EXHIBIT 13
FIRST CAPITAL, INC.
TABLE OF CONTENTS
Page
Letter to Stockholders............................................ 2
Selected Financial and Other Data................................. 3-4
Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 5-15
Independent Auditor's Report...................................... 16
Consolidated Financial Statements................................. 17-20
Notes to Consolidated Financial Statements........................ 21-42
Board of Directors................................................ 43
Corporate Information............................................. 44-45
BUSINESS OF THE COMPANY
First Capital, Inc. (the Company) is the thrift holding company of First
Harrison Bank (the Bank).
The Bank's deposit accounts are insured up to applicable legal limits by the
Federal Deposit Insurance Corporation through the Savings Association Insurance
Fund. The Bank is a member of the Federal Home Loan Bank System. The Bank
conducts its operations through its nine locations in Southern Indiana. The
Bank's main office is located at 220 Federal Drive, N.W., Corydon, Indiana. The
telephone number is (812) 738-2198.
The Bank is a community-oriented financial institution offering traditional
financial services primarily to residents of Harrison County, Indiana, and
contiguous counties. The Bank's primary business is attracting deposits from the
general public and using those funds to originate one-to-four family residential
mortgage loans. The Bank also originates multi-family and commercial real estate
loans primarily secured by properties located in Southern Indiana. To a lesser
extent, the Bank originates commercial and consumer loans. The Bank's
wholly-owned subsidiary, First Harrison Financial Services, Inc., sells property
and casualty insurance and non-deposit investment products.
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[GRAPHIC APPEARS HERE]
Dear Shareholders:
Management and the Board of Directors of First Capital, Inc. would like to thank
our shareholders, customers, and staff for helping reach our goals in 2002.
We are very proud of our stock appreciation from $14.40 per share on January 2nd
to $20.33 per share on December 30th. This increase ranks us as one of the best
performing stocks in the state of Indiana.
We had a busy year while meeting the demands of our long-term strategic plan.
Our announcement of the new office in Jeffersonville will further help us
position the Company as one of the strongest financial service providers in
southern Indiana. We anticipate this office opening in May and look forward to
the additional growth opportunities this new office will provide.
In September we announced our intent to merge with Hometown Bancshares, Inc.,
the parent company for Hometown National Bank in New Albany, Indiana. Everything
is on target to close this transaction and merge the bank into First Harrison
Bank by the end of the first quarter. We are excited about the opportunities
this offers us to further expand our market share in Floyd County, Indiana. Our
plan is to become a major competitor in markets we serve and merging the
customers and the excellent staff of Hometown National Bank will offer us this
opportunity in Floyd County and New Albany.
During the year we completed our technology upgrade, which will pay long-term
benefits to customers and staff. We improved our teller systems to make them
more efficient and allow them to better serve our customers. Our loan department
has gone through many internal changes to better serve customers and to help the
staff become more efficient in their daily jobs.
As always we cannot thank our staff enough for their personal commitment to the
communities we serve. The bank is able to give financially, but that cannot
measure up to the amount of time our staff has given to programs like Relay for
Life, United Way, Big Brothers-Big Sisters, American Heart Association, Harrison
County 4H, reading programs at the county jail, and our continued business
partnership with New Middletown School.
Our belief is all these things lead to improved value for our shareholders. You
can count on our continued hard work in these and many other areas. We are proud
of our past and look forward to a bright future. Thank you for your continued
support.
Sincerely,
/s/ William Harrod /s/ J. Gordon Pendleton
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William Harrod J. Gordon Pendleton
President CEO Chairman of the Board
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SELECTED FINANCIAL AND OTHER DATA
The financial data presented below is qualified in its entirety by the more
detailed financial data appearing elsewhere in this report, including the
Company's audited financial statements. The following tables set forth certain
information concerning the financial position and results of operations of the
Company at the dates indicated.
FINANCIAL CONDITION DATA: AT DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(In thousands)
Total assets $ 308,553 $ 282,823 $ 248,582 $ 222,797 $ 191,350
Cash and interest-bearing deposits (1) 12,653 12,382 11,468 9,522 16,459
Securities available for sale 64,980 54,891 34,779 30,097 22,302
Securities held to maturity 1,474 1,836 11,229 12,325 6,140
Loans receivable, net 215,996 201,730 179,304 154,982 135,379
Deposits 216,202 204,122 185,368 175,342 155,495
Advances from Federal Home Loan Bank 53,320 42,825 30,074 16,750 5,250
Stockholders' equity, substantially restricted 36,330 33,481 31,107 28,877 28,930
OPERATING DATA: FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(In thousands)
Interest income $ 18,912 $ 18,960 $ 17,363 $ 15,101 $ 13,506
Interest expense 8,802 9,842 9,267 7,566 6,848
------------ ------------ ------------ ------------ ------------
Net interest income 10,110 9,118 8,096 7,535 6,658
Provision for loan losses 305 66 48 142 83
------------ ------------ ------------ ------------ ------------
Net interest income after provision for loan losses 9,805 9,052 8,048 7,393 6,575
------------ ------------ ------------ ------------ ------------
Noninterest income 1,737 1,706 1,219 1,031 898
Noninterest expense (2) 6,531 5,945 5,629 5,574 4,390
------------ ------------ ------------ ------------ ------------
Income before income taxes 5,011 4,813 3,638 2,850 3,083
Income tax expense 1,763 1,714 1,180 1,080 1,077
------------ ------------ ------------ ------------ ------------
Net Income $ 3,248 $ 3,099 $ 2,458 $ 1,770 $ 2,006
============ ============ ============ ============ ============
PER SHARE DATA:
Net income - basic $ 1.31 $ 1.26 $ 1.00 $ 0.72 $ 0.79
Net income - diluted 1.30 1.25 1.00 0.71 0.79
Dividends 0.52 0.48 0.41 0.35 N/A
Dividends of pooled affiliate (3) N/A N/A N/A 0.39 0.39
Dividends to minority stockholders prior to conversion N/A N/A N/A N/A 0.27
(1) Includes interest-bearing deposits in other depository institutions.
(2) Includes merger related expenses of $439,000 in 1999.
(3) Includes dividends paid by HCB Bancorp which merged with and into First
Capital, Inc. on January 12, 2000.
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SELECTED FINANCIAL AND OTHER DATA - CONTINUED
SELECTED FINANCIAL RATIOS: AT AND FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
PERFORMANCE RATIOS:
Return on assets (1) 1.10% 1.17% 1.05% 0.84% 1.00%
Return on average equity (2) 9.32% 9.49% 8.27% 6.05% 7.81%
Dividend payout ratio (3) 39.90% 38.52% 41.40% 51.38% 42.78%
Average equity to average assets 11.77% 12.31% 12.64% 13.95% 12.81%
Interest rate spread (4) 3.16% 3.01% 2.99% 3.16% 3.18%
Net interest margin (5) 3.70% 3.73% 3.75% 3.86% 3.96%
Non-interest expense to average assets 2.20% 2.24% 2.39% 2.66% 2.48%
Average interest earning assets to
average interest bearing liabilities 117.39% 118.41% 118.30% 118.01% 119.11%
REGULATORY CAPITAL RATIOS:
Tier I - adjusted total assets 10.92% 11.25% 11.92% 12.13% 13.51%
Tier I - risk based 18.83% 19.67% 19.97% 19.64% 22.90%
Total risk-based 19.52% 20.36% 20.63% 19.64% 23.91%
ASSET QUALITY RATIOS:
Nonperforming loans as a percent of
loans receivable, net (6) 0.62% 0.62% 0.32% 0.13% 0.27%
Nonperforming assets as a
percent of total assets (7) 0.47% 0.52% 0.28% 0.21% 0.19%
Allowance for loan losses as a percent
of gross loans receivable 0.55% 0.54% 0.64% 0.75% 0.90%
- ----------
(1) Net income divided by average assets.
(2) Net income divided by average equity.
