First Capital (FCAP) 10-Q 2005 Q3 Quarterly report

UNITED STATES

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, 2005

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 incorporation or organization)	(I.R.S. Employer 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)

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2,592,038 shares of common stock were outstanding as of October 31, 2005.

FIRST CAPITAL, INC.

INDEX

		Page
Part I	Financial Information
	Item 1.Consolidated Financial Statements
	Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004 (unaudited)	3
	Consolidated Statements of Income for the three months and nine months ended September 30, 2005 and 2004 (unaudited)	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (unaudited)	5
	Notes to consolidated financial statements (unaudited)	6
	Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
	Item 3.Quantitative and Qualitative Disclosures About Market Risk	17
	Item 4.Controls and Procedures	19
Part II	Other Information
	Item 1.Legal Proceedings	20
	Item 2.Unregistered Sales of Equity Securities and Use of Proceeds	20
	Item 3.Defaults Upon Senior Securities	20
	Item 4.Submission of Matters to a Vote of Security Holders	21
	Item 5.Other Information	21
	Item 6.Exhibits	21
Signatures		23

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PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2005			December 31, 2004
	(In thousands)
ASSETS
Cash and due from banks	$	13,215		$	14,191
Interest bearing deposits with banks		2,502			2,175
Fed funds sold		591			1,059
Total cash and cash equivalents		16,308			17,425
Securities available for sale, at fair value		76,831			65,192
Securities-held to maturity		1,204			1,258
Loans, net		319,050			317,086
Loans held for sale		282			510
Federal Home Loan Bank stock, at cost		3,746			3,668
Foreclosed real estate		640			442
Premises and equipment		9,445			9,896
Accrued interest receivable		2,230			2,104
Cash value of life insurance		1,299			1,269
Goodwill		5,386			5,386
Core deposit intangibles		481			536
Other assets		755			530
Total Assets	$	437,657		$	425,302
LIABILITIES
Deposits:
Noninterest-bearing	$	33,667		$	33,801
Interest-bearing		290,589			282,661
Total Deposits		324,256			316,462
Retail repurchase agreements		10,002			635
Advances from Federal Home Loan Bank		58,647			65,099
Accrued interest payable		1,333			1,286
Accrued expenses and other liabilities		1,577			1,106
Total Liabilities		395,815			384,588
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 2,852,509 shares (2,846,457 shares in 2004)		29			28
Additional paid-in capital		19,390			19,278
Retained earnings-substantially restricted		28,413			26,888
Unearned ESOP shares		(267	)		(328	)
Unearned stock compensation		(2	)		(3	)
Accumulated other comprehensive income (loss)		(339	)		29
Less treasury stock, at cost - 260,471 shares (249,742 shares in 2004)		(5,382	)		(5,178	)
Total Stockholders’ Equity		41,842			40,714
Total Liabilities and Stockholders’ Equity	$	437,657		$	425,302

See accompanying notes to consolidated financial statements.

