10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2004

OR

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

For the transition period from                      to                     

Commission File Number: 0-25023

FIRST CAPITAL, INC.

(Exact name of registrant as specified in its charter)

Indiana	35-2056949
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
220 Federal Drive, N.W., Corydon, Indiana	47112
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (812) 738-2198

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

Yes ¨ No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates was $55.3 million, based upon the average bid and asked price of $23.13 as quoted on the Nasdaq Stock Market as of the last business day of the registrant’s most recently completed second fiscal quarter.

The number of shares outstanding of the registrant’s common stock as of March 3, 2005 was 2,596,705.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2004 Annual Report of Stockholders and of the Proxy Statement

for the 2005 Annual Meeting of Stockholders are incorporated by reference

in Parts II and III, respectively, of this Form 10-K.

INDEX

		Page
	Part I
Item 1.	Business	3
Item 2.	Properties	32
Item 3.	Legal Proceedings	32
Item 4.	Submission of Matters to a Vote of Security Holders	33
	Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	33
Item 6.	Selected Financial Data	33
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	33
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 8.	Financial Statements and Supplementary Data	34
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	34
Item 9A.	Controls and Procedures	34
Item 9B.	Other Information	34
	Part III
Item 10.	Directors and Executive Officers of the Registrant	35
Item 11.	Executive Compensation	35
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	36
Item 13.	Certain Relationships and Related Transactions	36
Item 14.	Principal Accountant Fees and Services	36
	Part IV
Item 15.	Exhibits and Financial Statement Schedules	37
SIGNATURES
CERTIFICATIONS

2

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

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends; the general economic climate in the specific market area in which First Capital operates, as well as nationwide; First Capital’s ability to control costs and expenses; competitive products and pricing; loan delinquency rates and changes in federal and state legislation and regulation. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as may be required by applicable law or regulation, First Capital assumes no obligation to update any forward-looking statements.

PART I

ITEM 1. BUSINESS

General

First Capital, Inc. (also referred to as the “Company” or “First Capital”) was incorporated under Indiana law in September 1998. The Company was organized for the purpose of becoming the holding company for First Federal Bank, A Federal Savings Bank (also referred to as the “Bank”) upon the Bank’s reorganization as a wholly owned subsidiary of the Company resulting from the conversion of First Capital, Inc., M.H.C. (“MHC”), from a federal mutual holding company to a stock holding company (“Conversion and Reorganization”). On January 12, 2000, the Company completed a merger of equals with HCB Bancorp, the former holding company for Harrison County Bank. The Bank changed its name to First Harrison Bank in connection with the merger. On March 20, 2003, the Company consummated its acquisition of Hometown Bancshares, Inc. (“Hometown”), a bank holding company located in New Albany, Indiana. The acquisition expanded the Company’s presence in the New Albany and Floyd County, Indiana market area and the Company expects to benefit from growth in this market area, as well as from expansion of the banking services provided to the existing customers of Hometown.

The Company has no significant assets, other than all of the outstanding shares of the Bank and the portion of the net proceeds from the Offering retained by the Company, and no significant liabilities. Management of the Company and the Bank are substantially similar and the Company neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank in accordance with applicable regulations.

The Bank is regulated by the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s deposits are federally insured by the FDIC under the Savings Association Insurance Fund (“SAIF”). The Bank is a member of the Federal Home Loan Bank (“FHLB”) System.

Availability of Information

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed with or furnished to the Securities and Exchange Commission are made available free of charge on the Company’s website, www.firstharrison.com, as soon as practicable after the Company electronically files such material, or furnishes it to, the Securities and Exchange Commission. The contents of the Company’s website shall not be incorporated by reference into this Form 10-K.

3

Market Area and Competition

The Bank considers Harrison, Floyd, Clark and Washington counties in Indiana its primary market area. All of its offices are located in these four counties, which results in most of the Bank’s loans being made in these four counties. The main office of the Bank is located in Corydon, Indiana, 35 miles west of Louisville, Kentucky. The Bank aggressively competes for business with local banks, as well as large regional banks. Its most direct competition for deposit and loan business comes from the commercial banks operating in these four counties. The Bank is the leader in deposit market share in Harrison County, its primary county of operation.

Lending Activities

General. The principal lending activity of the Bank is the origination of residential mortgage loans. To a lesser extent, the Bank also originates consumer, commercial business, commercial real estate (including farm properties) and residential construction loans.

4

Loan Portfolio Analysis. The following table presents the composition of the Bank’s loan portfolio by type of loan at the dates indicated.

	At December 31,
	2004					2003					2002				2001				2000
	Amount			Percent of Total		Amount			Percent of Total		Amount		Percent of Total		Amount		Percent of Total		Amount		Percent of Total
	(Dollars in thousands)
Mortgage Loans:
Residential(1)	$	179,816		55.10	%	$	176,569		55.77	%	$	145,467	65.79	%	$	132,350	64.35	%	$	109,813	59.80	%
Land		6,696		2.05			7,771		2.45			4,821	2.18			4,381	2.13			3,356	1.83
Commercial real estate		38,654		11.84			42,936		13.56			16,760	7.58			15,811	7.69			20,372	11.10
Residential construction(2)		23,215		7.11			25,077		7.92			9,783	4.42			10,477	5.09			9,665	5.26
Total mortgage loans		248,381		76.10			252,353		79.70			176,831	79.97			163,019	79.26			143,206	77.99
Consumer Loans:
Home equity and second mortgage loans		35,385		10.84			27,656		8.73			18,640	8.43			12,963	6.30			11,349	6.18
Automobile loans		13,726		4.20			12,863		4.06			9,598	4.34			10,376	5.04			10,156	5.53
Loans secured by savings accounts		1,611		0.49			1,248		0.39			1,249	0.56			1,309	0.64			1,554	0.85
Unsecured loans		2,307		0.71			1,855		0.59			1,193	0.54			1,721	0.84			1,609	0.88
Other(3)		4,154		1.27			4,543		1.43			4,176	1.89			4,949	2.41			5,920	3.22
Total consumer loans		57,183		17.51			48,165		15.20			34,856	15.76			31,318	15.23			30,588	16.66
Commercial business loans		20,866		6.39			16,162		5.10			9,440	4.27			11,339	5.51			9,816	5.35
Total gross loans		326,430		100.00	%		316,680		100.00	%		221,127	100.00	%		205,676	100.00	%		183,610	100.00	%
Less:
Due to borrowers on loans in process		6,933					10,085					3,887				2,727				2,893
Deferred loan fees net of direct costs		(67	)				(38	)				26				116				229
Allowance for loan losses		2,478					2,433					1,218				1,103				1,184
Total loans, net	$	317,086				$	304,200				$	215,996			$	201,730			$	179,304

⁽¹⁾ Includes conventional one- to four-family and multi-family residential loans.

⁽²⁾ Includes construction loans for which the Bank has committed to provide permanent financing.

⁽³⁾ Includes loans secured by lawn and farm equipment, mobile homes and other personal property.

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Residential Loans. The Bank’s lending activities have concentrated on the origination of residential mortgages, both for sale and retention in the Bank’s loan portfolio. Residential mortgages secured by multi-family properties are an immaterial portion of the residential loan portfolio. Substantially all residential mortgages are collateralized by properties within the Bank’s market area.

The Bank offers both fixed-rate mortgage loans and adjustable rate mortgage (“ARM”) loans typically with terms of 15 to 30 years. The Bank uses loan documents approved by the Federal National Mortgage Corporation (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) whether the loan is originated for investment or sale in the secondary market.

Historically, the Bank has retained its residential loan originations in its portfolio. Retaining fixed-rate loans in its portfolio subjects the Bank to a higher degree of interest rate risk. See “Risk Factors–Above Average Interest Rate Risk Associated with Fixed-Rate Loans” for a further discussion of the risks of rising interest rates. Beginning in 2004, one of the Bank’s strategic goals was to expand its mortgage business by originating mortgage loans for sale, while offering a full line of mortgage products to prospective customers. This practice increases the Bank’s lending capacity and allows the Bank to more effectively manage its profitability since it is not required to predict the prepayment, credit or interest rate risks associated with retaining either the loan or the servicing asset. For the year ended December 31, 2004, the Bank originated and funded $11.0 million of residential mortgage loans for sale in the secondary market. The Bank also originated $9.5 million of residential mortgage loans as an agent for a third-party mortgage company. The third-party mortgage company funded such originations and the Bank received a fee for each loan funded by the third party mortgage company. For a full discussion of the Bank’s mortgage banking operations, see “Item 1. Business–Mortgage Banking Activities.”

ARM loans originated have interest rates that adjust at regular intervals of one year, with 1.5% annual and 6% lifetime caps, and at intervals of five years with 1.5% per adjustment period and 6% lifetime caps, based upon changes in the prevailing interest rates on United States Treasury Bills. The Bank may occasionally use below market interest rates and other marketing inducements to attract ARM loan borrowers. The majority of ARM loans provide that the amount of any increase or decrease in the interest rate is limited to 1.5% (upward or downward) per adjustment period and generally contains minimum and maximum interest rates. Borrower demand for ARMs versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and interest rates and loan fees for ARM loans. The relative amount of fixed-rate and ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment.

The Bank’s lending policies generally limit the maximum loan-to-value ratio on fixed-rate and ARM loans to 80% of the lesser of the appraised value or purchase price of the underlying residential property unless private mortgage insurance to cover the excess over 80% is obtained, in which case the mortgage is limited to 90% (or 97% under a Freddie Mac program) of the lesser of appraised value or purchase price. The loan-to-value ratio, maturity and other provisions of the loans made by the Bank are generally reflected in the policy of making less than the maximum loan permissible under federal regulations, in accordance with established lending practices, market conditions and underwriting standards maintained by the Bank. The Bank requires title, fire and extended insurance coverage on all mortgage loans originated. All of the Bank’s real estate loans contain due on sale clauses. The Bank generally obtains appraisals on all its real estate loans from outside appraisers.

6

Construction Loans. Although the Bank originates construction loans that are repaid with the proceeds of a limited number of mortgage loans obtained by the borrower from another lender, the majority of the construction loans that the Bank originates are construction/permanent loans, which are originated with one loan closing at either a fixed or variable rate of interest and for terms of up to 30 years. Construction loans originated without a commitment by the Bank to provide permanent financing are generally originated for a term of six to 12 months and at a fixed interest rate based on the prime rate. In the case of construction/permanent loans, the construction loan is also generally for a term of six to 12 months and the rate charged is the rate chosen by the borrower for the permanent loan. Accordingly, if the borrower chooses a fixed interest rate for the permanent loan, the construction loan rate is also fixed at the same rate.

The Bank originates speculative construction loans to a limited number of builders that are operating and based in the Bank’s primary market area and with whom the Bank has well-established business relationships. At December 31, 2004, speculative construction loans, for which there is not a commitment for permanent financing in place at the time the construction loan was originated, amounted to $6.6 million. The Bank generally limits the number of speculative construction loans outstanding at any one time to any one builder to two loans.

All construction loans are generally originated with a loan-to-value ratio not to exceed 80% of the appraised estimated value of the completed property. The construction loan documents require the disbursement of the loan proceeds in increments as construction progresses. Disbursements are based on periodic on-site inspections by an independent appraiser and/or Bank personnel approved by the Board of Directors.

Construction lending is inherently riskier than one- to four-family mortgage lending. Construction loans, on average, generally have higher loan balances than one- to four-family mortgage loans. In addition, the potential for cost overruns because of the inherent difficulties in estimating construction costs and, therefore, collateral values and the difficulties and costs associated with monitoring construction progress, among other things, are major contributing factors to this greater credit risk. Speculative construction loans have the added risk that there is not an identified buyer for the completed home when the loan is originated, with the risk that the builder will have to service the construction loan debt and finance the other carrying costs of the completed home for an extended time period until a buyer is identified. Furthermore, the demand for construction loans and the ability of construction loan borrowers to service their debt depends highly on the state of the general economy, including market interest rate levels and the state of the economy of the Bank’s primary market area. A material downturn in economic conditions would be expected to have a material adverse effect on the credit quality of the construction loan portfolio.

Commercial Real Estate Loans. Commercial real estate loans are generally secured by small retail stores, professional office space and, in certain instances, farm properties. Commercial real estate loans are generally originated with a loan-to-value ratio not to exceed 75% of the appraised value of the property. Property appraisals are performed by independent appraisers approved by the Bank’s Board of Directors. The Bank attempts to originate commercial real estate loans at variable interest rates based on the United States Treasury Bill rate for terms ranging from ten to 15 years and with interest rate adjustment intervals of five years. However, in the current low interest rate environment, borrower demand for variable rate loans is low and the Bank is generally originating commercial real estate loans with fixed interest rates for five-year terms, with principal and interest payments amortized over 15 years.

7

Commercial real estate lending affords the Bank an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending. However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family and commercial properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by limiting the maximum loan-to-value ratio to 75% and strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. The Bank also obtains loan guarantees from financially capable parties based on a review of personal financial statements.

Commercial Business Loans. Commercial business loans are generally secured by inventory, accounts receivable and business equipment such as trucks and tractors. Many commercial business loans also have real estate as collateral. The Bank generally requires a personal guaranty of payment by the principals of a corporate borrower, and reviews the personal financial statements and income tax returns of the guarantors. Commercial business loans are generally originated with loan-to-value ratios not exceeding 75%.

Aside from lines of credit, commercial business loans are generally originated for terms not to exceed seven years with variable interest rates based on the prime lending rate. Approved credit lines totaled $14.1 million at December 31, 2004, of which $7.8 million was outstanding. Lines of credit are originated at fixed and variable interest rates for one-year renewable terms.

A director of the Bank is a shareholder of a farm implement dealership that contracts with the Bank to provide sales financing to the dealership’s customers. The Bank does not grant preferential credit under this arrangement. All sales contracts are presented to the Bank on a 50% recourse basis, with the dealership responsible for the sale and disposition of any repossessed equipment. During the year ended December 31, 2004, the Bank granted approximately $1.7 million of credit to customers of the dealership and such loans had an aggregate outstanding balance of $2.7 million at December 31, 2004. At December 31, 2004, seven loans were delinquent 30 days or more with an aggregate outstanding balance of $42,000.

Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral-based lending with loan amounts based on predetermined loan-to-collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary, and often insufficient, source of repayment.

Consumer Loans. The Bank offers a variety of secured or guaranteed consumer loans, including automobile and truck loans, home equity loans, home improvement loans, boat loans, mobile home loans and loans secured by savings deposits. In addition, the Bank offers unsecured consumer loans. Consumer loans are generally originated at fixed interest rates and for terms not to exceed seven years. The largest portion of the Bank’s consumer loan portfolio consists of home equity and second mortgage loans followed by automobile and truck loans. Automobile and truck loans are originated on both new

8

and used vehicles. Such loans are generally originated at fixed interest rates for terms up to five years and at loan-to-value ratios up to 80% of the blue book value in the case of used vehicles and 80% of the purchase price in the case of new vehicles.

Home equity and second mortgage loans are generally originated for terms not to exceed five years and at adjustable rates of interest. The loan-to-value ratio on such loans is limited to 95%, taking into account the outstanding balance on the first mortgage loan.

The Bank’s underwriting procedures for consumer loans includes an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loans. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, to the proposed loan amount. The Bank underwrites and originates the majority of its consumer loans internally, which management believes limits exposure to credit risks relating to loans underwritten or purchased from brokers or other outside sources.

Consumer loans generally entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by assets that depreciate rapidly, such as automobiles. In the latter case, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by the borrower against the Bank as the holder of the loan, and a borrower may be able to assert claims and defenses which it has against the seller of the underlying collateral.

Loan Maturity and Repricing

The following table sets forth certain information at December 31, 2004 regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity, but does not include potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned income and allowance for loan losses.

	Within One Year		After One Year Through 3 Years		After 3 Years Through 5 Years		After 5 Years Through 10 Years		After 10 Years Through 15 Years		After 15 Years		Total
	(Dollars in thousands)
Mortgage loans:
Residential	$	10,121	$	17,872	$	20,871	$	42,482	$	35,196	$	53,274	$	179,816
Commercial real estate and land loans		10,362		7,550		9,635		7,591		6,987		3,225		45,350
Residential construction(1)		20,681		154		504		548		664		664		23,215
Consumer loans		11,716		18,314		24,102		2,510		131		410		57,183
Commercial business		9,897		5,762		3,893		800		441		73		20,866
Total gross loans	$	62,777	$	49,652	$	59,005	$	53,931	$	43,419	$	57,646	$	326,430

⁽¹⁾ Includes construction loans for which the Bank has committed to provide permanent financing. The contractual maturities reflect the principal payments due following the period of construction.

9

The following table sets forth the dollar amount of all loans due after December 31, 2005, which have fixed interest rates and have floating or adjustable interest rates.

	Fixed Rates		Floating or Adjustable Rates
	(Dollars in thousands)
Mortgage loans:
Residential	$	139,868	$	29,827
Commercial real estate and land loans		14,743		20,245
Residential construction		2,534		—
Consumer loans		16,479		28,988
Commercial business		8,429		2,540
Total gross loans	$	182,053	$	81,600

Loan Solicitation and Processing. A majority of the loans originated by the Bank are made to existing customers. Walk-ins and customer referrals are also a source of loan originations. Upon receipt of a loan application, a credit report is ordered to verify specific information relating to the loan applicant’s employment, income and credit standing. A loan applicant’s income is verified through the applicant’s employer or from the applicant’s tax returns. In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken, generally by an independent appraiser approved by the Bank. The mortgage loan documents used by the Bank conform to secondary market standards.

The Bank requires that borrowers obtain certain types of insurance to protect its interest in the collateral securing the loan. The Bank requires either a title insurance policy insuring that the Bank has a valid first lien on the mortgaged real estate or an opinion by an attorney regarding the validity of title. Fire and casualty insurance is also required on collateral for loans.

The Bank’s lending practices generally limit the maximum loan to value ratio on conventional residential mortgage loans to 80% (or 90% under a Freddie Mac program) of the appraised value of the property as determined by an independent appraisal or the purchase price, whichever is less, and 75% for commercial real estate loans.

Loan Commitments and Letters of Credit. The Bank issues commitments for fixed- and adjustable-rate single-family residential mortgage loans conditioned upon the occurrence of certain events. Such commitments are made in writing on specified terms and conditions and are honored for up to 60 days from the date of application, depending on the type of transaction. The Bank had outstanding loan commitments of approximately $3.8 million at December 31, 2004.

As an accommodation to its commercial business loan borrowers, the Bank issues standby letters of credit or performance bonds usually in favor of municipalities for whom its borrowers are performing services. At December 31, 2004, the Bank had outstanding letters of credit of $1.3 million.

Loan Origination and Other Fees. The Bank, in most instances, receives loan origination fees or discount “points.” Loan fees and points are a percentage of the principal amount of the mortgage loan that is charged to the borrower for funding the loan. The Bank usually charges a fixed origination fee on one- to four-family residential real estate loans and long-term commercial real estate loans. On residential construction loans, the Bank usually charges one point. Current accounting standards require loan origination fees and certain direct costs of underwriting and closing loans to be deferred and amortized into interest income over the contractual life of the loan. Deferred fees and costs associated with loans that are sold are recognized as income at the time of sale. The Bank had $67,000 of net deferred loan costs at December 31, 2004.

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Mortgage Banking Activities. Mortgage loans originated and funded by the Bank and intended for sale in the secondary market are carried at the lower of aggregate cost or market value. Aggregate market value is determined based on the quoted prices under a “best efforts” sales agreement with a third party. Net unrealized losses are recognized through a valuation allowance by charges to income. Realized gains on sales of mortgage loans are included in noninterest income.

Commitments to originate and fund mortgage loans for sale in the secondary market are considered derivative financial instruments to be accounted for at fair value. The Bank’s mortgage loan commitments subject to derivative accounting are fixed rate mortgage commitments at market rates when initiated. At December 31, 2004, the Bank had commitments to originate $2.4 million in fixed-rate mortgage loans intended for sale in the secondary market after the loans are closed. Fair value is estimated based on fees that would be charged on commitments with similar terms.

The Bank also serves as an agent for a third-party mortgage company. In this role, the Bank accepts and processes mortgage loan applications and performs other loan origination activities, except funding, on behalf of the third-party mortgage company. The third-party mortgage company funds such loans and the Bank receives a fee for each loan funded. The fee is typically 1.5 to 2.0% of the loan principal amount.

Delinquencies. The Bank’s collection procedures provide for a series of contacts with delinquent borrowers. A late charge is assessed and a late charge notice is sent to the borrower after the 15th day of delinquency. After 20 days, the collector places a phone call to the borrower. When a payment becomes 60 days past due, the collector issues a default letter. If a loan continues in a delinquent status for 90 days or more, the Bank generally initiates foreclosure or other litigation proceedings.

Nonperforming Assets. Loans are reviewed regularly and when loans become 90 days delinquent, the loan is given nonaccrual status and the previously accrued interest income is reversed. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan.

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The following table sets forth information with respect to the Bank’s nonperforming assets for the periods indicated. During the periods shown, the Bank had no restructured loans within the meaning of Statement of Financial Accounting Standards (“SFAS”) No. 15.

	At December 31,
	2004			2003			2002			2001			2000
	(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Residential real estate	$	882		$	964		$	494		$	172		$	241
Commercial real estate		485			1,056			36			566			—
Commercial business		525			569			—			49			—
Consumer		183			48			77			—			10
Total		2,075			2,637			607			787			251
Loans past due 90 days on accrual status:
Residential real estate		706			1,825			385			375			280
Commercial real estate		671			575			228			—			—
Commercial business		70			78			8			—			—
Consumer		38			188			151			97			41
Total		1,485			2,666			772			472			321
Foreclosed real estate, net		442			225			102			212			119
Total nonperforming assets	$	4,002		$	5,528		$	1,481		$	1,471		$	691
Total loans delinquent 90 days or more to net loans		1.12	%		1.74	%		0.64	%		0.62	%		0.32	%
Total loans delinquent 90 days or more to total assets		0.84	%		1.30	%		0.45	%		0.45	%		0.23	%
Total nonperforming assets to total assets		0.94	%		1.35	%		0.48	%		0.52	%		0.28	%

The increase in nonperforming assets during 2003 is primarily the result of $3.3 million in impaired loans that were acquired in the Hometown merger.

The Bank accrues interest on loans over 90 days past due when, in the opinion of management, the estimated value of collateral and collection efforts are deemed sufficient to ensure full recovery. The Bank recognized $113,000 in interest income on nonaccrual loans for the fiscal year ended December 31, 2004.