(3) Dividends declared per share divided by net income per share. The dividend
payout ratio for 1998 was computed considering only the dividends to the
minority shareholders of First Federal Bank and their proportionate share
of net income prior to conversion from mutual to stock form. Prior to the
conversion on December 31, 1998, First Capital, Inc., M.H.C., a federally-
chartered mutual holding company, was the majority owner of First Federal
Bank and, with the approval of the OTS, elected to waive the receipt of
dividends.
(4) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Nonperforming loans consist of loans accounted for on a nonaccrual basis
and accruing loans 90 days or more past due.
(7) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans, but exclude restructured loans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Bank's results of operations depend primarily on net interest income, which
is the difference between the income earned on its interest-earning assets, such
as loans and investments, and the cost of its interest-bearing liabilities,
consisting primarily of deposits and borrowings from the Federal Home Loan Bank
of Indianapolis. The Bank's net income is also affected by, among other things,
fee income, provisions for loan losses, operating expenses and income tax
provisions. The Bank's results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government legislation and policies concerning monetary and
fiscal affairs, housing and financial institutions and the intended actions of
the regulatory authorities.
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company and the Bank. The information contained in
this section should be read in conjunction with the consolidated financial
statements and the accompanying notes to consolidated financial statements
included elsewhere in this report.
OPERATING STRATEGY
The Company is the parent company to an independent community-oriented financial
institution that delivers quality customer service and offers a wide range of
deposit, loan and investment products to its customers. The Company has no other
material income other than that generated by the Bank and the Bank's
wholly-owned subsidiary, First Harrison Financial Services, Inc., which sells
property and casualty insurance and non-deposit investment products.
The Bank's primary business strategy is attracting deposits from the general
public and using those funds to originate one-to-four family residential
mortgage loans. The Bank's lending activity also includes multi-family
residential loans, commercial real estate and business loans and consumer loans.
The Bank invests excess liquidity primarily in interest-bearing deposits with
the Federal Home Loan Bank of Indianapolis and other financial institutions,
U.S. government and agency securities, local municipal obligations and, to a
lesser extent, mortgage-backed securities.
In recent years, the Company's operating strategy has also included enhancing
profitability by increasing sources of non-interest income and improving
operating efficiency while managing its capital and limiting its credit risk and
interest rate risk exposures. To accomplish these objectives, the Company has
focused on the following:
.. Control credit risk by focusing on the origination of one-to-four family
residential mortgage loans and consumer loans, consisting primarily of home
equity loans and lines of credit while increasing the market share of
commercial real estate and small business loans.
.. Provide quality customer service by expanding and upgrading the branch
offices, introducing Internet banking and broadening its commercial deposit
and loan products.
.. Capitalize on the efficiencies, personnel and opportunities following the
merger with HCB Bancorp in January 2000.
.. Increase fee income from non-deposit investment products and providing
property and casualty insurance.
.. Continue to invest in technology to increase productivity and efficiency.
.. Engage in a capital management strategy to repurchase Company stock and pay
dividends to enhance shareholder value.
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PENDING MERGER
On September 25, 2002, the Company and Hometown Bancshares, Inc. (Hometown), a
bank holding company for Hometown National Bank in New Albany, Indiana, entered
into an agreement and plan of merger whereby each of the issued and outstanding
common shares of Hometown will be exchanged for shares of the Company's common
stock or $46.50 in cash per share. The number of shares of the Company's common
stock to be exchanged for each share of Hometown's common stock will be based on
the average closing price of the Company's common stock over a twenty day
trading period shortly before the closing of the merger. Elections to receive
stock, cash or a combination of stock and cash by the Hometown shareholders will
be limited by a requirement that 50% of the total number of outstanding shares
of Hometown's common stock be exchanged for Company common stock. The merger is
subject to regulatory and shareholder approvals. The merger is expected to be
completed in March 2003.
FORWARD LOOKING STATEMENTS
This report may contain forward-looking statements within the meaning of the
federal securities laws. These statements are not historical facts, rather
statements based on the Company's current expectations regarding its business
strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends" and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous
risks and uncertainties could cause or contribute to the Company's actual
results, performance and achievements to be materially different from those
expressed or implied by the forward-looking statements. Factors that may cause
or contribute to these differences include, without limitation, general economic
conditions, including changes in market interest rates and changes in monetary
and fiscal policies of the federal government; legislative and regulatory
changes; and other factors disclosed periodically in the Company's filings with
the Securities and Exchange Commission.
Because of the risks and uncertainties inherent in forward-looking statements,
readers are cautioned not to place undue reliance on them, whether included in
this report or made elsewhere from time to time by the Company or on its behalf
by its authorized officers. Except as may be required by applicable law and
regulation, the Company assumes no obligation to update any forward-looking
statements.
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CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company comply with accounting
principles generally accepted in the United States of America and conform to
general practices within the banking industry. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions. The financial position and results
of operations can be affected by these estimates and assumptions, which are
integral to understanding reported results. Critical accounting policies are
those policies that require management to make assumptions about matters that
are highly uncertain at the time an accounting estimate is made; and different
estimates that the Company reasonably could have used in the current period, or
changes in the accounting estimate that are reasonably likely to occur from
period to period, would have a material impact on the Company's financial
condition, changes in financial condition, or results of operations. Most
accounting policies are not considered by management to be critical accounting
policies. Several factors are considered in determining whether or not a policy
is critical in the preparation of financial statements. These factors include,
among other things, whether the estimates are significant to the financial
statements, the nature of the estimates, the ability to readily validate the
estimates with other information including third parties or available prices,
and sensitivity of the estimates to changes in economic conditions and whether
alternative accounting methods may be utilized under generally accepted
accounting principles.
Significant accounting policies, including the impact of recent accounting
pronouncements, are discussed in Note 1 of the Notes to Consolidated Financial
Statements. Those policies considered to be critical accounting policies are
described below.
Allowances for Loan Losses. Management's evaluation of the adequacy of the
allowance for loan losses is the most critical of accounting estimates for a
financial institution. The methodology for determining the allowance for loan
losses and the related provision for loan losses is described below in
"Allowance for Loan Losses". This accounting estimate is highly subjective and
requires a significant amount of judgment because a multitude of factors can
influence the ultimate collection of a loan. The methodology for determining the
allowance for loan losses attempts to identify the amount of probable losses in
the loan portfolio. However, there can be no assurance that the methodology will
successfully identify all probable losses as the factors and conditions that
influence the estimate are subject to significant change and management's
judgments. As a result, additional provisions for loan losses may be required
that would adversely impact earnings in future periods.
Valuation Methodologies. In the ordinary course of business, management applies
various valuation methodologies to assets and liabilities which often involve a
significant degree of judgment, particularly when active markets do not exist
for the items being valued. Generally, in evaluating various assets for
potential impairment, management compares the fair value to the carrying value.
Quoted market prices are referred to when estimating fair values for certain
assets, such as investment securities. However, for those items for which
market-based prices do not exist, management utilizes significant estimates and
assumptions to value such items. Examples of these items include capitalized
servicing assets, estimated present value of impaired loans, deferred
compensation plans, value ascribed to stock-based compensation and certain other
financial investments. The use of different assumptions could produce
significantly different results, which could have material positive or negative
effects on the Company's results of operations. Specific discussion of
assumptions and estimates utilized by management are discussed in detail in the
accompanying notes 1, 5, 13, 14 and 19 of Notes to Consolidated Financial
Statements.
Income Taxes. The accounting for income taxes requires the asset and liability
approach for financial accounting and reporting for deferred income taxes. See
Notes 1 and 11 in the accompanying Notes to Consolidated Financial Statements.
As part of the process of preparing the consolidated financial statements,
management estimates the income taxes in each of the taxing jurisdictions in
which the Company operates. This process involves estimating the actual current
tax exposure together with assessing temporary differences resulting from
differing treatment of items for financial accounting and tax purposes, such as
depreciation, loan fees and costs, loan losses, compensation plans and
unrealized securities gains and losses. These differences result in deferred tax
assets and liabilities, which are included in the consolidated balance sheet.
