First Capital (FCAP) 10-Q 2004 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(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, 2004

OR

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

For the transition period from            to            

Commission File No. 0-25023

First Capital, Inc.

(Exact name of registrant 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 812-738-2198

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The Registrant had 2,816,109 shares of common stock, par value $0.01 per share, outstanding as of October 28, 2004.

FIRST CAPITAL, INC.

INDEX

			Page
Part I	Financial Information
	Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 (unaudited)		3
	Consolidated Statements of Income for the three months and nine months ended September 30, 2004 and 2003 (unaudited)		4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 (unaudited)		5
	Notes to consolidated financial statements (unaudited)		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15
	Item 4.	Controls and Procedures	17
Part II	Other Information
	Item 1.	Legal Proceedings	18
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
	Item 3.	Defaults Upon Senior Securities	19
	Item 4.	Submission of Matters to a Vote of Security Holders	19
	Item 5.	Other Information	19
	Item 6.	Exhibits	19
Signatures			21
Exhibits

- 2 -

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2004			December 31, 2003
	(In thousands)
ASSETS
Cash and due from banks	$	13,244		$	12,190
Interest bearing deposits with banks		2,849			1,371
Securities available for sale, at fair value		61,978			66,244
Securities-held to maturity		1,264			1,507
Loans held for sale		574			—
Loans, net		320,197			304,200
Federal Home Loan Bank stock, at cost		3,630			3,094
Foreclosed real estate		706			225
Premises and equipment		10,070			10,291
Accrued interest receivable:
Loans		1,437			1,407
Securities		560			767
Cash value of life insurance		1,259			1,228
Goodwill		5,386			5,386
Core deposit intangibles		554			609
Other assets		526			619
Total Assets	$	424,234		$	409,138
LIABILITIES
Deposits:
Noninterest-bearing	$	34,162		$	30,535
Interest-bearing		277,893			271,933
Total Deposits		312,055			302,468
Retail repurchase agreements		295			520
Advances from Federal Home Loan Bank		64,249			60,242
Accrued interest payable		1,173			1,160
Accrued expenses and other liabilities		1,497			853
Total Liabilities		379,269			365,243
STOCKHOLDERS’ EQUITY
Preferred stock of $.01 par value per share; authorized 1,000,000 shares; none issued		—			—
Common stock of $.01 par value per share; authorized 5,000,000 shares; issued 2,845,331 shares (2,843,763 shares in 2003)		28			28
Additional paid-in capital		19,249			19,183
Retained earnings-substantially restricted		26,392			25,092
Unearned ESOP shares		(348	)		(400	)
Unearned stock compensation		(21	)		(73	)
Accumulated other comprehensive income		212			380
Less treasury stock, at cost - 29,194 shares (18,639 shares - 2003)		(547	)		(315	)
Total Stockholders’ Equity		44,965			43,895
Total Liabilities and Stockholders’ Equity	$	424,234		$	409,138

See accompanying notes to consolidated financial statements.

- 3 -

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2004		2003			2004			2003
	(In thousands, except per share data)
INTEREST INCOME
Loans receivable, including fees	$	4,845	$	4,746		$	14,331		$	13,509
Securities:
Taxable		486		548			1,462			1,706
Tax-exempt		152		141			443			394
Federal Home Loan Bank dividends		38		37			110			112
Interest bearing deposits with banks		9		34			41			131
Total interest income		5,530		5,506			16,387			15,852
INTEREST EXPENSE
Deposits		1,482		1,460			4,340			4,299
Retail repurchase agreements		1		—			2			1
Advances from Federal Home Loan Bank		807		729			2,407			2,202
Total interest expense		2,290		2,189			6,749			6,502
Net interest income		3,240		3,317			9,638			9,350
Provision for loan losses		100		275			345			600
Net interest income after provision for loan losses		3,140		3,042			9,293			8,750
NON-INTEREST INCOME
Service charges on deposit accounts		498		471			1,427			1,319
Commission income		58		63			241			208
Gain on sale of securities		—		—			—			51
Gain on sale of mortgage loans		60		—			97			14
Mortgage brokerage fees		33		38			103			38
Other income		30		13			107			59
Total non-interest income		679		585			1,975			1,689
NON-INTEREST EXPENSE
Compensation and benefits		1,444		1,228			4,288			3,475
Occupancy and equipment		264		280			775			730
Data processing		201		189			582			566
Other operating expenses		611		560			1,763			1,670
Total non-interest expense		2,520		2,257			7,408			6,441
Income before income taxes		1,299		1,370			3,860			3,998
Income tax expense		443		484			1,310			1,391
Net Income	$	856	$	886		$	2,550		$	2,607
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Unrealized gain (loss) on securities:
Unrealized holding gains (losses) arising during the period		650		(674	)		(169	)		(561	)
Less: reclassification adjustment		—		—			—			(31	)
Other comprehensive income (loss)		650		(674	)		(169	)		(592	)
Comprehensive Income	$	1,506	$	212		$	2,381		$	2,015
Net income per common share, basic	$	0.31	$	0.32		$	0.92		$	0.97
Net income per common share, diluted	$	0.30	$	0.32		$	0.91		$	0.96

