid interest is deducted from interest income. Subsequent receipts on nonaccrual loans, including specific impaired loans are recorded as a reduction of principal, and interest income is only recorded once principal recovery is reasonably assured. The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is 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 allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term. -20- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (1 - continued) A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. Foreclosed Real Estate Foreclosed real estate is carried at the lower of fair value minus estimated costs to sell or cost. Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and an allowance is established by a charge to non-interest expense if the carrying value exceeds the fair value minus estimated costs to sell. The net expense from operations of foreclosed real estate held for sale is reported in non-interest expense. Premises and Equipment The Bank uses the straight line and accelerated methods of computing depreciation at rates adequate to amortize the cost of the applicable assets over their useful lives. Items capitalized as part of premises and equipment are valued at cost. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of assets sold, or otherwise disposed of, are removed from the related accounts and any gain or loss is included in earnings. Mortgage Servicing Rights and Loan Servicing Mortgage servicing rights are recognized as separate assets when servicing rights are acquired through purchase or loan originations when there is a definitive plan to sell the underlying loan. Capitalized mortgage servicing rights are periodically evaluated for impairment based on the fair value of those rights. Capitalized mortgage servicing rights are amortized in proportion to, and over the period of, estimated future net servicing income of the underlying mortgage loans. Loan servicing fees are recognized in income as monthly principal and interest payments are collected on mortgages. Costs of loan servicing are charged to expense as incurred. Amortization of Intangibles Intangibles relating to the acquisition of a branch banking facility are amortized over 15 years using the straight-line method. Income Taxes Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of available for sale securities, allowance for loan losses, accumulated depreciation and accrued income and expenses for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. -21- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (1 - continued) Stock-Based Compensation Under the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the Company measures and recognizes compensation cost related to stock-based compensation plans using the intrinsic value method and discloses the pro forma effect of applying the fair value method contained in SFAS No. 123. Accordingly, no compensation cost is charged against earnings for stock options granted under the Company's stock-based compensation plans. Advertising Advertising costs are charged to operations when incurred Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. SFAS 133, as amended by SFAS 138 in June 2000, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It required that an entity recognize all derivatives as either assets or liabilities in the statement of condition and measure those instruments at fair value. The FASB issued SFAS 137, Accounting for Derivative Investments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133, which extended the effective date of implementation of SFAS 133 to fiscal quarters of fiscal years beginning after June 15, 2000. The implementation of this standard had no impact on the Company's financial condition and results of operations. In September 2000, FASB issued SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. The statement replaces SFAS 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS 125's provisions without reconsideration. The statement was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The statement was effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The implementation of this standard had no impact on the Company's financial condition or results of operations. In June 2001, FASB issued SFAS 141, Business Combinations, which amends or supersedes interpretations in APB Opinion No. 16, Business Combinations and supersedes SFAS 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. The provisions of SFAS 141 apply to all business combinations initiated after June 30, 2001 and requires the use of the purchase method of accounting and addresses financial accounting and report for goodwill and other intangibles acquired in a business combination at acquisition. The purchase method accounts for a business combination as the acquisition of one company by another. The acquiring company records at its cost the acquired assets less liabilities assumed. A difference between the cost of the acquired company and the sum of the fair values of tangible and identifiable intangible assets less liabilities is recorded as goodwill. Also, in June 2001, FASB issued SFAS 142, Goodwill and Other Intangible Assets, which supersedes APB Opinion No. 17, Intangible Assets. SFAS 142 addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) and also addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. Under this statement, goodwill shall not be amortized but will be evaluated for impairment. The provisions of SFAS 142 are required to be applied starting with fiscal years beginning after December 15, 2001. The implementation of this statement did not have a material impact on the Company's financial condition and results of operations. -22- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (1 - continued) In June 2001, FASB issued SFAS 143, Accounting for Asset Retirement Obligations. This statement applies to all entities and the legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset, except for certain obligations of lessees. