FIRST CAPITAL INC — Annual Report 2000

Mar 22, 2000

U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM JULY 1, 1999 TO DECEMBER 31, 1999 Commission File Number: 0-25023

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X ----- The issuer's revenues for the most recent fiscal year were $4.7 million. The aggregate market value of the voting common equity held by non- affiliates as of March 1, 2000 was $23,120,000. This figure is based on the average of the bid and asked price on the Nasdaq Stock Market for a share of the issuer's common stock on March 1, 2000, which was $10.82 per share. For purposes of this calculation, the issuer is assuming that the issuer's directors and executive officers are affiliates. As of March 1, 2000, there were 2,507,574 shares of the Registrant's common stock outstanding. Transitional Small Business Disclosure Format: Yes [ ] No [X] DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Form 10-KSB. This report contains certain "forward-looking statements" concerning the future operations of First Capital, Inc. Forward-looking statements are used to describe future plans and strategies, including expectations of future financial results. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors that could affect actual results include interest rate trends, the general economic climate in the market area in which First Capital operates, as well as nationwide, First Capital's ability to control costs and expenses, competitive products and pricing, loan delinquency rates, the ability to integrate successfully the operations of HCB Bancorp and changes in federal and state legislation and regulation. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. First Capital assumes no obligation to update any forward-looking statements. PART I Item 1. Description of Business. - --------------------------------- General First Capital, Inc. ("Company") was incorporated under Indiana law in September 1998. The Company was organized for the purpose of becoming the holding company for First Federal Bank, A Federal Savings Bank ("Bank") upon the Bank's reorganization as a wholly owned subsidiary of the Company resulting from the conversion of First Capital, Inc., M.H.C. ("MHC"), from a federal mutual holding company to a stock holding company ("Conversion and Reorganization"). In connection with the Conversion and Reorganization, which was completed on December 31, 1998, the Company sold 768,767 shares of its common stock to the public at $10 per share in a public offering ("Offering") and issued 523,057 shares in exchange for the outstanding shares of the Bank held by the Bank's stockholders other than the MHC. The Company has no significant assets, other than all of the outstanding shares of the Bank and the portion of the net proceeds from the Offering retained by the Company, and no significant liabilities. Management of the Company and the Bank are substantially similar and the Company neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank in accordance with applicable regulations. Accordingly, the information set forth in this report, including the consolidated financial statements and related financial data, relates primarily to the Bank, but does not include the consolidated accounts of HCB Bancorp. The Company and HCB Bancorp completed a merger of equals on January 12, 2000. See "Merger with HCB Bancorp" below. The Bank is regulated by the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). The Bank's deposits have been federally insured by the FDIC since 1961 and are currently insured by the FDIC under the Savings Association Insurance Fund ("SAIF"). The Bank is a member of the Federal Home Loan Bank ("FHLB") System. Merger with HCB Bancorp On January 12, 2000, the Company completed its merger of equals with HCB Bancorp. As part of the agreement, Harrison County Bank merged into First Federal Bank, which changed its name to First Harrison Bank. In accordance with the terms of the merger agreement, each share of HCB Bancorp common stock was converted into the right to receive 15.5 shares of First Capital common stock. As a result of the merger, the offices of Harrison County Bank in Crandall, Georgetown, Greenville, Hardinsburg, New Albany and Palmyra, Indiana became offices of First Harrison Bank. For pro forma financial information regarding the merger, see Note 21 to Notes to Consolidated Financial Statements. Market Area and Competition The Bank considers Harrison County as its primary market area because substantially all of the Bank's depositors live in the areas surrounding its main office and branch office and most of the Bank's loans are made to persons in Harrison County, Indiana. Corydon, the county seat of Harrison County, is located approximately 35 miles west of Louisville, Kentucky. Major employers in Harrison County include Keller Manufacturing Corporation, South Harrison Community School District and the Harrison County Hospital. The Bank faces intense competition in its primary market area for the attraction of deposits (its primary source of lendable funds) and in the origination of loans. Its most direct competition for deposits has historically come from the four commercial banks operating in Corydon and, to a lesser extent, from other financial institutions, such as brokerage firms and insurance companies. Three of the four commercial banks in Corydon are affiliated with large, multi-state bank holding companies and, therefore, have 2 significantly greater resources than the Bank. Particularly in times of high interest rates, the Bank has faced additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. The Bank's competition for loans comes primarily from the commercial banks operating in its primary market area. Lending Activities General. The principal lending activity of the Bank is the origination of residential mortgage loans. To a lesser extent, the Bank also originates consumer, commercial business, commercial real estate (including farm properties) and residential construction loans. Loan Portfolio Analysis. The following table sets forth the composition of the Bank's loan portfolio by type of loan at the dates indicated.

______ (1) Includes conventional one- to four-family and multi-family residential loans. (2) Includes loans secured by lawn and farm equipment, unimproved land, and other personal property. Residential Loans. The Bank's lending activities have concentrated on the origination of residential mortgages, primarily for retention in the Bank's loan portfolio. Residential mortgages secured by multi-family properties are an immaterial portion of the residential loan portfolio. Substantially all residential mortgages are collateralized by properties within the Bank's market area. The Bank offers both fixed-rate mortgage loans and adjustable rate mortgage ("ARM") loans typically with terms of 15 to 30 years. Although the Bank originates all residential mortgage loans for investment, the Bank uses loan documents approved by the Federal National Mortgage Corporation ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). ARM loans originated have interest rates that adjust at regular intervals of one year, with 1.5% annual and 5% lifetime caps, and at intervals of five years with 2% per adjustment period and 6% lifetime caps, based upon changes in the prevailing interest rates on U.S. Treasury Bills. The Bank does not use below market interest rates and other marketing inducements to attract ARM loan borrowers. The majority of ARM loans provide that the amount of any increase or decrease in the interest rate is limited to two percentage points (upward or downward) per adjustment period and generally contain minimum and maximum interest rates. Borrower demand for ARMs versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the 3 level of interest rates and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and interest rates and loan fees for ARM loans. The relative amount of fixed-rate and ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment. The Bank's lending policies generally limit the maximum loan-to-value ratio on fixed-rate and ARM loans to 90% of the lesser of the appraised value or purchase price of the underlying residential property unless private mortgage insurance to cover the excess over 90% is obtained, in which case the mortgage is limited to 95% (or 97% under a new Freddie Mac program) of the lesser of appraised value or purchase price. The loan-to-value ratio, maturity and other provisions of the loans made by the Bank are generally reflected in the policy of making less than the maximum loan permissible under federal regulations, in accordance with established lending practices, market conditions and underwriting standards maintained by the Bank. The Bank requires title, fire and extended insurance coverage on all mortgage loans originated. All of the Bank's real estate loans contain due on sale clauses. The Bank obtains appraisals on all its real estate loans from outside appraisers. Construction Loans. At December 31, 1999, the Bank had $5.8 million, or 6.0% of total loans, of construction loans for single-family residences. At December 31, 1999, speculative construction loans, for which there is not a commitment for permanent financing in place at the time the construction loan was originated, amounted to $873,000. Although the Bank originates construction loans that are repaid with the proceeds of a limited number of mortgage loan obtained by the borrower from another lender, the majority of the construction loans that the Bank originates are construction/permanent loans, which are originated with one loan closing at either a fixed or variable rate of interest and for terms up to 30 years. Construction loans originated without a commitment by the Bank to provide permanent financing are generally originated for a term of six to 12 months and at a variable interest rate based on the prime rate. In the case of construction/permanent loans, the construction loan is also generally for a term of six to 12 months and the rate charged is the rate chosen by the borrower for the permanent loan. Accordingly, if the borrower chooses a fixed interest rate for the permanent loan, the construction loan rate is also fixed at the same rate. At December 31, 1999, the largest non-speculative construction loan amounted to $228,000 and had an outstanding balance of $185,000. This loan was performing according to its terms at December 31, 1999. The Bank originates speculative construction loans to a limited number of builders operating and based in the Bank's primary market area and with whom the Bank has well-established business relationships. The Bank generally limits the number of speculative construction loans outstanding at any one time to any one builder to two loans. At December 31, 1999, the largest speculative construction loan relationship with a builder consisted of two loans in the committed aggregate amount of $266,000 with an aggregate outstanding balance of $225,000. Such loans were performing according to their respective terms at that date. All construction loans are originated with a loan-to-value ratio not to exceed 90% of the appraised estimated value of the completed property. The construction loan documents require the disbursement of the loan proceeds in increments as construction progresses. Disbursements are based on periodic on- site inspections by an independent appraiser and/or Bank personnel approved by the Board of Directors. Construction lending is inherently riskier than one- to four-family mortgage lending. Construction loans, on average, generally have higher loan balances than one- to four-family mortgage loans. In addition, the potential for cost overruns because of the inherent difficulties in estimating construction costs and, therefore, collateral values and the difficulties and costs associated with monitoring construction progress, among other things, are major contributing factors to this greater credit risk. Speculative construction loans have the added risk that there is not an identified buyer for the completed home when the loan is originated, with the risk that the builder will have to service the construction loan debt and finance the other carrying costs of the completed home for an extended time period until a buyer is identified. Furthermore, the demand for construction loans and the ability of construction loan borrowers to service their debt depends highly on the state of the general economy, including market interest rate levels, and the state of the economy of the Bank's primary market area. A material downturn in economic conditions would be expected to have a material adverse effect on the credit quality of the construction loan portfolio. Commercial Real Estate Loans. Commercial real estate loans are generally secured by small retail stores, professional office space and, in certain instances, farm properties. Commercial real estate loans are generally originated with a loan-to-value ratio not to exceed 80% of the appraised value of the property. Property appraisals are performed by independent appraisers approved by the Bank's Board of Directors. The Bank attempts to originate commercial real estate loans at variable interest rates based on the U.S. Treasury Bill rate for terms not to exceed five years. However, in the current low interest rate environment, borrower demand for variable rate loans is low and the Bank is generally 4 originating commercial real estate loans with fixed interest rates for terms ranging between ten and 15 years over which principal and interest is fully amortized. At December 31, 1999, the largest commercial real estate loan had an outstanding balance of $1.2 million and was secured by a commercial office and retail facility. This loan was performing according to its terms at that date. Commercial real estate lending affords the Bank an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending. However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one-to four-family residential mortgage loans. Because payments on loans secured by multi-family and commercial properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by limiting the maximum loan-to-value ratio to 75% and strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. The Bank also obtains loan guarantees from financially capable parties based on a review of personal financial statements. Commercial Business Loans. Commercial business loans are generally secured by inventory, accounts receivable, and business equipment such as trucks and tractors. Many commercial business loans also have real estate as collateral. The Bank generally requires a personal guaranty of payment by the principals of a corporate borrower, and reviews the personal financial statements and income tax returns of the guarantors. Commercial business loans are generally originated with loan-to-value ratios not exceeding 75%. At December 31, 1999, the largest commercial business loan had an outstanding balance of $715,000 and was unsecured. Such loan was performing according to its terms at that date. Aside from lines of credit, commercial business loans are generally originated for terms not to exceed seven years with variable interest rates based on the Bank's cost of funds. Approved credit lines totaled $2.1 million at December 31, 1999, of which $1.2 million was outstanding. Lines of credit are originated at fixed interest rates for one year renewable terms. A director of the Bank is a shareholder of a farm implement dealership that has contracted with the Bank to provide sales financing to the dealership's customers. The Bank does not grant preferential credit under this arrangement. All sales contracts are presented to the Bank on a 50% recourse basis, with the dealership responsible for the sale and disposition of any repossessed equipment. During the period ended December 31, 1999, the Bank granted approximately $366,000 of credit to customers of the dealership and such loans had an aggregate outstanding balance of $1.3 million at December 31, 1999. At December 31, 1999, none of these loans were delinquent 30 days or more. Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral-based lending with loan amounts based on predetermined loan-to-collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment. Consumer Loans. The Bank views consumer lending as an important component of its business because consumer loans generally have shorter terms and higher yields, thus reducing exposure to changes in interest rates. In addition, the Bank believes that offering consumer loans expands and creates stronger ties to its customer base. Subject to market conditions, the Bank intends to expand its consumer lending activities. The Bank offers a variety of secured or guaranteed consumer loans, including automobile and truck loans (both new and used), home equity loans, home improvement loans, student loans, boat loans, mobile home loans, and loans secured by savings deposits. In addition, the Bank offers unsecured consumer loans. Consumer loans are generally originated at fixed interest rates and for terms not to exceed seven years. The largest portion of the Bank's consumer loan portfolio consists of home equity and second mortgage loans ($4.8 million at December 31, 1999) followed by automobile and truck loans ($1.8 million at December 31, 1999). Automobile and truck loans are originated on both new and used vehicles. Such loans are generally originated at fixed interest rates for terms up to seven years and at loan- 5 to-value ratios up to 90% of the blue book value in the case of used vehicles and 90% of the purchase price in the case of new vehicles. The Bank does not engage in indirect automobile and truck lending. Home equity and second mortgage loans are generally originated for terms not to exceed 15 years and at fixed rates of interest. The loan-to-value ratio on such loans is limited to 95%, taking into account the outstanding balance on the first mortgage loan. The Bank employs strict underwriting standards for consumer loans. These procedures include an assessment of the applicant's payment history on other debts and ability to meet existing obligations and payments on the proposed loans. Although the applicant's creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, to the proposed loan amount. The Bank underwrites and originates the majority of its consumer loans internally, which management believes limits exposure to credit risks relating to loans underwritten or purchased from brokers or other outside sources. Consumer loans generally entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by assets that depreciate rapidly, such as automobiles. In the latter case, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by the borrower against the Bank as the holder of the loan, and a borrower may be able to assert claims and defenses which it has against the seller of the underlying collateral. At December 31, 1999, $66,000 of consumer loans were delinquent 30 days or more. Loan Maturity and Repricing The following table sets forth certain information at December 31, 1999 regarding the dollar amount of loans maturing in the Bank's portfolio based on their contractual terms to maturity, but does not include potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned income and allowance for loan losses.