See accompanying notes to consolidated financial statements.

- 4 -

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2004			2003
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,550		$	2,607
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and accretion of discounts on securities		178			310
Depreciation and amortization expense		606			516
Deferred income taxes		108			321
ESOP compensation expense		114			64
Stock compensation expense		53			53
Increase in cash value of life insurance		(31	)		(40	)
Provision for loan losses		345			600
Net gain on sale of securities available for sale		—			(51	)
Proceeds from sales of mortgage loans		5,120			705
Mortgage loans originated for sale		(5,597	)		(691	)
Net gain on sale of mortgage loans		(97	)		(14	)
Stock dividends on Federal Home Loan Bank stock		(111	)		(76	)
Decrease in accrued interest receivable		177			56
Increase (decrease) in accrued interest payable		13			(184	)
Net change in other assets/liabilities		725			273
Net Cash Provided By Operating Activities		4,153			4,449
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits with banks		(1,478	)		17,583
Purchase of securities available for sale		(19,212	)		(26,077	)
Proceeds from maturities of securities available for sale		19,675			17,000
Proceeds from maturities of securities held to maturity		166			118
Proceeds from sale of securities available for sale		—			2,551
Principal collected on mortgage-backed securities		3,423			9,280
Net increase in loans receivable		(17,105	)		(14,906	)
Purchase of Federal Home Loan Bank stock		(425	)		(64	)
Proceeds from sale of Federal Reserve Bank stock		—			180
Proceeds from sale of foreclosed real estate		282			—
Purchase of premises and equipment		(330	)		(1,120	)
Net cash paid in acquisition of Hometown Bancshares, Inc.		—			(5,726	)
Net Cash Used By Investing Activities		(15,004	)		(1,181	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits		9,587			(1,229	)
Net increase in advances from Federal Home Loan Bank		4,007			21
Net decrease in retail repurchase agreements		(225	)		(386	)
Exercise of stock options		18			71
Purchase of treasury stock		(232	)		(160	)
Dividends paid		(1,250	)		(1,103	)
Net Cash Provided (Used) By Financing Activities		11,905			(2,786	)
Net Increase in Cash and Due From Banks		1,054			482
Cash and due from banks at beginning of period		12,190			6,610
Cash and Due From Banks at End of Period	$	13,244		$	7,092

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. (the “Company”) is the holding company for First Harrison Bank (the “Bank”). The information presented in this report relates primarily to the Bank’s operations.

In the opinion of management, the unaudited consolidated financial statements include all normal adjustments considered necessary to present fairly the financial position as of September 30, 2004, and the results of operations for the three and nine months ended September 30, 2004 and 2003 and cash flows for the nine months ended September 30, 2004 and 2003. All of these adjustments are of a normal, recurring nature. Such adjustments are the only adjustments included in the unaudited consolidated financial statements. Interim results are not necessarily indicative of results for a full year.

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with generally accepted accounting principles for interim financial statements and are presented as permitted by the instructions to Form 10-Q. Accordingly, they do not contain certain information included in the Company’s annual audited consolidated financial statements and related footnotes for the year ended December 31, 2003 included in the Form 10-K.