Management must assess the likelihood that deferred tax assets will be recovered
from future taxable income and to the extent that recovery is not likely
establish a valuation allowance. Significant management judgment is required in
determining the provision for income taxes, the deferred tax assets and
liabilities and any valuation allowance recorded against net deferred tax
assets. To the extent a valuation allowance is recorded or increased, an expense
is recognized within the tax provisions in the statement of income.
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COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2002 AND 2001
Total assets increased 9.1% from $282.8 million at December 31, 2001 to $308.6
million at December 31, 2002, primarily as a result of increases in investment
securities and loans receivable, net, that were funded by growth in deposits and
advances from the Federal Home Loan Bank of Indianapolis.
Loans receivable, net, were $201.7 million at December 31, 2001 compared to
$216.0 million at December 31, 2002, a 7.1% increase. The loan growth is
attributable primarily to an 8.5% increase in residential mortgage and
construction loans and a 43.8% growth in home equity and second mortgage loans.
Residential mortgage and construction loans were $142.8 million at December 31,
2001, compared to $155.0 million at December 31, 2002 and home equity and second
mortgage loans increased from $13.0 million at December 31, 2001 to $18.6
million at December 31, 2002. Also, commercial real estate loans increased from
$15.8 million at December 31, 2001 to $17.0 million at December 31, 2002.
Commercial business loans decreased $1.9 million from $11.3 million at December
31, 2001 to $9.4 million at December 31, 2002, and other consumer loans
decreased during the year from $18.4 million to $16.2 million. During 2002, the
Bank focused on originating one-to-four family first mortgage loans and home
equity loans to provide for loan growth while maintaining portfolio credit
quality.
Securities available for sale, at fair value, consisting primarily of U. S.
agency mortgage-backed obligations, U. S. agency notes and bonds, and municipal
obligations, increased $10.1 million or 18.4%, from $54.9 million at December
31, 2001 to $65.0 million at December 31, 2002 primarily as a result of
purchases of $26.6 million net of maturities and repayments of $16.8 million.
The investment in securities held to maturity, consisting of federal agency
mortgage-backed certificates and municipal obligations, decreased from $1.8
million at December 31, 2001 to $1.5 million at December 31, 2002 primarily as a
result of maturities and repayments of $1.3 million offset by purchases of $1.1
million. Also, the Bank sold certain non-rated municipal securities with an
amortized cost of $150,000 due to regulatory restrictions (see Note 4 - Notes to
Consolidated Financial Statements).
Cash and interest-bearing deposits with banks increased from $12.4 million at
December 31, 2001 to $12.7 million at December 31, 2002 as a result of excess
liquidity funded by growth in deposits.
Total deposits increased from $204.1 million at December 31, 2001 to $216.2
million at December 31, 2002, a 5.9% increase. The increase in deposits resulted
from growth in all categories of deposit accounts. Interest-bearing demand
deposits increased $3.1 million in 2002, while noninterest-bearing demand
deposits increased $1.4 million in 2002. Savings and money market accounts
increased $4.0 million from $50.8 million at December 31, 2001 to $54.8 million
at December 31, 2002. Time deposits increased $3.5 million from $104.1 million
at December 31, 2001 to $107.6 million at December 31, 2002. Management
attributes the growth in deposits to the Bank's marketing efforts and the
weakened stock market as customers look to safer investments with a guaranteed
rate of return.
Federal Home Loan Bank borrowings increased $10.5 million from $42.8 million at
December 31, 2001 to $53.3 million at December 31, 2002. The new advances were
drawn primarily to fund loan growth while taking advantage of historically low
interest rates at favorable terms.
Total stockholders' equity increased from $33.5 million at December 31, 2001 to
$36.3 million at December 31, 2002 primarily as a result of retained net income
of $2.0 million and a net unrealized gain on securities available for sale of
$740,000. During 2002, the Company repurchased 1,834 shares of its common stock
at an average price of $15.91 per share. At year end the Company had 336,020
shares remaining under its Board-authorized repurchase program of 345,000
shares.
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ALLOWANCE FOR LOAN LOSSES
Loans are the Bank's largest concentration of assets and continue to represent
the most significant potential risk. In originating loans, the Bank recognizes
that losses will be experienced and that the risk of loss will vary with, among
other things, the type of loan made, the creditworthiness of the borrower over
the term of the loan, general economic conditions and, in the case of a secured
loan, the quality of the collateral. The Bank maintains an allowance for loan
losses to absorb losses inherent in the loan portfolio. The allowance for loan
losses represents management's estimate of probable loan losses based on
information available as of the date of the financial statements. The allowance
for loan losses is based on management's evaluation of the loan portfolio,
including historical loan loss experience, delinquencies, known and inherent
risks in the nature and volume of the loan portfolio, information about specific
borrower situations, estimated collateral values, and economic conditions.
The loan portfolio is reviewed quarterly by management to evaluate the adequacy
of the allowance for loan losses to determine the amount of any adjustment
required after considering the loan charge-offs and recoveries for the quarter.
Management applies a systematic methodology that incorporates its current
judgments about the credit quality of the loan portfolio. In addition, the
Office of Thrift Supervision (OTS), as an integral part of their examination
process, periodically review the Bank's allowance for loan losses and may
require the Bank to make additional provisions for estimated losses based on
their judgments about information available to them at the time of their
examination.
The methodology used in determining the allowance for loan losses includes
segmenting the loan portfolio by identifying risk characteristics common to
groups of loans, determining and measuring impairment of individual loans based
on the present value of expected future cash flows or the fair value of
collateral, and determining and measuring impairment for groups of loans with
similar characteristics by applying loss factors that consider the qualitative
factors which may effect the loss rates.
Specific allowances related to impaired loans and other classified loans are
established where management has identified significant conditions or
circumstances related to a loan that management believes indicate that a loss
has been incurred. The identification of these loans results from the loan
review process that identifies and monitors credits with weaknesses or
conditions which call into question the full collection of the contractual
payments due under the terms of the loan agreement. Factors considered by
management include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due.
For loans evaluated on a group basis, management applies loss factors to groups
of loans with common risk characteristics (i.e. residential mortgage loans, home
equity loans, credit card loans). The loss factors are derived from the Bank's
historical loss experience or, where the Bank does not have loss experience, the
peer group loss experience. Peer group loss experience is used after evaluating
the attributes of the Bank's loan portfolio as compared to the peer group. Loss
factors are adjusted for significant environmental factors that, in management's
judgment, affect the collectibility of the loan portfolio segment. The
significant environmental factors include the levels and trends in charge-offs
and recoveries, trends in volume and terms of loans, levels and trends in
delinquencies, the effects of changes in underwriting standards and other
lending practices or procedures, the experience and depth of the lending
management and staff, effects of changes in credit concentration, changes in
industry and market conditions and national and local economic trends and
conditions. Management evaluates these conditions on a quarterly basis and
evaluates and modifies the assumptions used in establishing the loss factors.
The allowance for loan losses was $1.2 million at December 31, 2002 and $1.1
million at December 31, 2001. Management has deemed these amounts as adequate on
those dates based on its evaluation methodology. At December 31, 2002,
nonperforming loans totaled $1.3 million or 0.43% of total assets. Included in
nonperforming loans are loans over 90 days past due secured by one-to-four
family residential real estate in the amount of $373,000, loans secured by
commercial real estate of $203,000, commercial business loans of $7,000 and
consumer loans in the amount of $147,000. These loans are accruing interest as
the estimated value of the collateral and collection efforts are deemed
sufficient to ensure full recovery.
-9-
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Net Income. Net income was $3.2 million ($1.30 per share diluted) for the year
ended December 31, 2002 compared to $3.1 million ($1.25 per share diluted) for
the year ended December 31, 2001. The increase was attributable primarily to an
increase in net interest income of $993,000 offset by an increase in the
provision for loan losses of $239,000 and noninterest expenses of $617,000.