6 The following table sets forth the dollar amount of all loans due after December 31, 2000, which have fixed interest rates and have floating or adjustable interest rates.

Loan Solicitation and Processing. A majority of the loans originated by the Bank are made to existing customers. Walk-ins and customer referrals are also an important source of loans originations. Upon receipt of a loan application, a credit report is ordered to verify specific information relating to the loan applicant's employment, income and credit standing. A loan applicant's income is verified through the applicant's employer or from the applicant's tax returns. In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken, generally by an independent appraiser approved by the Bank. The mortgage loan documents used by the Bank conform to secondary market standards. Individual loan officers have individual lending limits commensurate with their experience. All loans in excess of $150,000 or that are an exception to lending policy are approved by the Loan Committee, consisting of the Bank's President, Vice President, Treasurer and Operations Officer. All loans in excess of $500,000 must be approved by the Bank's Board of Directors. The Bank requires that borrowers obtain certain types of insurance to protect its interest in the collateral securing the loan. The Bank requires either a title insurance policy insuring that the Bank has a valid first lien on the mortgaged real estate or an opinion by an attorney regarding the validity of title. Fire and casualty insurance is also required on collateral for loans. The Bank requires escrows for insurance on all loans with a loan-to-value exceeding 90%. The Bank's lending practices generally limit the maximum loan to value ratio on conventional residential mortgage loans to 90% (or 97% under a new Freddie Mac program) of the appraised value of the property as determined by an independent appraisal or the purchase price, whichever is less, and 80% for commercial real estate loans. Loan Commitments and Letters of Credit. The Bank issues commitments for fixed- and adjustable-rate single-family residential mortgage loans conditioned upon the occurrence of certain events. Such commitments are made in writing on specified terms and conditions and are honored for up to 60 days from the date of application, depending on the type of transaction. The Bank had outstanding net loan commitments of approximately $1.2 million at December 31, 1999. As an accommodation to its commercial business loan borrowers, the Bank issues standby letters of credit or performance bonds usually in favor of municipalities for whom its borrowers are performing services. At December 31, 1999, the Bank had outstanding letters of credit of $272,000. Loan Origination and Other Fees. The Bank, in most instances, receives loan origination fees and discount "points." Loan fees and points are a percentage of the principal amount of the mortgage loan that are charged to the borrower for funding the loan. The Bank usually charges origination fees of 0.5% to 3.0% on one- to four-family residential real estate loans, long-term commercial real estate loans and residential construction loans. Current accounting standards require loan origination fees and certain direct costs of underwriting and closing loans to be deferred and amortized into interest income over the contractual life of the loan. Deferred fees and costs associated with loans that are sold are recognized as income at the time of sale. The Bank had $206,000 of net deferred loan fees at December 31, 1999. 7 Delinquencies. The Bank's collection procedures provide for a series of contacts with delinquent borrowers. A late charge is assessed and a late charge notice is sent to the borrower after the 15/th/ day of delinquency. A delinquency notice is mailed to the borrower after the 30/th/ day of delinquency. When payment becomes 60 days past due, the Loan Collection Committee of the Board of Directors generally meets and issues a default letter to the borrower. If a loan continues in a delinquent status for 90 days or more, the Bank generally initiates foreclosure proceedings. In certain instances, however, the Loan Collection Committee may decide to modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his financial affairs. Nonperforming Assets. Loans are reviewed regularly and when loans become 90 days delinquent, the loan is placed in nonaccrual status and the previously accrued interest income is reversed. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan. The following table sets forth information with respect to the Bank's nonperforming assets for the periods indicated. At the dates indicated, the Bank had no restructured loans within the meaning of SFAS No. 15 and no accruing loans which were past due 90 days or more.

The Bank does not accrue interest on loans over 90 days past due. However, if interest on nonaccrual loans had been accrued, interest income of approximately $5,700 would have been recorded for the six months ended December 31, 1999. The Bank recognized no interest income on nonaccrual loans for the six months ended December 31, 1999. Classified Assets. The OTS has adopted various regulations regarding problem assets of savings institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OTS examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified as loss, the insured institution establishes specific allowances for loan losses for the full amount of the portion of the asset classified as loss. All or a portion of general loan loss allowances established to cover possible losses related to assets classified substandard or doubtful can be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated "special mention" and monitored by the Bank. 8 Current accounting rules require that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or if expedient, at the loan's observable market price or the fair value of collateral if the loan is collateral dependent. A loan is classified as impaired by management when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due in accordance with the terms of the loan agreement. If the fair value, as measured by one of these methods, is less than the recorded investment in the impaired loan, the Bank establishes a valuation allowance with a provision charged to expense. Management reviews the valuation of impaired loans on a quarterly basis to consider changes due to the passage of time or revised estimates. Assets that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated "special mention" by management. An insured institution is required to establish and maintain an allowance for loan losses at a level that is adequate to absorb estimated credit losses associated with the loan portfolio, including binding commitments to lend. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities. When an insured institution classifies problem assets as "loss," it is required either to establish an allowance for losses equal to 100% of the amount of the assets, or charge off the classified asset. The amount of its valuation allowance is subject to review by the OTS which can order the establishment of additional general loss allowances. The Bank regularly reviews the loan portfolio to determine whether any loans require classification in accordance with applicable regulations. At December 31, 1999 and June 30, 1999 and 1998, the aggregate amounts of the Bank's classified assets at those dates and the general loss allowances for the periods then ended, were as follows:

Foreclosed Real Estate. Foreclosed real estate held for sale is carried at the lower of fair value minus estimated costs to sell, or cost. Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and an allowance is established by a charge to non-interest expense if the carrying value exceeds the fair value minus estimated costs to sell. The net income from operations of foreclosed real estate held for sale is reported in non-interest income. At December 31, 1999, the Bank had foreclosed real estate consisting of two one- to four-family residential properties totaling $256,000. Allowance for Loan Losses. Management evaluates the adequacy of the allowance for losses on loans each year based on estimated losses on specific loans and other procedures, including a review of all loans for which full collectibility may not be reasonably assured and considers, among other matters, the estimated market value of the underlying collateral of problem loans, prior loss experience, economic conditions and overall portfolio quality. These provisions for losses are charged against earnings in the year they are established. Management's estimate of specific and inherent credit losses in the loan portfolio as described above is intended to provide a reasonable allowance for loan losses applicable to all loan categories. The allowance for loan losses as a percentage of total loans outstanding as of the end of a given period represents an estimated loss percentage for the total loan portfolio and a general measure of adequacy. However, in accordance with GAAP, management assigns an estimated loss percentage or a range of loss to each loan category in estimating the total allowance for loan losses. Management's estimate also includes specifically identified loans having potential losses. It is management's assessment that the allowance for loan losses at December 31, 1999, and June 30, 1999 and 1998 were adequate and represented a reasonable estimate of the specific and inherent credit losses consistent with the composition of the loan portfolio and credit quality trends. 9 Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while the Bank believes it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request the Bank to increase significantly its allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect the Bank's financial condition and results of operations. The following table sets forth an analysis of the Bank's allowance for loan losses for the periods indicated.