The unaudited consolidated financial statements include the accounts of the Company and the Bank. All material intercompany balances and transactions have been eliminated in consolidation.

2. 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 and the allocated tax amounts for the three and nine months ended September 30, 2004 and 2003:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	(In thousands)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	$	1,076		$	(1,116	)	$	(280	)	$	(929	)
Income tax (expense) benefit		(426	)		442			111			368
Net of tax amount		650			(674	)		(169	)		(561	)
Less: reclassification adjustment for gains included in net income		—			—			—			(51	)
Income tax expense		—			—			—			20
Net of tax amount		—			—			—			(31	)
Other comprehensive income (loss)	$	650		$	(674	)	$	(169	)	$	(592	)

- 6 -

FIRST CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3. Merger with Hometown Bancshares, Inc.

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

Pursuant to the terms of the merger agreement, Hometown stockholders who elected to receive Company stock received 2.487 shares of Company common stock and Hometown shareholders who elected to receive cash received $46.50 in cash for each share of Hometown common stock. Hometown stockholders who did not submit properly completed election forms within the required timeframe received 0.773 shares of Company common stock and $32.05 in cash for each share of Hometown common stock. The Company issued 285,446 shares of common stock and paid approximately $5.4 million in cash consideration to former Hometown stockholders. The value assigned to the common shares issued in the transaction was approximately $6.1 million determined by the average closing price of the Company’s common stock over a twenty- day period ending March 17, 2003. The transaction was accounted for under the purchase method of accounting. Accordingly, the results of operations of Hometown have been included in the Company’s results of operations since the date of acquisition. Under the purchase method of accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. The excess of cost over the fair value of the net assets acquired of approximately $5.4 million has been recorded as goodwill.

4. Supplemental Disclosure for Earnings Per Share

	Three Months Ended				Nine Months Ended
	9/30/2004		9/30/2003		9/30/2004		9/30/2003
	(Dollars in thousands, except for share and per share data)
Basic
Earnings:
Net income	$	856	$	886	$	2,550	$	2,607
Shares:
Weighted average common shares outstanding		2,774,524		2,772,387		2,774,604		2,686,597
Net income per common share, basic	$	0.31	$	0.32	$	0.92	$	0.97
Diluted
Earnings:
Net income	$	856	$	886	$	2,550	$	2,607
Shares:
Weighted average common shares outstanding		2,774,524		2,772,387		2,774,604		2,686,597
Add: Dilutive effect of outstanding options		29,892		29,402		32,216		31,674
Add: Dilutive effect of restricted stock		2,939		4,425		2,692		4,230
Weighted average common shares outstanding, as adjusted		2,807,355		2,806,214		2,809,512		2,722,501
Net income per common share, diluted	$	0.30	$	0.32	$	0.91	$	0.96

- 7 -

FIRST CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5. Stock Option Plan

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	(In thousands, except per share data)
Net income, as reported	$	856		$	886		$	2,550		$	2,607
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(6	)		(3	)		(17	)		(8	)
Pro forma net income	$	850		$	883		$	2,533		$	2,599
Earnings per share:
Basic - as reported	$	0.31		$	0.32		$	0.92		$	0.97
Basic - pro forma	$	0.31		$	0.32		$	0.92		$	0.97
Diluted - as reported	$	0.30		$	0.32		$	0.91		$	0.96
Diluted - pro forma	$	0.30		$	0.32		$	0.91		$	0.96

- 8 -

FIRST CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6. Supplemental Disclosures of Cash Flow Information

	Nine Months Ended September 30,
	2004		2003
	(In thousands)
Cash payments for:
Interest	$	6,736	$	6,458
Taxes		1,116		1,371
Noncash investing activities:
Transfers from loans to real estate acquired through foreclosure		928		261
Acquisition of Hometown Bancshares, Inc. (Note 3)
Assets acquired		—		96,885
Liabilities assumed		—		85,122
Net assets acquired	$	—	$	11,763
Cash paid	$	—	$	5,626
Stock issued		—		6,137
Total purchase price	$	—	$	11,763

- 9 -

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. Except as required by applicable law or regulation, the Company assumes no obligation to update any forward-looking statements.