Net Interest Income. Net interest income increased $993,000 or 10.9% from $9.1
million in 2001 to $10.1 million in 2002 primarily due to an increase in average
interest-earning assets during 2002 and an increase in the interest rate spread
offset by an increase in average interest-bearing liabilities.
Total interest income remained relatively unchanged for 2002 compared to 2001.
This results from higher average balances for interest-earning assets offset by
lower average yields due to the impact of lower market interest rates. Interest
on loans receivable increased $28,000 and interest on investment securities
increased $114,000 as a result of higher average balances in 2002 offset by
lower average yields. Interest income on interest-bearing deposits with banks
decreased $203,000 due to a decrease in the average yield and lower average
balance. During 2002, management sought to reduce the average balance in
short-term investments by focusing on loan originations and investments in debt
securities. The average balance of total interest-earning assets increased from
$251.2 million in 2001 to $280.0 million in 2002. During 2001, the Federal
Reserve Bank lowered the discount rate by 4.50% from 5.75% in January to 1.25%
at December 31, 2001. In November 2002, the discount rate was again lowered to
0.75%. While a majority of the loan and securities portfolios are fixed rate in
nature, the Bank does hold variable rate investments and loans that have
repriced during the year leading to a lower overall effective yield. Also, loan
refinancings triggered by lower market interest rates have reduced the loan
portfolio average yield. The average yield on total interest-earning assets
decreased from 7.65% for 2001 to 6.85% for 2002 due to the decline in market
interest rates.
Total interest expense decreased $1.0 million, or 10.6%, to $8.8 million for
2002 compared to $9.8 million for 2001 primarily due to a decrease in the
average cost of funds offset by increases in average deposits and borrowings
from the Federal Home Loan Bank. The average balances of interest-bearing
deposits and advances from the Federal Home Loan Bank were $191.5 million and
$46.8 million, respectively, for 2002 compared to $177.1 million and $34.9
million for 2001. The average cost of funds decreased from 4.64% in 2001 to
3.69% in 2002 due to lower market interest rates. For further information see
"Average Balance Sheets" below. The changes in interest income and interest
expense resulting from changes in volume and changes in rates for 2002 and 2001
are shown in the schedule captioned "Rate/Volume Analysis" included herein.
Provision for Loan Losses. The provision for loan losses was $305,000 for 2002
compared to $66,000 for 2001. During 2002, the net loan portfolio growth was
$14.3 million. Residential and commercial real estate loans and consumer loans
increased $12.8 million, $1.2 million, and $3.5 million, respectively, during
this period while commercial business loans decreased $1.9 million. The
consistent application of management's allowance methodology resulted in an
increase in the level of the allowance for loan losses due to net charge-offs
during 2002 of $190,000 compared to $147,000 for 2001 and the general weakening
of economic conditions. The provisions were recorded to bring the allowance to
the level determined in applying the allowance methodology after reduction for
net charge-offs during the year. See "Allowance for Loan Losses".
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, which it considers adequate to provide for, estimated losses,
there can be no assurance that further additions will not be made to the
allowance for loan losses and that actual losses will not exceed the estimated
amounts.
-10-
Noninterest income. Noninterest income increased $61,000 or 3.6%, for 2002
compared to 2001. During 2001, the Bank recognized gains of $124,000 on the sale
of mortgage loans. The Bank sold no loans during 2002 in an effort to better
leverage capital. Service charges on deposit accounts increased $152,000 from
$1.2 million for 2001 to $1.4 million for 2002. Overdraft service charges on the
new "Carefree Checking" account offered by the Bank is the primary reason for
this increase.
Noninterest expense. Noninterest expense increased $617,000 or 10.4% to $6.5
million for 2002 compared to $5.9 million in 2001. The increase results
primarily from increases in compensation and benefits, data processing expenses,
and other operating expenses. Compensation and benefits expense increased
$357,000 due to normal salary increases, an increase in staff, an increase in
the cost of providing employee health insurance, and a reduction in the amount
of compensation and benefit costs deferred in connection with loan originations.
Data processing expenses increased $53,000 primarily due to increased automated
teller machine processing fees and depreciation charges on new equipment
purchased during 2001 and 2002. Other operating expenses increased $203,000
primarily due to increases in office supplies, correspondent bank charges and
telephone expenses. Office supplies and telephone expenses have increased due to
the Bank's growth and new systems implemented during 2002.
Income tax expense. Income tax expense for the year ended December 31, 2002 was
$1.8 million, compared to $1.7 million for the same period in 2001. The
effective tax rate for 2002 was 35.2% compared to 35.6 % for 2001. See Note 11
in the accompanying Notes to Consolidated Financial Statements.
-11-
AVERAGE BALANCE SHEETS
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earnings assets
and interest expense on average interest-bearing liabilities and average yields
and costs. Such yields and costs for the periods indicated are derived by
dividing income or expense by the average historical cost balances of assets or
liabilities, respectively, for the periods presented and do not give effect to
changes in fair value that are included as a separate component of stockholders'
equity. Average balances are derived from daily balances.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2002 2001
-------------------------------------- ------------------------------------
AVERAGE AVERAGE
(Dollars in Thousands) AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- ---------- ---------- ---------- ---------- ----------
Interest-earning assets:
Loans receivable (1) $ 208,308 $ 15,526 7.45% $ 189,916 $ 15,512 8.17%
Investment securities:
Taxable (2) 55,775 2,804 5.03% 45,321 2,730 6.02%
Tax-exempt (3) 9,488 648 6.83% 7,609 568 7.46%
---------- ---------- ---------- ----------
Total investment securities 65,263 3,452 5.29% 52,930 3,298 6.23%
---------- ---------- ---------- ----------
Federal funds sold -- -- -- -- -- --
Interest-bearing deposits with banks 6,351 190 2.99% 8,310 393 4.73%
---------- ---------- ---------- ----------
Total interest-earning assets 279,922 19,168 6.85% 251,156 19,203 7.65%
---------- ---------- ---------- ----------
Noninterest-earning assets 16,318 14,101
---------- ----------
Total assets $ 296,240 $ 265,257
========== ==========
Interest-bearing liabilities:
Savings and interest-bearing
demand deposits $ 84,196 $ 1,185 1.41% $ 76,445 $ 1,966 2.57%
Time deposits 107,325 4,904 4.57% 100,681 5,714 5.68%
---------- ---------- ---------- ----------
Total deposits 191,521 6,089 3.18% 177,126 7,680 4.34%
---------- ---------- ---------- ----------
Retail repurchase agreements 186 3 1.61% 92 3 3.26%
FHLB advances 46,753 2,710 5.80% 34,885 2,159 6.19%
---------- ---------- ---------- ----------
Total interest-bearing liabilities 238,460 8,802 3.69% 212,103 9,842 4.64%
---------- ---------- ---------- ----------
Noninterest-bearing liabilities:
Noninterest-bearing deposits 19,533 18,205
Other liabilities 3,384 2,295
---------- ----------
Total liabilities 261,377 232,603
Stockholders' equity 34,863 32,654
---------- ----------
Total liabilities and stockholders' equity $ 296,240 $ 265,257
========== ==========
Net interest income $ 10,366 $ 9,361
========== ==========
Interest rate spread 3.16% 3.01%
========== ==========
Net interest margin 3.70% 3.73%
========== ==========
Ratio of average interest-earning assets
to average interest-bearing liabilities 117.39% 118.41%
========== ==========
YEAR ENDED DECEMBER 31,
-------------------------------------
2000
-------------------------------------
AVERAGE YIELD/
(Dollars in Thousands) BALANCE INTEREST COST
---------- ---------- ---------
Interest-earning assets:
Loans receivable (1) $ 167,981 $ 14,030 8.35%
Investment securities:
Taxable (2) 40,580 2,608 6.43%
Tax-exempt (3) 7,325 570 7.78%
---------- ----------
Total investment securities 47,905 3,178 6.63%
---------- ----------
Federal funds sold 533 33 6.19%
Interest-bearing deposits with banks 5,794 352 6.08%
---------- ----------
Total interest-earning assets 222,213 17,593 7.92%
---------- ----------
Noninterest-earning assets 12,964
----------
Total assets $ 235,177
==========
Interest-bearing liabilities:
Savings and interest-bearing
demand deposits $ 75,231 $ 2,735 3.64%
Time deposits 93,450 5,300 5.67%
---------- ----------
Total deposits 168,681 8,035 4.76%
---------- ----------
Retail repurchase agreements -- -- --
FHLB advances 19,159 1,232 6.43%
---------- ----------
Total interest-bearing liabilities 187,840 9,267 4.93%
---------- ----------
Noninterest-bearing liabilities:
Noninterest-bearing deposits 15,243
Other liabilities 2,376
----------
Total liabilities 205,459
Stockholders' equity 29,718
----------
Total liabilities and stockholders' equity $ 235,177
==========
Net interest income $ 8,326
==========
Interest rate spread 2.99%
==========
Net interest margin 3.75%
==========
Ratio of average interest-earning assets
to average interest-bearing liabilities 118.30%
==========
- ----------
(1) Average loans receivable includes nonperforming loans.