10 Allowance for Loan Losses Analysis The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

_______ (1) Includes residential construction loans. Investment Activities Federally chartered savings institutions have authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, deposits at the applicable FHLB, certificates of deposit of federally insured institutions, certain bankers' acceptances and federal funds. Subject to various restrictions, such savings institutions may also invest a portion of their assets in commercial paper, corporate debt securities and mutual funds, the assets of which conform to the investments that federally chartered savings institutions are otherwise authorized to make directly. Savings institutions are also required to maintain minimum levels of liquid assets which vary from time to time. The Bank may decide to increase its liquidity above the required levels depending upon the availability of funds and comparative yields on investments in relation to return on loans. The Bank is required under federal regulations to maintain a minimum amount of liquid assets and is also permitted to make certain other securities investments. The balance of the Bank's investments in short-term securities in excess of regulatory requirements reflects management's response to the significantly increasing percentage of deposits with short maturities. It is the intention of management to hold securities with short maturities in the Bank's investment portfolio in order to enable the Bank to match more closely the interest-rate sensitivities of its assets and liabilities. The Bank periodically invests in mortgage-backed securities, including mortgage-backed securities guaranteed or insured by either Government National Mortgage Association ("Ginnie Mae"), Fannie Mae or Freddie Mac. Mortgage-backed securities generally increase the quality of the Bank's assets by virtue of the guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Bank. Of the Bank's total mortgage-backed securities portfolio, securities with a book value of $1.0 million have adjustable rates as of December 31, 1999. Investment decisions are made by the Bank's Investment Committee. The Bank's investment objectives are: (i) to provide and maintain liquidity within regulatory guidelines; (ii) to maintain a balance of high quality, diversified investments to minimize risk; (iii) to provide collateral for pledging requirements; (iv) to serve as a balance to earnings; and (v) to maximize returns. At December 31, 1999, neither the Company nor the Bank had investment in securities (other than U.S. Government and agency securities and mutual funds that invest in such securities) which exceeded 10% of the Company's stockholders' equity at that date. 11 The following table sets forth the securities portfolio at the dates indicated.

_____ (1) Securities held to maturity are carried at amortized cost. (2) Yields are calculated on a fully taxable equivalent basis using a marginal federal income tax rate of 34%. (3) The expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty. (4) The mutual fund invests primarily in U.S. Government agency securities. 12 Deposit Activities and Other Sources of Funds General. Deposits and loan repayments are the major source of the Bank's funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions. Borrowing may be used on a short-term basis to compensate for reductions in the availability of funds from other sources or may also be used on a longer term basis for general business purposes. Deposit Accounts. Deposits are attracted from within the Bank's primary market area through the offering of a broad selection of deposit instruments, including negotiable order of withdrawal ("NOW") accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans. Deposit account terms vary, according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, the Bank considers the rates offered by its competition, profitability to the Bank, matching deposit and loan products and its customer preferences and concerns. The Bank generally reviews its deposit mix and pricing weekly. The following table presents the maturity distributions of time deposits of $100,000 or more as of December 31, 1999. Amount at Maturity Period December 31, 1999 --------------- ----------------- (In Thousands) Three months or less................ $ 1,647 Over three through six months....... 1,539 Over six through 12 months.......... 2,435 Over twelve months.................. 6,618 ------- Total............................ $12,239 ======= The following table sets forth the balances of savings deposits in the various types of savings accounts offered by the Bank at the dates indicated.

13 The following table sets forth the amount and maturities of time deposits by rates at December 31, 1999.

The following table sets forth the deposit activity of the Bank for the periods indicated.

Borrowings. Deposits are the primary source of funds for the Bank's lending and investment activities and for its general business purposes. The Bank has at times relied upon advances from the FHLB of Indianapolis to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB of Indianapolis are secured by certain first mortgage loans and investment and mortgage-backed securities. At December 31, 1999, the Bank had advances from the FHLB of Indianapolis of $16.8 million. The FHLB functions as a central reserve bank providing credit for savings and loan associations and certain other member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution's net worth or on the FHLB's assessment of the institution's creditworthiness. Under its current credit policies, the FHLB generally limits advances to 20% of a member's assets, and short-term borrowing of less than one year may not exceed 10% of the institution's assets. The FHLB determines specific lines of credit for each member institution. 14 The following table sets forth certain information regarding borrowings by the Bank at the end of and during the periods indicated.

Subsidiary Activities As of December 31, 1999, the Bank was the Company's only subsidiary, and was wholly owned by the Company. The Bank has no subsidiaries. Personnel As of December 31, 1999, the Bank had 33 full-time employees and 8 part- time employees. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be good. REGULATION AND SUPERVISION General As a savings and loan holding company, the Company is required by federal law to file reports with, and otherwise comply with, the rules and regulations of the OTS. The Bank is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer. The Bank is a member of the FHLB System and, with respect to deposit insurance, of the Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The OTS and/or the FDIC conduct periodic examinations to examine the Bank's safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank and their operations. Certain of the regulatory requirements applicable to the Bank and to the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth in this Form 10-KSB does not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Company. 15 Holding Company Regulation The Company is a nondiversified unitary savings and loan holding company within the meaning of federal law. Under prior law, a unitary savings and loan holding company, such as the Company was not generally restricted as to the types of business activities in which it may engage, provided that the Bank continued to be a qualified thrift lender. See "Federal Savings Institution Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Further, the Gramm-Leach-Bliley Act specifies that grandfathered savings and loan holding companies may only engage in such activities. The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for activities with respect to unitary savings and loan holding companies existing prior to May 4, 1999, such as the Company, so long as the Bank continues to comply with the QTL Test. Upon any non-supervisory acquisition by the Company of another savings institution or savings bank that meets the qualified thrift lender test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would generally be limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and certain activities authorized by OTS regulation. A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company, without prior written approval of the OTS and from acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS considers the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the deposit insurance funds, the convenience and needs of the community and competitive factors. The OTS may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. Although savings and loan holding companies are not subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below. The Bank must notify the OTS 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution. Federal Savings Institution Regulation Business Activities. The activities of federal savings institutions are governed by federal law and regulations. These laws and regulations delineate the nature and extent of the activities in which federal associations may engage. In particular, many types of lending authority for federal association, e.g., commercial, non-residential real property loans and consumer loans, are limited to a specified percentage of the institution's capital or assets. Capital Requirements. The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMEL financial institution rating system), and, together with the risk-based capital standard itself, a 4% Tier 1 risk- based capital standard. The OTS regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank. The risk-based capital standard for savings institutions requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OTS capital regulation based on the risks believed inherent in the type of asset. Core (Tier 1) capital is defined as common stockholders' equity (including retained 16 earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk- weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The capital regulations also incorporate an interest rate risk component. Savings institutions with "above normal" interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. For the present time, the OTS has deferred implementation of the interest rate risk capital charge. At December 31, 1999, the Bank met each of its capital requirements. The following table presents the Bank's capital position at December 31, 1999.

