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.

- 13 -

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.

- 14 -

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.

- 15 -

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

- 16 -

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.

- 27 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(1 - continued)

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.

- 28 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(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.

- 29 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(4 – continued)

	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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(4 – continued)

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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(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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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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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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(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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FIRST CAPITAL, INC. AND SUBSIDIARIES

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

- 42 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

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.

- 43 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

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

- 44 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

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.

- 45 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

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.

- 46 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

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

- 47 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

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.

- 48 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

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

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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

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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

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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.

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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.

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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).

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