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PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2004		2005			2004
	(In thousands, except per share data)
INTEREST INCOME
Loans receivable, including fees	$	5,193		$	4,845	$	15,110		$	14,331
Securities
Taxable		599			486		1,650			1,462
Tax-exempt		160			152		479			443
Federal Home Loan Bank dividends		45			38		123			110
Interest bearing deposits with banks		49			9		169			41
Total interest income		6,046			5,530		17,531			16,387
INTEREST EXPENSE
Deposits		1,831			1,482		5,129			4,340
Retail repurchase agreements		100			1		178			2
Advances from Federal Home Loan Bank		734			807		2,296			2,407
Total interest expense		2,665			2,290		7,603			6,749
Net interest income		3,381			3,240		9,928			9,638
Provision for loan losses		150			100		463			345
Net interest income after provision for loan losses		3,231			3,140		9,465			9,293
NON-INTEREST INCOME
Service charges on deposit accounts		543			498		1,575			1,427
Commission income		93			58		283			241
Gain on sale of mortgage loans		26			60		192			97
Mortgage brokerage fees		40			33		134			103
Other income		25			30		84			107
Total non-interest income		727			679		2,268			1,975
NON-INTEREST EXPENSE
Compensation and benefits		1,392			1,444		4,342			4,288
Occupancy and equipment		281			264		847			775
Data processing		178			201		561			582
Professional fees		92			73		277			258
Advertising		85			75		240			194
Other operating expenses		437			463		1,381			1,311
Total non-interest expense		2,465			2,520		7,648			7,408
Income before income taxes		1,493			1,299		4,085			3,860
Income tax expense		518			443		1,382			1,310
Net Income	$	975		$	856	$	2,703		$	2,550
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Unrealized gain (loss) on securities:
Unrealized holding gains (losses) arising during the period		(226	)		650		(368	)		(169	)
Less: reclassification adjustment		—			—		—			—
Other comprehensive income (loss)		(226	)		650		(368	)		(169	)
Comprehensive Income	$	749		$	1,506	$	2,335		$	2,381
Net income per common share, basic	$	0.38		$	0.31	$	1.05		$	0.92
Net income per common share, diluted	$	0.38		$	0.30	$	1.04		$	0.91

See accompanying notes to consolidated financial statements.

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PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2005			2004
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,703		$	2,550
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and accretion of discounts		110			178
Depreciation and amortization expense		617			606
Deferred income taxes		172			108
ESOP and stock compensation expense		119			167
Increase in cash value of life insurance		(30	)		(31	)
Provision for loan losses		463			345
Proceeds from sales of mortgage loans		13,030			5,120
Mortgage loans originated for sale		(12,610	)		(5,597	)
Net gain on sale of mortgage loans		(192	)		(97	)
Stock dividends on Federal Home Loan Bank stock		(78	)		(111	)
(Increase) decrease in accrued interest receivable		(126	)		177
Increase in accrued interest payable		47			13
Net change in other assets/liabilities		288			725
Net Cash Provided By Operating Activities		4,513			4,153
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale		(22,466	)		(19,212	)
Proceeds from maturities of securities available for sale		6,023			19,675
Proceeds from maturities of securities held to maturity		25			166
Principal collected on mortgage-backed securities		4,136			3,423
Net increase in loans receivable		(3,299	)		(17,105	)
Purchase of Federal Home Loan Bank stock		—			(425	)
Proceeds from sale of foreclosed real estate		674			282
Purchase of premises and equipment		(111	)		(330	)
Net Cash Used In Investing Activities		(15,018	)		(13,526	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		7,794			9,587
Net increase (decrease) in advances from Federal Home Loan Bank		(6,452	)		4,007
Net increase (decrease) in retail repurchase agreements		9,367			(225	)
Exercise of stock options		61			18
Purchase of treasury stock		(203	)		(232	)
Dividends paid		(1,179	)		(1,250	)
Net Cash Provided By Financing Activities		9,388			11,905
Net Increase (Decrease) in Cash and Cash Equivalents		(1,117	)		2,532
Cash and cash equivalents at beginning of period		17,425			13,561
Cash and Cash Equivalents at End of Period	$	16,308		$	16,093

See accompanying notes to consolidated financial statements.

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FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Presentation of Interim Information

First Capital, Inc. (“Company”) is the holding company for First Harrison Bank (“Bank”). The information presented in this report relates primarily to the Bank’s operations. During 2004, the Bank established three wholly-owned subsidiaries to manage a portion of its investment securities portfolio. First Harrison Investments, Inc. and First Harrison Holdings, Inc. are Nevada corporations that jointly own First Harrison, LLC, a Nevada limited liability corporation that holds and manages an investment portfolio.

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, 2005, and the results of operations for the three and nine months ended September 30, 2005 and 2004 and cash flows for the nine months ended September 30, 2005 and 2004. 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, 2004 included in the Form 10-K.