Prompt Corrective Regulatory Action. The OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of undercapitalization. Generally, a savings institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk- weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be "undercapitalized." A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized" and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Subject to a narrow exception, the OTS is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date a savings institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Insurance of Deposit Accounts. The Bank is a member of the SAIF. The FDIC maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution's assessment rate depends upon the categories to which it is assigned. Assessment rates for SAIF member institutions are determined semiannually by the FDIC and currently range from zero basis points for the healthiest institutions to 27 basis points for the riskiest. In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999, FICO payments for SAIF members approximated 6.1 basis points, while Bank Insurance Fund ("BIF") members paid 1.2 basis points. By law, there is equal sharing of FICO payments between SAIF and BIF members beginning on January 1, 2000. 17 The Bank's FICO assessment rate for fiscal 1999 ranged from 5.8 to 5.92 basis points. Payments toward the FICO bonds amounted to $27,000. The FDIC has authority to increase insurance assessments. A significant increase in SAIF insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. Loans to One Borrower. Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. A savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral. At December 31, 1999, the Bank's limit on loans to one borrower was $3.9 million, and the Bank's largest aggregate outstanding balance of loans to one borrower was $1.2 million. QTL Test. The HOLA requires savings institutions to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a "domestic building and loan association" under the Internal Revenue Code or maintain at least 65% of its "portfolio assets" (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period. A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 1999, the Bank maintained 72.3% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered "qualified thrift investments." Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. The rule effective in the first quarter of 1999 established three tiers of institutions based primarily on an institution's capital level. An institution that exceeded all capital requirements before and after a proposed capital distribution ("Tier 1 Bank") and had not been advised by the OTS that it was in need of more than normal supervision, could, after prior notice but without obtaining approval of the OTS, make capital distributions during the calendar year equal to the greater of (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half the excess capital over its capital requirements at the beginning of the calendar year or (ii) 75% of its net income for the previous four quarters. Any additional capital distributions required prior regulatory approval. Effective April 1, 1999, the OTS's capital distribution regulation changed. Under the new regulation, an application to and the prior approval of the OTS is required prior to any capital distribution if the institution does not meet the criteria for "expedited treatment" of applications under OTS regulations (i.e., generally, examination ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with OTS. If an application is not required, the institution must still provide prior notice to OTS of the capital distribution if, like the Bank, it is a subsidiary of a holding company. In the event the Bank's capital fell below its regulatory requirements or the OTS notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. Liquidity. The Bank is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement is currently 4%, but may be changed from time to time by the OTS to any amount within the range of 4% to 10%. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank's liquidity ratio at December 31, 1999 was 7.3%, which exceeded the applicable requirements. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. 18 Assessments. Savings institutions are required to pay assessments to the OTS to fund the agency's operations. The general assessments, paid on a semi-annual basis, are computed upon the savings institution's total assets, including consolidated subsidiaries, as reported in the Bank's latest quarterly thrift financial report. The assessments paid by the Bank for the six months ended December 31, 1999 totaled $17,000. Transactions with Related Parties. The Bank's authority to engage in transactions with "affiliates" (e.g., any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with affiliates must be on terms and under circumstances, that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. The Bank's authority to extend credit to executive officers, directors and 10% shareholders ("insiders"), as well as entities such persons control, is also governed by federal law. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. Recent legislation created an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. The law limits both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank's capital position and requires certain board approval procedures to be followed. Enforcement. The OTS has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The FDIC has the authority to recommend to the Director of the OTS that enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations. Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that a savings institution fails to meet any standard prescribed by the guidelines, the OTS may require the institution to submit an acceptable plan to achieve compliance with the standard. Federal Home Loan Bank System The Bank is a member of the FHLB System, which consists of 12 regional Federal Home Loan Banks. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in that FHLB in an amount at least equal to 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. The Bank complied with this requirement with an investment in FHLB stock at December 31, 1999 of $938,000. The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, The Bank's net interest income would likely also be reduced. Recent legislation has changed the structure of the Federal Home Loan Banks funding obligations for insolvent thrifts, revised the capital structure of the Federal Home Loan Banks and implemented entirely voluntary membership for Federal Home Loan Banks. Management cannot predict the effect that these changes may have with respect to its FHLB membership. 19 Federal Reserve System The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $44.3 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for accounts aggregating greater than $44.3 million, the reserve requirement is $1.329 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $44.3 million. The first $5.0 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The Bank complies with the foregoing requirements. FEDERAL AND STATE TAXATION Federal Taxation General. The Company and the Bank report their income on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. The Bank has not been audited by the Internal Revenue Service ("IRS") in the past five years. Bad Debt Reserve. For taxable years beginning after December 31, 1995, the Bank is entitled to take a bad debt deduction for federal income tax purposes which is based on its current or historic net charge-offs. For tax years beginning prior to December 31, 1995, the Bank as a qualifying thrift had been permitted to establish a reserve for bad debts and to make annual additions to such reserve, which were deductible for federal income tax purposes. Under such prior tax law, generally the Bank recognized a bad debt deduction equal to 8% of taxable income. Under the 1996 Tax Act, the Bank is required to recapture all or a portion of its additions to its bad debt reserve made subsequent to the base year (which is the Bank's last taxable year beginning before January 1, 1988). This recapture is required to be made, after a deferral period based on certain specified criteria, ratably over a six-year period commencing in the Bank's calendar 1998 tax year. The Bank, in fiscal 1997, recorded a deferred tax liability for this bad debt recapture. As a result, the recapture is not anticipated to effect the Bank's future net income or federal income tax expense for financial reporting purposes. Potential Recapture of Base Year Bad Debt Revenue. The Bank's bad debt reserve as of the base year is not subject to automatic recapture as long as the Bank continues to carry on the business of banking. If the Bank no longer qualifies as a bank, the balance of the pre-1988 reserves (the base year reserves) are restored to income over a six-year period beginning in the tax year the Bank no longer qualifies as a bank. Such base year bad debt reserve is subject to recapture to the extent that the Bank makes "non-dividend distributions" that are considered as made from the base year bad debt. To the extent that such reserves exceed the amount that would have been allowed under the experience method ("Excess Distributions"), then an amount based on the amount distributed will be included in the Bank's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserve. Thus, any dividends to the Company that would reduce amounts appropriated to the Bank's bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Bank. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. The Bank makes a "non-dividend distribution," then approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 34% corporate income tax rate (exclusive of state and local taxes). The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserve. Corporate Alternative Minimum Tax. The Internal Revenue Code imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction claimed by the Bank over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating loss carryovers of which the Bank currently has none. AMTI is increased by an amount equal to 75% of the amount by which the Bank's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). In 20 addition, for taxable years beginning after June 30, 1986 and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modifications) over $2.0 million is imposed on corporations, including the Bank, whether or not an Alternative Minimum Tax ("AMT") is paid. The Bank does not expect to be subject to the AMT. Dividends Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank own more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted. Indiana Taxation Indiana imposes an 8.5% franchise tax based on a financial institution's adjusted gross income as defined by statute. In computing adjusted gross income, deductions for municipal interest, U.S. Government interest, the bad debt deduction computed using the reserve method and pre-1990 net operating losses are disallowed. The Bank's state income tax returns were audited for the years ended December 31, 1993, 1994 and 1995 without amendment and without additional tax liability. The Bank's state income tax returns have not been audited for any subsequent period. Item 2. Description of Property. - --------------------------------- The following table sets forth certain information regarding the Bank's offices as of December 31, 1999.

____ (1) Represents the net value of land, buildings, furniture, fixtures and equipment owned by the Bank. (2) Lease expires on November 30, 2003. Item 3. Legal Proceedings. - --------------------------- At December 31, 1999, neither the Company nor the Bank was involved in any pending legal proceedings that are believed by management to be material to the Company's financial condition or results of operations. In addition, from time to time, the Bank is involved in legal proceeding occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company's financial condition or results of operations. 21 Item 4. Submission of Matters to a Vote of Security Holders. - ------------------------------------------------------------- On November 17, 1999, the Company held its annual meeting of shareholders. At the meeting shareholders were asked to approve and adopt the Agreement and Plan of Merger, dated as of July 19, 1999, between First Capital, Inc., FC Acquisition Corp. and HCB Bancorp, pursuant to which, among other things, FC Acquisition Corp. merged with and into HCB Bancorp and each share of HCB Bancorp common stock was converted into 15.5 shares of First Capital, Inc. common stock. The number of votes cast at the meeting with respect to the Agreement and Plan of Merger was: BROKER FOR AGAINST ABSTAIN NON-VOTES ------- ------- ------- --------- 945,015 5,104 200 144,851 In addition, at the Company's annual meeting of shareholders shareholders were asked to elect two directors to serve for a term of one year, two directors to serve for a term of two years and three directors to serve for a term of three years; to approve the First Capital, Inc. 1999 Stock-Based Incentive Plan; and to ratify the appointment of Monroe Shine & Co., Inc. as the Company's independent auditors. The number of votes cast at the meeting as to each matter acted upon was as follows:

The year each Director's term expires is as follows: John W. Buschmeyer (2000); Kenneth R. Saulman (2000); Samuel E. Uhl (2001); Mark D. Shireman (2001); J. Gordon Pendleton (2002); Gerald L. Uhl (2002); and Dennis L. Huber (2002).

22 PART II Item 5. Market for Common Equity and Related Stockholder Matters. - ------------------------------------------------------------------ Common Shares The common shares of the Company trade on the Nasdaq SmallCap Market under the symbol "FCAP." As of March 1, 2000, the Company had 1,206 stockholders of record. This number 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 quarters ended September 30, 1999 and December 31, 1999, and for the years ended June 30, 1999 and 1998. For periods before December 31, 1998, the table reflects the price per share and dividend information for the Bank's common stock divided by 2.5638, the exchange ratio in connection with the Conversion and Reorganization completed on December 31, 1998. Because the Bank's common stock was not listed or quoted on an established market before December 31, 1998, share price information for periods before that date reflect trades known to management.

Item 6. Management's Discussion and Analysis or Plan of Operation. - ------------------------------------------------------------------- General The Company is the parent to its wholly owned subsidiary, First Harrison Bank (formerly, First Federal Bank, a Federal Savings Bank), a community-oriented financial institution offering traditional financial services primarily to residents of Harrison County, Indiana, and contiguous counties. The Company has no other material income other than that generated by the Bank. 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'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, U.S. government and agency securities, local municipal obligations and, to a lesser extent, mortgage-backed securities. 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 Form 10-KSB. 23 Operating Strategy The Bank's results of operations depend primarily on net interest income, which is the difference between the income earned on its interest- earning assets, such as loans and investments, and the cost of its interest- bearing liabilities, consisting of deposits and, if utilized, borrowings from the FHLB 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. The Bank's current business strategy is to operate as a well capitalized, locally owned community bank. This strategy has been implemented in recent years by controlling growth, emphasizing the origination of residential mortgage loans in the Bank's primary market area, improving asset quality, controlling operating expenses, and expanding customer services. 24 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 Form 10-KSB, 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. The Company changed its fiscal year end from June 30 to December 31 in November 1999.

________ (1) Includes interest bearing deposits in other depository institutions. (2) Includes one-time gain on sale of old main office building of $169,000 in 1998. (3) Includes one-time SAIF insurance assessment of $403,000 in 1997. (4) Includes merger related expenses of $331,000 in the six months ended December 31, 1999. 25

____ (1) Net income divided by average assets. (2) Net income divided by average equity. (3) Dividend payout ratio is computed considering only the minority shareholders' proportionate share of net income prior to conversion. Prior to the completion of the Conversion and Reorganization on December 31, 1998, the majority shareholder, First Capital, Inc., M.H.C., with the approval of the OTS, elected to waive the receipt of dividends. (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. 26 Average Balance Sheet The following table sets forth for the periods indicated information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning 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 balances of assets or liabilities, respectively, for the periods presented. Average balances were derived from daily balances.

_______ (1) Does not include interest on loans 90 days or more past due. (2) Includes mortgage-backed and other debt securities, securities classified as available for sale and Federal Home Loan Bank stock. 27 Average Balance Sheet (cont'd.)

____ (1) Does not include interest on loans 90 days or more past due. (2) Includes mortgage-backed and other debt securities, securities classified as available for sale and Federal Home Loan Bank stock. 28 Rate/Volume Analysis The following table sets forth the effects of changing rates and volumes on net interest income of the Bank. 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 on interest income attributable to changes in rate (changes in rate multiplied by prior volume); (iii) changes in rate/volume (change in rate multiplied by change in volume); and (iv) the net change (the sum of the prior columns).