Classified Assets. The OTS has adopted various regulations regarding problem assets of savings institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OTS examiners have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard” assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. “Doubtful” assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified as loss, the insured institution establishes specific allowances for loan losses for the full amount of the

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portion of the asset classified as loss. All or a portion of general loan loss allowances established to cover possible losses related to assets classified substandard or doubtful can be included in determining an institution’s regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated “special mention” and monitored by the Bank.

Current accounting rules require that impaired loans be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or if expedient, at the loan’s observable market price or the fair value of collateral if the loan is collateral dependent. A loan is classified as “impaired” by management when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due in accordance with the terms of the loan agreement. If the fair value, as measured by one of these methods, is less than the recorded investment in the impaired loan, the Bank establishes a valuation allowance with a provision charged to expense. Management reviews the valuation of impaired loans on a quarterly basis to consider changes due to the passage of time or revised estimates. Assets that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated “special mention” by management.

An insured institution is required to establish and maintain an allowance for loan losses at a level that is adequate to absorb estimated credit losses associated with the loan portfolio, including binding commitments to lend. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities. When an insured institution classifies problem assets as “loss,” it is required either to establish an allowance for losses equal to 100% of the amount of the assets, or charge off the classified asset. The amount of its valuation allowance is subject to review by the OTS, which can order the establishment of additional general loss allowances. The Bank regularly reviews the loan portfolio to determine whether any loans require classification in accordance with applicable regulations.

At December 31, 2004, 2003 and 2002, the aggregate amounts of the Bank’s classified assets at those dates were as follows:

	At December 31,
	2004		2003		2002
	(Dollars in thousands)
Classified assets:
Loss	$	—	$	—	$	—
Doubtful		1,135		2,733		1,158
Substandard		2,807		3,628		798
Special mention		2,679		1,360		—

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Loans classified as impaired in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan, included in the above regulatory classifications and the related allowance for loan losses are summarized below at the dates indicated:

	At December 31,
	2004		2003		2002
	(Dollars in thousands)
Impaired loans with related allowance	$	2,046	$	3,589	$	1,160
Impaired loans with no allowance		1,514		1,714		—
Total impaired loans	$	3,560	$	5,303	$	1,160
Allowance for loan losses:
Related to impaired loans		820		1,075		420
Related to other loans		1,658		1,358		798

Foreclosed Real Estate. Foreclosed real estate held for sale 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 income from operations of foreclosed real estate held for sale is reported in non-interest income. At December 31, 2004, the Bank had foreclosed real estate totaling $442,000.

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 its current judgments about the credit quality of the loan portfolio. In addition, the OTS, as an integral part of its examination process, periodically reviews the Bank’s allowance for loan losses and may require the Bank to make additional provisions for estimated losses based on its judgments about information available to the OTS at the time of its 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 affect the loss rates. The

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Allowance for Loan Losses Analysis table below shows changes in the breakdown of the allowance for loan losses by loan category. Management continues to refine the methodology used to allocate loan losses by category and the methodology for allocating loan loss allowances by type of loan.

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 was 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 and 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.

The allowance for loan losses was $2.5 million at December 31, 2004, $2.4 million at December 31, 2003 and $1.2 million at December 31, 2002. Management has deemed these amounts as adequate on those dates based on its evaluation methodology. At December 31, 2004, nonperforming loans totaled $3.6 million or 0.84% 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 $706,000, commercial real estate loans totaling $671,000, commercial business loans totaling $70,000 and consumer loans in the amount of $38,000. These loans are accruing interest as the estimated value of the collateral and collection efforts are deemed sufficient to ensure full recovery.

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The following table sets forth an analysis of the Bank’s allowance for loan losses for the periods indicated.

	Year Ended December 31,
	2004			2003			2002			2001			2000
	(Dollars in thousands)
Allowance at beginning of period	$	2,433		$	1,218		$	1,103		$	1,184		$	1,194
Provision for loan losses		510			725			305			66			48
		2,943			1,943			1,408			1,250			1,242
Allowance for loan losses on loans acquired in the Hometown merger		—			1,065			—			—			—
Recoveries:
Residential real estate		—			4			—			8			3
Commercial real estate		—			—			—			—			—
Commercial business		—			3			22			—			—
Consumer		56			45			35			67			15
Total recoveries		56			52			57			75			18
Charge-offs:
Residential real estate		129			172			78			2			13
Commercial real estate		162			6			—			—			—
Commercial business		20			55			2			114			3
Consumer		210			394			167			106			60
Total charge-offs		521			627			247			222			76
Net (charge-offs) recoveries		(465	)		(575	)		(190	)		(147	)		(58	)
Balance at end of period	$	2,478		$	2,433		$	1,218		$	1,103		$	1,184
Ratio of allowance to total loans outstanding at the end of the period		0.76	%		0.77	%		0.55	%		0.54	%		0.64	%
Ratio of net charge-offs to average loans outstanding during the period		0.15	%		0.21	%		0.09	%		0.08	%		0.03	%

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Allowance for Loan Losses Analysis

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

	At December 31,
	2004				2003				2002				2001				2000
	Amount		Percent of Outstanding Loans in Category		Amount		Percent of Outstanding Loans in Category		Amount		Percent of Outstanding Loans in Category		Amount		Percent of Outstanding Loans in Category		Amount		Percent of Outstanding Loans in Category
	(Dollars in thousands)
Residential real estate(1)	$	446	62.21	%	$	673	63.69	%	$	375	70.21	%	$	199	69.44	%	$	614	65.06	%
Commercial real estate and land loans		455	13.89			464	16.01			18	9.76			120	9.82			226	12.93
Commercial business		827	6.39			576	5.10			297	4.27			294	5.51			90	5.35
Consumer		750	17.51			720	15.20			528	15.76			490	15.23			254	16.66
Unallocated		—	—			—	—			—	—			—	—			—	—
Total allowance for loan losses	$	2,478	100.00	%	$	2,433	100.00	%	$	1,218	100.00	%	$	1,103	100.00	%	$	1,184	100.00	%

⁽¹⁾ Includes residential construction loans.

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Investment Activities

Federally chartered savings institutions have authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies and of state and municipal governments, deposits at the applicable FHLB, certificates of deposit of federally insured institutions, certain bankers’ acceptances and federal funds. Subject to various restrictions, such savings institutions may also invest a portion of their assets in commercial paper, corporate debt securities and mutual funds, the assets of which conform to the investments that federally chartered savings institutions are otherwise authorized to make directly. Savings institutions are also required to maintain minimum levels of liquid assets that vary from time to time. The Bank may decide to increase its liquidity above the required levels depending upon the availability of funds and comparative yields on investments in relation to return on loans.

The Bank is required under federal regulations to maintain a minimum amount of liquid assets and is also permitted to make certain other securities investments. The balance of the Bank’s investments in short-term securities in excess of regulatory requirements reflects management’s response to the significantly increasing percentage of deposits with short maturities. It is the intention of management to hold securities with short maturities in the Bank’s investment portfolio in order to enable the Bank to match more closely the interest-rate sensitivities of its assets and liabilities.

The Bank periodically invests in mortgage-backed securities, including mortgage-backed securities guaranteed or insured by Ginnie Mae, Fannie Mae or Freddie Mac. Mortgage-backed securities generally increase the quality of the Bank’s assets by virtue of the guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Bank. Of the Bank’s total mortgage-backed securities portfolio, securities with a book value of $252,000 have adjustable rates as of December 31, 2004.

At December 31, 2004, neither the Company nor the Bank had an investment in securities (other than United States Government and agency securities and mutual funds that invest in such securities) which exceeded 10% of the Company’s stockholders’ equity at that date.

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The following table sets forth the securities portfolio at the dates indicated.

	At December 31,
	2004								2003								2002
	Fair Value		Amortized Cost		Percent of Portfolio		Weighted Average Yield(2)		Fair Value		Amortized Cost		Percent of Portfolio		Weighted Average Yield(2)		Fair Value		Amortized Cost		Percent of Portfolio		Weighted Average Yield(2)
	(Dollars in thousands)
Securities Held to Maturity(1)
Municipal:
Due in one year or less		38		37	0.05		9.17			169		167	0.25		8.40			114		113	0.17		8.87
Due after one year through five years		188		180	0.27		9.16			174		167	0.25		9.08			194		189	0.29		8.59
Due after five years through ten years		101		99	0.15		7.38			142		137	0.20		8.10			74		74	0.11		10.23
Due after ten years		883		800	1.21		8.33			880		811	1.21		8.02			876		800	1.23		8.33
Mortgage-backed securities(3)		139		142	0.21		3.71			220		225	0.34		4.10			295		298	0.46		4.66
	$	1,349	$	1,258	1.89	%			$	1,585	$	1,507	2.25	%			$	1,553	$	1,474	2.26	%
Securities Available for Sale
Debt securities:
U.S. agency:
Due in one year or less	$	2,022	$	2,011	3.03	%	3.85	%	$	2,562	$	2,515	3.75	%	4.42	%	$	4,131	$	4,004	6.17	%	5.65	%
Due after one year through five years		25,999		26,055	39.25		3.91			29,864		29,547	44.01		4.11			38,105		37,074	57.18		4.73
Due after five years through ten years		1,473		1,501	2.26		3.36			3,500		3,522	5.25		3.43			—		—	—		—
Due after ten years through fifteen years		946		1,000	1.51		5.26			951		1,000	1.49		5.14			—		—	—		—
Mortgage-backed securities (3)		17,939		18,064	27.21		3.71			15,506		15,581	23.21		3.60			10,963		10,833	16.71		3.96
Municipal:
Due in one year or less		115		115	0.17		6.82			177		175	0.26		7.02			145		140	0.22		7.89
Due after one year through five years		3,970		3,857	5.81		6.05			2,637		2,489	3.71		6.32			1,885		1,769	2.73		6.79
Due after five years through ten years		8,483		8,335	12.55		6.13			6,305		6,097	9.08		5.85			5,503		5,335	8.23		6.55
Due after ten years		2,894		2,852	4.30		7.22			3,449		3,401	5.07		5.91			3,001		2,979	4.59		6.97
Equity securities:
Mutual funds		1,351		1,342	2.02		N/A			1,293		1,287	1.92		N/A			1,247		1,238	1.91		N/A
	$	65,192	$	65,132	98.11	%			$	66,244	$	65,614	97.75	%			$	64,980	$	63,372	97.74	%

⁽¹⁾ Securities held to maturity are carried at amortized cost.

⁽²⁾ Yields are calculated on a fully taxable equivalent basis using a marginal federal income tax rate of 34%. Weighted average yields are calculated using average prepayment rates for the most recent three-month period.

⁽³⁾ The expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.

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Deposit Activities and Other Sources of Funds

General. Deposits and loan repayments are the major source of the Bank’s funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions. Borrowing may be used on a short-term basis to compensate for reductions in the availability of funds from other sources or may also be used on a longer-term basis for interest rate risk management.

Deposit Accounts. Deposits are attracted from within the Bank’s primary market area through the offering of a broad selection of deposit instruments, including negotiable order of withdrawal (“NOW”) accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans. Deposit account terms vary, according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, the Bank considers the rates offered by its competition, profitability to the Bank, matching deposit and loan products and its customer preferences and concerns. The Bank generally reviews its deposit mix and pricing weekly.

The following table presents the maturity distributions of time deposits of $100,000 or more as of December 31, 2004.

Maturity Period	Amount at December 31, 2004
	(Dollars in thousands)
Three months or less	$	5,282
Over three through six months		2,681
Over six through 12 months		7,313
Over 12 months		23,967
Total	$	39,243

The following table sets forth the balances of deposits in the various types of accounts offered by the Bank at the dates indicated.

	At December 31,
	2004							2003							2002
	Amount		Percent of Total		Increase (Decrease)			Amount		Percent of Total		Increase (Decrease)			Amount		Percent of Total		Increase (Decrease)
	(Dollars in thousands)
Non-interest-bearing demand	$	33,801	10.68	%	$	3,266		$	30,535	10.10	%	$	10,483		$	20,052	9.27	%	$	1,423
NOW accounts		59,380	18.77			14,652			44,728	14.79			10,950			33,778	15.62			3,147
Savings accounts		36,000	11.38			4,563			31,437	10.39			11,362			20,075	9.29			2,801
Money market accounts		32,479	10.26			(3,645	)		36,124	11.94			1,527			34,597	16.00			1,136
Fixed rate time deposits which mature:
Within one year		61,799	19.53			(19,659	)		81,458	26.93			30,700			50,758	23.48			(9,253	)
After one year, but within three years		68,401	21.61			17,518			50,883	16.82			20,476			30,407	14.06			1,268
After three years, but within five years		23,619	7.46			(2,550	)		26,169	8.65			437			25,732	11.90			11,487
After five years		860	0.27			(186	)		1,046	0.35			345			701	0.32			43
Club accounts		123	0.04			35			88	0.03			(14	)		102	0.06			28
Total	$	316,462	100.00	%	$	13,994		$	302,468	100.00	%	$	86,266		$	216,202	100.00	%	$	12,080

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The following table sets forth the amount and maturities of time deposits by rates at December 31, 2004.

	Amount Due
	Less Than One Year		1 - 3 Years		3 - 5 Years		After 5 Years		Total		Percent of Total
	(Dollars in thousands)
Below 1.00%	$	162	$	—	$	—	$	—	$	162	0.10	%
1.00% — 1.99%		20,206		2,367		—		—		22,573	14.59
2.00% — 2.99%		22,359		14,387		209		—		36,955	23.89
3.00% — 3.99%		5,469		25,367		11,799		338		42,973	27.78
4.00% — 4.99%		4,465		13,002		11,348		192		29,007	18.76
5.00% — 5.99%		715		12,316		48		313		13,392	8.66
6.00% — 6.99%		6,578		911		213		2		7,704	4.98
7.00% — 7.99%		1,845		51		2		—		1,898	1.23
8.00% — 8.99%		—		—		—		15		15	0.01	%
Total	$	61,799	$	68,401	$	23,619	$	860	$	154,679	100.00	%

Borrowings. Deposits are the primary source of funds for the Bank’s lending and investment activities and for its general business purposes. The Bank has at times relied upon advances from the FHLB of Indianapolis to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB of Indianapolis are secured by certain first mortgage loans and investment and mortgage-backed securities. The Bank also uses retail repurchase agreements as a source of borrowings.

The FHLB functions as a central reserve bank providing credit for savings and loan associations and certain other member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the FHLB’s assessment of the institution’s creditworthiness. Under its current credit policies, the FHLB generally limits advances to 20% of a member’s assets, and short-term borrowing of less than one year may not exceed 10% of the institution’s assets. The FHLB determines specific lines of credit for each member institution.

The following table sets forth certain information regarding the Bank’s use of FHLB advances.

	At or For the Year Ended December 31,
	2004			2003			2002
	(Dollars in thousands)
Maximum balance at any month end	$	67,488		$	60,242		$	53,320
Average balance		63,122			54,722			46,753
Period end balance		65,099			60,242			53,320
Weighted average interest rate:
At end of period		4.84	%		5.05	%		5.49	%
During the period		5.07	%		5.41	%		5.80	%

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The following table sets forth certain information regarding the Bank’s use of retail repurchase agreements.

	At or For the Year Ended December 31,
	2004			2003			2002
	(Dollars in thousands)
Maximum balance at any month end	$	697		$	520		$	457
Average balance		296			156			186
Period end balance		640			520			457
Weighted average interest rate:
At end of period		1.99	%		0.68	%		0.93	%
During the period		1.21	%		0.76	%		1.61	%

Subsidiary Activities

As of December 31, 2004, the Bank was the Company’s only subsidiary. The Bank is wholly owned by the Company.

First Harrison Financial Services, Inc. is a former wholly-owned subsidiary of First Harrison Bank that sold property and casualty insurance, life insurance and non-deposit investment products. Effective January 1, 2004, First Harrison Financial Services, Inc. dissolved its charter and all accounts were combined with the Bank. During 2004, the Bank organized three wholly-owned subsidiaries to manage a portion of the investment securities portfolio. First Harrison Investments, Inc. and First Harrison Holdings, Inc. are Nevada corporations that jointly own First Harrison, LLC, a Nevada limited liability corporation that holds and manages an investment securities portfolio.

Personnel

As of December 31, 2004, the Bank had 127 full-time employees and 24 part-time employees. A collective bargaining unit does not represent the employees and the Bank considers its relationship with its employees to be good.

RISK FACTORS

Above average interest rate risk associated with fixed-rate loans

At December 31, 2004, approximately 42.3% of the Bank’s assets consisted of residential mortgage loans held for investment. Such loans represented 55.1% of the total loan portfolio at that date. While generally considered to involve less risk than other types of lending, such as commercial mortgage loans, commercial business loans and consumer loans, residential mortgage loans provide relatively lower yields. The Bank’s loan portfolio also includes a significant amount of loans with fixed rates of interest. At December 31, 2004, $182.1 million, or 69%, of the Bank’s total loans receivable had fixed interest rates all of which were held for investment. Although the Bank offers ARM loans, customer demand for them is generally low in times of low market interest rates, as currently exists. Unlike ARM loans, fixed-rate loans carry the risk that, because they do not reprice to market interest rates, their yield may be insufficient to offset increases in the Bank’s cost of funds during a rising interest rate environment. Accordingly, a material and prolonged increase in market interest rates could be expected to have a greater adverse effect on the Bank’s net interest income compared to other institutions that hold a

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materially larger portion of their assets in ARM loans or fixed-rate loans that are originated for committed sale in the secondary market. For a discussion of the Bank’s loan portfolio, see “Item 1. Business– Lending Activities.”

Commercial business lending risks

At December 31, 2004, the Bank’s commercial business loan portfolio amounted to $20.9 million, or 6.39% of total loans. Subject to market conditions and other factors, the Bank intends to expand its commercial business lending activities within its primary market area. Commercial business lending is inherently riskier than one- to four-family mortgage lending. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation value of these assets in the event of a borrower default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. See “Item 1. Business–Lending Activities–Commercial Business Loans.”

Commercial Real Estate Lending Risks

At December 31, 2004, the Bank’s commercial real estate loan portfolio amounted to $38.7 million, or 11.84% of total loans. Commercial real estate lending is inherently riskier than one- to-four family mortgage lending. Because payments on loans secured by commercial properties often depend upon the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy, among other things. See “Item 1. Business–Lending Activities–Commercial Real Estate Loans.”

A downturn in the local economy or a decline in real estate values could hurt the Company’s profits.

Nearly all of the Bank’s loans are secured by real estate or made to businesses in our primary market area. As a result of this concentration, a downturn in the local economy could cause significant increases in nonperforming loans, which would hurt profit. In recent years there has been a significant increase in real estate values in our market area. As a result of rising home prices, the Bank’s loans have been well collateralized. A decline in real estate values could cause some of the Bank’s mortgages to become adequately collateralized, which would expose the Company to a greater risk of loss.

Strong competition within the Bank’s market area could hurt the Company’s profit and growth.

The Bank faces intense competition both in making loans and attracting deposits. This competition has made it more difficult for it to make new loans and at times has forced it to offer higher deposit rates. Price competition for loans and deposits might result in the Bank earning less on loans paying more on deposits, which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits. Some of the institutions with which the Bank competes have substantially greater resources and lending limits than it has and may offer services that the Bank does not provide. Competition will likely increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. The Company’s profitability depends upon the Bank’s continued ability to compete successfully in its market area.

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The Bank and the Company operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.

The Company and the Bank are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, their chartering authority, and by the Federal Deposit Insurance Corporation, as insurer of the Bank’s deposits. The Company and the Bank are both subject to regulation and supervision by the Office of Thrift Supervision. Such regulations and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including to imposition of restrictions on operations, the classification of assets and determination of the level of allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory claim may have a material impact on the Bank’s operations.

REGULATION AND SUPERVISION

General

As a savings and loan holding company, the Company is required by federal law to report to, and otherwise comply with, the rules and regulations of the OTS. The Bank is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer. The Bank is a member of the Federal Home Loan Bank System and, with respect to deposit insurance, of the Savings Association Insurance Fund managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The OTS and/or the FDIC conduct periodic examinations to test the Bank’s safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, FDIC or Congress, could have a material adverse impact on the Company, the Bank and their operations. Certain regulatory requirements applicable to the Bank and Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Company and is qualified in its entirety by reference to the actual laws and regulations.

Holding Company Regulation

The Company is a nondiversified unitary savings and loan holding company within the meaning of federal law. Under prior law, a unitary savings and loan holding company, such as the Company, was not generally restricted as to the types of business activities in which it may engage, provided that the Bank continued to be a qualified thrift lender. See “Federal Savings Institution Regulation - QTL Test.” The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Further, the Gramm-Leach-Bliley Act specifies that existing savings and loan holding companies may only engage in such activities. The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted

24

authority for activities with respect to unitary savings and loan holding companies existing prior to May 4, 1999, so long as the Bank continues to comply with the QTL Test. The Company does qualify for the grandfathering. Upon any non-supervisory acquisition by the Company of another savings institution or savings bank that meets the qualified thrift lender test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would generally be limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and certain activities authorized by OTS regulation. However, the OTS has issued an interpretation concluding that multiple savings and loan holding companies may also engage in activities permitted for financial holding companies.

A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company, without prior written approval of the OTS and from acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS considers the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the deposit insurance funds, the convenience and needs of the community and competitive factors.

The OTS may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Although savings and loan holding companies are not currently subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below. The Bank must notify the OTS 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.

Acquisition of the Company. Under the federal Change in Bank Control Act (“CIBCA”), a notice must be submitted to the OTS if any person (including a company or savings association), or group acting in concert, seeks to acquire “control” of a savings and loan holding company or savings association. A change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the Company’s outstanding voting stock, unless the OTS has found that the acquisition will not result in a change of control of the Company. Under the CIBCA, the OTS has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that acquires control would then be subject to regulation as a savings and loan holding company.

Federal Savings Institution Regulation

Business Activities. Federal law and regulations govern the activities of federal savings institutions. These laws and regulations delineate the nature and extent of the activities in which federal associations may engage. In particular, certain lending authority for federal associations, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets.

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Capital Requirements. The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital to total assets ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest CAMELS rating), and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The OTS regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.

The risk-based capital standard for savings institutions requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OTS capital regulation based on the risks believed inherent in the type of asset. Core (Tier 1) capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

The OTS also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular circumstances. At December 31, 2004, the Bank met each of its capital requirements.

The following table presents the Bank’s capital position at December 31, 2004.