(2) Includes taxable debt and equity securities and Federal Home Loan Bank
Stock.
(3) Tax-exempt income has been adjusted to a tax equivalent basis using the
federal marginal tax rate of 34%.
-12-
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on
net interest income and interest expense. Information is provided with respect
to (i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects attributable to changes in rate
(changes in rate multiplied by prior volume); and (iii) effects attributable to
changes in rate and volume (change in rate multiplied by changes in volume). Tax
exempt income has been adjusted to a tax-equivalent basis using the federal
marginal tax rate of 34%.
2002 COMPARED TO 2001
INCREASE (DECREASE) DUE TO
------------------------------------------------------------
RATE/
RATE VOLUME VOLUME NET
(In Thousands)
Interest-earning assets:
Loans receivable $ (1,358) $ 1,507 $ (135) $ 14
Investment securities:
Taxable (450) 628 (104) 74
Tax-exempt (48) 140 (12) 80
------------ ------------ ------------ ------------
Total investment securities (498) 768 (116) 154
------------ ------------ ------------ ------------
Federal funds sold -- -- -- --
Interest-bearing deposits with banks (144) (93) 34 (203)
------------ ------------ ------------ ------------
Total net change in income
on interest-earning assets (2,000) 2,182 (217) (35)
------------ ------------ ------------ ------------
Interest-bearing liabilities:
Interest-bearing deposits (2,052) 628 (167) (1,591)
Retail repurchase agreements (2) 4 (2) --
FHLB advances (137) 734 (46) 551
------------ ------------ ------------ ------------
Total net change in expense
on interest-bearing liabilities (2,191) 1,366 (215) (1,040)
------------ ------------ ------------ ------------
Net change in net interest income $ 191 $ 816 $ (2) $ 1,005
============ ============ ============ ============
2001 COMPARED TO 2000
INCREASE (DECREASE) DUE TO
------------------------------------------------------------
RATE/
RATE VOLUME VOLUME NET
(In Thousands)
Interest-earning assets:
Loans receivable $ (305) $ 1,829 $ (42) $ 1,482
Investment securities:
Taxable (165) 306 (19) 122
Tax-exempt (23) 22 (1) (2)
------------ ------------ ------------ ------------
Total investment securities (188) 328 (20) 120
------------ ------------ ------------ ------------
Federal funds sold (33) (33) 33 (33)
Interest-bearing deposits with banks (78) 153 (34) 41
------------ ------------ ------------ ------------
Total net change in income
on interest-earning assets (604) 2,277 (63) 1,610
------------ ------------ ------------ ------------
Interest-bearing liabilities:
Interest-bearing deposits (713) 397 (39) (355)
Retail repurchase agreements -- -- 3 3
FHLB advances (46) 1,011 (38) 927
------------ ------------ ------------ ------------
Total net change in expense
on interest-bearing liabilities (759) 1,408 (74) 575
------------ ------------ ------------ ------------
Net change in net interest income $ 155 $ 869 $ 11 $ 1,035
============ ============ ============ ============
-13-
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits and proceeds from loan
repayments and prepayments, and from the sale and maturity of securities. The
Bank may also borrow from the Federal Home Loan Bank of Indianapolis. While loan
repayments and maturities and sales of securities are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by market
interest rates, general economic conditions and competition. At December 31,
2002, the Bank had cash and interest-bearing deposits with banks of $12.7
million and securities available for sale with a fair value of $65.0 million. If
the Bank requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the Federal Home Loan Bank of Indianapolis
and collateral eligible for repurchase agreements.
The Bank's primary investing activity is the origination of one-to-four family
mortgage loans and, to a lesser extent, consumer, multi-family, commercial real
estate, commercial business and residential construction loans. The Bank also
invests in U.S. government and agency securities and mortgage-backed securities
issued by U.S. government agencies.
The Bank must maintain an adequate level of liquidity to ensure the availability
of sufficient funds to support loan growth and deposit withdrawals, to satisfy
financial commitments and to take advantage of investment opportunities. At
December 31, 2002, the Bank had total commitments to extend credit of $26.5
million. See Note 15 in the accompanying Notes to Consolidated Financial
Statements. At December 31, 2002, the Bank had certificates of deposit scheduled
to mature within one year of $50.8 million. Historically, the Bank has been able
to retain a significant amount of its deposits as they mature.
The Bank is required to maintain specific amounts of capital pursuant to OTS
regulations. As of December 31, 2002, 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 10.9%, 10.9% and 19.5%,
respectively. See Note 18 in the accompanying Notes to Consolidated Financial
Statements.
EFFECT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented in this report
have been prepared in accordance with generally accepted accounting principles,
which generally require the measurement of financial position and operating
results in terms of historical dollars, without considering the changes in
relative purchasing power of money over time due to inflation. The primary
impact of inflation is reflected in the increased cost of the Bank's operations.
Unlike most industrial companies, virtually all the assets and liabilities of
the financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on the financial institutions
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
MARKET RISK ANALYSIS
Qualitative Aspects of Market Risk. The Bank's principal financial objective is
to achieve long-term profitability while reducing its exposure to fluctuating
market interest rates. The Bank has sought to reduce the exposure of its
earnings to changes in market interest rates by attempting to manage the
mismatch between asset and liability maturities and interest rates. In order to
reduce the exposure to interest rate fluctuations, the Bank has developed
strategies to manage its liquidity, shorten its effective maturities of certain
interest-earning assets and decrease the interest rate sensitivity of its asset
base. Management has sought to decrease the average maturity of its assets by
emphasizing the origination of short-term commercial and consumer loans, all of
which are retained by the Bank for its portfolio. The Bank relies on retail
deposits as its primary source of funds. Management believes retail deposits,
compared to brokered deposits, reduce the effects of interest rate fluctuations
because they generally represent a more stable source of funds.
-14-
Quantitative Aspects of Market Risk. The Bank does not maintain a trading
account for any class of financial instrument nor does the Bank engage in
hedging activities or purchase high-risk derivative instruments. Furthermore,
the Bank is not subject to foreign currency exchange rate risk or commodity
price risk.
The Bank uses interest rate sensitivity analysis to measure its interest rate
risk by computing changes in NPV (net portfolio value) of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained 100 to 300 basis point increase or decrease in
market interest rates with no effect given to any steps that management might
take to counter the effect of that interest rate movement. Using data compiled
by the OTS, the Bank receives a report that measures interest rate risk by
modeling the change in NPV (net portfolio value) over a variety of interest rate
scenarios. This procedure for measuring interest rate risk was developed by the
OTS to replace the "gap" analysis (the difference between interest-earning
assets and interest-bearing liabilities that mature or reprice within a specific
time period).