_______ (1) The Bank does not include interest on loans 90 days or more past due. (2) Includes mortgage-backed and other debt securities, securities classified as available for sale and FHLB stock. Comparison of Financial Condition at December 31, 1999 and June 30, 1999 Total assets increased 8.1% from $122.7 million at June 30, 1999 to $132.7 million at December 31, 1999, primarily as a result of an increase in loans receivable, net, which was funded primarily by growth in deposits and an increase in advances from the FHLB of Indianapolis. Loans receivable, net, were $83.9 million at June 30, 1999, compared to $93.5 million at December 31,1999, a 11.4% increase. The loan growth is attributable to a 3.2% growth in residential mortgage loans (including residential construction loans), a 69.9% growth in commercial real estate loans and a 37.2% growth in consumer loans. Commercial real estate loans were $3.7 million at June 30, 1999, compared to $6.3 million at December 31, 1999. Consumer loans were $6.4 million at June 30, 1999, compared to $8.8 million at December 31, 1999. The growth in consumer loans results primarily from a $1.8 million increase in home equity and second mortgage loans. The investment in mortgage-backed securities held-to-maturity decreased from $767,000 at June 30, 1999 to $627,000 at December 31,1999 as a result of repayments of $139,000. Securities available for sale, consisting of federal agency mortgage-backed certificates, federal agency notes and bonds, municipal bonds and mutual funds decreased by $948,000 from $20.2 million at June 30, 1999 to $19.3 million at December 31, 1999 primarily as a result of maturities and repayments of $452,000 and unrealized depreciation of $512,000. Other debt securities held to maturity, consisting of federal agency notes and bonds, increased from $8.5 million at June 30, 1999 to $9.0 million at December 31, 1999. During the six month period ended December 31, 1999, the Company purchased federal agency debt securities of $500,000. 29 Securities available for sale, consisting of federal agency mortgage-backed certificates, federal agency notes and bonds, municipal bonds and mutual funds decreased $948,000 from $20.2 million at June 30, 1999 to $19.3 million at December 31, 1999 primarily as a result of maturities and repayments of $452,000 and unrealized depreciation of $512,000. Cash and interest bearing deposits with banks increased from $2.6 million at June 30, 1999 to $2.9 million at December 31, 1999. The Bank increased the levels of working cash in connection with contingency planning for the Year 2000 date change. Total deposits increased from $92.0 million at June 30, 1999 to $97.6 million at December 31, 1999. The increase in deposits resulted primarily from growth in demand and savings deposit accounts, which management attributes primarily to its promotional efforts to attract lower cost accounts. Total stockholders' equity decreased from $17.3 million at June 30, 1999 to $17.1 million at December 31, 1999 primarily as a result of an increase in the net unrealized loss on available for sale securities of $309,000 net of retained net income of $68,000. Comparison of Operating Results for the Six Month Periods Ended December 31, 1999 and 1998 Net Income. Net income was $315,000 ($0.25 per share diluted) for the six months ended December 31, 1999 compared to $469,000 ($0.36 per share diluted) for the six months ended December 31, 1998. The results for 1999 include non- recurring merger related expenses of $280,000, net of tax. Excluding these non- recurring expenses, net income increased $127,000 for 1999 compared to 1998 primarily from an increase in net interest income offset by an increase in non- interest expenses. Net Interest Income. Net interest income increased 27.2% from $1.5 million in 1998 to $1.9 million in 1999 as a result of the increase in interest-earning assets during 1999 and a decrease in the average cost of funds in 1999 compared to the same period in 1998. Total interest income increased $981,000, or 26.7%, to $4.7 million for the six months ended December 31, 1999 compared to $3.7 million for the same period in 1998 as a result of a higher balance of interest-earning assets. Interest on loans receivable increased $385,000 and interest on investment securities increased $633,000 as a result of a higher average balance in 1999. The average yield on interest-earning assets decreased from 8.02% in 1998 to 7.56% in 1999 primarily because of lower yields on mortgage loans. The yield on short-term investments, including interest bearing deposits with banks, increased in 1999 compared to 1998 because of higher market interest rates. Total interest expense increased $563,000, or 26.3%, to $2.7 million for the six months ended December 31, 1999 compared to $2.1 million for the six months ended December 31, 1998 as a result of the growth in deposits and an increase in average borrowings from the FHLB. The average cost of deposits decreased during 1999 compared to 1998 as the average cost of interest bearing deposits decreased from 5.18% in 1998 to 4.98% in 1999. The decrease in the average cost of deposits results from the growth in lower cost checking and savings accounts. The average balance of non-interest bearing deposits increased from $2.7 million in 1998 to $4.0 million in 1999 as a result of the bank's efforts to attract business transaction accounts. Provision for Loan Losses. The provision for loan losses was $45,000 for the six months ended December 31, 1999. The provision for loan losses for the comparable period in 1998 was $18,000. 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. The Bank made provisions for the periods ended December 31, 1999 and 1998 to increase the allowance for loan losses to an amount considered reasonable by management based on quarterly evaluations. The Bank increased the provisions for loan losses in 1999 due to an increase in commercial business and consumer loans, which possess a higher inherent risk of loss than one- to four- family residential mortgage loans. Although management uses the best information available, future adjustments to the allowance may be necessary due to changes in economic, operating, regulatory and other conditions that may be beyond the Bank's control. While the Bank maintains its allowance for loan losses at a level considered 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. 30 Non-interest income. Non-interest income increased 35.1% to $196,000 for the six months ended December 31, 1999 compared to $145,000 for the six months ended December 31, 1998. Service charges on deposit accounts increased by $42,000 for 1999 compared to 1998 due to the growth in transaction accounts during 1999. Non-interest expense. Non-interest expense, excluding non-recurring merger related expenses of $331,000, increased $299,000 for 1999 compared to 1998. The increase results primarily from increases in compensation and benefits and occupancy and equipment expenses. Compensation and benefits expense increased $151,000 due to normal compensation increases, the compensation cost associated with the employee stock ownership plan adopted at December 31, 1998, and additional staff for the new branch office in New Salisbury, Indiana, which opened in March 1999. Occupancy and equipment costs have increased in 1999 compared to 1998 as a result of increased occupancy charges for the new branch office facility and equipment and expenses related to the Year 2000 issue. Other non-interest expenses increased $122,000 in 1999 compared to 1998 primarily due to increases in advertising costs, professional fees and other expenses of operating as a public company. Income tax. Income tax expense for the six months ended December 31, 1999 was $257,000, compared to $292,000 for the same period in 1998. The effective tax rate for 1999 was 44.9% compared to 38.4% for 1998. Non-recurring merger expenses in 1999 reduced net income before taxes by $331,000 as compared to 1998, resulting in lower income tax expense in 1999. Certain of these merger expenses are not deductible for federal and state income tax purposes, resulting in a higher effective tax rate for 1999. Comparison of Financial Condition at June 30, 1999 and 1998 Total assets increased 30.6% from $94.0 million at June 30, 1998 to $122.7 million at June 30, 1999, primarily as a result of increases in investment securities and loans receivable, net, which was funded primarily by the net proceeds from the issuance of common stock in the conversion, growth in deposits and an increase in advances from the FHLB of Indianapolis. Loans receivable, net, were $83.9 million at June 30, 1999, compared to $74.9 million at June 30, 1998, a 12.0% increase. The loan growth is attributable to a 16.7% growth in residential mortgage loans (includes residential construction loans). Residential mortgage loans were $61.6 million at June 30, 1998, compared to $71.9 million at June 30, 1999. The investment in mortgage-backed securities held-to-maturity decreased from $1.5 million at June 30, 1998 to $767,000 at June 30, 1999 as a result of repayments of $702,000. Other debt securities held to maturity, consisting of federal agency notes and bonds, increased from $1.6 million at June 30, 1998 to $8.5 million at June 30, 1999. During the year ended June 30, 1999, the Company purchased other debt securities of $8.5 million and had maturities of other debt securities with a carrying value of $1.6 million. Securities available for sale, consisting primarily of federal agency mortgage- backed certificates, notes and bonds, increased $15.4 million from $4.8 million at June 30, 1998 to $20.2 million at June 30, 1999 as a result of purchases of $22.6 million and maturities and repayments of $6.5 million. Cash and interest bearing deposits with banks decreased from $6.1 million at June 30, 1998 to $2.6 million at June 30, 1999 as a result of the investment in loans and investment securities. Total deposits increased from $77.5 million at June 30, 1998 to $92.0 million at June 30, 1999. The increase in deposits resulted primarily from growth in demand and savings deposit accounts, which management attributes primarily to its promotional efforts to attract lower cost accounts. Total stockholders' equity increased from $10.3 million at June 30, 1998 to $17.3 million at June 30, 1999 as a result of retained net income of $746,000 and net proceeds from issuance of common stock of $6.6 million in connection with the Conversion and Reorganization. Comparison of Operating Results for the Years Ended June 30, 1999 and 1998 Net Income. Net income was $1.0 million ($0.77 per share diluted) for the year ended June 30, 1999 compared to $958,000 ($0.73 per share diluted) for the year ended June 30, 1998. The results for 1998 included a one-time gain of $105,000, net of tax, associated with the sale of the Bank's old main office property. Excluding this one-time gain, 31 net income increased $148,000 for 1999 compared to 1998 primarily from an increase in net interest income offset by an increase in non-interest expenses. Net Interest Income. Net interest income increased 22.4% from $2.7 million in 1998 to $3.4 million in 1999 as a result of the increase in interest-earning assets during 1999 and a decrease in the average cost of funds in 1999 compared to the same period in 1998. Total interest income increased $938,000, or 13.7%, to $7.8 million for the year ended June 30, 1999 compared to $6.9 million in the prior year as a result of a higher balance of interest-earning assets. Interest on loans receivable increased $286,000 and interest on investment securities increased $646,000 as a result of a higher average balance in 1999. The average yield on interest- earnings assets decreased from 8.16% in 1998 to 7.82% in 1999 primarily because of lower market rates. Total interest expense increased $323,000, or 7.8%, to $4.4 million for the year ended June 30, 1999 compared to $4.1 million for the year ended June 30, 1998 as a result of the growth in deposits and an increase in average borrowings from the FHLB. Both the average cost of deposits and borrowings decreased during 1999 compared to 1998 as the average cost of interest bearing liabilities decreased from 5.44% in 1998 to 5.11% in 1999. The decrease in the average cost of deposits results from the growth in lower cost checking and savings accounts. Provision for Loan Losses. The provision for loan losses was $44,000 for the year ending June 30, 1999. There was no provision for loan losses for the comparable period in 1998 because the allowance for loan losses was considered adequate based upon management's evaluation. The Bank made provisions of $44,000 for the year ended June 30, 1999 to increase the allowance for loan losses to an amount considered reasonable by management based on quarterly evaluations. The Bank made provisions for loan losses in 1999 due to an increase in commercial business and unsecured personal loans, which possess a higher inherent risk of loss than one- to four-family residential mortgage loans, and the net charge-offs of $78,000 during the year. Non-interest income. Non-interest income decreased 26.7% to $301,000 for the year ended June 30, 1999 compared to $411,000 for the year ended June 30, 1998. The decrease is primarily the result of a one-time gain of $169,000 in 1998 from the sale of the Bank's old main office property. Service charges on deposit accounts increased $47,000 for 1999 compared to 1998 due to the growth in transaction accounts during 1999. Non-interest expense. Non-interest expense increased $376,000 for 1999 compared to 1998. The increase results primarily from increases in compensation and benefits and occupancy and equipment expenses. Compensation and benefits expense increased $174,000 due to normal compensation increases and additional staff in the loan department in 1999. Occupancy and equipment costs have increased in 1999 compared to 1998 as a result of increased depreciation charges on the new main office facility and equipment and expenses related to the Year 2000 issue. The Bank also experienced higher costs due to the opening of a new branch office in New Salisbury, Indiana in March 1999. The Bank had been operating a temporary facility in New Salisbury since November 1998. Income tax expense. Income tax expense for the year ended June 30, 1999 was $632,000, compared to $589,000 for the same period in 1998. The effective tax rate for 1999 was 38.7% compared to 38.1% for 1998. Year 2000 Issues The year 2000 issue exists because many computer systems and applications use two-digit date fields to designate a year. As the century date change occurs, date-sensitive systems may recognize the year 2000 as 1900, or not at all. This inability to recognize or properly treat the year 2000 may cause erroneous results, ranging from system malfunctions to incorrect or incomplete processing. As a user of computers, computer software and equipment utilizing embedded microprocessors, failure to resolve year 2000 issues could cause substantial disruption of the Bank's business and could have a material adverse effect on the Bank's business, financial condition or results of operations. The Bank established a year 2000 committee in 1997, headed by the Chief Operating Officer and included all department heads. The committee developed and implemented a comprehensive plan to make all information and non-information technology assets year 2000 compliant. The committee provided periodic reports to the Board of Directors in order to assist the directors in their year 2000 readiness oversight role. 32 While there can be no assurances that the Bank's year 2000 plan has effectively addressed the year 2000 issue, the Bank has not been notified, and is unaware of, any vendor or service provider problems related to year 2000 and all systems have performed properly since January 1, 2000. Likewise, the Bank is unaware of any year 2000 issues that have impaired the ability of the Bank's borrowers to repay their debt. 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 FHLB 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, 1999, the Bank had cash and interest-bearing deposits with banks of $2.9 million and securities available for sale with a fair value of $19.3 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB of Indianapolis and collateral eligible for repurchase agreements. The Bank's primary investing activity is the origination of one- to four- family mortgage loans and, to a lesser extent, consumer, multi-family, commercial real estate and residential construction loans. The Bank also invests in U.S. government and agency securities and mortgage-backed securities issued by U.S. government agencies. The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. At December 31, 1999, the Bank had total commitments to extend credit of $8.3 million. See Note 13 of Notes to Consolidated Financial Statements. At December 31, 1999, the Bank had certificates of deposit scheduled to mature within one year of $21.3 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. Current OTS regulations require the Bank to maintain an average daily balance of liquid assets (cash and eligible investments) equal to at least 4.0% of the average daily balance of its net withdrawable deposits and short-term borrowings. Historically, the Bank has maintained liquidity levels in excess of regulatory requirements. At December 31, 1999, the Bank's liquidity was 7.3%. The Bank is required to maintain specific amounts of capital pursuant to OTS requirements. As of December 31, 1999, the Bank was in compliance with all regulatory capital requirements which were effective as of such date with tangible, core and risk-based capital ratios of 11.6%, 11.6% and 20.0%, respectively. Effect of Inflation and Changing Prices The financial statements and related financial data presented in this Form 10-KSB 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. 33 Quantitative Aspects of Market Risk. The Bank does not maintain a trading account for any class of financial instrument nor does the Bank engage in hedging activities or purchase high-risk derivative instruments. Furthermore, the Bank is not subject to foreign currency exchange rate risk or commodity price risk. The Bank uses interest rate sensitivity analysis to measure its interest rate risk by computing changes in NPV (net portfolio value) of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or decrease in market interest rates with no effect given to any steps that management might take to counter the effect of that interest rate movement. Using data compiled by the OTS, the Bank receives a report which measures interest rate risk by modeling the change in NPV (net portfolio value) over a variety of interest rate scenarios. This procedure for measuring interest rate risk was developed by the OTS to replace the "gap" analysis (the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a specific time period). The following table is provided by the OTS and sets forth the change in the Bank's NPV at December 31, 1999, 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.