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The implementation of this standard is not expected to have an impact on the Company's financial condition and results of operations. In August 2001, FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and establishes a single financial accounting model for long-lived assets to be disposed of by sale. The statement retains the requirements of SFAS 121 to recognize an impairment loss if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and measure an impairment loss as the difference between the carrying amount and the fair value of the asset. The implementation of this standard is not expected to have an impact on the Company's financial condition or results of operations. (2) RESTRICTION ON CASH AND DUE FROM BANKS The Bank is required to maintain reserve balances on hand and with the Federal Reserve Bank which are noninterest bearing and unavailable for investment. The average amount of those reserve balances for the year ended December 31, 2001 and 2000 were approximately $1,104,000 and $757,000 respectively. (3) DEBT AND EQUITY SECURITIES Debt and equity securities have been classified in the balance sheets according to management's intent. Investment securities at December 31, 2001 and 2000 are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value December 31, 2001: Securities available for sale: Mortgage-backed securities: FNMA certificates $ 457,668 $ -- $ 10,716 $ 446,952 GNMA certificates 1,785,617 6,480 -- 1,792,097 FHLMC certificates 310,174 4,523 -- 314,697 FNMA REMICS 2,022,167 4,639 19,487 2,007,319 FHLMC REMICS 2,033,426 16,353 19,394 2,030,385 ----------------------------------------------------- 6,609,052 31,995 49,597 6,591,450 ----------------------------------------------------- Other debt securities: Federal agency 39,662,021 528,972 117,898 40,073,095 Municipal 7,061,710 71,290 72,106 7,060,894 ----------------------------------------------------- 46,723,731 600,262 190,004 47,133,989 ----------------------------------------------------- Mutual funds 1,175,717 10,218 20,106 1,165,829 ----------------------------------------------------- Total securities available for sale $54,508,500 $ 642,475 $ 259,707 $54,891,268 =====================================================
-23- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (3 - continued)
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value December 31, 2001: Securities held to maturity: Mortgage-backed securities: FNMA certificates $ 240,634 $ 1,554 $ 4,644 $ 237,544 GNMA certificates 152,014 1,610 736 152,888 ----------------------------------------------------- 392,648 3,164 5,380 390,432 ----------------------------------------------------- Other debt securities: Municipal 1,443,003 16,823 -- 1,459,826 ----------------------------------------------------- Total securities held to maturity $ 1,835,651 $ 19,987 $ 5,380 $ 1,850,258 ===================================================== December 31, 2000: Securities available for sale: Mortgage-backed securities: FHLMC certificates $ 581,685 $ -- $ 3,072 $ 578,613 GNMA certificates 2,928,927 -- 37,328 2,891,599 ----------------------------------------------------- 3,510,612 -- 40,400 3,470,212 ----------------------------------------------------- Other debt securities: Federal agency 25,448,400 124,526 297,549 25,275,377 Municipal 4,954,187 39,417 51,092 4,942,512 ----------------------------------------------------- 30,402,587 163,943 348,641 30,217,889 ----------------------------------------------------- Mutual funds 1,106,106 -- 15,666 1,090,440 ----------------------------------------------------- Total securities available for sale $35,019,305 $ 163,943 $ 404,707 $34,778,541 ===================================================== Securities held to maturity: Mortgage-backed securities: FHLMC certificates $ 22,142 $ 15 $ -- $ 22,157 GNMA certificates 207,993 -- 5,039 202,954 FNMA certificates 280,244 933 14,780 266,397 ----------------------------------------------------- 510,379 948 19,819 491,508 ----------------------------------------------------- Other debt securities: Federal agency 8,485,359 -- 97,442 8,387,917 Municipal 2,233,307 48,913 -- 2,282,220 ----------------------------------------------------- 10,718,666 48,913 97,442 10,670,137 ----------------------------------------------------- Total securities held to maturity $11,229,045 $ 49,861 $ 117,261 $11,161,645 =====================================================
During 2001, the Bank sold non-rated municipal securities classified as held to maturity with an amortized cost of $356,432 and recognized a gain of $15,555. These securities were sold following a recent examination by the Office of Thrift Supervision (OTS) which has required divestiture of these holdings within three years. The OTS limits the holdings of non-rated municipal securities to those issued by a municipality in which the institution has an office. Through the merger with HCB Bancorp, the Bank acquired certain non-rated municipal securities issued by municipalities in which the Bank does not have an office. At March 31, 2001, the Bank transferred from the held to maturity category to the available for sale category non-rated municipal securities with an amortized cost of $182,376. At December 31, 2001, the Bank holds non-rated municipal securities in the available for sale category with a carrying value of $1,070,703 which must be divested before December 31, 2004. -24- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (3 - continued) The amortized cost and fair value of debt securities as of December 31, 2001, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.