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. 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, 2005 and 2004:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
	(In thousands)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	$	(374	)	$	1,076		$	(610	)	$	(280	)
Income tax (expense) benefit		148			(426	)		242			111
Net of tax amount		(226	)		650			(368	)		(169	)
Less: reclassification adjustment for gains included in net income		—			—			—			—
Income tax benefit		—			—			—			—
Net of tax amount		—			—			—			—
Other comprehensive income (loss)	$	(226	)	$	650		$	(368	)	$	(169	)

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FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3. Supplemental Disclosure for Earnings Per Share

	Three Months Ended				Nine Months Ended
	9/30/2005		9/30/2004		9/30/2005		9/30/2004
	(Dollars in thousands, except for share and per share data)
Basic
Earnings:
Net income	$	975	$	856	$	2,703	$	2,550
Shares:
Weighted average common shares outstanding		2,566,627		2,774,524		2,565,757		2,774,604
Net income per common share, basic	$	0.38	$	0.31	$	1.05	$	0.92
Diluted
Earnings:
Net income	$	975	$	856	$	2,703	$	2,550
Shares:
Weighted average common shares outstanding		2,566,627		2,774,524		2,565,757		2,774,604
Add: Dilutive effect of outstanding options		23,422		29,892		25,459		32,216
Add: Dilutive effect of restricted stock		65		2,939		237		2,692
Weighted average common shares outstanding, as adjusted		2,590,114		2,807,355		2,591,453		2,809,512
Net income per common share, diluted	$	0.38	$	0.30	$	1.04	$	0.91

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FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4. 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,
	2005			2004			2005			2004
	(In thousands, except per share data)
Net income, as reported	$	975		$	856		$	2,703		$	2,550
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(6	)		(6	)		(18	)		(17	)
Pro forma net income	$	969		$	850		$	2,685		$	2,533
Earnings per share:
Basic - as reported	$	0.38		$	0.31		$	1.05		$	0.92
Basic - pro forma	$	0.38		$	0.31		$	1.05		$	0.92
Diluted - as reported	$	0.38		$	0.30		$	1.04		$	0.91
Diluted - pro forma	$	0.38		$	0.30		$	1.04		$	0.91

5. Supplemental Disclosures of Cash Flow Information

	Nine Months Ended September 30,
	2005		2004
	(In thousands)
Cash payments for:
Interest	$	7,556	$	6,736
Taxes		1,244		1,116
Noncash investing activities:
Transfers from loans to real estate acquired through foreclosure		839		928

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

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, but rather are 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; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the year ended December 31, 2004 under “Item 1. Business-Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

Financial Condition

Total assets increased from $425.3 million at December 31, 2004 to $437.7 million at September 30, 2005, an increase of 2.9%.

Net loans receivable (excluding loans held for sale) increased $2.0 million from $317.1 million at December 31, 2004 to $319.1 million at September 30, 2005. Home equity lines of credit increased $1.7 million during this period. Commercial and consumer loans also increased $1.2 million and $1.1 million, respectively. Residential mortgage loans decreased by $2.8 million during the period as the Bank originated and sold or acted as a mortgage broker on residential mortgages totaling $21.6 million, of which $11.1 million of the loan proceeds were used to pay off existing loans in the Bank’s portfolio. These loans were sold to help better manage interest rate risk. These changes in the loan portfolio are evidence of the Bank’s effort to transform the balance sheet from a traditional thrift institution to that of a commercial bank.

Securities available for sale increased $11.6 million to $76.8 million at September 30, 2005. Purchases of these securities totaled $22.5 million while maturities and principal repayments were $6.0 million and $4.1 million, respectively. This increase was funded primarily with increases in public funds on deposit.

Investment securities held-to-maturity decreased $54,000 primarily due to principal repayments of $27,000 and maturities of $25,000.

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Cash and cash equivalents decreased from $17.4 million at December 31, 2004 to $16.3 million at September 30, 2005. A $1.0 million decrease in cash and due from banks was the primary cause for the decrease.

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

Total deposits increased 2.5% from $316.5 million at December 31, 2004 to $324.3 million at September 30, 2005. Time deposits and checking accounts increased $6.1 million and $5.0 million during the period. Savings accounts decreased $3.3 million as customers moved their funds to certificates of deposit and money-market deposit accounts as interest rates continued to rise.