The above table indicates that in the event of a sudden and sustained increase in prevailing market interest rates, the Bank's NPV would be expected to decrease, and that in the event of a sudden and sustained decrease in prevailing market interest rates, the Bank's NPV would be expected to increase. Certain assumptions utilized by the OTS in assessing the interest rate risk of savings associations within its region were utilized in preparing the preceding table. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table. Item 7. Financial Statements. - ------------------------------ The financial statements listed in the index to Consolidated Financial Statements at Item 13 of this report are incorporated by reference into this Item 7. 34 Item 8. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------- Financial Disclosure. -------------------- None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; - ----------------------------------------------------------------------- Compliance with Section 16(a) of the Exchange Act. ------------------------------------------------- The information required by this Item with respect to Directors is incorporated herein by reference to the Proxy Statement under the heading "Proposal 1--Election of Directors." Executive Officers Who Are Not Directors

______ (1) As of December 31, 1999. Biographical Information M. Chris Frederick has been affiliated with the Bank since 1990 and has served in his present position since 1997. He is a member of Leadership Harrison County and the Parish Relations Board of the Corydon United Methodist Church. Joel E. Voyles has been affiliated with the Bank since December 1996 and has served in his present position since 1997. From November 1975 to December 1996, he served as Vice President - Deposit Operations Manager of Cumberland Savings Bank in Louisville, Kentucky. Sheri L. McGill has been affiliated with the Bank since January 1988 and has held her present position since 1992. She is a member of Leadership Harrison County. Dennis L. Thomas has been affiliated with the Bank since January 2000. He was employed by Harrison County Bank from 1981 until the merger with the Bank. He is active in the North Harrison Babe Ruth Baseball League. Bradley B. Backherms has been affiliated with the Bank since January 2000. He was employed by Harrison County Bank from 1982 until the merger with the Bank. He is a member of the Crandall United Methodist Church. Item 10. Executive Compensation. - -------------------------------- The information required by this Item is incorporated herein by reference to the Proxy Statement under the heading "Executive Compensation." Item 11. Security Ownership of Certain Beneficial Owners and Management. - ------------------------------------------------------------------------ The information required by this Item is incorporated herein by reference to the Proxy Statement under the heading "Stock Ownership." 35 Item 12. Certain Relationships and Related Transactions. - -------------------------------------------------------- The information required by this Item is incorporated herein by reference to the Proxy Statement under the heading "Transactions with Management." Item 13. Exhibits, Financial Statement Schedules and List and Reports on Form - ------------------------------------------------------------------------------ 8-K. - --- (a) Financial Statements The following consolidated financial statements of the Company and its subsidiary are filed as part of this document under Item 7. . Independent Auditors' Report . Consolidated Balance Sheets as of December 31, 1999 and June 30, 1999 and 1998 . Consolidated Statements of Stockholders Equity for the Six Months Ended December 31, 1999 and the Years Ended June 30, 1999 and 1998 . Consolidated Statements of Income for the Six Months Ended December 31, 1999 and 1998 and the Years Ended June 30, 1999 and 1998 . Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1999 and 1998 and the Years Ended June 30, 1999 and 1998 . Notes to Consolidated Financial Statements Financial Statement Schedules Financial Statements Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto. (a) Exhibits Exhibit Number ------ 3.1 Articles of Incorporation of First Capital, Inc. (1) 3.2 Bylaws of First Capital, Inc. 10.1 Employment Agreement with James G. Pendleton (2) 10.2 Employment Agreement with Samuel E. Uhl 10.3 Employment Agreement with M. Chris Frederick 10.4 Employment Agreement with Joel E. Voyles 10.5 Employee Severance Compensation Plan (2) 10.6 First Federal Bank, A Federal Savings Bank 1994 Stock Option Plan (as assumed by First Capital, Inc. effective December 31, 1998) (3) 10.7 First Capital, Inc. 1999 Stock-Based Incentive Plan (4) 10.8 1998 Officers' and Key Employees' Stock Option Plan for HCB Bancorp(4) 10.9 Employment Agreement with William W. Harrod 21.0 Subsidiaries of the Registrant (incorporated by reference to Part I, "Business--Subsidiary Activities" of this Form 10-KSB). 23.0 Consent of Monroe Shine and Co., Inc. 27.0 Financial Data Schedule (1) Incorporated by reference from the Exhibits filed with the Registration Statement on Form SB-2, and any amendments thereto, Registration No. 333-63515. (2) Incorporated by reference to the Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998. (3) Incorporated by reference from the Exhibits filed with the Registration Statement on Form S-8, and any amendments thereto, Registration Statement No. 333-76543. (4) Incorporated by reference from the Exhibits filed with the Registration Statement on Form S-8, and any amendments thereto, Registration Statement No. 333-95987. (b) Reports on Form 8-K (1) On November 18, 1999, the Company filed a Form 8-K announcing that the Board of the Company voted to change the Company's fiscal year end from June 30 to December 31. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST CAPITAL, INC. /s/ William W. Harrod ----------------------------------------------- William W. Harrod President, Chief Executive Officer and Director In accordance with the requirements of the Securities Act of 1933, this Registration Statement was signed by the following persons in the capacities and on the dates stated. Name Title Date - ---- ----- ---- /s/ William W. Harrod President, Chief Executive March 17, 2000 - -------------------------- William W. Harrod Officer and Director (principal executive officer) /s/ J. Gordon Pendleton Chairman March 17, 2000 - -------------------------- J. Gordon Pendleton /s/ Michael C. Frederick Chief Financial Officer and March 17, 2000 - -------------------------- Michael C. Frederick Treasurer (principal accounting and financial officer) /s/ Samuel E. Uhl Director March 17, 2000 - -------------------------- Samuel E. Uhl /s/ Mark D. Shireman Director March 17, 2000 - -------------------------- Mark D. Shireman /s/ Dennis L. Huber Director March 17, 2000 - -------------------------- Dennis L. Huber /s/ Kenneth R. Saulman Director March 17, 2000 - -------------------------- Kenneth R. Saulman /s/ John W. Buschemeyer Director March 17, 2000 - -------------------------- John W. Buschemeyer /s/ Gerald L. Uhl Director March 17, 2000 - -------------------------- Gerald L. Uhl 37 /s/ Earl H. Book Director March 17, 2000 - -------------------------- Earl H. Book /s/ James S. Burden Director March 17, 2000 - -------------------------- James S. Burden /s/ Marvin E. Kiesler Director March 17, 2000 - -------------------------- Marvin E. Kiesler /s/ James E. Nett Director March 17, 2000 - -------------------------- James E. Nett /s/ Michael L. Shireman Director March 17, 2000 - -------------------------- Michael L. Shireman /s/ Loren E. Voyles Director March 17, 2000 - -------------------- Loren E. Voyles 38 [LETTERHEAD OF MONROE SHINE] Independent Auditor's Report The Board of Directors First Capital, Inc. Corydon, Indiana We have audited the accompanying consolidated balance sheets of First Capital, Inc. and Subsidiary as of December 31, 1999 and June 30, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for the periods ended December 31, 1999 and 1998 and June 30, 1999 and 1998. 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 generally accepted auditing standards. 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 Subsidiary as of December 31, 1999 and June 30, 1999 and 1998, and the results of their operations and their cash flows for the periods ended December 31, 1999 and 1998 and June 30, 1999 and 1998 in conformity with generally accepted accounting principles. /s/ Monroe Shine January 13, 2000 F-1 FIRST CAPITAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998