The following table is provided by the OTS and sets forth the change in the
Bank's NPV at December 31, 2002, based on OTS assumptions, that would occur in
the event of an immediate change in interest rates, with no effect given to any
steps that management might take to counteract that change. Due to the level of
market interest rates at December 31, 2002, the table provides information for
only a sustained 100 basis point decrease in market interest rates.
At December 31, 2002
----------------------------------------------------------------------------------
Net Portfolio Value Net Portfolio Value as a
------------------------------------------- ----------------------------------
Change Dollar Dollar Percent Percent of Present Value of Assets
- ------------------ ------------ ------------ ------------ ----------------------------------
In Rates Amount Change Change NPV Ratio Change
- ------------------ ------------ ------------ ------------ ------------ ------------------
(Dollars in thousands)
300bp $ 32,637 $ (7,632) (19)% 10.66% (178)bp
200bp 36,565 (3,704) (9) 11.68 (76)bp
100bp 39,685 (584) (1) 12.42 (2)bp
--bp 40,269 -- -- 12.44 --bp
(100)bp 38,533 (1,736) (4) 11.82 (62)bp
The above table indicates that in the event of a sudden and sustained increase
or decrease in prevailing market interest rates, the Bank's NPV would be
expected to decrease. The expected decrease in the Bank's NPV is primarily
attributable to the relatively high percentage of fixed-rate loans in the Bank's
loan portfolio. At December 31, 2002, approximately 75% 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.
-15-
[LETTERHEAD OF MONROE SHINE]
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
First Capital, Inc.
Corydon, Indiana
We have audited the accompanying consolidated balance sheets of First Capital,
Inc. and Subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 2002 and 2001. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Capital, Inc.
and Subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for the years ended December 31, 2002 and 2001
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Monroe Shine
New Albany, Indiana
January 17, 2003
-16-
FIRST CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
-------------- --------------
ASSETS
Cash and due from banks $ 6,609,568 $ 7,183,882
Interest-bearing deposits with banks 6,043,699 5,198,423
Securities available for sale, at fair value 64,980,033 54,891,268
Securities held to maturity (fair
value $1,553,248; $1,850,258 in 2001) 1,474,236 1,835,651
Loans receivable, net of allowance for loan losses of
$1,218,246 in 2002 and $1,102,653 in 2001 215,996,193 201,730,217
Federal Home Loan Bank stock, at cost 2,716,000 2,178,800
Foreclosed real estate held for sale 102,300 212,293
Premises and equipment 7,000,741 5,940,291
Accrued interest receivable 1,794,313 1,841,245
Cash value of life insurance 1,266,917 1,214,260
Other assets 568,647 597,015
-------------- --------------
Total Assets $ 308,552,647 $ 282,823,345
============== ==============
LIABILITIES
Deposits:
Noninterest-bearing $ 20,051,772 $ 18,629,242
Interest-bearing 196,150,460 185,492,942
-------------- --------------
Total deposits 216,202,232 204,122,184
Retail repurchase agreements 456,732 284,221
Advances from Federal Home Loan Bank 53,319,551 42,824,645
Accrued interest payable 1,127,553 1,252,736
Other liabilities 1,116,805 858,894
-------------- --------------
Total Liabilities 272,222,873 249,342,680
-------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock of $.01 par value per share
Authorized 1,000,000 shares; none issued -- --
Common stock of $.01 par value per share
Authorized 5,000,000 shares; issued 2,551,763 shares
(2,545,961 shares in 2001) 25,518 25,460
Additional paid-in capital 12,954,838 12,878,050
Retained earnings-substantially restricted 23,079,438 21,127,319
Accumulated other comprehensive income 970,977 231,153
Unearned stock compensation (143,582) (212,083)
Unearned ESOP shares (440,760) (481,760)
Less treasury stock, at cost - 8,980
shares (7,146 shares in 2001) (116,655) (87,474)
-------------- --------------
Total Stockholders' Equity 36,329,774 33,480,665
-------------- --------------
Total Liabilities and Stockholders' Equity $ 308,552,647 $ 282,823,345
============== ==============
See notes to consolidated financial statements.
-17-
FIRST CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
-------------- --------------
INTEREST INCOME
Loans, including fees $ 15,489,849 $ 15,462,139
Securities:
Taxable 2,660,755 2,600,194
Tax-exempt 427,903 374,889
Federal Home Loan Bank dividends 143,276 130,078
Interest-bearing deposits in banks 190,111 392,708
-------------- --------------
Total interest income 18,911,894 18,960,008
-------------- --------------
INTEREST EXPENSE
Deposits 6,089,360 7,679,827
Retail repurchase agreements 2,589 2,831
Advances from Federal Home Loan Bank 2,709,548 2,159,527
-------------- --------------
Total interest expense 8,801,497 9,842,185
-------------- --------------
Net interest income 10,110,397 9,117,823
Provision for loan losses 305,000 66,000
-------------- --------------
Net interest income after provision for loan losses 9,805,397 9,051,823
-------------- --------------
NONINTEREST INCOME
Service charges on deposit accounts 1,382,286 1,230,002
Commission income 260,655 244,644
Gain on sale of securities 18,229 15,555
Net gain on sale of mortgage loans -- 123,591
Other income 75,351 91,895
-------------- --------------
Total noninterest income 1,736,521 1,705,687
-------------- --------------
NONINTEREST EXPENSE
Compensation and benefits 3,554,330 3,197,793
Occupancy and equipment 745,997 741,007
Data processing 508,369 455,566
Other expenses 1,722,224 1,549,479
-------------- --------------
Total noninterest expense 6,530,920 5,943,845
-------------- --------------
Income before income taxes 5,010,998 4,813,665
Income tax expense 1,762,639 1,714,422
-------------- --------------
Net Income $ 3,248,359 $ 3,099,243
============== ==============
Net income per common share, basic $ 1.31 $ 1.26
============== ==============
Net income per common share, diluted $ 1.30 $ 1.25
============== ==============
See notes to Consolidated financial statements.
-18-
FIRST CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME (LOSS)
Balances at January 1, 2001 $ 25,373 $ 12,811,494 $ 19,221,842 $ (145,398)
COMPREHENSIVE INCOME
Net income - - 3,099,243 -
Other comprehensive income:
Change in unrealized gain
on securities available for sale,
net of deferred income tax
expense of $246,981 - - - 376,551
Less: Reclassification adjustment - - - -
Total comprehensive income
Cash dividends ($0.48 per share) - - (1,193,766) -
Options exercised 87 50,283 - -
Shares released by ESOP trust - 16,273 - -
Stock compensation expense - - - -
Purchase of 7,146 treasury shares - - - -
------------------------------------------------------------------
Balances at December 31, 2001 25,460 12,878,050 21,127,319 231,153
COMPREHENSIVE INCOME
Net income - - 3,248,359 -
Other comprehensive income:
Change in unrealized gain
on securities available for sale,
net of deferred income tax
expense of $492,135 - - - 750,317
Less: Reclassification adjustment
net of deferred income tax
benefit of $6,883 - - - (10,493)
Total comprehensive income
Cash dividends ($0.52 per share) - - (1,296,240) -
Restricted stock grants - 1,523 - -
Forfeiture of restricted stock - - - -
Options exercised 58 47,913 - -
Shares released by ESOP trust - 27,352 - -
Stock compensation expense - - - -
Purchase of 1,834 treasury shares - - - -
---------------------------------------------------------------------
Balances at December 31, 2002 $ 25,518 $ 12,954,838 $ 23,079,438 $ 970,977
=====================================================================
UNEARNED UNEARNED
STOCK ESOP TREASURY
COMPENSATION SHARES STOCK TOTAL
Balances at January 1, 2001 $ (282,854) $ (522,760) $ - $ 31,107,697
COMPREHENSIVE INCOME
Net income - - - 3,099,243
Other comprehensive income:
Change in unrealized gain
on securities available for sale,
net of deferred income tax
expense of $246,981 - - - 376,551
Less: Reclassification adjustment - - - -
------------
Total comprehensive income 3,475,794
------------
Cash dividends ($0.48 per share) - - - (1,193,766)
Options exercised - - - 50,370
Shares released by ESOP trust - 41,000 - 57,273
Stock compensation expense 70,771 - - 70,771
Purchase of 7,146 treasury shares - - (87,474) (87,474)
------------------------------------------------------------
Balances at December 31, 2001 (212,083) (481,760) (87,474) 33,480,665
COMPREHENSIVE INCOME
Net income - - - 3,248,359
Other comprehensive income:
Change in unrealized gain
on securities available for sale,
net of deferred income tax
expense of $492,135 - - - 750,317
Less: Reclassification adjustment
net of deferred income tax
benefit of $6,883 - - - (10,493)
------------
Total comprehensive income 3,988,183
------------
Cash dividends ($0.52 per share) - - - (1,296,240)
Restricted stock grants (7,894) - 6,371 -
Forfeiture of restricted stock 6,371 - (6,371) -
Options exercised - - - 47,971
Shares released by ESOP trust - 41,000 68,352
Stock compensation expense 70,024 - - 70,024
Purchase of 1,834 treasury shares - - (29,181) (29,181)
------------------------------------------------------------
Balances at December 31, 2002 $ (143,582) $ (440,760) $ (116,655) $ 36,329,774
============================================================
See notes to consolidated financial statements.