							Capital
	Actual Capital		Required Capital		Excess Amount (Deficiency)		Actual Percent		Required Percent
	(Dollars in thousands)
Tangible	$	32,461	$	6,292	$	26,169	7.74	%	1.50	%
Core (Leverage)		32,461		16,778		15,683	7.74		4.00
Risk-based		33,638		20,821		12,817	12.92		8.00

Prompt Corrective Regulatory Action. The OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, a savings institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the OTS is

26

required to appoint a receiver or conservator within specified time frames for an institution that is “critically undercapitalized.” The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date a savings institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Insurance of Deposit Accounts. The Bank is a member of the Savings Association Insurance Fund. The FDIC maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution’s assessment rate depends upon the categories to which it is assigned. Assessment rates for Savings Association Insurance Fund member institutions are determined semi-annually by the FDIC and currently range from zero basis points for the healthiest institutions to 27 basis points of assessable deposits for the riskiest.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation (“FICO”) to recapitalize the predecessor to the Savings Association Insurance Fund. During fiscal 2004, FICO payments for Savings Association Insurance Fund members approximated 1.51 basis points of assessable deposits.

The Bank’s risk-based classifications resulted in no assessments during 2004. The FDIC has authority to increase insurance assessments. A significant increase in Savings Association Insurance Fund insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

Insurance deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

Loans to One Borrower. Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. Generally, subject to certain exceptions, a savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral. At December 31, 2004, the Bank’s limit on loans to one borrower was $5.8 million, and the Bank’s largest aggregate outstanding balance of loans to one borrower was $6.0 million. During the fourth quarter of 2004, the Company repurchased 220,519 shares of common stock. In order to facilitate the repurchase, the Bank declared a dividend to the Company, reducing the Bank’s capital to $38.6 million. At year-end, the Bank had a loan commitment to one borrower that totaled $6.0 million. The balance on this loan at year-end 2004 was $3,886,151, and the unused commitment totaled $2,126,302. Management has taken steps to rewrite the loan reducing the potential loan balance to less than 15% of unimpaired capital and surplus.

QTL Test. Federal law requires savings institutions to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less:

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(i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least nine months out of each 12-month period.

A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 2004, the Bank maintained 84.05% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered “qualified thrift investments.”

Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the OTS is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under OTS regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the OTS. If an application is not required, the institution must still provide prior notice to the OTS of the capital distribution if, like the Bank, it is a subsidiary of a holding company. In the event the Bank’s capital fell below its regulatory requirements or the OTS notified it that it was in need of increased supervision, the Bank’s ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice.

Transactions with Related Parties. The Bank’s authority to engage in transactions with “affiliates” (e.g., any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

The Sarbanes-Oxley Act of 2002 generally prohibits loans by the Company to its executive officers and directors. However, that act contains a specific exception for loans by the Bank to its executive officers and directors in compliance with federal banking laws. Under such laws, the Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The law limits both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank’s capital position and requires certain board approval procedures to be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees.

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Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that a savings institution fails to meet any standard prescribed by the guidelines, the OTS may require the institution to submit an acceptable plan to achieve compliance with the standard.

Enforcement. The OTS has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

Assessments. Savings institutions are required to pay assessments to the OTS to fund the agency’s operations. The general assessments, paid on a semi-annual basis, are computed upon the savings institution’s total assets, including consolidated subsidiaries, as reported in the Bank’s latest quarterly thrift financial report. The assessments paid by the Bank for the fiscal year ended December 31, 2004 totaled $93,823.

Federal Home Loan Bank System

The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. The Bank, as a member of the Federal Home Loan Bank, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount at least equal to 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the Federal Home Loan Bank, whichever is greater. The Bank was in compliance with this requirement with an investment in Federal Home Loan Bank stock at December 31, 2004 of $3.7 million.

The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, the Bank’s net interest income would likely also be reduced.

Federal Reserve System

The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $47.6 million; and a 10% reserve ratio is applied above $47.6 million. The first $7.0 million of otherwise reservable

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balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. These amounts are adjusted annually. The Bank was in compliance with the foregoing requirements at December 31, 2004.

FEDERAL AND STATE TAXATION

Federal Taxation

General. The Company and the Bank report their income on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank’s reserve for bad debts, as discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. The Bank has not been audited by the Internal Revenue Service (“IRS”) in the past five years.

Bad Debt Reserve. For taxable years beginning after December 31, 1995, the Bank is entitled to take a bad debt deduction for federal income tax purposes which is based on its current or historic net charge-offs by applying the experience reserve method for banks. For tax years beginning prior to December 31, 1995, the Bank as a qualifying thrift had been permitted to establish a reserve for bad debts and to make annual additions to such reserve, which were deductible for federal income tax purposes. Under such prior tax law, generally the Bank recognized a bad debt deduction equal to 8% of taxable income.

Under the 1996 Tax Act, the Bank was required to recapture all or a portion of its additions to its bad debt reserve made subsequent to the base year (which is the Bank’s last taxable year beginning before January 1, 1988). This recapture was required to be made, after a deferral period based on certain specified criteria, ratably over a six-year period commencing in the Bank’s calendar 1998 tax year. All post-1987 additions to the statutory bad debt reserve have been recaptured in taxable income as of December 31, 2002.

Potential Recapture of Base Year Bad Debt Reserve. The Bank’s bad debt reserve as of the base year is not subject to automatic recapture as long as the Bank continues to carry on the business of banking. If the Bank no longer qualifies as a bank, the balance of the pre-1988 reserves (the base year reserves) are restored to income over a six-year period beginning in the tax year the Bank no longer qualifies as a bank. Such base year bad debt reserve is subject to recapture to the extent that the Bank makes “non-dividend distributions” that are considered as made from the base year bad debt reserve. To the extent that such reserves exceed the amount that would have been allowed under the experience method (“Excess Distributions”), then an amount based on the amount distributed will be included in the Bank’s taxable income. Non-dividend distributions include distributions in excess of the Bank’s current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Bank’s current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank’s bad debt reserve. Thus, any dividends to the Company that would reduce amounts appropriated to the Bank’s bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Bank. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. If the Bank makes a “non-dividend distribution,” then approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 34% corporate income tax rate (exclusive of state and local taxes). The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserve.

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Corporate Alternative Minimum Tax. The Internal Revenue Code imposes a tax on alternative minimum taxable income (“AMTI”) at a rate of 20%. The excess of the bad debt reserve deduction claimed by the Bank over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating loss carry-overs, of which the Bank currently has a balance of $69,000 related to the acquisition of Hometown. AMTI is increased by an amount equal to 75% of the amount by which the Bank’s adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). In addition, for taxable years beginning after June 30, 1986 and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modifications) over $2.0 million is imposed on corporations, including the Bank, whether or not an Alternative Minimum Tax (“AMT”) is paid. The Bank does not expect to be subject to the AMT.

Dividends Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank own more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted.

Indiana Taxation

Indiana imposes an 8.5% franchise tax based on a financial institution’s adjusted gross income as defined by statute. In computing adjusted gross income, deductions for municipal interest, United States Government interest, the bad debt deduction computed using the reserve method and pre-1990 net operating losses are disallowed. The Bank’s state income tax returns were audited for the years ended December 31, 1993, 1994 and 1995 without amendment and without additional tax liability. The Bank’s state income tax returns have not been audited for any subsequent period.

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ITEM 2. PROPERTIES

The following table sets forth certain information regarding the Bank’s offices as of December 31, 2004.

Location	Year Opened	Net Book Value(1)		Owned/ Leased		Approximate Square Footage
	(Dollars in thousands)
Main Office:
220 Federal Drive, N.W. Corydon, Indiana 47112	1997	$	2,708	Owned		12,000
Branch Offices:
391 Old Capitol Plaza, N.E. Corydon, Indiana 47112	1997		13	Leased	(2)	425
8095 State Highway 135, N.W. New Salisbury, Indiana 47161	1999		871	Owned		3,500
710 Main Street Palmyra, Indiana 47164	1991		1,246	Owned		6,000
6040 Main Street NE Crandall, Indiana 47114	1938		84	Owned		1,000
9849 Highway 150 Greenville, Indiana 47124	1986		284	Owned		2,484
1058 North Luther Road Georgetown, Indiana 47122	1995		94	Leased	(3)	1,800
317 East U.S. Highway 150 Hardinsburg, Indiana 47125	1996		94	Owned		1,834
4303 Charlestown Crossing New Albany, Indiana 47150	1999		912	Owned		3,500
3131 Grant Line Road New Albany, Indiana 47150	2003		2,197	Owned		12,200
5609 Williamsburg Station Road Floyds Knobs, Indiana 47119	2003		347	Owned		4,160
2744 Allison Lane Jeffersonville, Indiana 47130	2003		1,032	Owned		4,090

⁽¹⁾ Represents the net value of land, buildings, furniture, fixtures and equipment owned by the Bank.

⁽²⁾ Lease expires April 2005.

⁽³⁾ Lease expires November 2005.

ITEM 3. LEGAL PROCEEDINGS

At December 31, 2004, neither the Company nor the Bank was involved in any pending legal proceedings believed by management to be material to the Company’s financial condition or results of operations. From time to time, the Bank is involved in legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company’s financial condition or results of operations.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2004.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The information regarding the market for First Capital’s common equity and related stockholder matters is incorporated herein by reference to First Capital’s 2004 Annual Report to Stockholders at “Corporate Information.”

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

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid Per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 1 through October 31, 2004	—		—	—	—
November 1 through November 30, 2004	—		—	—	—
December 1 through December 31, 2004	220,520	$	21.00	249,742	95,258
Total	220,520	$	21.00	249,742	95,258

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

ITEM 6. SELECTED FINANCIAL DATA

The information required by this item is incorporated herein by reference to the Section captioned “Selected Financial and Other Data” in the 2004 Annual Report to Stockholders.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The information regarding management’s discussion and analysis of financial condition and results of operation is incorporated herein by reference to First Capital’s 2004 Annual Report to Stockholders in the Section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this Item is incorporated herein by reference to the Section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2004 Annual Report to Stockholders.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The financial statements by this Item are incorporated by reference to the Company’s Audited Financial Statements and the Notes thereto found in First Capital’s 2004 Annual Report to Stockholders.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

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

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item with respect to Directors is incorporated herein by reference to the Proxy Statement under the heading “Proposal 1—Election of Directors.” The information contained under the section captioned “Other Information Relating to Directors and Executive Officers” in the Proxy Statement is incorporated herein by reference.

Executive Officers Who Are Not Directors

Name	Age(1)	Position
M. Chris Frederick	37	Senior Vice President, Chief Financial Officer and Treasurer
Joel E. Voyles	52	Senior Vice President - Retail and Corporate Secretary
Dennis L. Thomas	48	Senior Vice President - Lending

⁽¹⁾ As of December 31, 2004.

Biographical Information

M. Chris Frederick has been affiliated with the Bank since June, 1990 and has served in his present position since 1997.

Joel E. Voyles has been affiliated with the Bank since December 1996 and has served in his present position since 1997.

Dennis L. Thomas has been affiliated with the Bank since January 2000. He was employed by Harrison County Bank from 1981 until the merger with the Bank.

Code of Ethics

The Company maintains a Code of Ethics and Business Conduct that applies to all directors, officers and employees of the Company and its affiliates. A copy of the Code of Ethics and Business Conduct is filed as Exhibit 14.0 of this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference to the Proxy Statement under the heading “Executive Compensation” and “Proposal 1 — Election of Directors.”

35

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item regarding security ownership of certain beneficial owners is incorporated herein by reference to the Proxy Statement under the heading “Stock Ownership.”

Equity Compensation Plan Information as of December 31, 2004

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	110,894	$	15.81	$	44,295
Equity compensation plans not approved by security holders	—		—		—
Total	110,894	$	15.81	$	44,295

The Company does not maintain any equity compensation plans that have not been approved by security holders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated herein by reference to the Proxy Statement under the heading “Proposal 1 — Election of Directors” and “Other Information Relating to Directors and Executive Officers.”

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated herein by reference to the Proxy Statement under the heading “Proposal 2 — Ratification of Independent Auditors.”

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) The exhibits and financial statement schedules filed as part of this report are as follows:

• Report of Independent Registered Public Accounting Firm

• Consolidated Balance Sheets as of December 31, 2004 and 2003

• Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002

• Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2004, 2003 and 2002

• Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002

• Notes to Consolidated Financial Statements

(2) All financial statement schedules are omitted as the required information either is not applicable or is contained in the financial statements or related notes.

(3) Exhibits

3.1	Articles of Incorporation of First Capital, Inc. (1)
3.2	Second Amended and Restated Bylaws of First Capital, Inc. (6)
10.1	Employment Agreement with James G. Pendleton (3)
10.2	Employment Agreement with Samuel E. Uhl (2)
10.3	Employment Agreement with M. Chris Frederick (2)
10.4	Employment Agreement with Joel E. Voyles (2)
10.5	Employee Severance Compensation Plan (3)
10.6	First Federal Bank, A Federal Savings Bank 1994 Stock Option Plan (as assumed by First Capital, Inc. effective December 31, 1998) (4)
10.7	First Capital, Inc. 1999 Stock-Based Incentive Plan (5)
10.8	1998 Officers’ and Key Employees’ Stock Option Plan for HCB Bancorp (5)
10.9	Employment Agreement with William W. Harrod (2)
11.0	Statement Re: Computation of Per Share Earnings (incorporated by reference to Exhibit 13 to this Form 10-K)
13.0	Annual Report to Stockholders
14.0	Code of Ethics and Business Conduct
21.0	Subsidiaries of the Registrant (incorporated by reference to Part I, “Business—Subsidiary Activities” of this Form 10-K)
23.0	Consent of Monroe Shine and Co., Inc.
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0	Section 1350 Certification of Chief Executive Officer & Chief Financial Officer

(1) Incorporated by reference from the Exhibits filed with the Registration Statement on Form SB-2, and any amendments thereto, Registration No. 333-63515.

37

(2) Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 1999.

(3) Incorporated by reference to the Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998.

(4) Incorporated by reference from the Exhibits filed with the Registration Statement on Form S-8, and any amendments thereto, Registration Statement No. 333-76543.

(5) Incorporated by reference from the Exhibits filed with the Registration Statement on Form S-8, and any amendments thereto, Registration Statement No. 333-95987.

(6) Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 2001.

38

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FIRST CAPITAL, INC.

/s/ William W. Harrod

William W. Harrod

President, Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/ William W. Harrod William W. Harrod	President, Chief Executive Officer and Director (principal executive officer)	March 28, 2005
/s/ J. Gordon Pendleton J. Gordon Pendleton	Chairman	March 28, 2005
/s/ Michael C. Frederick Michael C. Frederick	Chief Financial Officer and Treasurer (principal accounting and financial officer)	March 28, 2005
/s/ Samuel E. Uhl Samuel E. Uhl	Director	March 28, 2005
/s/ Mark D. Shireman Mark D. Shireman	Director	March 28, 2005
/s/ Dennis L. Huber Dennis L. Huber	Director	March 28, 2005

/s/ Kenneth R. Saulman Kenneth R. Saulman	Director	March 28, 2005
/s/ John W. Buschemeyer John W. Buschemeyer	Director	March 28, 2005
/s/ Gerald L. Uhl Gerald L. Uhl	Director	March 28, 2005
/s/ James S. Burden James S. Burden	Director	March 28, 2005
/s/ James E. Nett James E. Nett	Director	March 28, 2005
/s/ Michael L. Shireman Michael L. Shireman	Director	March 28, 2005
/s/ Kathryn W. Ernstberger Kathryn W. Ernstberger	Director	March 28, 2005

EX-13.0

Exhibit 13.0

FIRST CAPITAL, INC.

TABLE OF CONTENTS

	Page
Letter to Shareholders	2
Selected Financial and Other Data	3-4
Management’s Discussion and Analysis of Financial Condition and Results of Operations	5-18
Report of Independent Registered Public Accounting Firm	19
Consolidated Financial Statements	20-24
Notes to Consolidated Financial Statements	25-52
Directors and Officers	53
Corporate Information	54-55

BUSINESS OF THE COMPANY

First Capital, Inc. (the “Company”) is the thrift holding company of First Harrison Bank (the “Bank”).

The Company’s principal executive office is located at 220 Federal Drive, N.W., Corydon, Indiana and the telephone number at that address is (812) 738-2198.

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 twelve locations in southern Indiana.

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. First Harrison Insurance and Investments, a division of First Harrison Bank, sells property and casualty insurance and non-deposit investment products. During 2004, the Bank established three wholly-owned subsidiaries to manage a portion of its investment securities portfolio. First Harrison Investments, Inc. and First Harrison Holdings, Inc. are Nevada corporations that jointly own First Harrison, LLC, a Nevada limited liability corporation that holds and manages an investment securities portfolio.

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Dear Shareholders:

Management and the Board of Directors of First Capital, Inc. would like to thank our shareholders, customers and staff for their continued support.

Our purchase of Hometown National Bank in 2003 has further supported our efforts to expand our market presence in southern Indiana. Management is very pleased with the loan growth at these offices and our new office in Jeffersonville and will continue to focus on this area as it continues to change and grow with the expansion of Veterans Parkway and the Allison Lane market areas.

Our focus this year will be on continued asset quality and quality loan growth, improved operating efficiency, improved net interest margin, and meeting the new regulatory environment with Bank Secrecy and customer identification programs. We are preparing to meet the challenges presented by Sarbanes-Oxley. While these are new regulatory rules, we are confident in telling you that management and the Board have always been and will continue to be committed to keeping our shareholders informed and operating your company in a safe and sound manner.

With the merger of two large banks in our area, we believe, while competition is tough, we continue to have a competitive advantage. Our staff is dedicated to providing the best possible service available to customers and non-customers. We pride ourselves on fulfilling our core values and strongly believe our competitive advantage is consistent with these values. When you call First Harrison Bank, you may get the President on the phone or a teller; we are all committed to helping the customer. We ask that you encourage your friends to choose First Harrison Bank as “Their Hometown Bank.” We make our decisions locally and serve our customers locally - - not from a remote location miles away.

Please take time to thoroughly review the information contained in this annual report. Please feel free to call us with questions. We look forward to serving you as we plan for long-term financial growth.

Sincerely,

William W. Harrod President and CEO J. Gordon Pendleton Chairman of the Board

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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 consolidated 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,
	2004		2003		2002		2001		2000
	(In thousands)
Total assets	$	425,302	$	409,138	$	308,553	$	282,823	$	248,582
Cash and cash equivalents (1)		17,425		13,561		12,653		12,382		11,468
Securities available for sale		65,192		66,244		64,980		54,891		34,779
Securities held to maturity		1,258		1,507		1,474		1,836		11,229
Net loans		317,086		304,200		215,996		201,730		179,304
Deposits		316,462		302,468		216,202		204,122		185,368
Advances from Federal Home Loan Bank		65,099		60,242		53,320		42,825		30,074
Total stockholders’ equity		40,714		43,895		36,330		33,481		31,107

OPERATING DATA:

	For the Year Ended December 31,
	2004		2003		2002		2001		2000
	(In thousands)
Interest income	$	22,109	$	21,303	$	18,912	$	18,960	$	17,363
Interest expense		9,117		8,715		8,802		9,842		9,267
Net interest income		12,992		12,588		10,110		9,118		8,096
Provision for loan losses		510		725		305		66		48
Net interest income after provision for loan losses		12,482		11,863		9,805		9,052		8,048
Noninterest income		2,666		2,276		1,737		1,706		1,219
Noninterest expense (2)		9,918		8,736		6,531		5,945		5,629
Income before income taxes		5,230		5,403		5,011		4,813		3,638
Income tax expense		1,799		1,870		1,763		1,714		1,180
Net Income	$	3,431	$	3,533	$	3,248	$	3,099	$	2,458
PER SHARE DATA:
Net income - basic	$	1.24	$	1.30	$	1.31	$	1.26	$	1.00
Net income - diluted		1.23		1.29		1.30		1.25		1.00
Dividends		0.60		0.56		0.52		0.48		0.41

⁽¹⁾ Includes cash and due from banks, interest-bearing deposits in other depository institutions and federal funds sold.

⁽²⁾ Includes merger-related expenses of $97,000 in 2003.

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SELECTED FINANCIAL AND OTHER DATA - CONTINUED

SELECTED FINANCIAL RATIOS:

	At and For the Year Ended December 31,
	2004		2003		2002		2001		2000
Performance Ratios:
Return on assets (1)	0.82	%	0.93	%	1.10	%	1.17	%	1.05	%
Return on average equity (2)	7.75	%	8.70	%	9.32	%	9.49	%	8.27	%
Dividend payout ratio (3)	47.65	%	43.03	%	39.90	%	38.52	%	41.40	%
Average equity to average assets	10.60	%	10.68	%	11.77	%	12.31	%	12.64	%
Interest rate spread (4)	3.06	%	3.25	%	3.16	%	3.01	%	2.99	%
Net interest margin (5)	3.42	%	3.62	%	3.70	%	3.73	%	3.75	%
Non-interest expense to average assets	2.38	%	2.30	%	2.20	%	2.24	%	2.39	%
Average interest earning assets to average interest bearing liabilities	115.03	%	115.02	%	117.39	%	118.41	%	118.30	%
Regulatory Capital Ratios:
Tier I - adjusted total assets	7.74	%	8.70	%	10.92	%	11.25	%	11.92	%
Tier I - risk based	12.47	%	13.42	%	18.83	%	19.67	%	19.97	%
Total risk-based	12.92	%	14.35	%	19.52	%	20.36	%	20.63	%
Asset Quality Ratios:
Nonperforming loans as a percent of net loans (6)	1.12	%	1.74	%	0.64	%	0.62	%	0.32	%
Nonperforming assets as a percent of total assets (7)	0.94	%	1.35	%	0.48	%	0.52	%	0.28	%
Allowance for loan losses as a percent of gross loans receivable	0.76	%	0.77	%	0.55	%	0.54	%	0.64	%

⁽¹⁾ Net income divided by average assets.

⁽²⁾ Net income divided by average equity.

⁽³⁾ Dividends declared per share divided by net income per share.

⁽⁴⁾ Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities.

⁽⁵⁾ Net interest income as a percentage of average interest-earning assets.

⁽⁶⁾ Nonperforming loans consist of loans accounted for on a nonaccrual basis and accruing loans 90 days or more past due.

⁽⁷⁾ Nonperforming assets consist of nonperforming loans and real estate acquired in settlement of loans, but exclude restructured loans.

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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. Except as may be required by applicable law and regulation, the Company assumes no obligation to update or revise any forward-looking statements subsequent to the date on which they are made.

General

As the holding company for the Bank, the Company conducts its business primarily through the Bank. 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 primarily 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.

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Operating Strategy

The Company is the parent company of 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 its subsidiaries.

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, federal funds sold, U.S. government and agency securities, local municipal obligations and, to a lesser extent, mortgage-backed securities.

In recent years, the Company’s operating strategy has also included strategies designed to enhance profitability by increasing sources of noninterest 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.