See notes to consolidated financial statements. F-2 FIRST CAPITAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY PERIODS ENDED JUNE 30, 1999 AND 1998

See notes to consolidated financial statements. F-3 FIRST CAPITAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY PERIOD ENDED DECEMBER 31, 1999

See notes to consolidated financial statements. F-4 FIRST CAPITAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME PERIODS ENDED DECEMBER 31, 1999 AND 1998 AND JUNE 30, 1999 AND 1998

See notes to consolidated financial statements. F-5 FIRST CAPITAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS PERIODS ENDED DECEMBER 31, 1999 AND 1998 AND JUNE 30, 1999 AND 1998

See notes to consolidated financial statements. F-6 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations First Capital, Inc. ("Company") was incorporated by First Federal Bank, a Federal Savings Bank ("Bank") in September 1998 in connection with the conversion from the mutual holding company form of organization to the stock holding company form of organization. Upon consummation of the conversion on December 31, 1998, the Company became the holding company for the Bank and the former mutual holding company, First Capital, Inc., M.H.C. ("MHC"), was merged with and into the Bank. The conversion was accounted for as a pooling of interests and, therefore, the consolidated financial statements for the fiscal year ended June 30, 1999 are based on the assumption the companies were combined for the full year and the prior year financial statements have been restated to give effect to the combination. The Bank provides a variety of banking services to individuals and business customers through three offices in southern Indiana. The Bank's primary source of revenue is single-family residential loans. Basis of Presentation The Company has changed its fiscal year to the calendar year. The statements of income for the periods ended December 31, 1999 and 1998 present the results of operations for the six month periods then ended. The statements of income for the periods ended June 30, 1999 and 1998 present the results of operations for the fiscal years then ended. The consolidated financial statements include the accounts of the Company and the Bank. All material intercompany balances and transactions have been eliminated in consolidation. Statements of Cash Flows For purposes of the statements of cash flows, the Bank has defined cash and cash equivalents as those amounts included in the balance sheet caption "Cash and due from banks." Reclassifications Certain prior year amounts have been reclassified to conform with current year presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of foreclosed real estate. In connection with the determination of estimated losses on loan and foreclosed real estate, management obtains appraisals for significant properties. While management uses available information to recognize losses on loans and foreclosed real estate, further reductions in the carrying amounts of loans and foreclosed assets may be necessary based on changes in local economic conditions. In addition, as an integral part of their examination process, regulatory agencies periodically review the estimated losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible the estimated losses on loans and foreclosed real estate may change materially in the near term. However, the amount of the change that is reasonable possible cannot be estimated. F-7 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (1 - continued) Securities Available for Sale Securities available for sale consist of debt and equity securities and are stated at fair value. Amortization of premium and accretion of discount are recognized in interest income using the interest method over the remaining period to maturity, adjusted for anticipated prepayments. Unrealized gains and losses, net of tax, on securities available for sale are reported as a separate component of stockholders' equity until realized. Realized gains and losses on the sale of securities available for sale are determined using the specific identification method. Securities Held to Maturity Debt securities for which the Bank has the positive intent and ability to hold to maturity are carried at cost, adjusted for amortization of premium and accretion of discount using the interest method over the remaining period to maturity, adjusted for anticipated prepayments. Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. Loans Loans receivable are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses. The Bank's real estate loan portfolio consists primarily of long-term loans, collateralized by first mortgages on single-family residences and multi-family residential properties located in the southern Indiana area and commercial real estate loans. In addition to real estate loans, the Bank makes commercial loans and consumer loans. Loan origination fees and certain direct costs of underwriting and closing loans are deferred and the net fee or cost is recognized as an adjustment to interest income over the contractual life of the loans using the interest method. The accrual of interest is discontinued on a loan when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. The Bank does not accrue interest on loans past due 90 days or more except when the estimated value of collateral and collection efforts are deemed sufficient to ensure full recovery. When a loan is placed on non accrual status, previously accrued but unpaid interest is deducted from interest income. Subsequent receipts on nonaccrual loans, including specific impaired loans are recorded as a reduction of principal, and interest income is only recorded once principal recovery is reasonably assured. The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specified impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Because of uncertainties inherent in the estimation process, management's estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term. F-8 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (1 - continued) Foreclosed Real Estate Foreclosed real estate is carried at the lower of fair value minus estimated costs to sell or cost. Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and an allowance is established by a charge to non-interest expense if the carrying value exceeds the fair value minus estimated costs to sell. The net expense from operations of foreclosed real estate held for sale is reported in non-interest expense. Premises and Equipment The Bank uses the straight line and accelerated methods of computing depreciation at rates adequate to amortize the cost of the applicable assets over their useful lives. Items capitalized as part of premises and equipment are valued at cost. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of assets sold, or otherwise disposed of, are removed from the related accounts and any gain or loss is included in earnings. Income Taxes Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of available for sale securities, allowance for loan losses, accumulated depreciation and accrued income and expenses for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Stock-Based Compensation Under the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the Company will measure and recognize compensation cost related to stock-based compensation plans using the intrinsic value method and disclose the pro forma effect of applying the fair value method contained in SFAS No. 123. Accordingly, no compensation costs will be charged against earnings for stock options granted under the Company's stock-based compensation plans. Advertising Advertising costs are charged to operations when incurred. Comprehensive Income On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the consolidated statements of changes in stockholders' equity and comprehensive income. The statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position, results of operations or cash flows. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. F-9 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (2) MERGER WITH HCB BANCORP On January 12, 2000, the Company completed the plan of merger with HCB Bancorp (HCB), a bank holding company located in Palmyra, Indiana. HCB is the parent company of Harrison County Bank, a state-chartered commercial bank. The merger provided for an exchange of 15.5 shares of the Company's common stock for each share of HCB common stock. The merger was accounted for as a pooling of interests. Unaudited pro forma condensed combined financial information is presented in Note 21. (3) DEBT AND EQUITY SECURITIES Debt and equity securities have been classified in the balance sheets according to management's intent. Investment securities at December 31, 1999 and June 30, 1999 and 1998 are summarized as follows:

F-10 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (3 - continued)

F-11 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (3 - continued) The amortized cost and fair value of debt securities as of December 31, 1999, 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.

Certain debt securities were pledged to secure advances from the Federal Home Loan Bank at December 31, 1999. (See Note 7) (4) LOANS Loans receivable at December 31, 1999 and June 30, 1999 and 1998 consisted of the following:

F-12 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (4 - continued) An analysis of the allowance for loan losses is as follows:

The Bank had no loans specifically classified as impaired at December 31, 1999 and June 30, 1999. At June 30, 1998, the Bank had loans amounting to $79,343 that were specifically classified as impaired. The average recorded investment in impaired loans amounted to $49,423, $52,171 and $92,291 for the periods ended December 31, 1999 and June 30, 1999 and 1998, respectively. The allowance for loan losses related to impaired loans amounted to $54,566 at June 30, 1998. There was no interest income recognized on impaired loans during the periods ended December 31, 1999 and June 30, 1999 and 1998, respectively. The Bank has entered into loan transactions with certain directors, officers and their affiliates (related parties). In the opinion of management, such indebtedness was incurred in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than normal risk of collectibility or present other unfavorable features. The following table represents the aggregate activity for related party loans which exceeded $60,000 in total for the periods presented:

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 periods ended December 31, 1999 and June 30, 1999 and 1998, the Bank granted approximately $366,000, $768,000 and $612,000, respectively, to customers of the dealership and such loans had an aggregate outstanding balance of approximately $1.3 million at December 31, 1999. F-13 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (5) PREMISES AND EQUIPMENT Premises and equipment consisted of the following:

(6) DEPOSITS The aggregate amount of time deposit accounts with balances of $100,000 or more was approximately $12,239,000, $12,789,000 and $11,002,000 at December 31, 1999 and June 30, 1999 and 1998, respectively. Deposit account balances in excess of $100,000 are not federally insured. At December 31, 1999, scheduled maturities of time deposits were as follows: Year ending December 31: 2000 $ 21,254,737 2001 11,456,607 2002 9,542,678 2003 3,678,037 2004 and thereafter 4,416,385 ------------ Total $ 50,348,444 ============ The Bank held deposits of approximately $2,461,000, $1,526,000 and $1,469,000 for related parties at December 31, 1999 and June 30, 1999 and 1998, respectively. (7) ADVANCES FROM FEDERAL HOME LOAN BANK At December 31, 1999 and June 30, 1999 and 1998, advances from the Federal Home Loan Bank were as follows:

The following is a schedule of maturities for advances outstanding as of December 31, 1999: Year ending December 31: 2000 $ 7,000,000 2001 1,750,000 2004 3,000,000 2006 1,000,000 2009 4,000,000 ------------ $ 16,750,000 ============ F-14 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (7 - continued) The advances are secured under a blanket collateral agreement. At December 31, 1999, eligible collateral included conventional mortgage loans with a carrying value of $59,629,254 and debt securities with a carrying value of $26,691,817 which were pledged as security for the advances. (8) LEASE COMMITMENT On April 1, 1997, the Bank entered into a noncancellable sub-lease agreement for a branch office for an initial lease term of eight years. The sub-lessor has a fixed term lease with the owner with an initial term expiring November 30, 2003. The following is a schedule by years of future minimum rental payments required under this operating lease: Year ending December 31: 2000 $ 12,690 2001 12,690 2002 12,690 2003 11,633 -------- Total minimum payments required $ 49,703 ======== Total minimum rental expense for all operating leases for each of the periods ended December 31, 1999 and 1998 amounted to $6,345. Total minimum rental expense for all operating leases for each of the periods ended June 30, 1999 and 1998 amounted to $12,690. (9) INCOME TAXES The components of income tax expense were as follows:

Significant components of the Bank's deferred tax assets and liabilities as of December 31, 1999 and June 30, 1999 and 1998 were as follows:

F-15 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (9 - continued) The reconciliation of income tax expense with the amount which would have been provided at the federal statutory rate of 34 percent follows:

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, 1999 includes approximately $909,000 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 $309,000 at December 31, 1999. Federal legislation repealed the reserve method of accounting for bad debts by qualified thrift institutions for tax years beginning after December 31, 1995. As a result, the Bank cannot use the percentage-of taxable-income method to calculate the annual addition to the statutory bad debt reserve. Instead, the Bank is required to compute its federal tax bad debt deduction based on actual loss experience over a period of years. The legislation required the Bank to recapture into taxable income over a six-year period its post-1987 additions to the statutory bad debt reserve, thereby generating additional tax liability. At December 31, 1999, the remaining unamortized balance of the post-1987 reserves totaled $336,856 for which a deferred tax liability of $114,531 has been recorded. The legislation also provided that the Bank will not be required to recapture its pre-1988 statutory bad debt reserves if it ceases to meet the qualifying thrift definitional tests and if the Bank continues to qualify as a "bank" under existing provisions of the Internal Revenue Code. (10) 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 $27,228 and $24,991 to the plan for the years ended June 30, 1999 and 1998, respectively. The Bank contributed $16,703 and $12,622 to the plan for the periods ended December 31, 1999 and 1998, respectively. F-16 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (10 - continued) 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 year ended June 30, 1999 amounted to $31,099. Compensation expense recognized for the periods ended December 31, 1999 and 1998 amounted to $23,977 and $10,250, respectively. Company common stock held by the ESOP trust was as follows:

(11) 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 1998 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 $17,440 and $33,866 for the years ended June 30, 1999 and 1998, respectively. Deferred compensation expense for this plan was $7,781 and $8,720 for the periods ended December 31, 1999 and 1998, 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 $10,571 and $16,633 for the years ended June 30, 1999 and 1998, respectively. Deferred compensation expense for this plan was $3,012 and $5,218 for the periods ended December 31, 1999 and 1998, respectively. F-17 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (12) STOCK-BASED COMPENSATION PLAN 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. The Company has an incentive stock option plan that provides for issuance of up to 51,298 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 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 at the date of the grant. Options granted 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. As of December 31, 1999, only incentive stock options have been granted under the plan. The following is a summary of the Company's stock options as of June 30, 1999 and 1998, and the changes for the years then ended:

For options outstanding at December 31, 1999, the option price per share ranged from $5.07 to $7.80 and the weighted average remaining contractual life of the options was 6.9 years. For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair market value of stock options granted in fiscal years ended June 30, 1999, 1998, 1997 and 1995 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 in fiscal years ended June 30, 1999 and 1998:

F-18 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (12 - continued) Had compensation cost for the Company's stock-based compensation plans been determined in accordance with the fair value based accounting method provided by SFAS No. 123, the net income and net income per common share for the years ended June 30, 1999 and 1998 would have been as follows:

(13) 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 $272,000 at December 31, 1999. The following is a summary of the commitments to extend credit at December 31, 1999 and June 30, 1999 and 1998:

(14) 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 13). The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. F-19 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (14 - continued) 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 period ended December 31, 1999 and the years ended June 30, 1999 and 1998. (15) STOCKHOLDERS' EQUITY Capital Stock On December 31, 1998, the MHC and Bank completed a conversion and stock offering whereby the MHC was merged with and into the Bank with the Bank becoming a wholly-owned subsidiary of the Company which offered common stock to certain current and former depositor and borrower customers of the Bank in a subscription offering. The Company issued 768,551 shares of common stock (including 61,501 shares issued to the ESOP trust) for gross proceeds of $7,685,510 as a result of the offering. Total expenses in connection with the conversion and offering amounted to $449,382 and were charged against the proceeds from the offering. The Company also issued 532,057 common shares in exchange for the 204,015 common shares held by the public stockholders of the Bank pursuant to an exchange ratio resulting in the public stockholders of the Bank owning in the aggregate approximately 40.5% of First Capital, Inc. after the conversion and offering. Dividends The payment of dividends by the Bank is subject to regulation by the Office of Thrift Supervision (OTS). The Bank may not declare or pay a cash dividend or repurchase any of its capital stock if the effect thereof would cause the regulatory capital of the Bank to be reduced below regulatory capital requirements imposed by the OTS or below the amount of the liquidation account. Liquidation Account Upon completion of the conversion, the Bank established a liquidation account in an amount equal to the amount of the cumulative dividends with respect to the Bank's common stock waived by First Capital, Inc. MHC plus 59.5% of the Bank's stockholders' equity as of September 30, 1998 totaling $7.5 million. The liquidation account is maintained for the benefit of depositors as of the March 31, 1997 eligibility record date (or the September 30, 1998 supplemental eligibility record date) who maintain their deposits in the Bank after conversion. F-20 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (15 - continued) In the event of complete liquidation, and only in such an event, each eligible depositor will be entitled to receive a liquidation distribution from the liquidation account in the proportionate amount of the then current adjusted balance for deposits held, before any liquidation distribution may be made with respect to the stockholders. Except for the repurchase of stock and payment of dividends by the Bank, the existence of the liquidation account does not restrict the use or application of retained earnings of the Bank. (16) REGULATORY MATTERS The Company and its subsidiary are 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 disrectionary-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 Company and its subsidiary 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 Company and its subsidiary 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, 1999, that the Company and its subsidiary meet all capital adequacy requirements to which they are subject. As of December 31, 1999, the most recent notification from the OTS categorized the subsidiary bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the subsidiary bank must maintain minimum total risk- based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institutions' categories. The actual capital amounts and ratios are also presented in the table. No amounts were deducted from capital for interest-rate risk in either year.

F-21 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (16 - continued)

F-22 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value and estimated fair value of financial instruments are as follows:

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: Cash and Short-Term Investments For short-term investments, including cash and due from banks and interest bearing deposits with banks, the carrying amount is a reasonable estimate of fair value. Debt and Equity Securities For debt securities, including mortgage-backed securities, the fair values are based on quoted market prices. For restricted equity securities held for investment, the carrying amount is a reasonable estimate of fair value. Loans Receivable The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. F-23 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (17 - continued) 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. Borrowed Funds The fair value of advances from Federal Home Loan Bank is estimated by discounting the future cash flows using the current rates at which similar loans with the same remaining maturities could be obtained. Commitments to Extend Credit The majority of commitments to extend credit would result in loans with a market rate of interest if funded. The fair value of these commitments are the fees that would be charged to customers to enter into similar agreements. For fixed rate loan commitments, the fair value also considers the difference between current levels of interest rates and the committed rates. (18) PARENT COMPANY CONDENSED FINANCIAL INFORMATION Condensed financial information for First Capital, Inc. (parent company only) follows: Balance Sheets (In thousands)

F-24 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (18 - continued)

F-25 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (19) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE

Unearned ESOP shares are not considered as outstanding for purposes of computing the weighted-average common shares outstanding. (20) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

(21) PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma condensed combined balance sheet as of December 31, 1999 and the unaudited pro forma condensed combined statements of income for each of the years in the two-year period ended December 31, 1999 give effect to the merger with HCB, accounted for as a pooling of interests. The unaudited pro forma condensed combined financial information is based on the historical consolidated financial statements of the Company and HCB under the assumptions and adjustments set forth in the accompanying notes to the unaudited pro forma condensed combined financial statements, and gives effect to the merger as if the merger had been consummated on January 1, 1998. The unaudited pro forma condensed combined financial statements do not give effect to the anticipated cost savings in connection with the merger. F-26 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 (21 - continued) The unaudited pro forma condensed combined financial statements should be read in conjunction with the consolidated historical financial statements of the Company and HCB, including the respective notes to those statements. The pro forma information is not necessarily indicative of the combined financial position or the results of operations in the future or of the combined financial position or the results of operations which would have been realized had the merger been consummated during the periods or as of the dates for which the pro forma information is presented. Pro forma per share amounts for the combined company are based on the exchange ratio. Unaudited Pro Forma Condensed Combined Balance Sheet As of December 31, 1999

F-27 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 Unaudited Pro Forma Condensed Combined Statement of Income For the Year Ended December 31, 1999

F-28 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 Unaudited Pro Forma Condensed Combined Statement of Income For the Year Ended December 31,1998

F-29 FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998 Notes to the Unaudited Pro Forma Condensed Combined Financial Statements Basis of Presentation Under generally accepted accounting principles, the transaction was accounted for as a pooling of interests and, as such, the assets and liabilities of HCB were combined with those of the Company at book value. In addition, the statements of income of HCB were combined with the statements of income of the Company as of the earliest period presented. The unaudited pro forma condensed combined balance sheet assumes the merger was consummated on December 31, 1999. Certain reclassifications have been included in the unaudited pro forma condensed combined balance sheet and unaudited pro forma condensed combined statements of income to conform presentation. Accounting Policies and Financial Statement Classifications The accounting policies of both companies are in the process of being reviewed for consistency. As a result of this review, certain conforming accounting adjustments may be necessary. The nature and extent of these adjustments have not been determined but are not expected to be significant. Pro Forma Adjustments Pro forma adjustments to common stock and additional paid-in capital at December 31, 1999, reflect the merger accounted for as a pooling of interests, through: (1) the exchange of 1,238,837 shares of Company common stock (using the exchange ratio of 15.5) for 79,925 outstanding shares of HCB common stock at December 31, 1999, (2) the reclassification adjustment from common stock to additional paid-in capital to reflect the $.01 par value of Company common stock and (3) the cancellation of 25,000 shares of Company common stock held by HCB and classified as available for sale securities at December 31, 1999. The pro forma adjustments to interest income and income tax expense for the year ended December 31, 1999 reflects the elimination of income and the related income tax expense of HCB for dividends on the 25,000 shares of Company common stock held during 1999. The pro forma combined weighted average common shares outstanding for each of the years in the two-year period ended December 31, 1999, reflect the First Capital weighted average common shares outstanding plus the converted HCB weighted average common shares outstanding. Each share of HCB common stock was converted into 15.5 shares of Company common stock. F-30