Securities Available for Sale Securities Held to Maturity ----------------------------- --------------------------- Amortized Fair Amortized Fair Cost Value Cost Value Due in one year or less $ 3,916,586 $ 3,996,789 $ 826,993 $ 830,228 Due after one year through five years 32,212,395 32,542,995 525,010 538,598 Due after five years through ten years 9,053,636 9,087,928 91,000 91,000 Due after ten years 1,541,114 1,506,277 -- -- ----------------------------------------------------------- 46,723,731 47,133,989 1,443,003 1,459,826 Mortgage-backed securities 6,609,052 6,591,450 392,648 390,432 ----------------------------------------------------------- $53,332,783 $53,725,439 $ 1,835,651 $ 1,850,258 ===========================================================
Certain securities were pledged to secure advances from the Federal Home Loan Bank at December 31, 2001. (See Note 8) (4) LOANS Loans receivable at December 31, 2001 and 2000 consisted of the following:
2001 2000 ---- ---- Real estate mortgage loans: Residential $132,348,492 $109,812,449 Land 4,381,011 3,356,389 Residential construction 10,476,939 9,665,497 Commercial real estate 15,810,867 20,371,994 Commercial business loans 11,339,361 9,815,614 Consumer loans: Home equity and second mortgage loans 12,962,816 11,348,657 Automobile loans 10,376,402 10,156,005 Loans secured by savings accounts 1,309,396 1,554,237 Unsecured loans 1,721,400 1,609,396 Other consumer loans 4,949,299 5,919,878 --------------------------- Gross loans receivable 205,675,983 183,610,116 --------------------------- Less: Deferred loan origination fees, net 116,189 228,992 Undisbursed portion of loans in process 2,726,924 2,893,217 Allowance for loan losses 1,102,653 1,183,637 --------------------------- 3,945,766 4,305,846 --------------------------- Loans receivable, net $201,730,217 $179,304,270 ===========================
-25- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (4 - continued) Mortgage loans serviced for the benefit of others amounted to $10,061,396 and $10,265,945 at December 31, 2001 and 2000, respectively. The balance of capitalized mortgage servicing rights, carried at estimated fair value, included in other assets at December 31, 2001 and 2000, was $124,231 and $115,861, respectively. The estimated fair value of mortgage servicing rights was determined using a discount rate of 10 percent and prepayment speeds ranging from 2.22 percent to 13.44 percent, depending upon the stratification of the specific rights. During the years ended December 31, 2001 and 2000 , the Bank capitalized mortgage servicing rights amounting to $77,206 and $42,357, respectively. The Bank recognized amortization of $68,836 and $18,915, for the years ended December 31, 2001 and 2000, respectively. An analysis of the allowance for loan losses is as follows: 2001 2000 ---- ---- Beginning balances $ 1,183,638 $ 1,193,606 Provision 66,000 48,000 Recoveries 74,940 17,778 Loans charged-off (221,925) (75,746) --------------------------- Ending balances $ 1,102,653 $ 1,183,638 =========================== The Bank had loans amounting to approximately $806,000 and $251,000 specifically classified as impaired at December 31, 2001 and 2000, respectively. The average recorded investment in impaired loans amounted to approximately $356,000 and $132,000 for the years ended December 31, 2001 and 2000, respectively. The Bank had a specific allowance for loan losses related to impaired loans of $165,729 at December 31, 2001. The Bank had no specific allowance for loan losses related to impaired loans at December 31, 2000. Interest income on impaired loans of $18,374 was recognized in 2001 for cash payments received. No interest income on impaired loans was recognized in 2000. The Bank has entered into loan transactions with certain directors, officers and their affiliates (related parties). In the opinion of management, such indebtedness was incurred in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons. The following table represents the aggregate activity for related party loans during the year ended December 31, 2001: Beginning balance $ 2,045,566 New loans 1,014,826 Payments (1,268,548) ----------- Ending balance $ 1,791,844 =========== The Bank has purchased commercial paper from a corporation where a director is considered a related party. In the opinion of management, these transactions were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with unrelated parties. During the year ended December 31, 2001, the Bank granted approximately $2,424,000, to customers of the corporation and such loans had an aggregate outstanding balance of approximately $1,957,000 at December 31, 2001. -26- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (5) PREMISES AND EQUIPMENT Premises and equipment consisted of the following: 2001 2000 ---- ---- Land and land improvements $1,146,490 $1,146,490 Leasehold improvements 153,077 148,283 Office building 4,870,478 4,819,652 Furniture, fixtures and equipment 2,308,390 2,241,964 ----------------------- 8,478,435 8,356,389 Less accumulated depreciation 2,538,144 2,128,643 ----------------------- Totals $5,940,291 $6,227,746 ======================= (6) DEPOSITS The aggregate amount of time deposit accounts with balances of $100,000 or more was approximately $24,592,000 and $19,454,000 at December 31, 2001 and 2000, respectively. Deposit account balances in excess of $100,000 are not federally insured. At December 31, 2001, scheduled maturities of time deposits were as follows: Year ending December 31: 2002 $ 60,017,496 2003 19,180,850 2004 9,958,086 2005 11,183,443 2006 and thereafter 3,720,428 ------------ Total $104,060,303 ============ The Bank held deposits of approximately $6,670,000 and $4,387,000 for related parties at December 31, 2001 and 2000, respectively. (7) RETAIL REPURCHASE AGREEMENTS Retail repurchase agreements represent overnight borrowings from deposit customers and the debt securities sold under the repurchase agreements were under the control of the Bank at December 31, 2001. Information concerning borrowings under repurchase agreements at December 31, 2001 and for the year then ended is summarized as follows:
Weighted average interest rate during the year 3.12% Average daily balance $ 90,752 Maximum month-end balance during the year $ 578,534 Amortized cost of debt securities underlying the agreements $1,019,710 Fair value of debt securities underlying the agreements $1,056,644
(8) ADVANCES FROM FEDERAL HOME LOAN BANK At December 31, 2001 and 2000, advances from the Federal Home Loan Bank were as follows: 2001 2000 ----------------------- ----------------------- Weighted Weighted Average Average Rate Amount Rate Amount Fixed rate advances 5.87% $42,824,645 6.30% $30,074,207 =============================================== -27- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (8 - continued) The following is a schedule of maturities for advances outstanding as of December 31, 2001: Due in: 2002 $ 3,505,094 2003 3,528,004 2004 2,442,497 2005 7,101,821 2006 2,361,097 Thereafter 23,886,132 ------------ Total $ 42,824,645 ============ The advances are secured under a blanket collateral agreement. At December 31, 2001, eligible collateral pledged as security for the advances included the following: Carrying Value Residential mortgage loans $119,127,136 Available for sale securities 46,289,247 Held to maturity securities 392,648 ------------ Total pledged assets $165,809,031 ============ (9) LEASE COMMITMENTS On April 1, 1997, the Bank entered into a noncancellable sub-lease agreement for a branch office for an initial lease term of eight years. The sub-lessor has a fixed term lease with the owner with an initial term expiring November 30, 2003. The Bank also has a noncancellable lease agreement for a branch office dated December 1, 1995 that expires in the year 2005. The following is a schedule by years of future minimum rental payments required under these operating leases: Year ending December 31: 2002 $ 31,890 2003 30,833 2004 19,200 2005 17,600 -------- Total minimum payments required $ 99,523 ======== Total minimum rental expense for all operating leases for each of the periods ended December 31, 2001 and 2000 amounted to $31,890. (10) INCOME TAXES The components of income tax expense were as follows: 2001 2000 ---- ---- Current $ 1,695,451 $ 1,314,286 Deferred 18,971 (134,075) ---------------------------- Totals $ 1,714,422 $ 1,180,211 ============================ -28- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (10 - continued) Significant components of the Bank's deferred tax assets and liabilities as of December 31, 2001 and 2000 were as follows:
2001 2000 ---- ---- Deferred tax assets (liabilities): Depreciation $(197,962) $(199,869) Deferred loan fees (49,080) (33,299) Deferred compensation plans 153,176 141,524 Stock compensation expense 27,400 -- Allowance for loan losses 426,765 458,254 Post-1987 bad debt deduction (57,266) (85,898) Unrealized loss on securities available for sale (151,614) 95,367 Other (42,641) (28,748) ---------------------- Net deferred tax asset $ 108,778 $ 347,331 ======================
The reconciliation of income tax expense with the amount which would have been provided at the federal statutory rate of 34 percent follows:
2001 2000 ---- ---- Provision at federal statutory tax rate $ 1,636,646 $ 1,237,045 State income tax-net of federal tax benefit 227,740 107,817 Change in state tax law - net of federal benefit -- (18,730) Tax-exempt interest income (135,758) (127,660) Increase in cash value of life insurance (18,114) (17,135) Nondeductible merger expenses -- 6,954 Other 3,908 (8,080) --------------------------- Totals $ 1,714,422 $ 1,180,211 =========================== Effective tax rate 35.6% 32.4% ===========================
In 2000, the Indiana financial institution tax law was amended to treat resident financial institutions the same as nonresident financial institutions by providing for apportionment of Indiana income based on receipts in Indiana. Receipts for Indiana were defined to exclude receipts from out of state sources and federal government and agency obligations. This change was effective retroactively to January 1, 1999. The provision of income taxes for 2000 includes a credit of $18,730 in recognition of this change. Prior to July 1, 1996, the Bank was permitted by the Internal Revenue Code to deduct from taxable income an annual addition to a statutory bad debt reserve subject to certain limitations. Retained earnings at December 31, 2001 includes approximately $1,040,000 of cumulative deductions for which no deferred federal income tax liability has been recorded. Reduction of these reserves for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes subject to the then current corporate income tax rate. The unrecorded deferred liability on these amounts was approximately $354,000 at December 31, 2001. -29- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (10 - continued) Federal legislation in 1996 repealed the use of the qualified thrift reserve method of accounting for bad debts for tax years beginning after December 31, 1995. As a result, the Bank discontinued the calculation of the annual addition to the statutory bad debt reserve using the percentage-of-taxable-income method and adopted the experience reserve method for banks. Under this method, the Bank computes its federal tax bad debt deduction based on actual loss experience over a period of years. The legislation required the Bank to recapture into taxable income over a six-year period its post-1987 additions to the qualified thrift statutory bad debt reserve, thereby generating additional tax liability. At December 31, 2001, the remaining unamortized balance of the post-1987 reserves totaled $168,428 for which a deferred tax liability of $57,266 has been recorded. The legislation also provided that the Bank will not be required to recapture its pre-1988 statutory bad debt reserves if it ceases to meet the qualifying thrift definitional tests as provided under prior law and if the Bank continues to qualify as a "bank" under existing provisions of the Internal Revenue Code. (11) EMPLOYEE BENEFIT PLANS Defined Contribution Plan: The Bank has a qualified contributory defined contribution plan available to all eligible employees. The plan allows participating employees to make tax-deferred contributions