• Focus on growth at the branch offices in commercial deposit and loan relationships.

• Capitalize on the efficiencies, personnel and growth opportunities following the merger with Hometown National Bank, allowing for further expansion of market share in southern Indiana.

• Increase fee income from secondary market mortgage originations by having dedicated originators serving each office.

• Continue to invest in technology to increase productivity and efficiency, increase growth of our Internet banking service, bill payment service, and the Company’s ability to provide customer information at our teller lines in minutes versus days.

• Engage in a capital management strategy to repurchase Company stock and pay dividends to enhance shareholder value.

Merger with Hometown Bancshares, Inc.

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

Pursuant to the terms of the merger agreement, Hometown stockholders who elected to receive Company stock received 2.487 shares of Company common stock and Hometown shareholders who elected to receive cash received $46.50 in cash for each share of Hometown common stock. Hometown stockholders who did not submit properly completed election forms within the required timeframe received 0.773 shares of Company common stock and $32.05 in cash for each share of Hometown common stock. The Company issued 285,370 shares of common stock and paid approximately $5.4 million in cash consideration to former Hometown stockholders. The value assigned to the common shares issued in the transaction was approximately $6.1 million as determined by the average closing price of the Company’s common stock over a twenty-day period ended March 17, 2003. The transaction was accounted for using the purchase method of accounting. Accordingly, the results of operations of Hometown have been included in the Company’s results of operations since the date of acquisition. Under the purchase method of accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. The excess of cost over the fair value of the net assets acquired of approximately $5.4 million has been recorded as goodwill.

For additional pro forma information, see Note 2 of the Notes to Consolidated Financial Statements.

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Critical Accounting Policies

The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding reported results. Critical accounting policies are those policies that require management to make assumptions about matters that are highly uncertain at the time an accounting estimate is made; and different estimates that the Company reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the Company’s financial condition, changes in financial condition or results of operations. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under generally accepted accounting principles.

Significant accounting policies, including the impact of recent accounting pronouncements, are discussed in Note 1 of the Notes to Consolidated Financial Statements. Those policies considered to be critical accounting policies are described below.

Allowances for Loan Losses. Management’s evaluation of the adequacy of the allowance for loan losses is the most critical of accounting estimates for a financial institution. The methodology for determining the allowance for loan losses and the related provision for loan losses is described below in “Allowance for Loan Losses.” This accounting estimate is highly subjective and requires a significant amount of judgment because a multitude of factors can influence the ultimate collection of a loan. The methodology for determining the allowance for loan losses attempts to identify the amount of probable losses in the loan portfolio. However, there can be no assurance that the methodology will successfully identify all probable losses as the factors and conditions that influence the estimate are subject to significant change and management’s judgments. As a result, additional provisions for loan losses may be required that would adversely impact earnings in future periods.

Valuation Methodologies. In the ordinary course of business, management applies various valuation methodologies to assets and liabilities that often involve a significant degree of judgment, particularly when active markets do not exist for the items being valued. Generally, in evaluating various assets for potential impairment, management compares the fair value to the carrying value. Quoted market prices are referred to when estimating fair values for certain assets, such as investment securities. However, for those items for which market-based prices do not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include capitalized servicing assets, goodwill and other intangible assets, estimated present value of impaired loans, deferred compensation plans, value ascribed to stock-based compensation and certain other financial investments. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Company’s results of operations. The assumptions and estimates utilized by management are discussed in detail in the accompanying notes 1, 4, 7, 15, 16 and 21 of Notes to Consolidated Financial Statements.

Income Taxes. The accounting for income taxes requires the asset and liability approach for financial accounting and reporting for deferred income taxes. See Notes 1 and 13 in the accompanying Notes to Consolidated Financial Statements. As part of the process of preparing the consolidated financial statements, management estimates the income taxes in each of the taxing jurisdictions in which the Company operates. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for financial accounting and tax purposes, such as depreciation, loan fees and costs, loan losses, compensation plans and unrealized securities gains and losses. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. Management must assess the likelihood that deferred tax assets will be recovered from future taxable income and, to the extent that recovery is not likely, establish a valuation allowance. Significant management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. To the extent a valuation allowance is recorded or increased, an expense is recognized within the tax provisions in the statement of income.

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Comparison of Operating Results

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Net Income. Net income was $3.4 million ($1.23 per share diluted; weighted average common shares outstanding of 2,798,253, as adjusted) for the year ended December 31, 2004 compared to $3.5 million ($1.29 per share diluted; weighted average common shares outstanding of 2,743,998, as adjusted) for the year ended December 31, 2003. The decrease was attributable primarily to an increase in noninterest expense of $1.2 million partially offset by increases in net interest income of $404,000 and noninterest income of $390,000 and a decrease in the provision for loan losses of $215,000.

Net Interest Income. Net interest income increased $404,000, or 3.2%, from $12.6 million in 2003 to $13.0 million in 2004 primarily due to an increase in average interest-earning assets during 2004 offset by an increase in average interest-bearing liabilities and a decrease in the interest rate spread.

Total interest income increased 3.8% from $21.3 million in 2003 to $22.1 million in 2004. This increase was a result of the higher average balances of interest-earning assets offset by lower yields due to lower market interest rates. Interest on loans increased $1.1 million primarily as a result of an increase in the average balance during the year offset by a lower average yield. Interest on investment securities decreased $262,000 during 2004 due to decreases in both the average balance and the average yield on those investments during the year. Interest income on federal funds sold and interest-bearing deposits with banks also decreased $64,000 due to decreases in both the average balance during the year and the average yield on those earning assets. The average balance of interest-earning assets increased 9.9% from $355.5 million in 2003 to $390.5 million in 2004. The average tax equivalent yield on interest-earning assets decreased from 6.07% in 2003 to 5.75% in 2004. During 2004, loan repayments and investment maturities were replaced by lower-yielding assets. Also during 2004, management sought to focus loan origination efforts on variable-rate loans which typically have a lower initial interest rate than fixed-rate loans. This focus was successful as total variable-rate loans increased $17.6 million to 31% of the loan portfolio, up from 28% of the portfolio at the end of 2003.

Total interest expense increased from $8.7 million for 2003 to $9.1 million for 2004. This increase was due to an increase in the average balance of interest-bearing liabilities partially offset by a decrease in the average cost of funds. The average balances of deposits and advances from the Federal Home Loan Bank were $276.1 million and $63.1 million, respectively, for 2004. In 2003, those average balances were $254.2 million and $54.7 million. The average cost of funds decreased from 2.82% in 2003 to 2.69% in 2004. This decrease was primarily due to growth in lower cost savings and demand deposit accounts versus time deposits. 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 2004 and 2003 are shown in the schedule captioned “Rate/Volume Analysis” included herein.

Provision for Loan Losses. The provision for loan losses was $510,000 for 2004 compared to $725,000 for 2003. During 2004, the net loan portfolio growth was $12.9 million, primarily due to increases in home equity lines of credit and commercial business loans. The consistent application of management’s allowance methodology resulted in a decrease in the provision for loan losses due to net charge-offs during 2004 of $465,000 compared to $575,000 for 2003 and the improvement in asset quality. 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 year. See “Asset Quality.”

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

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Noninterest income. Noninterest income increased $390,000, or 17.2%, for 2004 compared to 2003 primarily due to increases in gains on the sale of mortgage loans and mortgage brokerage fees of $154,000 and $82,000, respectively. In mid-2003, the Bank resumed its mortgage banking activities and 2004 was the first full year with a mortgage banking operation. Since the resumption of this business, we have improved our interest rate risk, reduced our concentration in long-term fixed rate mortgage loans, increased fee income, and expanded our mortgage products to potential borrowers. For a discussion of our mortgage banking operations, see Note 1 in the accompanying Notes to Consolidated Financial Statements. Service charges on deposits increased during 2004 by $142,000 primarily due to the increased number of transaction accounts. During 2004, the Bank also recognized a $43,000 gain on the sale of a parcel of land adjacent to a branch office.

Noninterest expense. Noninterest expense increased $1.2 million, or 13.5%, to $9.9 million for 2004 compared to $8.7 million in 2003. The increase results primarily from a $930,000 increase in compensation and benefits expense. A large part of the compensation and benefits increase can be attributed to the March 2003 acquisition of Hometown. The expenses associated with the additional employees from the acquisition were on the books for the entire year during 2004 compared to nine months in 2003. Another significant factor in the increase in compensation and benefits was the reduction in the deferral of direct loan origination costs in 2004. The low interest rates and corresponding large number of mortgage refinancings during 2003 reduced compensation and benefits by $529,000 in that period. During 2004, the Bank recorded deferrals of direct loan origination costs of $293,000 as the pace of loan originations declined due to an increase in market interest rates. Professional fees increased $49,000 for 2004 compared to the prior year primarily due to costs associated with the organization of subsidiaries formed to manage a portion of the Bank’s investment securities portfolio and legal services related to problem loans. Other operating expenses increased $179,000 during 2004 including an increase in charitable contributions of $63,000 as the Bank fulfilled commitments to help fund the construction of a local YMCA and youth baseball fields. Expenses and losses recognized on foreclosed real estate also increased from $18,000 for 2003 to $76,000 for 2004 as the Bank continued its efforts to reduce nonperforming loans.

Income tax expense. Income tax expense for the year ended December 31, 2004 was $1.8 million compared to $1.9 million for 2003. The effective tax rate for 2004 was 34.4% compared to 34.6% for 2003. See Note 13 in the accompanying Notes to Consolidated Financial Statements.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Net Income. Net income was $3.5 million ($1.29 per share diluted; weighted average common shares outstanding of 2,743,998, as adjusted) for the year ended December 31, 2003 compared to $3.2 million ($1.30 per share diluted; weighted average common shares outstanding of 2,505,994, as adjusted) for the year ended December 31, 2002. The increase was attributable primarily to an increase in net interest income of $2.5 million offset by an increase in the provision for loan losses of $420,000 and noninterest expense of $2.2 million.

Net Interest Income. Net interest income increased $2.5 million, or 24.5%, from $10.1 million in 2002 to $12.6 million in 2003 primarily due to an increase in average interest-earning assets during 2003 and an increase in the interest rate spread offset by an increase in average interest-bearing liabilities.

Total interest income increased 12.6% from $18.9 million for 2002 compared to $21.3 million for 2003. This increase results from higher average balances of interest-earning assets offset by lower average yields due to the impact of lower market interest rates. Interest on loans increased $2.7 million as a result of an increase in the average balance during the year primarily as a result of the Hometown acquisition and loan originations, offset by a lower average yield. Interest on investment securities decreased $314,000 during 2003 despite an increase in the average outstanding balance because of an overall lower yield as maturing securities were replaced with lower-yielding investments. Interest income on interest-bearing deposits with banks also decreased $40,000 due to decreases in the average yield and average balance. During 2003, management sought to reduce the average balance in short-term investments by focusing on loan originations and investments in debt securities with the goal of improving the net interest margin. The average balance of total interest-earning assets increased 27.0% from $279.9 million in 2002 to $355.5 million in 2003. During 2003, the average tax equivalent yield on interest-earning assets decreased from 6.85% to 6.07%. Variable rate loans and investment securities continued to reprice during the year and loan repayments and investment maturities were replaced by lower-yielding assets. Also, loan refinancings triggered by lower market interest rates reduced the loan portfolio average yield.

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Total interest expense decreased slightly from $8.8 million for 2002 to $8.7 million for 2003. Interest expense decreased primarily due to a decrease in the average cost of funds offset by increases in average deposits and borrowings from the Federal Home Loan Bank. The average balances of interest-bearing deposits and advances from the Federal Home Loan Bank were $254.2 million and $54.7 million, respectively, for 2003 compared to $191.5 million and $46.8 million, respectively, for 2002. The average cost of funds decreased from 3.69% in 2002 to 2.82% in 2003 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 2003 and 2002 are shown in the schedule captioned “Rate/Volume Analysis” included herein.

Provision for Loan Losses. The provision for loan losses was $725,000 for 2003 compared to $305,000 for 2002. During 2003, the net loan portfolio growth was $23.9 million, excluding the loans acquired in the Hometown merger, which was primarily due to an increase in residential mortgage loans. The consistent application of management’s allowance methodology resulted in an increase in the level of the allowance for loan losses due to net charge-offs during 2003 of $575,000 compared to $190,000 for 2002 and the general weakening of economic conditions. 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 year. See “Asset Quality.”

Noninterest income. Noninterest income increased $539,000, or 31.1%, for 2003 compared to 2002 primarily due to an increase in service charges on deposit accounts. Service charges on deposit accounts increased $399,000, or 28.9%, from $1.4 million for 2002 to $1.8 million for 2003 primarily due to a significant increase in the number of transaction accounts after the Hometown acquisition and the opening of the new Jeffersonville, Indiana office. The Bank recognized gains of $51,000 on the sale of securities during 2003 compared to $18,000 during 2002. The Bank had several available for sale securities due to mature within the same time frame so a portion of these securities was sold to reduce the interest rate risk. During 2003, the Bank recognized mortgage brokerage fees of $59,000 and gains of $12,000 on the sale of mortgage loans as the Bank resumed its mortgage banking activities in 2003.

Noninterest expense. Noninterest expense increased $2.2 million, or 33.8%, to $8.7 million for 2003 compared to $6.5 million in 2002. The increase results primarily from merger-related expenses of $97,000 and increases in compensation and benefits, occupancy and data processing fees and other operating expenses. Compensation and benefits expense increased $1.2 million due to the addition of staff from the Hometown acquisition and the opening of the Jeffersonville, Indiana branch in May 2003. The number of employees increased from 109 full-time and part-time employees at December 31, 2002 to 141 full-time and part-time employees at December 31, 2003, including the addition of 22 former Hometown employees. Occupancy and equipment and data processing expenses increased $269,000 and $261,000, respectively, primarily due to the addition of the newly opened branch facility and the two former Hometown facilities during 2003. Data processing fees also increased due to the one-time cost of converting the Hometown accounts and records to the Bank’s core processing system. Professional fees increased $38,000 primarily due to employment and training consulting services performed in 2003, and advertising increased $176,000 as the Company concentrated its marketing on the new areas of operation following the merger and branch opening. Other operating expenses increased $282,000 primarily due to increases in telephone charges and office supplies expense related to the growth of the Bank during the year.

Income tax expense. Income tax expense for the year ended December 31, 2003 was $1.9 million compared to $1.8 million for the same period in 2002. The effective tax rate for 2003 was 34.6% compared to 35.2% for 2002. See Note 13 in the accompanying Notes to Consolidated Financial Statements.

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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. Tax-exempt income on loans and investment securities has been adjusted to a tax equivalent basis using the federal marginal tax rate of 34%.

	Year ended December 31,
	2004						2003						2002
(Dollars in thousands)	Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost
Interest-earning assets:
Loans (1) (2)	$	316,700	$	19,405	6.13	%	$	276,460	$	18,249	6.60	%	$	208,308	$	15,526	7.45	%
Investment securities:
Taxable (3)		53,741		2,059	3.83	%		58,146		2,382	4.10	%		55,775		2,804	5.03	%
Tax-exempt		14,440		904	6.26	%		12,414		812	6.54	%		9,488		648	6.83	%
Total investment securities		68,181		2,963	4.35	%		70,560		3,194	4.53	%		65,263		3,452	5.29	%
Federal funds sold and interest-bearing deposits with banks		5,642		86	1.52	%		8,464		150	1.77	%		6,351		190	2.99	%
Total interest-earning assets		390,523		22,454	5.75	%		355,484		21,593	6.07	%		279,922		19,168	6.85	%
Noninterest-earning assets		26,994						24,567						16,318
Total assets	$	417,517					$	380,051					$	296,240
Interest-bearing liabilities:
Interest-bearing demand deposits	$	84,375	$	724	0.86	%	$	73,743	$	724	0.98	%	$	64,750	$	951	1.47	%
Savings accounts		35,455		278	0.78	%		27,109		234	0.86	%		19,446		234	1.20	%
Time deposits		156,257		4,912	3.14	%		153,323		4,793	3.13	%		107,325		4,904	4.57	%
Total deposits		276,087		5,914	2.14	%		254,175		5,751	2.26	%		191,521		6,089	3.18	%
Retail repurchase agreements		295		4	1.36	%		157		1	0.64	%		186		3	1.61	%
FHLB advances		63,120		3,199	5.07	%		54,722		2,963	5.41	%		46,753		2,710	5.80	%
Total interest-bearing liabilities		339,502		9,117	2.69	%		309,054		8,715	2.82	%		238,460		8,802	3.69	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		29,869						26,418						19,533
Other liabilities		3,876						3,983						3,384
Total liabilities		373,247						339,455						261,377
Stockholders’ equity		44,270						40,596						34,863
Total liabilities and stockholders’ equity	$	417,517					$	380,051					$	296,240
Net interest income			$	13,337					$	12,878					$	10,366
Interest rate spread					3.06	%					3.25	%					3.16	%
Net interest margin					3.42	%					3.62	%					3.70	%
Ratio of average interest-earning assets to average interest-bearing liabilities					115.03	%					115.02	%					117.39	%

⁽¹⁾ Interest income on loans includes fee income of $400, $554, and $325 for the years ended December 31, 2004, 2003, and 2002, respectively.

⁽²⁾ Average loans includes loans held for sale and nonperforming loans.

⁽³⁾ Includes taxable debt and equity securities and Federal Home Loan Bank Stock.

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RATE/VOLUME ANALYSIS

The following table sets forth the effects of changing rates and volumes on net interest income and interest expense computed on a tax-equivalent basis. 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 (change in rate multiplied by changes in volume). Tax exempt income on loans and investment securities has been adjusted to a tax-equivalent basis using the federal marginal tax rate of 34%.

	2004 Compared to 2003 Increase (Decrease) Due to												2003 Compared to 2002 Increase (Decrease) Due to
	Rate			Volume			Rate/ Volume			Net			Rate			Volume		Rate/ Volume			Net
	(In thousands)
Interest-earning assets:
Loans	$	(1,308	)	$	2,653		$	(189	)	$	1,156		$	(1,772	)	$	5,074	$	(579	)	$	2,723
Investment securities:
Taxable		(155	)		(180	)		12			(323	)		(519	)		119		(22	)		(422	)
Tax-exempt		(35	)		133			(6	)		92			(28	)		200		(8	)		164
Total investment securities		(190	)		(47	)		6			(231	)		(547	)		319		(30	)		(258	)
Federal funds sold and interest-bearing deposits with banks		(21	)		(50	)		7			(64	)		(77	)		63		(26	)		(40	)
Total net change in income on interest-earning assets		(1,519	)		2,556			(176	)		861			(2,396	)		5,456		(635	)		2,425
Interest-bearing liabilities:
Interest-bearing deposits		(306	)		495			(26	)		163			(1,760	)		1,998		(576	)		(338	)
Retail repurchase agreements		1			1			1			3			(2	)		—		—			(2	)
FHLB advances		(188	)		453			(29	)		236			(179	)		463		(31	)		253
Total net change in expense on interest-bearing liabilities		(493	)		949			(54	)		402			(1,941	)		2,461		(607	)		(87	)
Net change in net interest income	$	(1,026	)	$	1,607		$	(122	)	$	459		$	(455	)	$	2,995	$	(28	)	$	2,512

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Comparison of Financial Condition at December 31, 2004 and 2003

Total assets increased 4.0% from $409.1 million at December 31, 2003 to $425.3 million at December 31, 2004 primarily due to an increase in net loans receivable funded by increases in deposits and advances from the Federal Home Loan Bank of Indianapolis.

Net loans increased 4.2% from $304.2 million at December 31, 2003 to $317.1 million at December 31, 2004. Residential mortgage loans increased $3.2 million during 2004. Home equity and second mortgage loans increased 28.0% to $35.4 million at December 31, 2004 compared to $27.7 million at December 31, 2003. Commercial business loans totaled $20.9 million at December 31, 2004, a 29.1% increase over the December 31, 2003 total of $16.1 million. Our strategic goals for 2004 included expanding our mortgage business and increasing our loans to small businesses. Our mortgage originations, excluding the $3.2 million increase, totaled $20.5 million of new residential mortgage loans. These loans were either originated and funded by us and sold in the secondary market or originated as an agent for a third-party mortgage company. Our small business loans secured by commercial business assets grew as a result of our calling efforts and our growing presence in the Floyd and Clark County markets. Originating mortgage loans for sale or serving as an agent for a third-party mortgage company allows us to manage better our interest rate risk, while offering a full line of mortgage products to prospective customers.

Securities available for sale, at fair value, consisting primarily of U. S. agency mortgage-backed obligations, U. S. agency notes and bonds, and municipal obligations, decreased $1.1 million, or 1.6%, from $66.2 million at December 31, 2003 to $65.2 million at December 31, 2004. Purchases of securities available for sale at both the Bank and First Harrison Investments totaled $27.6 million in 2004. These purchases were offset by maturities of $23.7 million and principal repayments of $4.2 million. We invest excess cash in securities that provide safety, liquidity and yield. With this in mind, we purchase mortgage-backed securities to provide cash flow for loan demand and deposit changes, purchase federal agency notes for short-term yield and low risk, and municipals are purchased to improve our tax equivalent yield focusing on longer term profitability.

The investment in securities held to maturity, consisting of federal agency mortgage-backed certificates and municipal obligations, totaled $1.3 million at December 31, 2004 compared to $1.5 million at December 31, 2003. During 2004, the Bank had maturities of $166,000 and principal repayments of $81,000.

Cash and cash equivalents increased from $13.6 million at December 31, 2003 to $17.4 million at December 31, 2004 as a result of excess liquidity funded by growth in deposits.

Total deposits increased 4.6%, from $302.5 million at December 31, 2003 to $316.5 million at December 31, 2004. Interest-bearing demand deposits and savings accounts increased $15.6 million, a 13.9% increase, during 2004. Noninterest-bearing demand deposits increased 10.7% to $33.8 million at December 31, 2004. These increases were a result of management’s continued focus on attracting lower-cost transaction accounts through direct mail and general marketing efforts. Time deposits decreased $4.9 million as management continued to refrain from paying above market interest rates to certificate of deposit customers without the benefit of having other financial relationships.

Federal Home Loan Bank borrowings increased $4.9 million from $60.2 million at December 31, 2003 to $65.1 million at December 31, 2004. New advances of $22.3 million were drawn during the year. The majority of these new advances were drawn to cover short-term liquidity needs. Principal payments on advances totaled $17.4 million during 2004.

Total stockholders’ equity decreased from $43.9 million at December 31, 2003 to $40.7 million at December 31, 2004 primarily as a result of stock repurchases of $4.9 million and a $351,000 reduction in the unrealized gain on available for sale securities partially offset by retained net income of $1.8 million. During 2004, the Company repurchased 231,103 shares of its stock at a weighted average price of $21.04 per share. As of December 31, 2004, the Company has repurchased 249,742 shares of the 345,000 authorized by the Board of Directors under the current stock repurchase program.