Financial Condition

Total assets increased to $424.2 million at September 30, 2004 from $409.1 million at December 31, 2003, an increase of 3.7%. When compared to September 30, 2003, the asset growth was $25.2 million.

Net loans receivable (excluding loans held for sale) increased to $320.2 million at September 30, 2004 from $304.2 million at December 31, 2003. The primary growth occurred in home equity lines of credit, increasing $6.0 million. Commercial loans and residential mortgages also increased $3.7 million and $2.8 million, respectively.

Securities available for sale decreased to $62.0 million at September 30, 2004 from $66.2 million at December 31, 2003. The Bank had purchases of $19.2 million offset by maturities of $19.7 million and principal payments of $3.3 million. The funds from the portfolio were used to help fund the previously-described loan growth.

Cash and short-term investments increased to $16.1 million at September 30, 2004 from $13.6 million at December 31, 2003 due to a temporary increase in the balance of overnight funds held at the Federal Reserve.

- 10 -

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC. AND SUBSIDIARY

Total deposits increased to $312.1 million at September 30, 2004 from $302.5 million at December 31, 2003, an increase of 3.2%. Checking and savings accounts increased $13.4 million during the period while time deposits decreased $3.8 million. Hometown National Bank had a large number of customers with jumbo certificates and no other deposit relationship. The Bank made a strategic decision not to give a rate premium on these jumbo certificates without attracting the customers’ primary deposit accounts. This decision has helped attract new savings and checking deposits while better managing interest expense by not paying a premium for jumbo certificates without other deposit relationships.

Federal Home Loan Bank borrowings increased $4.0 million to $64.2 million at September 30, 2004. New advances of $19.2 million were partially offset by principal payments of $15.2 million.

Total stockholders’ equity increased $1.1 million to $45.0 million at September 30, 2004 compared to $43.9 million at December 31, 2003. This was primarily the result of retained net income of $1.3 million offset by $232,000 in treasury stock purchases and a net unrealized loss of $169,000 on securities available for sale.

Results of Operations

Net income for the nine-month periods ended September 30, 2004 and 2003.Net income was $2.6 million ($0.91 per share diluted) for the nine months ended September 30, 2004 compared to $2.6 million ($0.96 per share diluted) for the nine months ended September 30, 2003. The Company experienced increases in net interest income after the provision for loan losses and noninterest income, offset by an increase in noninterest expenses.

Net income for the three-month periods ended September 30, 2004 and 2003.Net income was $856,000 ($0.30 per share diluted) for the three months ended September 30, 2004 compared to $886,000 ($0.32 per share diluted) for the same period in 2003. Increases in net interest income after the provision for loan losses and noninterest income were offset by an increase in noninterest expenses.

Net interest income for the nine-month periods ended September 30, 2004 and 2003.Net interest income increased to $9.6 million in 2004 from $9.4 million in 2003. This 3.1% increase was primarily due to an increase in earning assets offset by a decrease in the tax-equivalent interest rate spread.

Total interest income increased $535,000 to $16.4 million when comparing the first nine months of 2004 to the same period in 2003. The average balance of interest-earning assets for 2004 was $388.2 million compared to $348.0 million for the prior year. The average tax-equivalent yield on these assets decreased to 5.72% in 2004 from 6.16% in 2003 primarily due to continued refinancing of residential mortgages and, to a lesser extent, an increase in lower-yielding, adjustable-rate loans.

Total interest expense increased $247,000 during the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 primarily due to an increase of $205,000 in interest on borrowed funds. The average balance of interest-bearing liabilities increased to $337.6 million in 2004 from $302.6 million in 2003 while the average rate on these liabilities decreased to 2.67% in 2004 from 2.87% in 2003. As a result, the tax-equivalent interest rate spread decreased to 3.05% during the first nine months of 2004 from 3.29% for the same period in 2003.

- 11 -

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, 2004 and 2003.Net interest income decreased from $3.3 million for the three months ended September 30, 2003 to $3.2 million for the same period in 2004 primarily due to a decrease in the tax-equivalent yield on interest-earning assets.