Federal Home Loan Bank borrowings decreased from $65.1 million at December 31, 2004 to $58.6 million at September 30, 2005. New advances of $6.5 million were offset by principal repayments of $13.0 million.

Retail repurchase agreements increased from $635,000 at December 31, 2004 to $10.0 million at September 30, 2005. This increase was primarily due to the Bank’s successful efforts to acquire local public funds which are held in retail repurchase accounts in connection with sweep account agreements.

Total stockholders’ equity increased from $40.7 million at December 31, 2004 to $41.8 million at September 30, 2005. This increase was primarily the result of retained net income of $1.5 million offset by a net unrealized loss of $368,000 on securities available for sale and payments of $203,000 for treasury stock.

Results of Operations

Net Income for the nine-month periods ended September 30, 2005 and 2004.Net income was $2.7 million ($1.04 per share diluted) for the nine months ended September 30, 2005 compared to $2.6 million ($0.91 per share diluted) for the nine months ended September 30, 2004. The Company experienced increases in net interest income after the provision for loan losses and noninterest income, offset by an increase in noninterest expenses. Part of the increase in earnings per share is due to the Company repurchasing approximately 221,000 shares of its stock in December 2004, thereby lowering the number of weighted average shares used in the earnings per share calculation. As of September 30, 2005, the Company had repurchased 260,471 shares of the 345,000 originally authorized in the repurchase plan.

Net Income for the three-month periods ended September 30, 2005 and 2004.Net income was $975,000 ($0.38 per share diluted) for the three months ended September 30, 2005 compared to $856,000 ($0.30 per share diluted) for the same period in 2004. This increase was due to increases in net interest income after the provision for loan losses and noninterest income and a decrease in noninterest expense.

Net interest income for the nine-month periods ended September 30, 2005 and 2004.Net interest income increased $290,000 to $9.9 million in 2005 compared to $9.6 million in 2004.

Total interest income increased $1.1 million during the nine months ended September 30, 2005 compared to the same period in 2004. The average balance of interest-earning assets and their tax-equivalent yield increased from $388.2 million and 5.72% in 2004 to $402.4 million and 5.89% in 2005 primarily due to a 24 basis point increase in the average loan yield.

Total interest expense increased $854,000 during the nine months ended September 30, 2005 compared to the same period ended the prior year. The average balance of interest-bearing liabilities

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increased from $337.6 million in 2004 to $352.7 million in 2005 while the average rate on these liabilities increased from 2.67% in 2004 to 2.87% in 2005. As a result, the Bank’s tax-equivalent interest rate spread decreased from 3.05% during the first nine months of 2004 to 3.02% for the same period in 2005.

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

Net interest income for the three-month periods ended September 30, 2005 and 2004.Net interest income increased from $3.2 million for the three months ended September 30, 2004 to $3.4 million for the same period in 2005 primarily due to growth in interest-earning assets.

Total interest income increased $516,000 for the three months ended September 30, 2005 compared to the same period in 2004. This increase was caused by increases in the average balance of interest-earning assets and the tax-equivalent yield on those assets. For the quarter ended September 30, 2004, those totaled $391.6 million and 5.74%, respectively, but increased during the same period in 2005 to $405.3 million and 6.05%.

Total interest expense increased $375,000 for the three months ended September 30, 2005 compared to the same period in 2004. While the average balance of interest-bearing liabilities increased from $339.3 million in 2004 to $356.1 million in 2005, the average cost of these liabilities increased from 2.69% in 2004 to 2.99% in 2005. As a result, the interest rate spread increased from 3.05% to 3.06% when comparing the two periods.