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Asset Quality

At December 31, 2004, nonperforming assets, consisting of nonaccrual loans, loans 90 days past due and still accruing and real estate owned, totaled $4.0 million, or 0.94% of total assets compared to a total of $5.5 million, or 1.35% of total assets, at December 31, 2003. At December 31, 2004 and 2003, impaired loans totaled $3.6 million and $5.3 million, respectively, as defined by Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan. Impaired loans at December 31, 2004 and 2003 included nonaccrual loans of $2.1 million and $2.6 million, respectively, and loans 90 days past due still accruing interest of $1.5 million and $2.7 million, respectively. Loans 90 days past due may continue to accrue interest as long as the estimated value of the collateral and collection efforts are deemed sufficient to ensure full recovery. The related allowance for loan losses on impaired loans was $820,000 at December 31, 2004 and $1.1 million at December 31, 2003. The average carrying value of impaired loans was $4.2 million and $3.9 million during the years ended December 31, 2004 and 2003, respectively, and interest income of $189,000 and $210,000 has been recognized on impaired loans during the period of impairment under the cash receipts method during 2004 and 2003, respectively. The Bank’s net charge-offs were $465,000, or 0.15% of average loans outstanding for the year ended December 31, 2004, compared to $575,000, or 0.21% of average loans outstanding for the year ended December 31, 2003. The allowance for loan losses was $2.5 million, or 0.76% of total loans, at December 31, 2004 compared to $2.4 million, or 0.77% of total loans, at December 31, 2003. Management has deemed these amounts as adequate on those dates based on its evaluation methodology discussed below.

The following table presents an analysis of nonperforming assets as of the dates indicated:

	At December 31,
	2004			2003
	(Dollars in thousands)
Nonperforming loans:
Nonaccrual loans	$	2,075		$	2,637
Loans 90 days past due still accruing interest		1,485			2,666
Total nonperforming loans		3,560			5,303
Foreclosed real estate, net		442			225
Total nonperforming assets	$	4,002		$	5,528
Nonperforming loans to net loans		1.12	%		1.74	%
Nonperforming loans to total assets		0.84	%		1.30	%
Nonperforming assets to total assets		0.94	%		1.35	%

Regulations require that the Bank classify its assets on a regular basis. There are three regulatory classifications for problem assets: substandard, doubtful and loss. Management regularly reviews the loan portfolio to determine whether any loans require classification or a change in classification. At December 31, 2004, the Bank had $1.1 million in doubtful loans and $2.8 million in substandard loans. In addition to regulatory classifications, the Bank also classifies loans as “special mention” or “watch” when they are currently performing in accordance with their contractual terms but exhibit potential weaknesses that must be monitored by management on an ongoing basis. At December 31, 2004, that Bank had identified $2.7 million as special mention or watch loans.

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Allowance for Loan Losses

Loans are the Bank’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 its current judgments about the credit quality of the loan portfolio. In addition, the Office of Thrift Supervision (OTS), as an integral part of its examination process, periodically reviews 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 affect 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.

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Off-Balance-Sheet Arrangements

The Company is a party to financial instruments with off-balance-sheet risk including commitments to extend credit under existing lines of credit and commitments to originate loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements.

Off-balance-sheet financial instruments whose contract amounts represent credit and interest rate risk are summarized as follows:

	At December 31,
	2004		2003
	(In thousands)
Commitments to originate new loans	$	3,823	$	2,853
Undisbursed portion of construction loans		6,607		10,085
Unfunded commitments to extend credit under existing commercial and personal lines of credit		27,236		25,539
Standby letters of credit		1,338		1,228

The Company does not have any special purpose entities, derivative financial instruments or other forms of off-balance-sheet financing arrangements.

Commitments to originate new loans or to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally expire within 30 to 45 days. Most equity line commitments are for a term of 5 to 10 years and commercial lines of credit are generally renewable on an annual basis. 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 Company evaluates each customer’s creditworthiness on a case-by-case basis. The amounts of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.

Contractual Obligations

The following table summarizes information regarding the Company’s contractual obligations as of December 31, 2004:

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(In thousands)
Deposits	$	316,462	$	223,582	$	68,401	$	23,619	$	860
Federal Home Loan Bank advances		65,099		11,652		13,753		12,918		26,776
Retail repurchase agreements		635		635		—		—		—
Operating lease obligations		100		39		28		28		5
Total contractual obligations	$	382,296	$	235,908	$	82,182	$	36,565	$	27,641

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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, 2004, the Bank had cash and interest-bearing deposits with banks of $17.4 million and securities available for sale with a fair value of $65.2 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, 2004, the Bank had total commitments to extend credit of $37.7 million. See Note 17 in the accompanying Notes to Consolidated Financial Statements. At December 31, 2004, the Bank had certificates of deposit scheduled to mature within one year of $61.8 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, 2004, the Bank was in compliance with all regulatory capital requirements which were effective as of such date with tangible, core and risk-based capital ratios of 7.7%, 7.7% and 12.9%, respectively. See Note 20 in the accompanying Notes to Consolidated Financial Statements.

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.

- 17 -

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

The following tables are provided by the OTS and set forth the change in the Bank’s NPV at December 31, 2004 and 2003, 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, 2004 and 2003, the tables provide information for only a sustained 100 basis point decrease in market interest rates.

	At December 31, 2004
	Net Portfolio Value							Net Portfolio Value as a Percent of Present Value of Assets
Change In Rates	Dollar Amount		Dollar Change			Percent Change		NPV Ratio		Change
(Dollars in thousands)
300bp	$	39,696	$	(9,586	)	(19	)%	9.50	%	(173)bp
200bp		44,144		(5,138	)	(10	)	10.36		(87)bp
100bp		47,771		(1,511	)	(3	)	11.02		(21)bp
—  bp		49,282		—		—		11.23		—   bp
(100)bp		47,665		(1,617	)	(3	)	10.79		(44)bp
	At December 31, 2003
	Net Portfolio Value							Net Portfolio Value as a Percent of Present Value of Assets
Change In Rates	Dollar Amount		Dollar Change			Percent Change		NPV Ratio		Change
(Dollars in thousands)
300bp	$	34,140	$	(12,197	)	(26	)%	8.60	%	(240)bp
200bp		38,863		(7,474	)	(16	)	9.58		(142)bp
100bp		43,158		(3,179	)	(7	)	10.43		(57)bp
—  bp		46,337		—		—		11.00		—   bp
(100)bp		45,463		(874	)	(2	)	10.70		(30)bp

The preceding tables indicate that in the event of a sudden and sustained increase or decrease in prevailing market interest rates, the Bank’s NPV would be expected to decrease. The expected decrease in the Bank’s NPV is primarily attributable to the relatively high percentage of fixed-rate loans in the Bank’s loan portfolio. At December 31, 2004, approximately 69% 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 tables. 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 tables. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the tables.

- 18 -

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

First Capital, Inc.

Corydon, Indiana

We have audited the accompanying consolidated balance sheets of First Capital, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

New Albany, Indiana

January 14, 2005

- 19 -

MONROE SHINE & CO., INC. · CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

FIRST CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2004 AND 2003

	2004			2003
ASSETS
Cash and due from banks	$	14,191,132		$	12,190,166
Interest-bearing deposits with banks		2,174,786			1,370,812
Federal funds sold		1,059,000			—
Total cash and cash equivalents		17,424,918			13,560,978
Securities available for sale, at fair value		65,192,107			66,244,411
Securities held to maturity (fair value $1,349,452; $1,584,769 in 2003)		1,257,656			1,506,575
Loans held for sale		509,900			—
Loans, net of allowance for loan losses of $2,478,081 in 2004 and $2,433,329 in 2003		317,086,336			304,199,637
Federal Home Loan Bank stock, at cost		3,668,200			3,094,500
Foreclosed real estate		441,957			225,485
Premises and equipment		9,896,137			10,290,633
Accrued interest receivable		2,103,856			2,173,826
Cash value of life insurance		1,268,569			1,227,591
Goodwill		5,386,279			5,386,279
Core deposit intangibles		535,692			608,600
Other assets		530,462			619,867
Total Assets	$	425,302,069		$	409,138,382
LIABILITIES
Deposits:
Noninterest-bearing	$	33,800,920		$	30,535,227
Interest-bearing		282,660,921			271,933,085
Total deposits		316,461,841			302,468,312
Retail repurchase agreements		635,053			520,231
Advances from Federal Home Loan Bank		65,099,050			60,241,547
Accrued interest payable		1,285,812			1,159,726
Other liabilities		1,105,971			853,341
Total Liabilities		384,587,727			365,243,157
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 2,846,457 shares (2,843,763 shares in 2003)		28,465			28,438
Additional paid-in capital		19,278,166			19,182,788
Retained earnings-substantially restricted		26,888,417			25,092,103
Accumulated other comprehensive income		29,150			380,479
Unearned stock compensation		(3,281	)		(73,426	)
Unearned ESOP shares		(328,010	)		(399,760	)
Less treasury stock, at cost - 249,742 shares (18,639 shares in 2003)		(5,178,565	)		(315,397	)
Total Stockholders’ Equity		40,714,342			43,895,225
Total Liabilities and Stockholders’ Equity	$	425,302,069		$	409,138,382

See notes to consolidated financial statements.

- 20 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

	2004		2003		2002
INTEREST INCOME
Loans, including fees	$	19,367,478	$	18,234,189	$	15,489,849
Securities
Taxable		1,908,963		2,231,258		2,660,755
Tax-exempt		596,469		536,203		427,903
Federal Home Loan Bank dividends		149,739		150,734		143,276
Federal funds sold and interest-bearing deposits in banks		86,141		150,236		190,111
Total interest income		22,108,790		21,302,620		18,911,894
INTEREST EXPENSE
Deposits		5,914,057		5,750,558		6,089,360
Retail repurchase agreements		3,575		1,180		2,589
Advances from Federal Home Loan Bank		3,199,488		2,963,185		2,709,548
Total interest expense		9,117,120		8,714,923		8,801,497
Net interest income		12,991,670		12,587,697		10,110,397
Provision for loan losses		510,000		725,000		305,000
Net interest income after provision for loan losses		12,481,670		11,862,697		9,805,397
NONINTEREST INCOME
Service charges on deposit accounts		1,923,415		1,781,611		1,382,286
Commission income		317,607		310,668		260,655
Gain on sale of securities		—		50,938		18,229
Gain on sale of mortgage loans		165,145		11,581		—
Mortgage brokerage fees		141,165		58,948		—
Other income		118,809		62,105		75,351
Total noninterest income		2,666,141		2,275,851		1,736,521
NONINTEREST EXPENSE
Compensation and benefits		5,662,764		4,733,067		3,554,330
Occupancy and equipment		1,047,305		1,014,574		745,997
Data processing		777,491		769,511		508,369
Other expenses		2,430,132		2,218,187		1,722,224
Total noninterest expense		9,917,692		8,735,339		6,530,920
Income before income taxes		5,230,119		5,403,209		5,010,998
Income tax expense		1,798,737		1,870,145		1,762,639
Net Income	$	3,431,382	$	3,533,064	$	3,248,359
Net income per common share, basic	$	1.24	$	1.30	$	1.31
Net income per common share, diluted	$	1.23	$	1.29	$	1.30

See notes to consolidated financial statements.

- 21 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Unearned Stock Compensation			Unearned ESOP Shares			Treasury Stock			Total
Balances at January 1, 2002	$	25,460	$	12,878,050	$	21,127,319		$	231,153		$	(212,083	)	$	(481,760	)	$	(87,474	)	$	33,480,665
COMPREHENSIVE INCOME
Net income		—		—		3,248,359			—			—			—			—			3,248,359
Other comprehensive income:
Change in unrealized gain on securities available for sale, net of deferred income tax expense of $492,135		—		—		—			750,317			—			—			—			750,317
Less: Reclassification adjustment net of deferred income tax benefit of $6,883		—		—		—			(10,493	)		—			—			—			(10,493	)
Total comprehensive income																					3,988,183
Cash dividends ($0.52 per share)		—		—		(1,296,240	)		—			—			—			—			(1,296,240	)
Restricted stock grants		—		1,523		—			—			(7,894	)		—			6,371			—
Forefeiture of restricted stock		—		—		—			—			6,371			—			(6,371	)		—
Options exercised		58		47,913		—			—			—			—			—			47,971
Shares released by ESOP trust		—		27,352		—			—			—			41,000			—			68,352
Stock compensation expense		—		—		—			—			70,024			—			—			70,024
Purchase of 1,834 treasury shares		—		—		—			—			—			—			(29,181	)		(29,181	)
Balances at December 31, 2002		25,518		12,954,838		23,079,438			970,977			(143,582	)		(440,760	)		(116,655	)		36,329,774
COMPREHENSIVE INCOME
Net income		—		—		3,533,064			—			—			—			—			3,533,064
Other comprehensive income:
Change in unrealized gain on securities available for sale, net of deferred income tax benefit of $367,113		—		—		—			(559,737	)		—			—			—			(559,737	)
Less: Reclassification adjustment net of deferred income tax benefit of $20,177		—		—		—			(30,761	)		—			—			—			(30,761	)
Total comprehensive income																					2,942,566
Acquisition of Hometown Bancshares, Inc.		2,854		6,105,473		—			—			—			—			—			6,108,327
Cash dividends ($0.56 per share)		—		—		(1,520,399	)		—			—			—			—			(1,520,399	)
Options exercised		66		85,051		—			—			—			—			—			85,117
Shares released by ESOP trust		—		37,426		—			—			—			41,000			—			78,426
Stock compensation expense		—		—		—			—			70,156			—			—			70,156
Purchase of 9,659 treasury shares		—		—		—			—			—			—			(198,742	)		(198,742	)
Balances at December 31, 2003	$	28,438	$	19,182,788	$	25,092,103		$	380,479		$	(73,426	)	$	(399,760	)	$	(315,397	)	$	43,895,225

See notes to consolidated financial statements

- 22 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - continued

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Unearned Stock Compensation			Unearned ESOP Shares			Treasury Stock			Total
Balances at December 31, 2003	$	28,438	$	19,182,788	$	25,092,103		$	380,479		$	(73,426	)	$	(399,760	)	$	(315,397	)	$	43,895,225
COMPREHENSIVE INCOME
Net income		—		—		3,431,382			—			—			—			—			3,431,382
Other comprehensive income:
Change in unrealized gain on securities available for sale, net of deferred income tax benefit of $230,438		—		—		—			(351,329	)		—			—			—			(351,329	)
Less: Reclassification adjustment		—		—		—			—			—			—			—			—
Total comprehensive income																					3,080,053
Cash dividends ($0.60 per share)		—		—		(1,635,068	)		—			—			—			—			(1,635,068	)
Options exercised		27		31,228		—			—			—			—			—			31,255
Shares released by ESOP trust		—		64,150		—			—			—			71,750			—			135,900
Stock compensation expense		—		—		—			—			70,145			—			—			70,145
Purchase of 231,103 treasury shares		—		—		—			—			—			—			(4,863,168	)		(4,863,168	)
Balances at December 31, 2004	$	28,465	$	19,278,166	$	26,888,417		$	29,150		$	(3,281	)	$	(328,010	)	$	(5,178,565	)	$	40,714,342

See notes to consolidated financial statements.

- 23 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

	2004			2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,431,382		$	3,533,064		$	3,248,359
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Amortization of premium and accretion of discount on securities, net		224,042			376,025			218,454
Depreciation and amortization expense		818,109			723,963			480,393
Deferred income taxes		235,159			(212,976	)		(24,088	)
ESOP and stock compensation expense		226,321			154,929			138,376
(Increase) decrease in cash value of life insurance		(40,978	)		39,326			(52,657	)
Provision for loan losses		510,000			725,000			305,000
Gain on sale of securities		—			(50,938	)		(18,229	)
Proceeds from sale of mortgage loans		10,656,851			702,581			—
Mortgage loans originated for sale		(11,001,606	)		(691,000	)		—
Net gain on sale of mortgage loans		(165,145	)		(11,581	)		—
Stock dividends on Federal Home Loan Bank stock		(149,500	)		(114,700	)		—
(Increase) decrease in accrued interest receivable		69,970			(50,970	)		46,932
Increase (decrease) in accrued interest payable		126,086			(196,079	)		(125,183	)
Net change in other assets and liabilities		306,137			551,086			(174,885	)
Net Cash Provided By Operating Activities		5,246,828			5,477,730			4,042,472
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale		(27,634,588	)		(34,646,974	)		(26,590,589	)
Purchase of securities held to maturity		—			—			(1,100,000	)
Proceeds from maturities of securities available for sale		23,735,600			23,140,000			15,177,000
Proceeds from maturities of securities held to maturity		166,100			118,000			1,218,800
Proceeds from sale of securities available for sale		—			2,550,938			693,402
Proceeds from sale of securities held to maturity		—			—			150,750
Principal collected on mortgage-backed obligations		4,240,182			10,771,270			1,748,130
Net increase in loans		(14,312,151	)		(24,939,542	)		(14,852,948	)
Purchase of Federal Home Loan Bank stock		(424,200	)		(63,800	)		(537,200	)
Proceeds from sale of Federal Reserve Bank stock		—			179,650			—
Proceeds from sale of foreclosed real estate		698,980			268,893			391,965
Purchase of premises and equipment		(350,705	)		(1,307,904	)		(1,540,836	)
Net cash and cash equivalents acquired in merger		—			12,428,883			—
Net Cash Used In Investing Activities		(13,880,782	)		(11,500,586	)		(25,241,526	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		13,993,529			1,593,263			12,080,049
Advances from Federal Home Loan Bank		22,270,000			11,600,000			15,000,000
Repayment of advances from Federal Home Loan Bank		(17,412,497	)		(4,678,004	)		(4,505,094	)
Net increase in retail repurchase agreements		114,822			63,499			172,511
Exercise of stock options		30,274			70,950			47,971
Purchase of treasury stock		(4,863,168	)		(198,742	)		(29,181	)
Dividends paid		(1,635,066	)		(1,520,399	)		(1,296,240	)
Net Cash Provided By Financing Activities		12,497,894			6,930,567			21,470,016
Net Increase in Cash and Cash Equivalents		3,863,940			907,711			270,962
Cash and cash equivalents at beginning of year		13,560,978			12,653,267			12,382,305
Cash and Cash Equivalents at End of Year	$	17,424,918		$	13,560,978		$	12,653,267

See notes to consolidated financial statements.

- 24 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 twelve locations in southern Indiana. The Bank’s primary source of revenue is real estate mortgage loans. The Bank originates mortgage loans for sale in the secondary market and also serves as an agent for a mortgage company. The Bank also provides property and casualty insurance and non-deposit investment products through a financial services division of the Bank. Effective January 1, 2004, First Harrison Financial Services, Inc., a wholly-owned subsidiary of the Bank that formerly provided these services, dissolved its charter and all accounts were combined with the Bank. During 2004, the Bank organized three wholly-owned subsidiaries to manage a portion of the investment securities portfolio. First Harrison Investments, Inc. and First Harrison Holdings, Inc. are Nevada corporations that jointly own First Harrison, LLC, a Nevada limited liability corporation that holds and manages an investment securities portfolio.

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared in accordance with generally accepted accounting principles and conform with general practices in the banking industry. Intercompany balances and transactions have been eliminated. Certain prior year amounts have been reclassified to conform with the current year presentation.

Statements of Cash Flows

For purposes of the statements of cash flows, the Bank has defined cash and cash equivalents as cash and amounts due from banks, interest-bearing deposits with other banks and federal funds sold.

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 real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties.

While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. 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 that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

- 25 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(1 - continued)

Investment Securities

Securities Available for Sale: Securities available for sale consist of federal agency mortgage-backed and other debt securities, municipal debt securities, and mutual funds that are reported at fair value. Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. Amortization of premium and accretion of discount are recognized in interest income using methods approximating the interest method over the period to maturity. Unrealized gains and losses, net of tax, on securities available for sale are included in other comprehensive income and the accumulated unrealized holding gains and losses are reported as a separate component of equity until realized. Realized gains and losses on the sale of securities available for sale are determined using the specific identification method and are included in other noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income.

Securities Held to Maturity: Federal agency mortgage-backed securities and municipal debt securities for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premium and accretion of discount that are recognized in interest income using methods approximating the interest method over the 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.

Declines in the fair value of individual available for sale and held to maturity securities below their amortized cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans and Allowance for Loan Losses

The Bank grants real estate mortgage, commercial business and consumer loans. A substantial portion of the loan portfolio is represented by mortgage loans to customers in southern Indiana. The ability of the Bank’s customers to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses.

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

- 26 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(1 - continued)

The recognition of income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments become ninety (90) days past due unless, in the opinion of management, the outstanding interest remains collectible. Past due status is determined based on contractual terms. Generally, by applying the cash receipts method, interest income is subsequently recognized only as received until the loan is returned to accrual status. The cash receipts method is used when the likelihood of further loss on the loan is remote. Otherwise, the Bank applies the cost recovery method and applies all payments as a reduction of the unpaid principal balance until the loan qualifies for return to accrual status. A loan is restored to accrual status when all principal and interest payments are brought current and the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. The Bank’s practice is to charge off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loans classification as a loss by regulatory examiners, or for other reasons.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

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

The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

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 discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Foreclosed Real Estate

Foreclosed real estate includes both formally foreclosed property and in-substance foreclosed property held for sale. In-substance foreclosed properties are those properties for which the institution has taken physical possession, regardless of whether formal foreclosure proceedings have taken place.

Foreclosed real estate held for sale 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 noninterest expense if the carrying value exceeds the fair value minus estimated costs to sell. The net cost from operations of foreclosed real estate held for sale is reported in noninterest expense.

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Premises and Equipment

The Bank uses the straight line method of computing depreciation at rates adequate to amortize the cost of the applicable assets over their estimated 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.

Goodwill and Other Intangibles

Goodwill recognized in a business combination is carried at its implied fair value and is evaluated for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the carrying amount is greater than its fair value. If the carrying amount of the goodwill exceeds its implied fair value, an impairment loss is recognized in earnings equal to that excess amount. The loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis.

Other intangible assets consist of acquired core deposit intangibles. Core deposit intangibles are amortized over the estimated economic lives of the acquired core deposits. The carrying amount of core deposit intangibles and the remaining estimated economic life are evaluated annually or whenever events or circumstances indicate the carrying amount may not be recoverable or the remaining period of amortization requires revision. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset is its new accounting basis.

Mortgage Banking Activities

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market value. Aggregate market value is determined based on the quoted prices under a “best efforts” sales agreement with a third party. Net unrealized losses are recognized through a valuation allowance by charges to income. Realized gains on sales of mortgage loans are included in noninterest income.