-19-
FIRST CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,248,359 $ 3,099,243
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of premium and accretion
of discount on securities, net 218,461 30,847
Depreciation expense 480,393 463,264
Deferred income taxes (24,088) 18,971
ESOP and stock compensation expense 138,376 128,044
Increase in cash value of life insurance (52,657) (53,275)
Provision for loan losses 305,000 66,000
Net gain on sale of securities (18,229) (15,555)
Proceeds from the sale of mortgage loans - 5,488,218
Mortgage loans originated for sale - (5,364,627)
Net gain on sale of mortgage loans - (123,591)
Net gain on sale of foreclosed real estate (14,506) -
Net change in other assets/liabilities (253,135) 165,754
-------------- --------------
Net Cash Provided By Operating Activities 4,027,974 3,903,293
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing
deposits with banks (845,276) 259,990
Purchase of securities available for sale (26,590,589) (42,716,013)
Purchase of securities held to maturity (1,100,000) (500,000)
Proceeds from maturities of securities available for sale 15,177,000 21,938,000
Proceeds from maturities of securities held to maturity 1,218,800 9,270,100
Proceeds from sale of securities available for sale 693,402 -
Proceeds from sale of securities held to maturity 150,750 356,432
Principal collected on mortgage-backed securities 1,748,130 1,540,387
Net increase in loans receivable (14,771,683) (22,618,022)
Purchase of Federal Home Loan Bank stock (537,200) (675,000)
Proceeds from sale of foreclosed real estate 325,206 32,422
Purchase of premises and equipment (1,540,843) (175,809)
-------------- --------------
Net Cash Used By Investing Activities (26,072,303) (33,287,513)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 12,080,048 18,754,032
Advances from Federal Home Loan Bank 15,000,000 16,000,000
Repayment of advances from Federal Home Loan Bank (4,505,094) (3,249,562)
Net increase in retail repurchase agreements 172,511 284,221
Exercise of stock options 47,971 50,370
Purchase of treasury stock (29,181) (87,474)
Dividends paid (1,296,240) (1,193,766)
-------------- --------------
Net Cash Provided By Financing Activities 21,470,015 30,557,821
-------------- --------------
Net Increase (Decrease) in Cash and Due From Banks (574,314) 1,173,601
Cash and due from banks at beginning of year 7,183,882 6,010,281
-------------- --------------
Cash and Due From Banks at End of Year $ 6,609,568 $ 7,183,882
============== ==============
See notes to consolidated financial statements.
-20-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
First Capital, Inc. (the Company) is the thrift holding company of
First Harrison Bank (the Bank), a wholly-owned subsidiary. The Bank is
a federally-chartered savings bank which provides a variety of banking
services to individuals and business customers through nine locations
in Southern Indiana. The Bank's primary source of revenue is
single-family residential loans. The Bank's wholly-owned subsidiary,
First Harrison Financial Services, Inc., sells property and casualty
insurance and non-deposit investment products.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Bank has defined cash
and cash equivalents as those amounts included in the balance sheet
caption "Cash and due from banks."
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses and
the valuation of foreclosed real estate. In connection with the
determination of estimated losses on loan and foreclosed real estate,
management obtains appraisals for significant properties.
While management uses available information to recognize losses on
loans and foreclosed real estate, further reductions in the carrying
amounts of loans and foreclosed assets may be necessary based on
changes in local economic conditions. In addition, as an integral part
of their examination process, regulatory agencies periodically review
the estimated losses on loans and foreclosed real estate. Such agencies
may require the Bank to recognize additional losses based on their
judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible the
estimated losses on loans and foreclosed real estate may change
materially in the near term. However, the amount of the change that is
reasonably possible cannot be estimated.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt and equity securities and
are stated at fair value. Amortization of premium and accretion of
discount are recognized in interest income using the interest method
over the remaining period to maturity, adjusted for anticipated
prepayments. Mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and
serviced by issuers of the securities. Unrealized gains and losses, net
of tax, on securities available for sale are reported as a separate
component of stockholders' equity until realized. Realized gains and
losses on the sale of securities available for sale are determined
using the specific identification method.
-21-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(1 - continued)
SECURITIES HELD TO MATURITY
Debt securities for which the Bank has the positive intent and ability
to hold to maturity are carried at cost, adjusted for amortization of
premium and accretion of discount using the interest method over the
remaining period to maturity, adjusted for anticipated prepayments.
Mortgage-backed securities represent participating interests in pools
of long-term first mortgage loans originated and serviced by issuers of
the securities.
LOANS
Loans receivable are stated at unpaid principal balances, less net
deferred loan fees and the allowance for loan losses. The Bank's real
estate loan portfolio consists primarily of long-term loans,
collateralized by first mortgages on single-family residences and
multi-family residential properties located in the southern Indiana
area and commercial real estate loans. In addition to real estate
loans, the Bank makes commercial loans and consumer loans.
Loan origination fees and certain direct costs of underwriting and
closing loans are deferred and the net fee or cost is recognized as an
adjustment to interest income over the contractual life of the loans
using the interest method.
The accrual of interest is discontinued on a loan when, in the judgment
of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. The Bank does not accrue
interest on loans past due 90 days or more except when the estimated
value of collateral and collection efforts are deemed sufficient to
ensure full recovery. When a loan is placed on non accrual status,
previously accrued but unpaid interest is charged against interest
income.
Interest payments on nonaccrual loans, including specific impaired
loans, are accounted for as interest income using the cash receipts
method or cost recovery method until qualifying for return to accrual.
Generally, the cash receipts method is used when the likelihood of
further loss on the loan is remote. Loans are returned to accrual
status when all the principal and interest amounts contractually due
are brought current and future payments are reasonably assured.
The Bank's practice is to charge off any loan or portion of a loan when
the loan is determined by management to be uncollectible due to the
borrower's failure to meet repayment terms, the borrower's
deteriorating or deteriorated financial condition, the depreciation of
the underlying collateral, the loans classification as a loss by
regulatory examiners, or for other reasons.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specified impaired loans, and economic
conditions. The allowance is increased by a provision for loan losses,
which is charged to expense, and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans are
charged or credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process, management's estimate
of credit losses inherent in the loan portfolio and the related
allowance may change in the near term.
-22-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(1 - continued)
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan
basis by either the present value of expected future cash flows at the
loan's effective interest rate or the fair value of the collateral if
the loan is collateral dependent.
FORECLOSED REAL ESTATE HELD FOR SALE
Foreclosed real estate is carried at the lower of fair value minus
estimated costs to sell or cost. Costs of holding foreclosed real
estate are charged to expense in the current period, except for
significant property improvements, which are capitalized. Valuations
are periodically performed by management and an allowance is
established by a charge to non-interest expense if the carrying value
exceeds the fair value minus estimated costs to sell. The net expense
from operations of foreclosed real estate held for sale is reported in
non-interest expense.