Provision for loan losses. The provision for loan losses was $150,000 for the three-month period ended September 30, 2005 as compared to $100,000 for the same period in 2004. Net charge offs amounted to $85,000 and $198,000 for the three-month periods ended September 30, 2005 and 2004, respectively. The provision for loan losses was $463,000 for the nine-month period ended September 30, 2005 as compared to $345,000 for the same period in 2004. During the nine-month period ended September 30, 2005, gross loans receivable increased $1.7 million while net charge offs amounted to $767,000. Net charge offs totaled $363,000 for the nine-month period ended September 30, 2004. As stated earlier in this report, residential mortgages decreased $2.8 million during the nine-month period ended September 30, 2005 while home equity lines of credit, commercial and consumer loans increased $1.7 million, $1.2 million and $1.1 million, respectively. The consistent application of management’s allowance methodology resulted in an increase in the provision for loan losses due to the increased amount of net charge offs for the nine-month period ended September 30, 2005 compared to the same period in 2004.

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.

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

The allowance for loan losses was $2.2 million at September 30, 2005 compared to $2.5 million at December 31, 2004. 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, 2005, nonperforming loans amounted to $3.1 million compared to $3.6 million at December 31, 2004. During the quarter ended September 30, 2005, nonperforming loans increased $958,000. Included in nonperforming loans are loans over 90 days past due secured by residential mortgages in the amount of $713,000, commercial mortgages of $310,000, commercial loans amounting to $18,000 and consumer 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, 2005, nonaccrual loans amounted to $2.0 million compared to $2.1 million at December 31, 2004.

Noninterest income for the nine-month periods ended September 30, 2005 and 2004. Noninterest income increased 14.8% to $2.3 million for the nine months ended September 30, 2005 compared to $2.0 million for the nine months ended September 30, 2004. Service charges on deposit accounts and gains on the sale of mortgage loans increased $148,000 and $95,000 when comparing the two periods.

Noninterest income for the three-month periods ended September 30, 2005 and 2004. Noninterest income for the quarter ended September 30, 2005 increased to $727,000 compared to $679,000 for the quarter ended September 30, 2004. Service charges on deposit accounts accounted for this increase as well, increasing $45,000.

Noninterest expense for the nine-month periods ended September 30, 2005 and 2004. Noninterest expense increased 3.2% to $7.6 million for the nine months ended September 30, 2005 compared to $7.4 million for the same period in 2004. Occupancy and equipment expense increased $72,000 primarily due to increases in equipment depreciation and maintenance.

Other operating expenses increased $70,000 when comparing the first nine months of 2005 to the same period in 2004. Increases in charitable contributions, correspondent bank charges and postage expense contributed primarily to this increase.

Noninterest expense for the three-month periods ended September 30, 2005 and 2004. Noninterest expense for the quarter ended September 30, 2005 decreased 2.2%, or $55,000, when compared to the quarter ended September 30, 2004. Compensation and benefits decreased $52,000 when comparing the two periods, primarily due to decreases in stock compensation expense and employee salaries.

Other operating expenses decreased $26,000 when comparing the third quarter of 2005 to the same period in 2004. Decreases in telephone and office supply expenses contributed primarily to this decrease.

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

Income tax expense. Income tax expense for the nine-month period ended September 30, 2005 was $1.4 million, compared to $1.3 million for the same period in 2004. The effective tax rate decreased from 33.9% in 2004 to 33.8% in 2005. Income tax expense for the three-month period ended September 30, 2005 was $518,000, compared to $443,000 for the same quarter in 2004. The effective tax rate was 34.1% for the third quarter 2004 compared to 34.7% for the same period in 2005.

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, 2005, the Bank had cash and cash equivalents of $16.3 million and securities available-for-sale with a fair value of $76.8 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB of Indianapolis and additional 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 regulatory requirements. As of September 30, 2005, 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 8.2%, 8.2% and 13.9%, respectively. The regulatory requirements at that date were 1.5%, 3.0% and 8.0%, respectively. At September 30, 2005, the Bank was considered “well-capitalized” under applicable regulatory guidelines.

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 2004 Annual Report to Stockholders, filed as an exhibit to the Form 10-K for the year ended December 31, 2004.

For the nine months ended September 30, 2005, 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.