Commitments to originate mortgage loans held for sale are considered derivative financial instruments to be accounted for at fair value. The Bank’s mortgage loan commitments subject to derivative accounting are fixed rate mortgage loan commitments at market rates when initiated. At December 31, 2004, the Bank had commitments to originate $2.4 million in fixed rate mortgage loans intended for sale in the secondary market after the loans are closed. Fair value is estimated based on fees that would be charged on commitments with similar terms.

Mortgage Servicing Rights and Loan Servicing

Rights to service mortgage loans for others are recorded as separate assets, whether those rights are acquired through activities or through purchase activities 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.

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(1 - continued)

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, estimated losses on foreclosed real estate, 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. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Stock-Based Compensation

Under the provisions of Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock-Based Compensation, the Company elects to measure and recognize 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 123. Accordingly, no compensation cost is charged against earnings for stock options granted under the Company’s stock-based compensation plans.

Advertising Costs

Advertising costs are charged to operations when incurred.

Recent Accounting Pronouncements

The following are summaries of recently issued accounting pronouncements that impact the accounting and reporting practices of the Company:

In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this interpretation are applied prospectively to guarantees issued or modified after December 31, 2002. The adoption of these recognition provisions will result in recording liabilities associated with certain guarantees provided by the Company. These currently include standby letters of credit. The disclosure requirements of this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The implementation of the recognition provisions of this interpretation did not have a material impact on the Company’s financial condition or results of operations.

In April 2003, FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133. Specifically, this amendment clarifies that loan commitments that relate to the origination of mortgage loans that will be held for sale should be accounted for as derivative instruments by the issuer of the loan commitment. The statement generally was effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003 and is applied prospectively. The implementation of this standard did not have a material impact on the Company’s financial condition or results of operations.

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(1 - continued)

In December 2003, FASB issued revised Interpretation No. 46 (FIN 46R), Consolidation of Variable Interest Entities, which provides guidance with respect to the identification and consolidation of variable interest entities. A variable interest entity exists and is required to be consolidated when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the entity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics include the direct and indirect ability to make decisions about an entity’s activities through voting rights or similar rights, the obligation to absorb the expected losses of an entity if they occur, and the right to receive the expected residual returns of the entity if they occur. FIN 46 was effective immediately for variable interest entities as of December 31, 2003, and the Company adopted the provisions of FIN 46R beginning for the quarter ended March 31, 2004. The adoption of FIN 46R had no material impact on the Company’s financial condition or results of operations.

In December 2004, FASB issued a revision of SFAS 123, Share-Based Payment. This statement requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements based on the grant date fair value of the award. The compensation cost will be recognized over the period which an employee is required to provide service in exchange for the award (the requisite service period) which is usually the vesting period. This statement must be applied as of the first interim reporting period that begins after June 15, 2005. This statement will apply to the Company’s stock option plan awards. Under the statement’s transition provisions, compensation cost is recognized on or after the effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant date fair value of those awards calculated under this statement. The adoption of this statement is not expected to have a material impact on the Company’s financial condition or results of operations.

In December 2004, FASB issued SFAS 153, Exchanges of Nonmonetary Assets – An Amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29 (APB 29) is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged with certain exceptions. This statement amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as result of the exchange. The provisions of this statement are to be applied prospectively and the statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this statement is not expected to have a material impact on the Company’s financial condition or results of operations.

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(2) MERGER WITH HOMETOWN BANCSHARES, INC.

On March 20, 2003, the Company acquired 100% of the outstanding common shares of Hometown Bancshares, Inc. (Hometown), a bank holding company located in New Albany, Indiana, pursuant to an Agreement and Plan of Merger dated September 25, 2002. Hometown was the parent company of Hometown National Bank, which was merged with and into the Bank. The acquisition was made for the purpose of expanding the Company’s presence in the New Albany and Floyd County, Indiana market area as, the Company expected to benefit from growth in this market area, as well as from expansion of the banking services provided to the existing customers of Hometown.

Pursuant to the terms of the merger agreement, Hometown stockholders who elected to receive Company stock received 2.487 shares of Company common stock and Hometown shareholders who elected to receive cash received $46.50 in cash for each share of Hometown common stock. Hometown stockholders who did not submit properly completed election forms within the required time frame received 0.773 shares of Company common stock and $32.05 in cash for each share of Hometown common stock. The Company issued 285,370 shares of common stock and paid approximately $5.4 million in cash consideration to former Hometown stockholders. The value assigned to the common shares issued in the transaction was approximately $6.1 million determined by the average closing price of the Company’s common stock over a twenty-day period ended March 17, 2003. The transaction was accounted for using the purchase method of accounting. Accordingly, the results of operations of Hometown have been included in the Company’s results of operations since the date of acquisition. Under the purchase method of accounting, the purchase price is assigned to the assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. The excess of cost over the fair value of the acquired net assets of approximately $5.4 million has been recorded as goodwill.

Following is a condensed balance sheet showing the fair values of the assets acquired and the liabilities assumed as of the date of acquisition:

	(In thousands)
Cash and interest-bearing deposits with banks	$	18,059
Investment securities		4,533
Loans, net		64,301
Premises and equipment		2,647
Goodwill arising in the acquisition		5,386
Core deposit intangibles		566
Other assets		1,393
Total assets acquired		96,885
Deposit accounts		84,673
Other liabilities		449
Total liabilities assumed		85,122
Net assets acquired	$	11,763

In accounting for the acquisition, $566,491 was assigned to core deposit intangibles which are amortized over a weighted-average estimated economic life of 9.3 years. It is not anticipated that the core deposit intangibles will have significant residual values. No amount of the goodwill arising in the acquisition is deductible for income tax purposes.

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(2 – continued)

The following pro forma information assumes that the acquisition was consummated on January 1, 2002:

	2003		2002
(In thousands, except per share data)
Interest income	$	22,307	$	23,826
Interest expense		9,582		10,675
Net interest income		12,725		13,151
Provision for loan losses		754		1,828
Net interest income after provision for loan losses		11,971		11,323
Noninterest income		2,347		2,208
Noninterest expenses		9,408		8,399
Income before income taxes		4,910		5,132
Income tax expense		1,767		1,836
Net income	$	3,143	$	3,296
Net income per common share, basic	$	1.05	$	1.19
Net income per common share, diluted	$	1.04	$	1.18

In addition to combining the historical results of operations, the pro forma calculations consider the purchase accounting adjustments and nonrecurring charges directly related to the acquisition and the related tax effects. The pro forma calculations do not include any anticipated cost savings as a result of the acquisition. The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the Hometown acquisition actually been consummated on January 1, 2002, or results that may occur in the future.

(3) 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 years ended December 31, 2004 and 2003 were approximately $4,565,000 and $2,075,000, respectively.

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(4) INVESTMENT SECURITIES

Debt and equity securities have been classified in the balance sheets according to management’s intent. Investment securities at December 31, 2004 and 2003 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2004:
Securities available for sale:
Mortgage-backed securities:
FNMA certificates	$	7,767,428	$	11,217	$	81,789	$	7,696,856
GNMA certificates		178,424		7,407		—		185,831
FHLMC certificates		2,485,523		1,401		43,709		2,443,215
FNMA REMICs		3,513,597		—		15,428		3,498,169
GNMA REMICs		991,358		—		885		990,473
FHLMC REMICs		3,128,106		—		3,261		3,124,845
		18,064,436		20,025		145,072		17,939,389
Other debt securities:
Federal agency		30,566,601		71,057		197,845		30,439,813
Municipal		15,159,183		343,648		40,710		15,462,121
Subtotal, debt securities		63,790,220		434,730		383,627		63,841,323
Mutual funds		1,341,738		22,637		13,591		1,350,784
Total securities available for sale	$	65,131,958	$	457,367	$	397,218	$	65,192,107
Securities held to maturity:
Mortgage-backed securities:
FNMA certificates	$	89,880	$	—	$	5,101	$	84,779
GNMA certificates		51,776		2,850		380		54,246
		141,656		2,850		5,481		139,025
Other debt securities:
Municipal		1,116,000		94,427		—		1,210,427
Total securities held to maturity	$	1,257,656	$	97,277	$	5,481	$	1,349,452
December 31, 2003:
Securities available for sale:
Mortgage-backed securities:
FNMA certificates	$	6,612,351	$	7,056	$	55,551	$	6,563,856
GNMA certificates		379,147		16,746		—		395,893
FHLMC certificates		2,017,700		1,819		25,786		1,993,733
FNMA REMICs		4,186,668		3,864		35,774		4,154,758
FHLMC REMICs		2,385,719		12,052		—		2,397,771
		15,581,585		41,537		117,111		15,506,011
Other debt securities:
Federal agency		36,584,416		389,287		96,384		36,877,319
Municipal		12,161,518		437,934		31,520		12,567,932
Subtotal, debt securities		64,327,519		868,758		245,015		64,951,262
Mutual funds		1,286,856		24,530		18,237		1,293,149
Total securities available for sale	$	65,614,375	$	893,288	$	263,252	$	66,244,411

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	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2003:
Securities held to maturity:
Mortgage-backed securities:
FNMA certificates	$	144,663	$	263	$	6,620	$	138,306
GNMA certificates		79,840		2,870		703		82,007
		224,503		3,133		7,323		220,313
Other debt securities:
Municipal		1,282,072		82,384		—		1,364,456
Total securities held to maturity	$	1,506,575	$	85,517	$	7,323	$	1,584,769

During 2002, non-rated municipal securities classified as held to maturity with an amortized cost of $149,897 were sold and gross gains of $853 were realized. These securities were sold as a result of an Office of Thrift Supervision (OTS) examination in 2000 which 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 in January 2000, the Bank acquired certain non-rated municipal securities issued by municipalities in which the Bank does not have an office. As of December 31, 2002, all non-rated municipal securities had been sold to comply with the OTS directive.

Securities available for sale were sold for total proceeds of $2,550,938 and $693,402, resulting in gross realized gains of $50,938 and $17,376 during the years 2003 and 2002, respectively.

The amortized cost and fair value of debt securities as of December 31, 2004, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.

	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	2,126,191	$	2,136,812	$	36,862	$	38,412
Due after one year through five years		29,911,115		29,968,972		180,299		187,866
Due after five years through ten years		9,836,423		9,955,561		98,839		101,322
Due after ten years		3,852,055		3,840,589		800,000		882,827
		45,725,784		45,901,934		1,116,000		1,210,427
Mortgage-backed securities		18,064,436		17,939,389		141,656		139,025
	$	63,790,220	$	63,841,323	$	1,257,656	$	1,349,452

Investment securities with a carrying amount of $515,339 were pledged to secure public deposits at December 31, 2004. Also see notes 9 and 10 regarding investment securities pledged for other purposes.

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The following table presents information about investment securities with gross unrealized losses at December 31, 2004 aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position.

	Number Of Investment Positions	Fair Value		Gross Unrealized Losses
Securities available for sale:
Continuous loss position less than twelve months:
Federal agency mortgage-backed securities	13	$	8,556,352	$	55,513
Federal agency obligations	17		11,998,626		78,944
Municipal obligations	4		2,318,120		17,271
Total less than twelve months	34		22,873,098		151,728
Continuous loss position more than twelve months:
Federal agency mortgage-backed securities	9		6,673,773		89,559
Federal agency obligations	6		5,881,052		118,901
Municipal obligations	4		1,270,945		23,439
Mutual fund	1		261,030		13,591
Total more than twelve months	20		14,086,800		245,490
Total securities available for sale	54	$	36,959,898	$	397,218
Securities held to maturity:
Continuous loss position more than twelve months:
Federal agency mortgage-backed securities	2	$	96,862	$	5,481

At December 31, 2004, the 53 debt securities in the available for sale classification in a loss position had depreciated approximately 1% from the amortized cost basis. The two debt securities in the held to maturity classification in a loss position at December 31, 2004 had depreciated approximately 5% from the amortized cost basis. All of the debt securities in a loss position at December 31, 2004 were backed by federal or state governments or secured by mortgage loans. These unrealized losses related principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other-than-temporary.

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(5) LOANS

Loans at December 31, 2004 and 2003 consisted of the following:

	2004			2003
Real estate mortgage loans:
Residential	$	179,815,687		$	176,569,170
Land		6,696,041			7,770,517
Residential construction		23,215,094			25,076,706
Commercial real estate		38,653,718			42,936,244
Commercial business loans		20,865,682			16,162,173
Consumer loans:
Home equity and second mortgage loans		35,384,786			27,656,394
Automobile loans		13,726,193			12,863,196
Loans secured by savings accounts		1,611,492			1,248,370
Unsecured loans		2,307,278			1,854,637
Other consumer loans		4,154,483			4,542,710
Gross loans		326,430,454			316,680,117
Less:
Deferred loan origination fees, net		(66,982	)		(37,675	)
Undisbursed portion of loans in process		6,933,019			10,084,826
Allowance for loan losses		2,478,081			2,433,329
		9,344,118			12,480,480
Loans, net	$	317,086,336		$	304,199,637

Mortgage loans serviced for the benefit of others amounted to $1,150,000 and $2,090,706 at December 31, 2004 and 2003, respectively. The balance of capitalized mortgage servicing rights, carried at estimated fair value, included in other assets at December 31, 2004 and 2003, was $10,271 and $21,964, respectively. The estimated fair value of mortgage servicing rights was determined using discount rates ranging from 7.5 to 10% and prepayment speeds ranging from .01% to 9.24%, depending upon the stratification of the specific rights. During 2001, the Bank discontinued the origination of mortgage loans for sale in the secondary market with servicing retained by the Bank. The Bank capitalized no mortgage servicing rights during the years 2004, 2003 and 2002. The Bank recognized amortization of $11,693, $44,155 and $58,112 for the years ended December 31, 2004, 2003 and 2002, respectively.

An analysis of the allowance for loan losses is as follows:

	2004			2003			2002
Beginning balances	$	2,433,329		$	1,218,246		$	1,102,653
Allowance related to acquired loans		—			1,065,400			—
Provision for loan losses		510,000			725,000			305,000
Recoveries		55,991			52,176			57,552
Loans charged-off		(521,239	)		(627,493	)		(246,959	)
Ending balances	$	2,478,081		$	2,433,329		$	1,218,246

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(5 – continued)

At December 31, 2004 and 2003, the total recorded investment in loans on nonaccrual amounted to approximately $2,075,000 and $2,637,000, respectively. The total recorded investment in loans past due ninety days or more and still accruing interest amounted to approximately $1,485,000 and $2,666,000 at December 31, 2004 and 2003, respectively. Information about impaired loans and the related allowance for loan losses is presented below.

	2004		2003		2002
	(In thousands)
At end of year:
Impaired loans with related allowance	$	2,046	$	3,589	$	1,160
Impaired loans with no allowance		1,514		1,714		—
Total	$	3,560	$	5,303	$	1,160
Allowance related to impaired loans	$	820	$	1,075	$	420
Average balance of impaired loans during the year		4,192		3,941		1,085
Interest income recognized in the statements of income during the periods of impairment		113		168		46
Interest income recognized during the periods of impairment – cash method		189		210		82

The Bank has entered into loan transactions with certain directors, officers and their affiliates (i.e., related parties). In the opinion of management, such indebtedness was incurred 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 other persons.

The following table represents the aggregate activity for related party loans during the year ended December 31, 2004:

Beginning balance	$	2,312,931
New loans		4,415,674
Payments		(3,614,711	)
Ending balance	$	3,113,894

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, 2004, the Bank granted approximately $1,737,000 to customers of the corporation and such loans had an aggregate outstanding balance of approximately $2,692,000 and $2,733,000 at December 31, 2004 and 2003, respectively.

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(6) PREMISES AND EQUIPMENT

Premises and equipment as of December 31 consisted of the following:

	2004		2003
Land and land improvements	$	2,549,417	$	2,602,829
Leasehold improvements		157,777		157,777
Office buildings		7,432,714		7,377,489
Furniture, fixtures and equipment		3,822,160		3,410,408
		13,962,068		13,548,503
Less accumulated depreciation		4,065,931		3,257,870
Totals	$	9,896,137	$	10,290,633

Depreciation expense was $781,845, $661,873 and $478,733 for the years ended December 31, 2004, 2003 and 2002, respectively.

(7) FORECLOSED REAL ESTATE

During the years ended December 31, 2004, 2003 and 2002, foreclosure losses in the amount of $152,274, $19,939 and $35,881, respectively, were charged off to the allowance for loan losses. No losses on subsequent writedowns of foreclosed real estate were recognized in 2004, 2003 or 2002. Real estate taxes and other expenses of holding foreclosed real estate are recognized in other expenses and amounted to $48,151, $11,767 and $21,297 in 2004, 2003 and 2002, respectively. Net realized losses on sales of foreclosed real estate amounted to $27,544 and $6,018 in 2004 and 2003, respectively, and a net realized gain of $14,506 was recognized on sales of foreclosed real estate during 2002.

(8) GOODWILL AND INTANGIBLES

As discussed in Note 2, the Company acquired goodwill in the acquisition of Hometown Bancshares, Inc. during 2003. Goodwill is reviewed for impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the carrying amount is greater than its fair value. No impairment of goodwill was recognized during 2004 or 2003.

The following is a summary of non-goodwill intangibles subject to amortization as of December 31, 2004 and 2003:

	2004			2003
Core deposit intangibles:
Acquired in branch acquisition	$	180,899		$	180,899
Acquired in Hometown merger		566,491			566,491
Gross carrying amount		747,390			747,390
Accumulated amortization		(211,698	)		(138,790	)
	$	535,692		$	608,600

Amortization expense was $72,908, $59,395 and $12,060 for the years ended December 31, 2004, 2003 and 2002, respectively. Estimated amortization expense for each of the ensuing years through December 31, 2009 is $72,908.

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FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(9) DEPOSITS

The aggregate amount of time deposit accounts with balances of $100,000 or more was approximately $39,243,000 and $43,110,000 at December 31, 2004 and 2003, respectively. Deposit account balances in excess of $100,000 are not federally insured.

At December 31, 2004, scheduled maturities of time deposits were as follows:

Year ending December 31:
2005	$	61,798,952
2006		41,104,975
2007		27,296,187
2008		12,435,238
2009 and thereafter		12,043,681
Total	$	154,679,033

The Bank held deposits of approximately $4,641,000, and $5,546,000 for related parties at December 31, 2004 and 2003, respectively.

(10) RETAIL REPURCHASE AGREEMENTS

Retail repurchase agreements represent overnight borrowings from deposit customers and the debt securities sold under the repurchase agreements are under the control of the Bank. Information concerning borrowings under repurchase agreements is summarized as follows:

	2004			2003			2002
Weighted average interest rate during the year		1.21	%		0.76	%		1.39	%
Average daily balance	$	295,410		$	156,388		$	185,929
Maximum month-end balance during the year	$	696,821		$	520,230		$	456,732
Debt securities underlying the agreements at December 31:
Amortized cost	$	2,006,936		$	2,014,347		$	1,009,365
Fair value	$	2,015,033		$	2,061,898		$	1,040,721

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FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(11) ADVANCES FROM FEDERAL HOME LOAN BANK

At December 31, 2004 and 2003, advances from the Federal Home Loan Bank were as follows:

	2004				2003
	Weighted Average Rate		Amount		Weighted Average Rate		Amount
Fixed rate advances	4.98	%	$	62,099,050	5.18	%	$	58,241,547
Variable rate advances	1.95	%		3,000,000	1.11	%		2,000,000
			$	65,099,050			$	60,241,547

At December 31, 2004, advances from the Federal Home Loan Bank totaling $25,000,000 carried a put option whereby the Federal Home Loan Bank will automatically convert the fixed rate advance to a variable rate should the market interest rate exceed a pre-determined strike rate.

The following is a schedule of maturities for advances outstanding as of December 31, 2004:

Due in:
2005	$	11,651,821
2006		4,986,097
2007		8,767,274
2008		5,864,224
2009		7,053,592
Thereafter		26,776,042
Total	$	65,099,050

The advances are secured under a blanket collateral agreement. At December 31, 2004, the carrying value of residential mortgage loans and investment securities pledged as security for the advances was $163,202,073 and $1,089,754, respectively.

(12) LEASE COMMITMENTS

During 2004, the Bank extended a noncancellable sub-lease agreement for branch office space which expires in five years. The Bank also has a noncancellable lease agreement for a branch office dated December 1, 1995 that expires during 2005.

The subsidiary companies headquartered in Nevada lease office space under two-year noncancellable sub-lease agreements which expire in October 2006.

The following is a schedule by years of future minimum rental payments required under these operating leases:

Year ending December 31:
2005	$	39,265
2006		14,213
2007		14,213
2008		14,213
2009		14,213
2010		4,738
Total minimum payments required	$	100,855

Total rental expense for all operating leases for the years ended December 31, 2004, 2003 and 2002 amounted to $35,291, $33,528 and $33,528, respectively.

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FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(13) INCOME TAXES

The components of income tax expense were as follows:

	2004		2003			2002
Current	$	1,562,598	$	2,068,954		$	1,785,045
Tax benefit allocated to additional paid-in capital related to exercise of options		980		14,167			1,682
Deferred		235,159		(212,976	)		(24,088	)
Totals	$	1,798,737	$	1,870,145		$	1,762,639

Significant components of the deferred tax assets and liabilities as of December 31, 2004 and 2003 were as follows:

	2004			2003
Deferred tax assets (liabilities):
Depreciation	$	(611,384	)	$	(569,427	)
Deferred loan fees and costs		(28,349	)		(86,600	)
Deferred compensation plans		170,044			175,588
Stock compensation plan		27,314			27,148
Federal Home Loan Bank stock dividends		(117,896	)		(59,006	)
Allowance for loan losses		966,762			943,365
Unrealized gain on securities available for sale		(31,000	)		(249,557	)
Acquisition purchase accounting adjustments		(160,769	)		(99,944	)
Net operating loss carryovers acquired		23,602			178,753
Other		(7,026	)		(12,420	)
Net deferred tax asset	$	231,298		$	247,900

The reconciliation of income tax expense with the amount which would have been provided at the federal statutory rate of 34% follows:

	2004			2003			2002
Provision at federal statutory tax rate	$	1,778,240		$	1,837,091		$	1,703,739
State income tax-net of federal tax benefit		255,172			254,279			229,184
Tax-exempt interest income		(200,710	)		(170,650	)		(146,627	)
Increase in cash value of life insurance		(13,932	)		(20,629	)		(17,903	)
Other		(20,033	)		(29,946	)		(5,754	)
Totals	$	1,798,737		$	1,870,145		$	1,762,639
Effective tax rate		34.4	%		34.6	%		35.2	%

The acquisition of Hometown during 2003 qualified for tax-free exchange treatment and the Company acquired federal and state net operating loss carryovers of $1,012,854 and $696,380, respectively. The federal and state net operating loss carryovers expire in 2023 and 2018, respectively. The utilization of the net operating loss carryovers is subject to an annual limitation under Internal Revenue Code Section 382. At December 31, 2004, the remaining federal net operating loss carryover amounted to $69,418. The Company has fully utilized the state net operating loss carryover and expects to utilize the remaining federal net operating loss carryover in 2005.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(13 - continued)

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, 2004 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, 2004.