Total interest income increased $24,000 for the three months ended September 30, 2004 compared to the same period in 2003. The increase was caused by a $19.6 million increase in the average balance of interest-earning assets offset by a decrease in the tax-equivalent yield on interest-earning assets to 5.74% during the three months ended September 30, 2004 compared to 6.00% for the same period in 2003.

Total interest expense increased $101,000 for the three months ended September 30, 2004 compared to the same period in 2003. The average balance of interest-bearing liabilities increased to $339.3 million in 2004 from $324.4 million in 2003 while the average cost of these liabilities remained relatively unchanged, decreasing to 2.69% in 2004 from 2.70% in 2003. As a result, the interest rate spread decreased to 3.05% in 2004 from 3.30% in 2003.

Provision for loan losses. The provision for loan losses was $345,000 for the nine-month period ended September 30, 2004 compared to $600,000 for the same period in 2003. During 2004, gross loans receivable increased $16.0 million. A significant portion of that growth is attributable to a $3.0 million short-term loan to a local municipality for which the source of repayment is tax revenues. Other significant increases include home equity lines of credit and commercial loans, increasing $6.0 million and $3.7 million, respectively. However, the consistent application of management’s allowance methodology resulted in a decrease in the provision for loan losses due to the lower levels of nonperforming loans at September 30, 2004 compared to December 31, 2003.

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

The methodology used in determining the allowance for loan losses includes segmenting the loan portfolio by identifying risk characteristics common to groups of loans, determining and measuring impairment of individual loans based on the present value of expected future cash flows or the fair value of collateral, and determining and measuring impairment for groups of loans with similar characteristics by applying loss factors that consider the qualitative factors which may affect the loss rates.

- 12 -

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC. AND SUBSIDIARY

The allowance for loan losses was $2.4 million at September 30, 2004 and December 31, 2003. Management has deemed these amounts as adequate on those dates based on its best estimate of probable known and inherent loan losses. At September 30, 2004, nonperforming loans amounted to $4.1 million compared to $5.2 million at December 31, 2003. Included in nonperforming loans are loans over 90 days past due secured by commercial mortgages in the amount of $809,000, residential mortgages of $564,000, consumer loans amounting to $23,000 and commercial loans of $17,000. These loans are accruing interest as the estimated value of the collateral and collection efforts are deemed sufficient to ensure full recovery. At September 30, 2004, nonaccrual loans amounted to $2.7 million compared to $2.6 million at December 31, 2003.

Noninterest income for the nine-month periods ended September 30, 2004 and 2003. Noninterest income increased 16.9% to $2.0 million for the nine months ended September 30, 2004 compared to $1.7 million for the nine months ended September 30, 2003. Service charges on deposits increased $108,000 when comparing the two periods, primarily due to an increase of 949 transaction accounts when comparing September 30, 2004 to September 30, 2003. Gains on the sale of loans and mortgage brokerage fees increased $83,000 and $65,000, respectively, when comparing the two periods.

Noninterest income for the three-month periods ended September 30, 2004 and 2003. Noninterest income for the quarter ended September 30, 2004 increased 16.1% to $679,000 compared to $585,000 for the quarter ended September 30, 2003. During this period in 2004, the Bank recognized gains of $60,000 on the sale of mortgage loans. The Bank did not sell mortgage loans during the same period of 2003.

Noninterest expense for the nine-month periods ended September 30, 2004 and 2003. Noninterest expense increased 15.0% to $7.4 million for the nine months ended September 30, 2004 compared to $6.4 million for the same period in 2003. Compensation and benefits increased $813,000 when comparing the two periods due to an increase in staff caused by three new offices, the two Hometown National Bank locations (see Note 3) and the new Jeffersonville, Indiana office that opened in May 2003, and by a reduction in the deferral of direct loan origination costs. The low interest rates of 2003 and corresponding large number of mortgage refinancings led to a reduction of compensation and benefits expense of $446,000 during the nine months ended September 30, 2003. For the same period in 2004, the Bank recorded deferrals of direct loan origination costs of $230,000 as the pace of loan originations declined.

Other operating expenses increased $93,000 during the nine months ended September 30, 2004 compared to September 30, 2003. Charitable contributions and expenses on foreclosed property contributed $28,000 each to this increase.

