FIRST CAPITAL INC — Interim / Quarterly Report 2000

Nov 14, 2000

SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB (Mark One) ---------- (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 ------------------ OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from__ to ___ Commission File No. 0-25023 ------- First Capital, Inc. ------------------- (Exact name of small business issuer as specified in its charter) Indiana 35-2056949 ------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 220 Federal Drive NW, Corydon, Indiana 47112 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 1-812-738-2198 -------------- Not applicable - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[ ] APPLICABLE ONLY TO CORPORATE ISSUERS; Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 2,537,324 shares of common stock were outstanding as of October 31, 2000. FIRST CAPITAL, INC. INDEX

-2- PART I - FINANCIAL INFORMATION FIRST CAPITAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited)

See accompanying notes to consolidated financial statements. -3- PART I - FINANCIAL INFORMATION FIRST CAPITAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

See accompanying notes to consolidated financial statements. -4- PART I - FINANCIAL INFORMATION FIRST CAPITAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying notes to consolidated financial statements. -5- FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Presentation of Interim Information First Capital, Inc. ("Company") was incorporated by First Harrison Bank (formerly 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 Bank's former mutual holding company, First Capital, Inc., M.H.C. ("MHC"), was merged with and into the Bank. Accordingly, the information presented in this report relates primarily to the Bank's operations. In the opinion of the management, the unaudited consolidated financial statements include all normal adjustments considered necessary to present fairly the financial position as of September 30, 2000, and the results of operations for the nine months ended September 30, 2000 and 1999 and cash flows for the nine months ended September 30, 2000 and 1999. All of these adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of results for a full year. The consolidated financial statements and notes are presented as permitted by Form 10-QSB, and do not contain certain information included in the Company's annual audited consolidated financial statements. The consolidated financial statements include the accounts of the Company, the Bank and the Bank's wholly-owned subsidiary, First Harrison Financial Services, Inc. (formerly HCB Insurance Agency, Inc.). (See Note 2) All material intercompany balances and transactions have been eliminated in consolidation. 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 was the parent company of Harrison County Bank, a state-chartered commercial bank, which was merged with and into the Bank. The merger provided for an exchange of 15.5 shares of the Company's common stock for each share of HCB common stock. The merger was accounted for as a pooling of interests and the consolidated financial statements give effect to the merger as if the merger had been consummated on January 1, 1999. -6- FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 3. Supplemental Disclosures of Cash Flow Information

1. Comprehensive Income Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income for the Company includes net income and other comprehensive income representing the net unrealized gains and losses on securities available for sale. The following tables set forth the components of other comprehensive income (loss) and the allocated income tax amounts for the three and nine months ended September 30, 2000 and 1999:

-7- FIRST CAPITAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (Unaudited) 5. Supplemental Disclosure for Earnings Per Share