under Internal Revenue Code Section 401(k). The Bank contributed $109,773 and $86,856 to the plan for the years ended December 31, 2001 and 2000, respectively. Employee Stock Ownership Plan: On December 31, 1998, the Company established a leveraged employee stock ownership plan (ESOP) covering substantially all employees. The ESOP trust acquired 61,501 shares of Company common stock financed by a term loan with the Company. The employer loan and the related interest income are not recognized in the consolidated financial statements as the debt is serviced from Company contributions. Dividends payable on allocated shares are charged to retained earnings and are satisfied by the allocation of cash dividends to participant accounts. Dividends payable on unallocated shares are not considered dividends for financial reporting purposes. Shares held by the ESOP trust are allocated to participant accounts based on the ratio of the current year principal and interest payments to the total of the current year and future years principal and interest to be paid on the employer loan. Compensation expense is recognized based on the average fair value of shares released for allocation to participant accounts during the year with a corresponding credit to stockholders' equity. Compensation expense recognized for the years ended December 31, 2001 and 2000 amounted to $50,251 and $44,320, respectively. Company common stock held by the ESOP trust was as follows: 2001 2000 ---- ---- Allocated shares 13,325 9,225 Shares committed to be released -- -- Unearned shares 48,176 52,276 ------------------- Total ESOP shares 61,501 61,501 =================== Fair value of unearned shares $693,734 $575,036 =================== -30- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (12) DEFERRED COMPENSATION PLANS The Bank has a deferred compensation plan whereby certain officers will be provided specific amounts of income for a period of fifteen years following normal retirement. The benefits under the agreements become fully vested after four years of service beginning with the effective date of the agreements. The Bank accrues the present value of the benefits so the amounts required will be provided at the normal retirement dates and thereafter. Assuming normal retirement, the benefits under the plan will be paid in varying amounts between 1999 and 2022. The Bank is the owner and beneficiary of insurance policies on the lives of these officers which may provide funds for a portion of the required payments. The agreements also provide for payment of benefits in the event of disability, early retirement, termination of employment or death. Deferred compensation expense for this plan was $28,051 and $20,909 for the years ended December 31, 2001 and 2000, respectively. The Bank also has a directors' deferred compensation plan whereby a director defers into a retirement account a portion of his monthly director fees for a specified period to provide a specified amount of income for a period of fifteen years following normal retirement. The Bank also accrues the interest cost on the deferred obligation so the amounts required will be provided at the normal retirement dates and thereafter. Assuming normal retirement, the benefits under the plan will be paid in varying amounts between 1995 and 2037. The agreements also provide for payment of benefits in the event of disability, early retirement, termination of service or death. Deferred compensation expense for this plan was $12,208 and $9,691 for the years ended December 31, 2001 and 2000, respectively. (13) STOCK-BASED COMPENSATION PLANS The Company applies APB No. 25 and related interpretations in accounting for its stock-based compensation plans. In accordance with SFAS No. 123, the Company elected to continue to apply the provisions of APB No. 25. However, pro forma disclosures as if the Company adopted the compensation cost recognition provisions of SFAS No. 123, are presented along with a summary of the plans and awards. Restricted Stock Compensation Plan The Company has a restricted stock compensation plan as an encouragement for directors, officers and key employees to remain in the employment or service of the Bank. The shares granted under the plan were in the form of restricted stock vesting over a five-year period beginning one year after the date of grant of the award. Since the stock issued is held in escrow by the Company before some or all of the services are performed, unearned compensation is recorded as a reduction of stockholders' equity. Compensation expense is recognized pro rata over the period during which the shares are earned. The terms of the restricted stock compensation plan include a provision whereby all unearned shares become fully vested upon a change in control. Compensation expense of $70,771 was recognized for each of the years ended December 31, 2001 and 2000. Stock Option Plan The Company's stock option plan provides for issuance of up to 138,876 shares of the Company's authorized but unissued common stock to all employees, including any officer or employee-director. Under the plan, the Company may grant both non-qualified and qualified (i.e. incentive) stock options. In the case of incentive stock options, the aggregate fair value of the stock (determined at the time the incentive stock option is granted) for which any optionee may be granted incentive options which are first exercisable during any calendar year shall not exceed $100,000. Option prices may not be less than the fair market value of the underlying stock at the date of the grant. -31- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (13 - continued) Options granted vest ratably over five to ten years and are exercisable in whole or in part for a period up to ten years from the date of the grant. The following is a summary of the Company's stock options as of December 31, 2001 and 2000, and the changes for the years then ended:
2001 2000 -------------------- -------------------- Weighted Weighted Average Average Number of Exercise Number of Exercise Shares Price Shares Price Outstanding at beginning of year 93,629 $ 7.88 30,005 $ 7.88 Granted -- -- 66,500 11.00 Exercised 8,638 5.83 -- -- Forfeited 256 7.81 2,876 10.05 ------ ------ Outstanding at end of year 84,736 $10.46 93,629 $10.03 ====== ====== Exercisable at end of year 25,533 $ 9.52 16,392 $ 6.73 ====== ======