Noninterest expense for the three-month periods ended September 30, 2004 and 2003. Noninterest expense increased 11.7% to $2.5 million for the three months ended September 30, 2004 compared to $2.3 million for the same period in 2003. Compensation and benefits increased by $216,000 to account for the majority of this increase, primarily due to a $125,000 reduction in compensation and benefit costs deferred in connection with loan originations.

Other operating expenses increased $51,000 when comparing the two periods. Expenses on foreclosed property and advertising fees increased $19,000 and $11,000, respectively.

- 13 -

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, 2004 was $1.3 million, compared to $1.4 million for the same period in 2003. The effective tax rate decreased to 33.9% in 2004 from 34.8% in 2003 primarily due to an increase in tax-exempt income in 2004. Income tax expense for the three-month period ended September 30, 2004 was $443,000, compared to $484,000 for the same quarter in 2003. The effective tax rate was 34.1% for the third quarter 2004 compared to 35.3% for the same period in 2003.

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, 2004, the Bank had cash and interest-bearing deposits with banks of $16.1 million and securities available-for-sale with a fair value of $62.0 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.

The Bank is required to maintain specific amounts of capital pursuant to OTS requirements. As of September 30, 2004, the Bank was in compliance with all regulatory capital requirements, which were effective as of such date with tangible, core and risk-based capital ratios of 9.1%, 9.1% and 14.5%, respectively. The minimum regulatory requirements at that date were 1.5%, 3.0% and 8.0%, respectively.

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded on the Company’s financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are primarily used to manage customers’ requests for funding and take the form of loan commitments and letters of credit. A further presentation of the Company’s off-balance sheet arrangements is presented in the Company’s Form 10-K for the year ended December 31, 2003.

For the three and nine months ended September 30, 2004, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.

- 14 -

PART I – ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

FIRST CAPITAL, INC. AND SUBSIDIARY

Qualitative Aspects of Market Risk. The Bank’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Bank has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. In order to reduce the exposure to interest rate fluctuations, the Bank has developed strategies to manage its liquidity, shorten its effective maturities of certain interest-earning assets and decrease the interest rate sensitivity of its asset base. Management has sought to decrease the average maturity of its assets by emphasizing the origination of short-term commercial and consumer loans, all of which are retained by the Bank for its portfolio. The Bank relies on retail deposits as its primary source of funds. Management believes retail deposits, compared to brokered deposits, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds.

Quantitative Aspects of Market Risk. The Bank does not maintain a trading account for any class of financial instrument nor does the Bank engage in hedging activities or purchase high-risk derivative instruments. Furthermore, the Bank is not subject to foreign currency exchange rate risk or commodity price risk.

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

The following tables are provided by the OTS and set forth the change in the Bank’s NPV at December 31, 2003 and June 30, 2004, based on OTS assumptions that would occur in the event of an immediate change in interest rates, with no effect given to any steps that management might take to counteract that change. Due to the level of market interest rates over these time periods, the tables provide information for only a sustained 100 basis point decrease in market interest rates. Given the timing of the release of this information by the OTS, information as of September 30, 2004 is unavailable for inclusion in this report.

- 15 -

PART I – ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

FIRST CAPITAL, INC. AND SUBSIDIARIES

	At December 31, 2003
	Net Portfolio Value							Net Portfolio Value as a Percent of Present Value of Assets
Change In Rates	Dollar Amount		Dollar Change			Percent Change		NPV Ratio		Change
	(Dollars in thousands)
300bp	$	34,141	$	(12,197	)	(26	)%	8.60	%	(240	)bp
200bp		38,863		(7,474	)	(16	)	9.58		(142	)bp
100bp		43,158		(3,179	)	(7	)	10.43		(57	)bp
Static		46,337		—		—		11.00		—	bp
(100)bp		45,463		(874	)	(2	)	10.70		(30	)bp
	At June 30, 2004
	Net Portfolio Value							Net Portfolio Value as a Percent of Present Value of Assets
Change In Rates	Dollar Amount		Dollar Change			Percent Change		NPV Ratio		Change
	(Dollars in thousands)
300bp	$	38,103	$	(13,177	)	(26	)%	9.41	%	(253	)bp
200bp		43,101		(8,179	)	(16	)	10.43		(151	)bp
100bp		47,676		(3,604	)	(7	)	11.31		(64	)bp
Static		51,280		—		—		11.94		—	bp
(100)bp		51,648		369		1		11.89		(5	)bp