-8- PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST CAPITAL, INC. AND SUBSIDIARY Safe Harbor Statement for Forward Looking Statements This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, rather statements based on the Company's current expectations regarding its business strategies and their intended results and its future performance. Forward- looking statements are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions. Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company's actual results, performance and achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; and other factors disclosed periodically in the Company's filings with the Securities and Exchange Commission. Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by the Company or on its behalf. The Company assumes no obligation to update any forward-looking statements. Financial Condition Total assets increased 8.3% from $222.8 million at December 31, 1999 to $241.1 million at September 30, 2000, primarily as a result of increases in interest bearing deposits with banks, investment securities and loans receivable, net, which were funded primarily by a decrease in federal funds sold, growth in deposits and an increase in advances from the Federal Home Loan Bank of Indianapolis. Loans receivable, net, were $155.0 million at December 31, 1999, compared to $172.2 million at September 30, 2000, an 11.1% increase. This increase is primarily the result of increases in residential and commercial mortgage loans and consumer loans. The investment in securities held-to-maturity decreased from $12.3 million at December 31, 1999 to $11.3 million at September 30, 2000 as a result of maturities of $947,000 and principal repayments of $89,000. Securities available for sale increased $5.4 million from $30.1 million at December 31, 1999 to $35.5 million at September 30, 2000 as a result of purchases of $6.9 million offset by maturities of $1.5 million and principal repayments of $397,000. Cash and interest bearing deposits with banks increased from $9.5 million at December 31, 1999 to $10.7 million at September 30, 2000 as a result of excess liquidity funded by growth in deposits. -9- PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST CAPITAL, INC. AND SUBSIDIARY Total deposits increased from $175.3 million at December 31, 1999 to $182.7 million at September 30, 2000. The increase in deposits resulted primarily from growth in demand and savings deposit accounts, which management attributes to the customers' positive reactions to the merger and its promotional efforts to attract lower cost accounts. Time deposits also increased $3.8 million from $90.3 million at December 31, 1999 to $94.1 million at September 30, 2000. Total stockholders' equity increased from $28.9 million at December 31, 1999 to $30.1 million at September 30, 2000 as a result of retained net income of $952,000 and a decrease in net unrealized loss on securities available for sale of $188,000. Results of Operations Net income for the nine month periods ended September 30, 2000 and 1999. Net income was $1.7 million ($.69 per share diluted) for the nine months ended September 30, 2000 compared to $1.4 million ($.58 per share diluted) for the nine months ended September 30, 1999. Net income increased for 2000 compared to 1999 primarily from an increase in net interest income offset by an increase in non-interest expenses. Net income for the three month periods ended September 30, 2000 and 1999. Net income was $632,000 ($.26 per share diluted) for the three months ended September 30, 2000 compared to $407,000 ($.17 per share diluted) for the three months ended September 30, 1999. Net income increased for 2000 compared to 1999 primarily from increases in net interest income and non-interest income and a decrease in non-interest expenses. Net interest income for the nine month periods ended September 30, 2000 and 1999. Net interest income increased 7.0% from $5.6 million in 1999 to $6.0 million in 2000 primarily as a result of the increase in interest-earning assets funded by growth in deposits and additional borrowings from the Federal Home Loan Bank of Indianapolis. Total interest income increased $1.7 million, or 14.9% to $12.8 million for the nine months ended September 30, 2000 compared to $11.1 million in the prior year primarily as a result of a higher average balance of interest earning assets. Interest on loans receivable increased $1.4 million and interest on securities increased $298,000 as a result of higher average balances in 2000. The average balance of loans receivable was $164.4 million for the nine month period ended September 30, 2000 compared to $142.9 million for the same period in 1999. The yield on interest earning assets increased from 7.69% in 1999 to 7.79% in 2000 due to increases in average interest rates for loans, securities and interest bearing deposits with banks. Total interest expense increased $1.3 million, or 23.0%, to $6.8 million for the nine months ended September 30, 2000 compared to $5.5 million for the nine months ended September 30, 1999 as a result of the growth in deposits and an increase in average borrowings from the Federal Home Loan Bank of Indianapolis. The average balances of interest bearing deposits and advances from the Federal Home Loan Bank were $169.1 million and $16.7 million, respectively, for the nine month period ended September 30, 2000 compared to $154.7 million and $11.3 million, respectively, for the same period in 1999. The average cost of funds increased from 4.42% in 1999 to 4.86% in 2000 due to the use of higher cost borrowed funds and an increase in market interest rates. -10- PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST CAPITAL, INC. AND SUBSIDIARY Net interest income for the three month periods ended September 30, 2000 and 1999. Net interest income increased from $1.9 million in 1999 to $2.0 million for 2000 primarily as a result of an increase in interest-earning assets offset by increases in interest-bearing deposits and advances from the Federal Home Loan Bank during the three months ended September 30, 2000 compared to 1999. Total interest income increased $618,000, or 15.9%, to $4.5 million for the three months ended September 30, 2000 compared to $3.9 million for the same period in 1999 primarily as a result of a higher average balance of loans receivable. The average balance of loans receivable was $171.6 million for the three month period ended September 30, 2000 compared to $149.4 million for the same period in 1999. Total interest expense increased $512,000, or 26.4%, to $2.4 million for the three months ended September 30, 2000 compared to $1.9 million for the three months ended September 30, 1999 due to higher average balances of interest bearing deposits and advances from the Federal Home Loan Bank. The average balances of interest bearing deposits and advances from the Federal Home Loan Bank were $170 million and $22.5 million, respectively, for the three month period ended September 30, 2000 compared to $158.5 million and $14.5 million, respectively, for the same period in 1999. Provision for loan losses. The provision for loan losses was $24,000 for the nine month period ended September 30, 2000 compared to $118,000 for the nine months ended September 30, 1999. For 1999, the provision was recorded to bring the allowance for loan losses to the level determined by applying the methodology for estimating credit losses after reduction for net charge-offs of consumer loans during the period. During 2000, the decline in the level of net charge-offs and nonperforming loans reduced the recorded provision based on the application of the allowance methodology, even though the Bank experienced overall growth in the loan portfolio. During the nine month period ended September 30, 2000, the net loan portfolio growth was $15.2 million. Commercial and residential real estate loans and consumer installment loans increased $12.1 million and $5.6 million, respectively, during this period, while commercial business loans