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

Recent Accounting Pronouncements

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

In December 2004, the Financial Accounting Standards Board (FASB) issued a revision of SFAS 123,Share-Based Payment. This statement requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements based on the grant date fair value of the award. The compensation cost will be recognized over the period that an employee is required to provide service in exchange for the award (the requisite service period) which is usually the vesting period. This statement requires public companies other than small business issuers to apply its provisions as of the first interim reporting period that begins after June 15, 2005. On April 15, 2005, the SEC announced it would permit calendar year registrants to continue to follow the guidance in SFAS 123 throughout 2005 and implement the new rules reflected in SFAS 123R beginning January 1, 2006. The Company plans to adopt the new rules beginning with the deferred effective date. This statement will apply to the Company’s stock option plan awards. Under the statement’s transition provisions, compensation cost is recognized on or after the effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant date fair value of those awards calculated under this statement. The adoption of this statement is not expected to have a material impact on the Company’s financial condition or results of operations.

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

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PART I – ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

FIRST CAPITAL, INC.

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.

The following tables are provided by the OTS and set forth the change in the Bank’s NPV at December 31, 2004 and June 30, 2005, 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 low level of market interest rates at December 31, 2004, the table for that date provides information for only a sustained 100 basis point decrease in market interest rates. However, due to increasing market interest rates at June 30, 2005, that table provides information for a sustained 200 basis point increase as well. Given the timing of the release of this information by the OTS, information as of September 30, 2005 is unavailable for inclusion in this report.

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PART I – ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

FIRST CAPITAL, INC.

	At December 31, 2004
	Net Portfolio Value							Net Portfolio Value as a Percent of Present Value of Assets
Change In Rates	Dollar Amount		Dollar Change			Percent Change
								NPV Ratio		Change
	(Dollars in thousands)
300bp	$	39,696	$	(9,586	)	(19	)%	9.50	%	(173	)bp
200bp		44,144		(5,138	)	(10	)	10.36		(87	)bp
100bp		47,771		(1,511	)	(3	)	11.02		(21	)bp
Static		49,282		—		—		11.23		—	bp
(100)bp		47,665		(1,617	)	(3	)	10.79		(44	)bp

	At June 30, 2005
	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	$	42,342	$	(9,363	)	(18	)%	9.83	%	(163	)bp
200bp		46,578		(5,127	)	(10	)	10.62		(84	)bp
100bp		50,110		(1,595	)	(3	)	11.24		(22	)bp
Static		51,705		—		—		11.46		—	bp
(100)bp		49,807		(1,898	)	(4	)	10.97		(49	)bp
(200)bp		45,617		(6,088	)	(12	)	10.04		(142	)bp

The preceding tables indicate that in the event of a sudden and sustained increase or decrease in prevailing market interest rates, the Bank’s NPV would be expected to decrease. The expected decrease in the Bank’s NPV is primarily attributable to the relatively high percentage of fixed-rate loans in the Bank’s loan portfolio. At June 30, 2005 and September 30, 2005, approximately 65% and 66%, 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.

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PART I - ITEM 4

CONTROLS AND PROCEDURES

FIRST CAPITAL, INC.

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.

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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

Issuer Purchases of Equity Securities

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, 2005	156	19.25	156	89,800
August 1 through August 31, 2005	5,259	18.35	5,259	84,541
September 1 through September 30, 2005	—	—	—	84,541
Total	5,415	18.38	5,415	84,541

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

Item 3. Defaults upon Senior Securities

Not applicable.

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PART II

OTHER INFORMATION

FIRST CAPITAL, INC.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

None.

Item 6. 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 J. Gordon Pendleton (3)
10.2	Employment Agreement with Samuel E. Uhl (2)
10.3	Employment Agreement with Michael C. 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)

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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.

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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 14, 2005	BY:	/s/ William W. Harrod
		William W. Harrod
		President and CEO
Dated November 14, 2005	BY:	/s/ Michael C. Frederick
		Michael C. Frederick
		Senior Vice President and Treasurer

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