For options outstanding at December 31, 2001, the option price per share ranged from $6.24 to $12.65 and the weighted average remaining contractual life of the options was 3.8 years. For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair market value of stock options granted for the years ended December 31, 2001 and 2000, was estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model was originally developed for use in estimating the fair value of traded options which have different characteristics from the Company's employee stock options and require the use of highly subjective assumptions which can materially affect the fair value estimate. As a result, management believes that the Black-Scholes model may not necessarily provide a reliable measure of the fair value of employee stock options. The following assumptions were used for grants for the year ended December 31, 2000: 2000 ---- Expected dividend yields 3.88% Risk-free interest rates 6.65% Expected volatility 11.69% Expected life of options 5 years Weighted average fair value at grant date $ 1.59 Had compensation cost for the Company's stock-based compensation plans been determined in accordance with the fair value based accounting method provided by SFAS No. 123, the net income and net income per common share for the years ended December 31, 2001 and 2000 would have been as follows: (In thousands, except per share amounts) 2001 2000 ---- ---- Pro forma net income $ 3,085 $ 2,446 Pro forma net income per share: Basic $ 1.25 $ 1.00 Diluted $ 1.24 $ 0.99 -32- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (14) COMMITMENTS AND CONTINGENCIES In the normal course of business, there are outstanding various commitments and contingent liabilities, such as commitments to extend credit and legal claims, which are not reflected in the financial statements. Commitments under outstanding standby letters of credit totaled $640,400 at December 31, 2001. The following is a summary of the commitments to extend credit at December 31, 2001 and 2000: 2001 2000 ---- ---- Loan commitments: Fixed rate $ 7,599,459 $ 1,774,680 Adjustable rate 617,550 865,500 Undisbursed commercial and personal lines of credit 8,857,316 8,210,294 Undisbursed portion of construction loans in process 2,726,924 2,893,217 Other loans in process 8,416,594 5,884,984 ------------------------- Total commitments to extend credit $28,217,843 $19,628,675 ========================= (15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments (see Note 14). The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Bank upon extension of credit, varies and is based on management's credit evaluation of the counterparty. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank's policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. The Bank has not been required to perform on any financial guarantees and has not incurred any losses on its commitments during the years ended December 31, 2001 and 2000. -33- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (16) STOCKHOLDERS' EQUITY Conversion and Offering On December 31, 1998, the Bank's former mutual holding company, First Capital, Inc., M.H.C. (MHC), 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. Prior to the conversion, the MHC owned 59.5% of the outstanding common stock of the Bank. Upon consummation of the conversion, the Company issued 768,551 shares of common stock (including 61,501 shares issued to the ESOP trust) for gross offering proceeds of $7,685,510. Total expenses in connection with the conversion and offering amounted to $449,382 and were charged against the gross offering proceeds. The conversion was accounted for as a pooling of interests. The Company also issued 532,057 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 the Company after the conversion and offering. Dividends The payment of dividends by the Bank is subject to regulation by the Office of Thrift Supervision (OTS). The Bank may not declare or pay a cash dividend or repurchase any of its capital stock if the effect thereof would cause the regulatory capital of the Bank to be reduced below regulatory capital requirements imposed by the OTS or below the amount of the liquidation account. Liquidation Account Upon completion of the conversion and offering, the Bank established a liquidation account in an amount equal to the amount of the cumulative dividends with respect to the Bank's common stock waived by First Capital, Inc. MHC plus 59.5% of the Bank's stockholders' equity as of September 30, 1999, which together totaled $7.5 million. The liquidation account is maintained for the benefit of depositors as of the March 31, 1997 eligibility record date (or the September 30, 1999 supplemental eligibility record date) who maintain their deposits in the Bank after the conversion and offering. In the event of complete liquidation, and only in such an event, each eligible depositor will be entitled to receive a liquidation distribution from the liquidation account in the proportionate amount of the then current adjusted balance for deposits held, before any liquidation distribution may be made with respect to the stockholders. Except for the repurchase of stock and payment of dividends by the Bank, the existence of the liquidation account does not restrict the use or application of retained earnings of the Bank. (17) REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involved quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to quantitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001, that the Bank meets all capital adequacy requirements to which it is subject. -34- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (17 - continued) As of December 31, 2001, the most recent notification from the OTS categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institutions' categories. The actual capital amounts and ratios are also presented in the table. No amounts were deducted from capital for interest-rate risk in either year.