Federal legislation enacted 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 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.

(14) 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 $184,992, $162,327 and $128,359 to the plan for the years ended December 31, 2004, 2003 and 2002, 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, 2004, 2003 and 2002 amounted to $156,176, $84,773 and $68,327, respectively.

Company common stock held by the ESOP trust at December 31 was as follows:

	2004		2003
Allocated shares		26,362		19,671
Unearned shares		32,801		39,976
Total ESOP shares		59,163		59,647
Fair value of unearned shares	$	688,821	$	839,496

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(15) 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 $34,270, $32,503 and $30,839 for the years ended December 31, 2004, 2003 and 2002, 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 $11,751, $14,420 and $13,122 for the years ended December 31, 2004, 2003 and 2002, respectively.

(16) 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 $70,145, $70,156 and $70,024 was recognized for the years ended December 31, 2004, 2003 and 2002, respectively.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(16 - continued)

Options granted generally vest ratably over five 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, 2004, 2003 and 2002 and the changes for the years then ended:

	2004			2003			2002
	Number of Shares	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
Outstanding at beginning of year	67,138	$	10.67	73,923	$	10.68	84,736	$	10.46
Granted	45,150		23.00	—		—	750		14.25
Exercised	2,694		11.24	6,630		10.70	5,802		7.98
Forfeited	1,700		21.59	155		12.65	5,761		10.69
Outstanding at end of year	107,894	$	15.64	67,138	$	10.67	73,923	$	10.67
Exercisable at end of year	52,390	$	10.54	42,476	$	10.40	37,555	$	10.40

For options outstanding at December 31, 2004, the following information is provided by range of exercise price:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Number of Shares	Weighted Average Exercise Price
$6.24 - $7.41	4,364	$	6.95	2.1 years	4,364	$	6.95
$9.42 - $12.65	59,130		10.87	4.9 years	47,726		10.84
$14.25	750		14.25	7.1 years	300		14.25
$23.00	43,650		23.00	9.5 years	—		—
$6.24 - $23.00	107,894	$	15.64	6.7 years	52,390	$	10.54

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(16 - continued)

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

	Years Ended December 31,
	2004			2003			2002
Net income, as reported	$	3,431,382		$	3,533,064		$	3,248,359
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(22,507	)		(11,995	)		(12,327	)
Pro forma net income	$	3,408,875		$	3,521,069		$	3,236,032
Earnings per share:
Basic - as reported	$	1.24		$	1.30		$	1.31
Basic - pro forma	$	1.23		$	1.30		$	1.31
Diluted - as reported	$	1.23		$	1.29		$	1.30
Diluted - pro forma	$	1.22		$	1.28		$	1.29

For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair market value of stock options granted 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 years ended December 31, 2004 and 2002:

	2004			2002
Expected dividend yields		2.61	%		3.14	%
Risk-free interest rates		3.62	%		4.27	%
Expected volatility		17.60	%		10.65	%
Expected life of options		7 years			7 years
Weighted average fair value at grant date	$	4.10		$	1.71

No employee stock options were granted during 2003.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(17) 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 $1,337,910 at December 31, 2004.

The following is a summary of the commitments to extend credit at December 31, 2004 and 2003:

	2004		2003
Loan commitments:
Fixed rate	$	3,222,332	$	2,210,000
Adjustable rate		600,600		642,850
Unused lines of credit on credit cards		2,312,889		2,045,846
Undisbursed commercial and personal lines of credit		10,117,990		10,610,761
Undisbursed portion of construction loans in process		6,607,474		10,084,826
Undisbursed portion of home equity lines of credit		14,804,728		12,882,281
Total commitments to extend credit	$	37,666,013	$	38,476,564

(18) 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 17). 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, 2004, 2003 and 2002.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(19) DIVIDEND RESTRICTION

As an Indiana corporation, the Company is subject to Indiana law with respect to the payment of dividends. Under Indiana law, the Company may pay dividends so long as it is able to pay its debts as they become due in the usual course of business and its assets exceed the sum of its total liabilities, plus the amount that would be needed, if the Company were to be dissolved at the time of the dividend, to satisfy any rights that are preferential to the rights of the persons receiving the dividend. The ability of the Company to pay dividends depends primarily on the ability of the Bank to pay dividends to the Company.

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 established upon completion of a conversion from mutual to stock form on December 31, 1998.

(20) 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, 2004, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2004, 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 institution’s 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.

	Actual				Minimum For Capital Adequacy Purposes:				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions:
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2004:
Total capital (to risk weighted assets)	$	33,638	12.92	%	$	20,821	8.00	%	$	26,026	10.00	%
Tier I capital (to risk weighted assets)	$	32,461	12.47	%	$	10,411	4.00	%	$	15,125	6.00	%
Tier I capital (to adjusted total assets)	$	32,461	7.74	%	$	16,778	4.00	%	$	20,973	5.00	%
Tangible capital (to adjusted total assets)	$	32,461	7.74	%	$	6,292	1.50	%		N/A

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(20 - continued)

	Actual				Minimum For Capital Adequacy Purposes:				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions:
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2003:
Total capital (to risk weighted assets)	$	37,506	14.35	%	$	20,904	8.00	%	$	26,130	10.00	%
Tier I capital (to risk weighted assets)	$	35,073	13.42	%	$	10,452	4.00	%	$	15,678	6.00	%
Tier I capital (to adjusted total assets)	$	35,073	8.70	%	$	16,118	4.00	%	$	20,148	5.00	%
Tangible capital (to adjusted total assets)	$	35,073	8.70	%	$	6,044	1.50	%		N/A

(21) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table summarizes the carrying value and estimated fair value of financial instruments at December 31:

	2004				2003
	Carrying Value		Fair Value		Carrying Value		Fair Value
(In thousands)
Financial assets:
Cash and cash equivalents	$	17,425	$	17,425	$	13,561	$	13,561
Securities available for sale		65,192		65,192		66,244		66,244
Securities held to maturity		1,258		1,349		1,507		1,585
Loans held for sale		510		510		—		—
Loans, net		317,086		312,432		304,200		302,264
Federal Home Loan Bank stock		3,668		3,668		3,095		3,095
Accrued interest receivable		2,104		2,104		2,174		2,174
Financial liabilities:
Deposits		316,462		319,186		302,468		307,782
Retail repurchase agreements		635		635		520		520
Advances from Federal Home Loan Bank		65,099		65,020		60,242		64,244
Accrued interest payable		1,286		1,286		1,160		1,160
Off-balance-sheet financial instruments:
Asset related to commitments to extend credit		—		12		—		29

The carrying amounts in the preceding table are included in the consolidated balance sheets under the applicable captions. The contractual or notional amounts of financial instruments with off-balance-sheet risk are disclosed in Note 17.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(21 - continued)

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 Cash Equivalents

For cash and cash equivalents, 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 and marketable equity securities, the fair values are based on quoted market prices. For Federal Home Loan Bank stock, a restricted equity security, the carrying amount is a reasonable estimate of fair value because it is not marketable.

Loans

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. The carrying amount of accrued interest receivable approximates its fair value.

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. The carrying amount of accrued interest payable approximates its fair value.

Borrowed Funds

The carrying amount of initial repurchase agreements approximate its fair value. 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.

(22) PARENT COMPANY CONDENSED FINANCIAL INFORMATION

Condensed financial information for First Capital, Inc. (parent company only) follows:

Balance Sheets
(In thousands)
	As of December 31,
	2004		2003
Assets:
Cash and interest bearing deposits	$	2,078	$	2,215
Other assets		214		210
Investment in subsidiaries		38,422		41,470
	$	40,714	$	43,895
Liabilities and Stockholders’ Equity:
Other liabilities	$	—	$	—
Stockholders’ equity		40,714		43,895
	$	40,714	$	43,895

- 49 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(22 - continued)

Statements of Income

(In thousands)

	Years Ended December 31,
	2004			2003			2002
Interest income	$	14		$	16		$	18
Dividend income		1,641			2,100			1,706
Other operating expenses		(404	)		(331	)		(265	)
Income before income taxes and equity in undistributed net income of subsidiaries		1,251			1,785			1,459
Income tax credit		176			155			114
Income before equity in undistributed net income of subsidiaries		1,427			1,940			1,573
Equity in undistributed net income of subsidiaries		2,004			1,593			1,675
Net income	$	3,431		$	3,533		$	3,248

Statements of Cash Flows

(In thousands)

	Years Ended December 31,
	2004			2003			2002
Operating Activities:
Net income	$	3,431		$	3,533		$	3,248
Adjustments to reconcile net income to cash provided by operating activities:
Equity in undistributed net income of subsidiaries		(2,004	)		(1,593	)		(1,675	)
ESOP and stock compensation expense		226			155			138
Net (increase) decrease in other assets and liabilities		(22	)		981			(153	)
Net cash provided by operating activities		1,631			2,176			1,558
Investing Activities:
Cash paid in acquisition of Hometown Bancshares, Inc.		—			(5,631	)		—
Financing Activities:
Cash distributions from bank subsidiary:
Acquisition of Hometown Bancshares, Inc.		—			6,000			—
Purchase of treasury stock		4,700			—			—
Exercise of stock options		30			71			48
Purchase of treasury stock		(4,863	)		(199	)		(29	)
Cash dividends paid		(1,635	)		(1,520	)		(1,296	)
Net cash provided by (used in) financing activities		(1,232	)		4,352			(1,277	)
Net increase (decrease) in cash		(137	)		897			281
Cash at beginning of year		2,215			1,318			1,037
Cash at end of year	$	2,078		$	2,215		$	1,318

- 50 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(23) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE

	Years Ended December 31,
	2004		2003		2002
Basic:
Earnings:
Net income	$	3,431,382	$	3,533,064	$	3,248,359
Shares:
Weighted average common shares outstanding		2,763,983		2,708,356		2,475,938
Net income per common share, basic	$	1.24	$	1.30	$	1.31
Diluted:
Earnings:
Net income	$	3,431,382	$	3,533,064	$	3,248,359
Shares:
Weighted average common shares outstanding		2,763,983		2,708,356		2,475,938
Add: Dilutive effect of outstanding options		31,402		31,212		25,327
Dilutive effect of restricted stock		2,868		4,430		4,729
Weighted average common shares outstanding, as adjusted		2,798,253		2,743,998		2,505,994
Net income per common share, diluted	$	1.23	$	1.29	$	1.30

Unearned ESOP shares are not considered as outstanding for purposes of computing weighted average common shares outstanding.

(24) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

	Years Ended December 31,
	2004		2003		2002
Cash payments for:
Interest	$	8,991,034	$	8,682,750	$	8,926,680
Income taxes		1,430,352		1,542,270		1,965,453
Noncash investing activities:
Transfers from loans to real estate acquired through foreclosure	$	1,182,775	$	340,678	$	318,631
Proceeds from sales of foreclosed real estate financed through loans		160,676		—	$	87,400

- 51 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(26) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	(In thousands, except per share data)
2004
Interest income	$	5,439	$	5,418	$	5,530	$	5,722
Interest expense		2,226		2,233		2,290		2,368
Net interest income		3,213		3,185		3,240		3,354
Provision for loan losses		125		120		100		165
Net interest income after provision for loan losses		3,088		3,065		3,140		3,189
Noninterest income		588		704		675		699
Noninterest expenses		2,439		2,445		2,516		2,518
Income before income taxes		1,237		1,324		1,299		1,370
Income tax expense		404		463		443		489
Net income	$	833	$	861	$	856	$	881
Net income per common share, basic	$	0.30	$	0.31	$	0.31	$	0.32
Net income per common share, diluted	$	0.30	$	0.31	$	0.30	$	0.32
2003
Interest income	$	4,708	$	5,638	$	5,506	$	5,451
Interest expense		2,062		2,251		2,189		2,213
Net interest income		2,646		3,387		3,317		3,238
Provision for loan losses		150		175		275		125
Net interest income after provision for loan losses		2,496		3,212		3,042		3,113
Noninterest income		509		595		585		587
Noninterest expenses		1,918		2,266		2,257		2,295
Income before income taxes		1,087		1,541		1,370		1,405
Income tax expense		366		541		484		479
Net income	$	721	$	1,000	$	886	$	926
Net income per common share, basic	$	0.29	$	0.36	$	0.32	$	0.33
Net income per common share, diluted	$	0.28	$	0.36	$	0.32	$	0.33

- 52 -

DIRECTORS AND OFFICERS

Board of Directors	Executive Officers
James G. Pendleton	William W. Harrod
Chairman of the Board and retired Chief Executive	President and Chief Executive Officer of First
Officer of First Harrison Bank	Capital, Inc. and Chief Operating Officer of First
	Harrison Bank
Dennis L. Huber	Samuel E. Uhl
President and Publisher of O’Bannon Publishing	President and Chief Executive Officer of First
Company, Inc.	Harrison Bank and Chief Operating Officer of
	First Capital, Inc.
Kenneth R. Saulman	M. Chris Frederick
Supervisor for Clark County REMC	Senior Vice President, Chief Financial Officer
	and Treasurer
Gerald L. Uhl	Dennis L. Thomas
Business Manager for Jacobi Sales, Inc.	Senior Vice President, Consumer Lending
	Processing and Servicing
James E. Nett	Joel E. Voyles
Accountant for Koetter Woodworking, Inc.	Senior Vice President, Retail Banking
	Operations and Corporate Secretary
Mark D. Shireman
President of James L. Shireman, Inc.	Advisory Board
Michael L. Shireman	Thomas D. Lumley
President of Uhl Truck Sales, Inc.	President and CEO of Carlson
	Wagonlit/WTS, Inc.
John W. Buschemeyer	Stephen L. Banet, DVM
Retired President of Hurst Lumber Company	Animal Care Clinic of Salem
James S. Burden	Carl F. Booth
Owner of Tracy’s Mobile Home Park	President of Carl Booth & Co., Inc.
Kathryn W. Ernstberger	Anne Ragains
Associate Professor of Business Administration	CEO of Great Escape Theaters
at Indiana University Southeast
William W. Harrod	Michael J. Pattison
Executive Officer of First Capital, Inc. and	Retired
First Harrison Bank
Samuel E. Uhl	Craig Stanley
Executive Officer of First Capital, Inc. and	Retired
First Harrison Bank
	Patrick N. Lucas
	President of Lucas, Inc.

- 53 -

CORPORATE INFORMATION

General Counsel	Independent Auditors
Simpson & Thompson	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 & Aguggia 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, 2004, the Company had 1,308 stockholders of record and 2,596,715 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, 2004 and 2003 as reported by NASDAQ. The market prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

	High Bid		Low Bid		Dividends		Market price end of period
2004:
First Quarter	$	24.99	$	18.75	$	0.15	$	22.50
Second Quarter		24.00		21.00		0.15		22.50
Third Quarter		22.25		18.64		0.15		21.00
Fourth Quarter		21.40		19.60		0.15		21.00
2003:
First Quarter	$	22.02	$	20.00	$	0.13	$	22.00
Second Quarter		21.50		20.00		0.14		21.00
Third Quarter		20.75		17.70		0.14		20.17
Fourth Quarter		21.75		18.57		0.15		21.00

Dividend payments by the Company depend primarily on dividends received by the Company from the Bank. See Note 19 to Consolidated Financial Statements for information regarding the dividend restrictions applicable to the Company and the Bank.

Annual Meeting

The Annual Meeting of Stockholders will be held at 12:00 Noon, local time, Wednesday, April 20, 2005, at the main office of the Bank, 220 Federal Drive, N.W., Corydon, Indiana 47112.

- 54 -

General Inquiries and Reports

The Company is required to file an Annual Report on Form 10-K for its fiscal year ended December 31, 2004 with the Securities and Exchange Commission. Copies of this Annual Report and the Company’s annual reports on Form 10-K (without exhibits) and quarterly reports on Form 10-Q (without exhibits) 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 Company’s internet website (www.firstharrison.com) and the Securities and Exchange Commission’s internet website (www.sec.gov).

- 55 -

EX-14.0

Exhibit 14.0

First Capital, Inc.

Code of Ethics and Business Conduct

This Code of Ethics and Business Conduct (“Code”) represents an overview of the corporate policies that should govern the actions of all employees, officers and directors of First Capital, Inc. and its subsidiaries (collectively, the “Company”). This Code is not a replacement for policies and procedures that address the specifics of our business or which may impose stricter or more detailed requirements.

No code of conduct can cover every potential situation. This Code is designed to provide written standards to promote honest and ethical conduct, compliance with law, and a vehicle for prompt internal reporting and accountability to assure adherence to this Code. It is the responsibility of each individual to apply the principles set forth in this Code in a serious and respectful fashion and with the exercise of good business judgment. Failure to adhere to the requirements of this Code and the policies and procedures set forth in it may result in disciplinary action up to and including dismissal.

Certain parts of this Code may apply to specific “executive officers.” “Executive officer” means a member of the management of the Company or of a subsidiary of the Company so designated by resolution of the Board of Directors.

The policies and procedures contained in this Code do not constitute a legal contract and may be changed, modified or discontinued from time to time without notice (except as required by law) and in the sole discretion of the Company. Except as otherwise provided by written agreement or applicable law, persons employed by the Company or its subsidiaries are employed at will, and the Company reserves the right to take employment action, including termination, at any time, for any reason, without notice.

TABLE OF CONTENTS

Financial Policies	1
Political Contributions and Activities	2
Conflicts of Interest	2
Accepting Gifts and Gratuities	3
Corporate Opportunities	5
Equal Employment Opportunity, Harassment and Sexual Harassment	5
Illegal and Impairing Substances	6
Workplace Violence	7
Marketing Practices and Antitrust	7
Computer Networks, Voice Mail, E-Mail and the Internet	8
Confidential Information	9
Examinations, Government Investigations and Litigation	11
Detailed Policies and Procedures	12
Administration of the Code of Ethics and Business Conduct	12
Contacts	15

NOTE: Throughout this Code, the term “Company” refers to First Capital, Inc. and/or the subsidiary in which an employee works, depending on context.

FINANCIAL POLICIES

Use of Company Assets

The Company’s assets are to be used exclusively in the pursuit of the Company’s business except for minimal personal use authorized by your supervisor in accordance with other Company policies. The Company’s assets include equipment, facilities, supplies, services such as telephones and computer networks, and the time and efforts of its employees. You should not use Company assets for personal gain or convenience, or make Company assets available for the gain or convenience of anyone else, or for any purpose other than conducting the Company’s business unless you have management authorization to do so.

Authority to Make Commitments

Only specific employees are authorized to make financial or other commitments on behalf of the Company. Commitments might be such things as approving a loan or other extension of credit, ordering equipment or materials, authorizing business travel, approving payment of an invoice or expense report, authorizing budgets or budget overruns, signing leases or other contracts, selling Company assets, settling litigation or other claims, borrowing money, setting compensation or employee benefits, making charitable contributions and other transactions. You should not commit the Company to any obligation unless you have the authority to do so. These authorizations are in writing and are governed by corporate policies.

Bribes and Other Illegal Corporate Payments

The use of Company funds for payments to any individual, company or organization for the purpose of obtaining favorable treatment in securing business or other special considerations is prohibited by law. This policy does not prohibit normal and customary business expenses such as reasonable entertainment, trade organization dues or similar expenses that are allowed by applicable Company policies, which must be properly reported on an appropriate expense report form.

Relations with Government Employees

The U.S. government has various regulations prohibiting government personnel from accepting entertainment, gifts, gratuities or other business courtesies that may be acceptable in the private commercial sector. All Company employees who may have to make these sorts of judgments must understand and comply with the letter and intent of such regulations.

Integrity of Records and Reports

The Company’s accounting records are relied upon to produce reports to the Company’s management, shareholders, government agencies and other entities. All Company accounting records, and the reports produced from those records, shall be kept and presented in a timely fashion and in accordance with the applicable laws, rules and regulations of each jurisdiction. Such records and reports must constitute understandable disclosure and fully, accurately and fairly reflect in reasonable detail the Company’s assets, liabilities, revenues and expenses.

1

Responsibility for accurate and complete financial records does not rest solely with the Company’s accounting employees. All employees involved in approving transactions, supplying supporting information for transactions and determining account classifications have responsibility for complying with our policies.

Reports to Management

The same high standards required in the Company’s external reporting apply to financial reports to management. Accruals and estimates included in internal reports (such as business plans, budgets and forecasts) shall be supported by appropriate documentation and based on good-faith judgment.

Payments and Disbursements

All payments made by or on behalf of the Company must be documented in the accounting records with appropriate approval(s) and an adequate description of the business purpose of the disbursement.

Cash Deposits and Bank Accounts

All cash that the Company receives shall be promptly recorded in the accounting records and deposited in a bank account properly authorized by the Company. All bank accounts and other cash accounts shall be clearly and accurately recorded in the accounting records. No unrecorded accounts, funds or assets shall be established for any purpose.

Cooperation with Inquiries

Employees shall provide complete and accurate information in response to inquiries from the Company’s internal and outside independent auditors as well as the Company’s legal counsel.

POLITICAL CONTRIBUTIONS AND ACTIVITIES

No Company funds or assets, including the work time of any employee, may be contributed, loaned or made available, directly or indirectly, to any political party or to the campaign of any candidate for a local, state or federal office.

CONFLICTS OF INTEREST

You must carry out your professional responsibilities with integrity and with a sense of loyalty to the Company. You must avoid any situation that involves a possible conflict or an appearance of a conflict of interest between your personal interests and the interests of the Company. Knowingly acting in a manner that presents a conflict between your personal interests and the best interests of the Company is a violation of this Code.

2

A conflict of interest cannot be defined precisely, only illustrated. The basic factor that exists in all conflict situations is a division of loyalty between the Company’s best interests and the personal interest of the individual. Many, but not all, conflict situations arise from personal loyalties or personal financial dealings. It is impossible to list every circumstance giving rise to a possible conflict of interest, but the following illustrates the types of situations that may cause conflicts:

Family Members

A conflict of interest may exist when the Company does business with or competes with an organization in which a family member has an ownership or employment interest. “Family members” include a spouse, parents, children, siblings and in-laws. You may not conduct business on behalf of the Company with family members or an organization with which you or a family member is associated unless you receive prior written approval under this Code.