decreased $2.5 million. The consistent application of management's allowance methodology did not result in an increase in the level of the allowance for loan losses due to lower levels of estimated inherent credit losses in residential, consumer and commercial real estate loans combined with the decrease in commercial business loans which have a higher level of inherent credit risk. The provision for loan losses was $24,000 for the three month period ended September 30, 2000 compared to $26,000 for the three months ended September 30, 1999. During these three month periods, the provisions were recorded to bring the allowance to the level determined in applying the allowance methodology after reduction for net charge-offs during the quarter. Provisions for loan losses are charged to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for estimated inherent losses based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specified impaired loans, and economic conditions. Although management uses the best information available, future adjustments to the allowance may be necessary due to changes in economic, operating, regulatory and other conditions that may be beyond the Bank's control. While the Bank maintains its allowance for loan losses at a level which it considers adequate to provide for estimated losses, there can be no assurance that further additions will not be made to the allowance for loan losses and that actual losses will not exceed the estimated amounts. At September 30, 2000, -11- PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST CAPITAL, INC. AND SUBSIDIARY nonperforming loans amounted to $443,000. Included in non-performing loans are loans over 90 days past due secured by one-to-four family residential real estate in the amount of $216,000. These loans are accruing interest as the estimated value of the collateral and collection efforts are deemed sufficient to ensure full recovery. Non-interest income for the nine month periods ended September 30, 2000 and 1999. Non-interest income increased 20.7% to $899,000 for the nine months ended September 30, 2000 compared to $745,000 for the nine months ended September 30, 1999. The increase is attributable to an increase in service charges on deposit accounts of $45,000 resulting from growth in transaction accounts, an increase in commission income of $38,000 due to increased investment product sales and an increase in other income of $46,000 resulting primarily from increases in automated teller machine and debit card fees. Non-interest income for the three month periods ended September 30, 2000 and 1999. Non-interest income increased 19.4% to $326,000 for the three months ended September 30, 2000 compared to $273,000 for the three months ended September 30, 1999. The increase is attributable primarily to an increase in gain on sale of mortgage loans due to a larger number of loans sold during 2000 compared to 1999 and an increase in other income of $21,000 resulting primarily from increases in automated teller machine and debit card fees. Non-interest expense for the nine month periods ended September 30, 2000 and 1999. Non-interest expense increased by $316,000 for the nine month period ended September 30, 2000 compared to the same period for the prior year. The increase results primarily from increases in compensation and benefits and other operating expenses. Compensation and benefits expense increased $243,000 due to normal compensation increases, compensation adjustments after the merger, additional staff for the new branch office in New Albany, Indiana opened during 1999 and the adoption of a stock compensation plan in the third quarter of 1999. Other operating expenses increased $63,000 during the nine month period ended September 30, 2000 primarily due to increases in automated teller machine processing fees, office supplies and public filing expenses offset by decreases in professional fees and merger related expenses. The increase in office supplies was merger related as the Company had to replace the existing stationery and office products with those bearing the new bank logo. The increase in automated teller machine processing fees related to the increase in the volume of transactions and the purchase of an additional machine for the new branch. Professional fees decreased due to merger related expenses incurred during the third quarter of 1999, offset by costs associated with the Company's change in fiscal year to a calendar year end and other expenses incurred as part of operating as a public company. Non-interest expense for the three month periods ended September 30, 2000 and 1999. Non-interest expense decreased by $112,000 for the three month period ended September 30, 2000 compared to the same period for the prior year. The decrease results primarily from decreases in other operating expenses offset by increases in compensation and benefits. Compensation and benefits expense increased $38,000 due to normal compensation increases. Other operating expenses decreased $151,000 during the three month period ended September 30, 2000 primarily due to decreases in professional fees and merger related expenses offset by an increase in automated teller machine processing fees. -12- PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST CAPITAL, INC. AND SUBSIDIARY Income tax expense. Income tax expense for the nine month period ended September 30, 2000 was $937,000, compared to $876,000 for the same period in 1999. The effective tax rate for the nine month period in 2000 is 35.6% compared to 38.0 % for 1999. Income tax expense for the three month period ended September 30, 2000 was $350,000, compared to $302,000 for the same period in 1999. The effective tax rate for the three month period in 2000 is 35.6% compared to 42.6% for 1999. The higher effective tax rates for 1999 compared to 2000 resulted from significant nondeductible merger related expenses incurred during the third quarter of 1999. Liquidity and Capital Resources The Bank's primary sources of funds are customer deposits, proceeds from loan repayments, maturing securities and FHLB advances. While loan repayments and maturities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. At September 30, 2000, the Bank had cash and interest-bearing deposits with banks of $10.7 million and securities available- for-sale with a fair value of $35.5 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. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. Current OTS regulations require savings institutions to maintain an average daily balance of liquid assets (cash and eligible investments) equal to at least 4.0% of the average daily balance of its net withdrawable deposits and short- term borrowings. Historically, the Bank has maintained liquidity levels in excess of regulatory requirements. The Bank is required to maintain specific amounts of capital pursuant to OTS requirements. As of September 30, 2000, 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 11.94%, 11.94% and 20.71%, respectively. The regulatory requirements at that date were 1.5%, 3.0% and 8.0%, respectively. -13- PART II OTHER INFORMATION FIRST CAPITAL, INC. Item 1. Legal Proceedings Periodically, there have been various claims and lawsuits involving the Bank, mainly as a plaintiff, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank's business. The Bank is not a party to any pending legal proceedings that it believes would have a material adverse affect on it's financial condition or operations. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K Exhibit ------- 27 Financial Data Schedule No reports on Form 8-K were filed during the period covered by this report. -14- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. FIRST CAPITAL, INC. (Registrant) Dated November 9, 2000 BY:/s/ William W. Harrod ----------------------- ----------------------- William W. Harrod President and CEO Dated November 9, 2000 BY:/s/ Michael C. Frederick ----------------------- --------------------------- Michael C. Frederick Chief Financial Officer -15-