Minimum To Be Well Minimum Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio As of December 31, 2001: Total capital (to risk weighted assets) $32,921 20.36% $12,938 8.00% $16,172 10.00% Tier I capital (to risk weighted assets) $31,818 19.67% $ 6,469 4.00% $ 9,703 6.00% Tier I capital (to adjusted total assets) $31,818 11.25% $11,311 4.00% $14,138 5.00% Tangible capital (to adjusted total assets) $31,818 11.25% $ 4,241 1.50% N/A As of December 31, 2000: Total capital (to risk weighted assets) $30,783 20.63% $11,935 8.00% $14,919 10.00% Tier I capital (to risk weighted assets) $29,599 19.97% $ 5,967 4.00% $ 8,951 6.00% Tier I capital (to adjusted total assets) $29,599 11.92% $ 9,934 4.00% $12,417 5.00% Tangible capital (to adjusted total assets) $29,599 11.92% $ 3,725 1.50% N/A
-35- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (18) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value and estimated fair value of financial instruments are as follows:
2001 2000 ---- ---- Carrying Fair Carrying Fair Value Value Value Value (In thousands) Financial assets: Cash and due from banks $ 7,184 $ 7,184 $ 6,010 $ 6,010 Interest bearing deposits in banks 5,198 5,198 5,458 5,458 Securities available for sale 54,891 54,891 34,779 34,779 Securities held to maturity 1,836 1,850 11,229 11,162 Loans receivable 202,833 201,663 180,488 180,794 Less: allowance for loan losses 1,103 1,103 1,184 1,184 ----------------------------------------- Loans receivable, net 201,730 200,560 179,304 179,610 ----------------------------------------- Federal Home Loan Bank stock 2,179 2,179 1,504 1,504 Financial liabilities: Deposits 204,122 206,690 185,368 187,398 Retail repurchase agreements 284 285 -- -- Advances from Federal Home Loan Bank 42,825 45,017 30,074 30,239 Off-balance-sheet financial instruments: Asset related to commitments to extend credit -- 90 -- -- Liability related to commitments to extend credit -- -- -- 46
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: Cash and Short-Term Investments For short-term investments, including cash and due from banks, interest bearing deposits with banks, and federal funds sold, the carrying amount is a reasonable estimate of fair value. Debt and Equity Securities For debt securities, including mortgage-backed securities, the fair values are based on quoted market prices. For restricted equity securities held for investment, the carrying amount is a reasonable estimate of fair value. Loans Receivable The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits The fair value of demand deposits, savings accounts, money market deposit accounts and other transaction accounts is the amount payable on demand at the balance sheet date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. -36- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (18 - continued) Borrowed Funds The fair value of advances from Federal Home Loan Bank is estimated by discounting the future cash flows using the current rates at which similar loans with the same remaining maturities could be obtained. Commitments to Extend Credit The majority of commitments to extend credit would result in loans with a market rate of interest if funded. The fair value of these commitments are the fees that would be charged to customers to enter into similar agreements. For fixed rate loan commitments, the fair value also considers the difference between current levels of interest rates and the committed rates. (19) PARENT COMPANY CONDENSED FINANCIAL INFORMATION Condensed financial information for First Capital, Inc. (parent company only) follows: Balance Sheets (In thousands)
2001 2000 ---- ---- Assets: Cash and interest bearing deposits $ 1,037 $ 1,284 Other assets 155 126 Investment in subsidiaries 32,289 29,697 ------------------ $33,481 $31,107 ================== Liabilities and Stockholders' Equity: Other liabilities $ -- $ -- Stockholders' equity 33,481 31,107 ------------------ $33,481 $31,107 ==================
Statements of Income (In thousands)
2001 2000 ---- ---- Interest income $ 28 $ 72 Dividend income 1,030 -- Other operating expenses (253) (284) ------------------ Income (loss) before income taxes and equity in undistributed net income of subsidiaries 805 (212) Income tax credit 79 74 ------------------ Income (loss) before equity in undistributed net income of subsidiaries 884 (138) Equity in undistributed net income of subsidiaries 2,215 2,596 ------------------ Net income $ 3,099 $ 2,458 ==================
-37- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (19 - continued) Statements of Cash Flows (In thousands)
2001 2000 ---- ---- Operating Activities: Net income $ 3,099 $ 2,458 Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed net income of subsidiaries (2,215) (2,596) ESOP and stock compensation expense 128 124 Net change in other assets/liabilities 2 (103) ------------------ Net cash provided (used) by operating activities 1,084 (117) ------------------ Financing Activities: Exercise of stock options (50) -- Repurchase of common stock (87) -- Cash dividends paid (1,194) (1,017) ------------------ Net cash provided by financing activities (1,331) (1,017) ------------------ Net decrease in cash (247) (1,134) Cash at beginning of year 1,284 2,418 ------------------ Cash at end of year $ 1,037 $ 1,284 ==================
(20) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