Ownership in Other Businesses

You cannot own, directly or indirectly, a significant financial interest in any business entity that does business with or is in competition with the Company unless you receive prior written approval under this Code. As a guide, “a significant financial interest” is defined as ownership by an employee and/or family members of more than 5% of the outstanding securities/capital value of a corporation or ownership that represents more than 5% of the total assets by the employee and/or family members. This is not a “bright line” rule. Ownership interests less than this percentage may be deemed “significant” depending on the specific facts and circumstances.

Outside Employment

Employees must keep outside business activities, such as a second job or self-employment, completely separate from the employee’s activities with the Company. Employees may not use Company assets, facilities, materials, or the services of other employees for outside activities unless specifically authorized by the Company, such as for certain volunteer work.

Disclosure Required - When in Doubt, Ask!

You should avoid any actual or apparent conflict of interest. Conflicts can arise unexpectedly and prompt disclosure is critically important. Employees must disclose existing or emerging conflicts of interest (including personal relationships that could reasonably be considered to create conflicts) to their supervisor and follow the guidance provided. Executive officers and directors must disclose existing or emerging conflicts of interest to the President and Chief Executive Officer of the Company.

ACCEPTING GIFTS AND GRATUITIES

Accepting Things of Value

Except as provided below, you may not solicit or accept for yourself or for a third party anything of value from anyone in return for any business, service or confidential information with respect to the Company. Things of value include gifts, meals, favors, services and entertainment. The

3

purpose of this policy is to ensure that the Company’s business is safeguarded from undue influence of bribery and personal favors.

The solicitation of and acceptance of things of value is generally prohibited by the Bank Bribery Act. Violations may be punished by fines and imprisonment.

Permitted Transactions

The following transactions are permitted and will be considered as exceptions to the general prohibition against accepting things of value:

• Acceptance of gifts, gratuities, amenities or favors based on family or personal relationships when the circumstances make clear that it is those relationships, rather than the business of the Company, that are the motivating factors;

• Acceptance of meals, refreshments, travel arrangements, accommodations or entertainment, all of a reasonable value, in the course of a meeting or other occasion, the purpose of which is to hold bona fide business discussions or to foster better business relations, provided that the expense would be paid for by the Company as a reasonable business expense if not paid for by another party;

• Acceptance of advertising or promotional material of reasonable value, such as pens, pencils, note pads, key chains, calendars and similar items;

• Acceptance of discounts or rebates on merchandise or services that do not exceed those available to other customers;

• Acceptance of gifts of reasonable value related to commonly recognized events or occasions, such as a promotion, new job, wedding, retirement, birthday or holiday; or

• Acceptance of civic, charitable, education or religious organizational awards for recognition of service and accomplishment.

The Company maintains detailed written policies and procedures that govern the acceptance of permitted gifts and gratuities. You should refer to such policies and procedures for more specific guidance.

Other Transactions

If you are offered or receive something of value beyond what is permitted by this Code and related policies and procedures, you must obtain prior approval before you may accept or keep it. Transactions other than those described above may be approved so long as approval is consistent with the Bank Bribery Act. If you are at all uncertain as to whether you may accept something of value, do not hesitate to ask.

4

CORPORATE OPPORTUNITIES

Directors and officers of the Company stand in a fiduciary relationship to the Company. It is a breach of this duty for any such person to take advantage of a business opportunity for his or her own personal profit or benefit when the opportunity is within the corporate powers of the Company and when the opportunity is of present or potential practical advantage to the Company, unless the Board of Directors knowingly elects not to avail itself of such opportunity and the director’s or officer’s participation is approved in advance by the Board. It is the policy of the Company that no director or executive officer appropriates a corporate opportunity without the prior consent of the Board of Directors.

EQUAL EMPLOYMENT OPPORTUNITY, HARASSMENT AND SEXUAL HARASSMENT

Equal Employment Opportunity

It is the policy of the Company to provide equal employment opportunity in full compliance with all federal, state and local equal employment opportunity laws and regulations.

Harassment Prohibited

The Company is committed to providing a work environment where all employees work free from harassment because of race, color, religion, age, gender, sexual orientation, national origin, disability or any characteristic protected by applicable law. The Company will not tolerate harassment by employees, supervisors, customers or others.

Our policy is essentially based on common sense: all employees should treat each other with respect and courtesy. Harassment in any form – including verbal and physical conduct, visual displays, threats, demands and retaliation – is prohibited.

What Constitutes Sexual Harassment?

The Equal Employment Opportunity Commission has guidelines that define sexual harassment as unwelcome sexual advances, requests for sexual favors and other verbal or physical conduct of a sexual nature when:

• Submission to such conduct is made either explicitly or implicitly a term or condition of an individual’s employment, or used as the basis for employment decisions affecting such individual; or

• Such conduct creates an intimidating, hostile or offensive working environment.

Sexual harassment can involve either a tangible employment action or a hostile work environment. Sexual harassment includes more than overt physical or verbal intimidation. Lewd or vulgar remarks, suggestive comments, posters, pictures and calendars, pressure for dates and sexual favors, and unacceptable physical contact are some examples of what can constitute harassment.

It is important to realize that what may not be offensive to you may be offensive to others. You should consider carefully the effect of your words and actions on others, and should not assume

5

that another employee’s failure to object means that the employee welcomes the behavior at issue.

The Company, as a general matter, does not seek to regulate the private social behavior of employees. However, intimate relationships between supervisors and employees whom they directly supervise are discouraged. Because of the undesirable workplace repercussions that they may have, any such ongoing relationship should be disclosed to the supervisor’s department head. All employees should understand that no one at the Company has the authority to offer job benefits or threaten job disadvantages based on the provision of sexual favors.

Sexual harassment also can occur among co-workers or result from behavior by contractors or other non-employees who have reason to interact with Company employees. Our policy extends to those circumstances as well.

Obligation to Report

Any employee who has reason to believe that he or she is being harassed must promptly report the harassment. The official procedure for reporting violations or suspected violations of this policy is located later in this Code under the heading “How to Report a Violation.” Do not allow an inappropriate situation to continue by not reporting it, regardless of who is creating the situation.

Investigations

As set forth later in this Code under the heading “Administration of the Code of Business Conduct,” the Company will promptly investigate allegations of harassment and, to the extent possible, conduct such investigations confidentially. Any employee who is found to have violated this policy is subject to discipline or discharge.

No Retaliation

The Company will not tolerate retaliation in any form against an employee who has, in good faith, reported an incident of harassment, and employees should not fear that such a report will endanger his or her job.

ILLEGAL AND IMPAIRING SUBSTANCES

You may not possess, use, sell, distribute or be under the influence of illegal drugs while on Company property or while conducting Company business anywhere. Such behavior is a violation of Company policy in addition to a violation of the law.

When reporting for work and throughout the work day, you must be fit for duty at all times and, in particular, not pose a safety hazard to yourself or others through your use of alcohol or other legal, but impairing, substances.

6

WORKPLACE VIOLENCE

The Company expressly prohibits any acts of violence or threats of violence by any Company employee against any other person in or about Company facilities or in connection with the conduct of Company business elsewhere at any time.

You are prohibited from possessing firearms while on Company property or while conducting Company business anywhere at any time unless authorized by the Company.

MARKETING PRACTICES AND ANTITRUST

Marketing Practices

The Company’s products and services must be sold fairly and honestly. You should not attempt to take advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair practice. Many of the products and services provided by the Company are subject to laws and regulations that specify the information that must be provided to the Company’s customers. It is the policy of the Company to comply fully with these disclosure requirements.

Antitrust

The antitrust laws are intended to foster free and open competition and it is important that the Company comply with the letter and the spirit of such laws. Agreements that reduce business competition are a core concern of the antitrust laws and violations may result in severe civil and criminal penalties to the Company and to individuals. Antitrust laws pertain to dealings with customers and suppliers as well as competitors.

In some cases, depending on the circumstances, the antitrust laws prohibit discussions among competitors about competitively sensitive subjects. The most serious antitrust violations are agreements among competitors that directly restrict competition among them.

These include agreements:

• To raise, lower or stabilize prices;

• To divide the areas in which they will do business or the customers they will serve; or

• To refuse to deal with certain customers or suppliers.

Conduct intended to drive a competitor out of business may also violate antitrust laws. It is the policy of the Company to comply fully with all applicable antitrust laws.

Antitrust is a complex area of the law and violations have serious consequences for the Company and for individuals personally. The Company’s legal counsel should be consulted with any questions.

7

COMPUTER NETWORKS, VOICE MAIL, E-MAIL AND THE INTERNET

Many Company employees depend on access to computer networks, voice mail, e-mail and/or the Internet to do their jobs. These tools come with risks and responsibilities that all employees must understand and accept.

You must use these resources only for the business activities of the Company (except as described under below under the heading “Authorized Uses”) and:

• Properly identify yourself in electronic communication;

• Use only your own password and user ID to gain access to systems or data;

• Accept full personal responsibility for the activities undertaken with your password and user ID;

• Delete e-mail, voice mail and other electronic files in accordance with applicable record retention policies; and

• Comply with the computer security policies of the Company and conduct yourself in a manner that protects the Company from damage, theft, waste and violations of the law, including:

• Protecting against exposure to potentially destructive elements, intentional (viruses, sabotage, etc.) or unintentional (bugs); and

• Protecting against unauthorized access to Company information or resources (hacking).

Company Property and Privacy

Computer networks and electronic communications systems, and all messages and log files generated on or handled by them (including back-up copies), are considered to be the property of the Company.

There should be no expectation of privacy in these electronic interactions. The Company may monitor the content of your electronic communications or monitor the content of server log files to review what Web sites or other Internet locations you have visited and what files you may have sent or received. Computer networks, e-mail systems, voice mail systems and server logs are monitored regularly to support routine and non-routine activities such as operations, maintenance, auditing, security and investigations. You should also keep in mind that, as a matter of law, the Company may be called upon to turn over this information to law enforcement and private litigants.

You may not intercept or disclose, or assist in intercepting or disclosing, electronic communications or Internet activity except as specifically provided above and only then with appropriate authorization.

8

Authorized Uses

Company computer networks, e-mail and voice mail systems and Internet access generally must be used only for Company business activities. Incidental personal use is permitted if it:

• Does not preempt or interfere with any Company business activity or with employee productivity and consumes only a trivial amount of Company resources.

• Incidental personal use is subject to the same policies as business use.

Prohibited Uses

Under no circumstances should Company computer networks, e-mail and voice mail systems or Internet access be used:

• For any illegal activity;

• To communicate offensive sexual, racial or other remarks, jokes, slurs and obscenities;

• For private business, commercial or solicitation activities;

• For chain-letter communications of any kind;

• For charitable endeavors that are not Company-sponsored or authorized, including any fundraising;

• For gambling; or

• For pornography.

Additional uses may be prohibited or limited by other provisions of this Code or by other Company policies.

CONFIDENTIAL INFORMATION

Many employees learn confidential Company information in the course of their jobs and use it to perform important functions. It is vitally important that all employees handle confidential information properly.

There are two major concerns:

• Preventing the release of unauthorized or inappropriate information that might adversely affect the Company’s business; and

• Avoiding violations of the law, particularly the securities laws relating to disclosure of material financial information before the information is made public.

What is Confidential Information?

What follows is not a complete list of what is considered to be confidential information, but it illustrates what is typically confidential unless it has been disclosed by the Company in a securities filing, press release, or other authorized formal or official public communication:

• Financial results, budgets or forecasts;

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• Business plans, operating plans, strategy statements, memos, operating manuals, organization charts and other internal communications;

• Company investments, acquisitions or divestitures;

• New products, processes or designs;

• Whether a product or business is meeting financial or other expectations;

• Business relationships or the terms of any business arrangement, including prices paid or received by the Company;

• Customer data such as customer names and addresses or any confidential personal or business information of the customer;

• Advertising and marketing plans and campaigns;

• Wages and salaries, bonus or compensation plans, notices to employees or unannounced personnel changes; and

• Personal information about any employee.

In general, if the Company has not made public information about itself, it should be treated as confidential.

Non-Disclosure and Non-Use

You may not disclose to unauthorized persons or use for your own personal advantage or profit, or the advantage or profit of another, any confidential information that you obtain as a result of your position with the Company. That includes not only financial analysts and the press, but also business associates, family members and personal friends. It is a serious mistake to disclose such information to anyone simply because you are confident that the person will neither try to benefit from it nor disclose it to others.

Your obligations not to disclose the Company’s confidential information and not to use it for unauthorized purposes continue after your affiliation with the Company ends.

Privacy of Customer Information

The Company is entrusted with important information about individuals and businesses. It is essential that you respect the confidential nature of that information. The Company is legally obliged to protect the privacy of a consumer’s personal financial information. The Company’s privacy practices are set out in a privacy policy that is circulated to our customers and made available to the public. All employees are expected to adhere to the Company’s privacy policy.

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Public Disclosures

You may be asked for information about the Company by the media, trade groups, consultants and others collecting information for various purposes. You should not make public statements on behalf of the Company or provide confidential information in response to external inquiries unless you have been specifically authorized to do so.

Proper Disclosures

Some employees must disclose confidential Company information as a part of their job responsibilities. This policy on confidential information is not intended to prohibit such authorized disclosures.

A few examples of situations in which confidential information might properly be disclosed are:

• Disclosure of operational data to vendors or consultants in connection with providing services to the Company;

• Participation in legitimate and authorized industry surveys;

• Providing data to governmental agencies as part of required filings; or

• An authorized employee responding to media or financial analyst inquiries.

You should be certain that you understand what you have been authorized to disclose, and to whom, prior to disclosing any confidential information.

“Inside” Information and Insider Trading

You must not trade in the Company’s stock when you have material information about the Company that is not yet public. Material information is information that would reasonably be expected to either: (1) affect the price of securities issued by the Company; or (2) be important to an investor in deciding whether to buy, sell or hold securities issued by the Company. Furthermore, you must not communicate material non-public information to persons outside the Company so that they may profit from transactions in the Company’s securities.

Engaging in insider trading, or providing confidential information that is used in insider trading, is illegal and can result in substantial fines and criminal penalties to you.

The Company maintains a policy on insider trading that provides more complete guidance on this subject, including rules on trading in Company securities by executive officers, directors and employees who have access to certain financial information. You should contact the President and Chief Executive Officer with any questions about buying or selling Company stock.

EXAMINATIONS, GOVERNMENT INVESTIGATIONS AND LITIGATION

Regulatory Examinations

The Company and its subsidiaries are subject to examination by federal and state banking regulators. It is Company policy to cooperate fully with the Company’s regulators.

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Government Investigations

It is Company policy to cooperate with reasonable and valid requests by federal, state or local government investigators. At the same time, the Company is entitled to all the safeguards provided in the law for persons under investigation, including representation by counsel. Accordingly, if a government investigator requests an interview with you, seeks information or access to files, or poses written questions, he or she should be told that you must first consult with the Company’s legal counsel. You should immediately contact the President and Chief Executive Officer of the Company who will then provide advice as to further action.

Penalties

You should be aware that criminal sanctions could be imposed upon any person who submits false or misleading information to the government in connection with any regulatory examination or government investigation. Full cooperation and proper legal supervision of any response in connection with a regulatory examination or government investigation is essential from both corporate and individual viewpoints.

Litigation

In the event any litigation is begun or threatened against the Company, notify the President and Chief Executive Officer of the Company immediately even if the action or threat appears to be without merit or insignificant.

Preservation of Records

All records relating to the business of the Company shall be retained as required by the Company’s record retention guidelines. Notwithstanding such guidelines, under no circumstances shall any records known to be the subject of or germane to any anticipated, threatened or pending lawsuit, governmental or regulatory investigation, or bankruptcy proceeding be removed, concealed or destroyed.

DETAILED POLICIES AND PROCEDURES

This Code does not contain all of the policies of the Company or all of the details of the policies that are described in this Code. The Company has written policies and procedures that provide more detailed information on many of the topics addressed in this Code.

Talk to your supervisor about the Company’s policies and procedures that you are responsible for following in your job and make sure that you have reviewed and understand them.

ADMINISTRATION OF THE CODE OF ETHICS AND BUSINESS CONDUCT

Every Employee Has an Obligation to:

• Comply with this Code of Ethics and Business Conduct, which prohibits violation of local, state, federal or foreign laws and regulations applicable to our businesses, and requires compliance with all Company policies;

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• Be familiar with laws and Company policies applicable to his or her job and communicate them effectively to subordinates;

• Ask questions if a policy or the action to take in a specific situation is unclear;

• Be alert to indications and/or evidence of possible wrongdoing; and

• Report violations and suspected violations of this Code of Ethics and Business Conduct to the appropriate person as described in “How to Report a Violation” below, and elsewhere in this Code.

The Company’s managers have a particular responsibility to notice and question incidents, circumstances and behaviors that point to a reasonable possibility that a violation of this Code has occurred. A manager’s failure to follow up on reasonable questions is itself a violation of Company policy.

How to Ask a Question

Whenever possible, an employee should work with his or her immediate supervisor to get answers to routine questions.

If a supervisor’s answer does not resolve a question, or if an employee has a question that he or she cannot comfortably address to his or her supervisor, he or she should go to the President and Chief Executive Officer of the Company.

Executive officers and directors may bring any questions to the Chairman of the Board or the Chairman of the Audit Committee.

How to Report a Violation

Any employee having information about a violation (or suspected violation) of this Code should report the violation in writing to the President and Chief Executive Officer of the Company. Executive officers and directors may submit any reports of violations (or suspected violations) of this Code in writing to the President and Chief Executive Officer of the Company.

If the violation involves the President and Chief Executive Officer of the Company, then the employee should report the violation by informing the Chief Operating Officer of the Company, or the Chairman of the Board or the Chairman of the Audit Committee.

Follow-up to the Report of a Violation

The President and Chief Executive Officer of the Company may arrange a meeting with the employee to allow the employee to present a complete description of the situation. The President and Chief Executive Officer of the Company will take the matter under consideration, including undertaking any necessary investigation or evaluation of the facts related to the situation and, after consultation with the appropriate individual, shall render a written decision, response or explanation as expeditiously as possible. Individuals who are alleged to be involved in a violation will not participate in its investigation.

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Determining Whether a Violation Has Occurred

If the alleged violation of this Code concerns an executive officer or director, the determination of whether a violation has occurred shall be made by the Audit Committee of the Board of Directors, in consultation with the President and Chief Executive Officer of the Company and/or such external legal counsel as the Audit Committee deems appropriate.

If the alleged violation concerns any other employee, the determination of whether a violation has occurred shall be made by the President and Chief Executive Officer of the Company, in consultation with the Chief Operating Officer of the Company.

In determining whether a violation of this Code has occurred, the committee or person making such determination may take into account the extent to which the violation was intentional, the materiality of the violation from the perspective of either the detriment to the Company or the benefit to the director, executive officer or employee, the policy behind the provision violated and such other facts and circumstances as they shall deem advisable.

Acts or omissions determined to be violations of this Code by other than the Audit Committee under the process set forth above shall be promptly reported by the President and Chief Executive Officer of the Company to the Audit Committee and by the Audit Committee to the Board.

Confidentiality

Reports of suspected violations will be kept confidential to the extent possible and consistent with the conduct of an appropriate investigation.

No Retaliation

Retaliation in any form against an employee who has, in good faith, reported a violation of this Code will not be tolerated.

Consequences of a Violation

Employees who violate this Code, or who fail to report violations of which they are aware or should be aware, will subject themselves to disciplinary action up to and including dismissal. Some violations may also result in civil liability and/or lead to criminal prosecution.

Prior Approvals

Whenever the requirement for prior approval appears in this Code, it means that a writing setting forth the pertinent facts of the situation under consideration shall be submitted according to the following process:

• If a request for prior approval relates to an executive officer or director, the determination with respect to the approval shall be made by the Audit Committee of the Board of Directors, in consultation with the President and Chief Executive Officer of the Company and/or such external legal counsel as the Audit Committee deems appropriate.

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• If a request for prior approval relates to any other employee, the determination shall be made by the President and Chief Executive Officer of the Company, in consultation with the Chief Operating Officer of the Company, unless the matter is quantitatively or qualitatively material or outside the ordinary course of business, in which case such determination shall be made by the Audit Committee.

All approvals (other than those approved by the Audit Committee) shall be promptly reported to the Audit Committee.

Waivers

You must request a waiver of a provision of this Code if there is a reasonable likelihood that your contemplated action will violate this Code.

If a waiver request relates to an executive officer or director, the determination with respect to the waiver shall be made by the Audit Committee of the Board of Directors, in consultation with the President and Chief Executive Officer of the Company and/or such external legal counsel as the Audit Committee deems appropriate. Any waivers granted by such committee shall be submitted to the Board for ratification.

Waivers will not be granted except under extraordinary or special circumstances.

Any waivers of this Code for any executive officer or director of the Company must approved by the Board of Directors and promptly be disclosed to stockholders.

Updates and Changes

This Code will be reissued periodically to remind employees, officers and directors of its specifics and to make changes and clarifications based on experience and suggestions.

CONTACTS

To Ask Questions and/or to Report Violations

William W. Harrod, President and Chief Executive Officer

Samuel E. Uhl, Chief Operating Officer

Key Contact

James E. Nett, Chairman of the Audit Committee

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EX-23.0

Exhibit 23.0

We consent to the incorporation by reference in First Capital, Inc.’s Registration Statement No. 333-76543 on Form S-8 and in First Capital, Inc.’s Registration Statement No. 333-95987 on Form S-8 of our report dated January 14, 2005 contained in the annual report for the year ended December 31, 2004 appearing in this Form 10-K.

/s/ MONROE SHINE & CO., INC.

New Albany, Indiana

March 22, 2005

EX-31.1

Exhibit 31.1

CERTIFICATION

I, William W. Harrod, certify that:

1. I have reviewed this report on Form 10-K of First Capital, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer[s] and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15)(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer[s] and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 28, 2005	/s/ William W. Harrod
	William W. Harrod President and Chief Executive Officer (principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Michael C. Frederick, certify that:

1. I have reviewed this report on Form 10-K of First Capital, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer[s] and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15)(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer[s] and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 28, 2005	/s/ Michael C. Frederick
	Michael C. Frederick Senior Vice President, Chief Financial Officer and Treasurer (principal financial officer)

EX-32.0

Exhibit 32.0

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of First Capital, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2004, as filed with the Securities and Exchange Commission (the “Report”), the undersigned hereby certify, pursuant to 18 U.S.C.§ 1350, as added by § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

Date: March 28, 2005	/s/ William W. Harrod
	William W. Harrod President and Chief Executive Officer
	/s/ Michael C. Frederick
	Michael C. Frederick Senior Vice President, Chief Financial Officer and Treasurer