The preceding tables indicate that in the event of a sudden and sustained increase in prevailing market interest rates, the Bank’s NPV would be expected to decrease. The expected decrease in the Bank’s NPV is primarily attributable to the relatively high percentage of fixed-rate loans in the Bank’s loan portfolio. At December 31, 2003 and September 30, 2004, approximately 71% and 69%, respectively, of the loan portfolio consisted of fixed-rate loans.

Certain assumptions utilized by the OTS in assessing the interest rate risk of savings associations within its region were utilized in preparing the preceding table. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under differing interest rate scenarios, among others.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the table.

- 16 -

PART I - ITEM 4

CONTROLS AND PROCEDURES

FIRST CAPITAL, INC. AND SUBSIDIARY

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

- 17 -

PART II

OTHER INFORMATION

FIRST CAPITAL, INC.

Item 1. Legal Proceedings

The Company is not a party to any 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 its financial condition or operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid Per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 through July 31, 2004	402	20.50	402	317,840
August 1 through August 31, 2004	2,025	20.25	2,025	315,815
September 1 through September 30, 2004	—	—	—	315,815
Total	2,427	20.29	2,427	315,815

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

The Company has purchased nine shares of its common stock from the First Harrison Bank Employee Stock Ownership Plan representing the aggregate amount of fractional shares of terminated participants.

- 18 -

PART II

OTHER INFORMATION

FIRST CAPITAL, INC.

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
	None.
Item 6.	Exhibits
	Exhibits
	3.1	Articles of Incorporation of First Capital, Inc. (1)
	3.2	Second Amended and Restated Bylaws of First Capital, Inc. (6)
	10.1	Employment Agreement with James G. Pendleton (3)
	10.2	Employment Agreement with Samuel E. Uhl (2)
	10.3	Employment Agreement with M. Chris Frederick (2)
	10.4	Employment Agreement with Joel E. Voyles (2)
	10.5	Employee Severance Compensation Plan (3)
	10.6	First Federal Bank, A Federal Savings Bank 1994 Stock Option Plan (as assumed by First Capital, Inc. effective December 31, 1998) (4)
	10.7	First Capital, Inc. 1999 Stock-Based Incentive Plan (5)
	10.8	1998 Officers’ and Key Employees’ Stock Option Plan for HCB Bancorp (5)
	10.9	Employment Agreement with William W. Harrod (2)
	11.0	Statement Regarding Computation of Per Share Earnings (incorporated by reference to Note 4 of the Unaudited Consolidated Financial contained herein)

- 19 -

PART II

OTHER INFORMATION

FIRST CAPITAL, INC.

Item 6.	Exhibits - (continued)
	31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
	31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
	32.1 Section 1350 Certification of Chief Executive Officer
	32.2 Section 1350 Certification of Chief Financial Officer
	(1)    Incorporated by reference from the Exhibits filed with the Registration Statement on Form SB-2, and any amendments thereto, Registration No. 333-63515.
	(2)    Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 1999.
	(3)    Incorporated by reference to the Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998.
	(4)    Incorporated by reference from the Exhibits filed with the Registration Statement on Form S-8, and any amendments thereto, Registration Statement No. 333-76543.
	(5)    Incorporated by reference from the Exhibits filed with the Registration Statement on Form S-8, and any amendments thereto, Registration Statement No. 333-95987.
	(6)    Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 2001.

- 20 -

SIGNATURES

Pursuant to the requirements 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.
	(Registrant)
Dated November 12, 2004	BY:	/s/ William W. Harrod
		William W. Harrod
		President and Chief Executive Officer
		(Principal Executive Officer)
Dated November 12, 2004	BY:	/s/ Michael C. Frederick
		Michael C. Frederick
		Senior Vice President and Treasurer
		(Principal Financial and Accounting Officer)

- 21 -