2001 2000 ---- ---- Basic: Earnings: Net income $3,099,243 $2,458,157 ======================= Shares: Weighted average common shares outstanding 2,463,343 2,452,248 ======================= Net income per common share, basic $ 1.26 $ 1.00 ======================= Diluted: Earnings: Net income $3,099,243 $2,458,157 ======================= Shares: Weighted average common shares outstanding 2,463,433 2,452,248 Add: Dilutive effect of outstanding options 15,717 8,503 Dilutive effect of restricted stock 3,009 1,657 ----------------------- Weighted average common shares outstanding, as adjusted 2,482,069 2,462,408 ======================= Net income per common share, diluted $ 1.25 $ 1.00 =======================
Unearned ESOP shares are not considered as outstanding for purposes of computing weighted average common shares outstanding. -38- FIRST CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 AND 2000 (21) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION 2001 2000 ---- ---- Cash payments for: Interest $9,895,455 $8,979,668 Income taxes 1,581,824 1,229,710 Noncash investing activities: Transfers from loans to real estate acquired through foreclosure $ 126,398 $ 118,640 Proceeds from sales of foreclosed real estate financed through loans 34,222 213,220 (22) MERGER WITH HCB BANCORP On January 12, 2000, the Company completed a merger with HCB Bancorp (HCB), a bank holding company located in Palmyra, Indiana. HCB was the parent company of Harrison County Bank, a state-chartered commercial bank which was merged with and into First Harrison Bank. The merger provided for an exchange of 15.5 shares of the Company's common stock for each outstanding share of HCB common stock. The merger was accounted for as a pooling of interests. -39- -------------------------------------------------------------------------------- BOARD OF DIRECTORS/OFFICERS --------------------------------------------------------------------------------
Directors and Directors Emeritus James G. Pendleton Mark D. Shireman Chairman of the Board and retired Chief Executive President of James L. Shireman, Inc. Officer of First Harrison Bank Dennis L. Huber Michael L. Shireman President and Publisher of O'Bannon Publishing President of Uhl Truck Sales, Inc. Company, Inc. Kenneth R. Saulman John W. Buschemeyer Supervisor for Clark County REMC President and Majority Owner of Hurst Lumber Company Gerald L. Uhl Loren E. Voyles Business Manager for Jacobi Sales, Inc. Retired President of Harrison County Bank Earl H. Book James S. Burden President of Carriage Ford, Inc. Owner of Tracy's Mobile Home Park James E. Nett Marvin E. Kiesler, Director Emeritus Accountant for Koetter Woodworking, Inc. Retired Senior Vice President of Harrison County Bank Executive Officers William W. Harrod M. Chris Frederick President and Chief Executive Officer of First Senior Vice President, Chief Financial Officer and Capital, Inc. and Chief Operating Officer of First Treasurer Harrison Bank Samuel E. Uhl Joel E. Voyles President and Chief Executive Officer of First Senior Vice President, Retail Banking Operations Harrison Bank and Chief Operating Officer of and Corporate Secretary First Capital, Inc. Dennis L. Thomas Senior Vice President, Consumer Lending Processing and Servicing
-40- -------------------------------------------------------------------------------- CORPORATE INFORMATION -------------------------------------------------------------------------------- General Counsel Independent Auditors Thompson & Byrd Monroe Shine & Co., Inc. 303 N. Capitol Avenue 222 East Market Street Corydon, Indiana 47112 New Albany, Indiana 47150 Special Counsel Transfer Agent Muldoon Murphy & Faucette LLP Registrar and Transfer Company 5101 Wisconsin Ave., N.W. 10 Commerce Drive Washington, D.C. 20016 Crawford, New Jersey 07016 1-800-368-5948 Common Shares and Dividend Information The common shares of the Company are traded on the Nasdaq SmallCap Market under the symbol "FCAP." As of December 31, 2001, the Company has 1,291 stockholders of record and 2,538,815 common shares outstanding. This does not reflect the number of persons whose shares are in nominee or "street" name accounts through brokers. The following table lists quarterly market price and dividend information per common share for the years ended December 31, 2001 and 2000. Market price High Low Dividends end of period 2001: First Quarter $ 12.99 $ 9.81 $ 0.11 $ 11.88 Second Quarter 11.88 10.40 0.12 10.80 Third Quarter 14.61 11.39 0.12 13.37 Fourth Quarter 14.40 12.92 0.13 14.40 2000: First Quarter $ 11.06 $ 10.31 $ 0.10 $ 10.92 Second Quarter 11.16 9.71 0.10 10.53 Third Quarter 11.39 10.04 0.10 10.63 Fourth Quarter 11.00 10.14 0.11 11.00 Dividend payments by the Company depend primarily on dividends received by the Company from the Bank. See Note 16 to Consolidated Financial Statements for information regarding the dividend restrictions applicable to the Bank. Annual Meeting The Annual Meeting of Stockholders will be held at 12:00 p.m., Wednesday, April 24, 2002, at the office of the Bank, 220 Federal Drive, N.W., Corydon, Indiana 47112. -41- General Inquiries and Reports The Company is required to file an Annual Report on Form 10-KSB for its fiscal year ended December 31, 2001 with the Securities and Exchange Commission. Copies of this Annual Report and the Company's annual reports on Form 10-KSB and quarterly reports on Form 10-QSB may be obtained without charge by writing: William W. Harrod President and CEO First Capital, Inc. 220 Federal Drive, N.W. Corydon, Indiana 47112 (812) 738-2198 The Company's Annual Reports and Quarterly Reports are also available through the Securities and Exchange Commission's internet website (www.sec.gov). -42-