PREMISES AND EQUIPMENT
The Bank uses the straight line and accelerated methods of computing
depreciation at rates adequate to amortize the cost of the applicable
assets over their useful lives. Items capitalized as part of premises
and equipment are valued at cost. Maintenance and repairs are expensed
as incurred. The cost and related accumulated depreciation of assets
sold, or otherwise disposed of, are removed from the related accounts
and any gain or loss is included in earnings.
MORTGAGE SERVICING RIGHTS AND LOAN SERVICING
Mortgage servicing rights are recognized as separate assets when
servicing rights are acquired through purchase or loan originations
when there is a definitive plan to sell the underlying loan.
Capitalized mortgage servicing rights are periodically evaluated for
impairment based on the fair value of those rights. Capitalized
mortgage servicing rights are amortized in proportion to, and over the
period of, estimated future net servicing income of the underlying
mortgage loans.
Loan servicing fees are recognized in income as monthly principal and
interest payments are collected on mortgages. Costs of loan servicing
are charged to expense as incurred.
INCOME TAXES
Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently due
plus deferred taxes related primarily to differences between the basis
of available for sale securities, allowance for loan losses,
accumulated depreciation and accrued income and expenses for financial
and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
-23-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(1 - continued)
STOCK-BASED COMPENSATION
Under the provisions of SFAS 123, Accounting for Stock-Based
Compensation, the Company elects to measure and recognize compensation
cost related to stock-based compensation plans using the intrinsic
value method and discloses the pro forma effect of applying the fair
value method contained in SFAS 123. Accordingly, no compensation cost
is charged against earnings for stock options granted under the
Company's stock-based compensation plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. This statement applies to all entities and the legal
obligations associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development
and/or normal operation of a long-lived asset, except for certain
obligations of lessees. This statement requires that the fair value of
a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value
can be made. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The
implementation of this standard is not expected to have a material
impact on the Company's financial condition and results of operations.
In August 2001, FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supersedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and establishes a single financial accounting
model for long-lived assets to be disposed of by sale. The statement
retains the requirements of SFAS 121 to recognize an impairment loss if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and measure an impairment loss as the
difference between the carrying amount and the fair value of the asset.
This statement is effective for financial statements issued for fiscal
years beginning after December 15, 2001, and interim periods within
those fiscal years. The implementation of this standard had no material
impact on the Company's financial condition or results of operations.
In May 2002, FASB issued SFAS 145, Rescission of FASB Statements 4, 44,
and 64, Amendment of FASB Statement 13, and Technical Corrections as of
April 2002. This Statement rescinds SFAS 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that Statement, SFAS
64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements.
This Statement also rescinds SFAS 44, Accounting for Intangible Assets
of Motor Carriers, and amends SFAS 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. This statement is effective for transactions occurring
after May 15, 2002. The implementation of this standard had no material
impact on the Company's financial condition or results of operations.
In June 2002, FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement addresses the
accounting and reporting for costs associated with exit or disposal
activities and nullifies previous guidance. The principal difference
between this statement and prior guidance is that a liability for a
cost associated with an exit or disposal activity can only be
recognized when actually incurred versus the date when management
commits to the plan. This statement establishes that fair value is the
objective for initial measurement of the liability. This statement is
effective for exit or disposal activities that are initiated after
December 31, 2002. The implementation of this standard is not expected
to have a material impact on the Company's financial condition or
results of operations.
-24-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(1 - continued)
In October 2002, the FASB issued SFAS 147, Acquisitions of Certain
Financial Institutions, an amendment of FASB Statements 72 and 144 and
FASB Interpretation 9, which addresses the financial accounting and
reporting for the acquisitions of all or part of a financial
institution. SFAS 147 removes acquisitions of financial institutions,
except for transactions between two or more mutual enterprises, from
the scope of both SFAS 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with SFAS 141, Business
Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS
147 also amends SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term
customer-relationship and credit cardholder intangible assets, and
requires companies to cease amortization of unidentifiable assets
associated with certain branch acquisitions. The provisions of this
statement were effective beginning October 1, 2002. The implementation
of this standard had no material impact on the Company's financial
condition or results of operation.
In November 2002, the FASB issued FASB Interpretation (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, which
elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of the guarantee, a liability
for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions
of this interpretation are applied prospectively to guarantees issued
or modified after December 31, 2002. The adoption of these recognition
provisions will result in recording liabilities associated with certain
guarantees provided by the Company. These currently include standby
letters of credit. The disclosure requirements of this interpretation
are effective for financial statements of interim or annual periods
ending after December 15, 2002. The implementation of the recognition
provisions of this interpretation are not expected to have a material
impact on the Company's financial condition or results of operation.
(2) PENDING MERGER
On September 25, 2002, the Company and Hometown Bancshares, Inc.
(Hometown), a bank holding company for Hometown National Bank in New
Albany, Indiana, entered into an agreement and plan of merger whereby
each of the issued and outstanding common shares of Hometown will be
exchanged for shares of the Company's common stock or $46.50 in cash
per share. The number of shares of the Company's common stock to be
exchanged for each share of Hometown's common stock will be based on
the average closing price of the Company's common stock over a twenty
day trading period shortly before the closing of the merger. Elections
to receive stock, cash or a combination of stock and cash by the
Hometown shareholders will be limited by a requirement that 50% of the
total number of outstanding shares of Hometown's common stock be
exchanged for Company common stock. The merger is subject to regulatory
and shareholder approvals. The merger is expected to be completed in
March 2003.
(3) RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances on hand and with the
Federal Reserve Bank which are noninterest bearing and unavailable for
investment. The average amount of those reserve balances for the year
ended December 31, 2002 and 2001 were approximately $1,649,000 and
$1,104,000 respectively.
-25-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(4) INVESTMENT SECURITIES
Debt and equity securities have been classified in the balance sheets
according to management's intent. Investment securities at December 31,
2002 and 2001 are summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
DECEMBER 31, 2002:
Securities available for sale:
Mortgage-backed securities:
FNMA certificates $ 1,759,759 $ 25,638 $ - $ 1,785,397
GNMA certificates 874,617 7,608 - 882,225
FHLMC certificates 200,241 2,539 - 202,780
FNMA REMICS 2,008,096 32,698 - 2,040,794
FHLMC REMICS 5,989,820 62,590 163 6,052,247
---------------------------------------------------------
10,832,533 131,073 163 10,963,443
---------------------------------------------------------
Other debt securities:
Federal agency 41,078,195 1,160,051 2,242 42,236,004
Municipal 10,223,239 320,196 9,529 10,533,906
---------------------------------------------------------
62,133,967 1,611,320 11,934 63,733,353
---------------------------------------------------------
Mutual funds 1,238,223 36,059 27,602 1,246,680
---------------------------------------------------------
Total securities available for sale $ 63,372,190 $ 1,647,379 $ 39,536 $ 64,980,033
=========================================================
Securities held to maturity:
Mortgage-backed securities:
FNMA certificates $ 183,534 $ 2,901 $ 8,932 $ 177,503
GNMA certificates 114,194 3,655 260 117,589
---------------------------------------------------------
297,728 6,556 9,192 295,092
---------------------------------------------------------
Other debt securities:
Municipal 1,176,508 81,648 - 1,258,156
---------------------------------------------------------
Total securities held to maturity $ 1,474,236 $ 88,204 $ 9,192 $ 1,553,248
=========================================================
DECEMBER 31, 2001:
Securities available for sale:
Mortgage-backed securities:
FNMA certificates $ 457,668 $ - $ 10,716 $ 446,952
GNMA certificates 1,785,617 6,480 - 1,792,097
FHLMC certificates 310,174 4,523 - 314,697
FNMA REMICS 2,022,167 4,639 19,487 2,007,319
FHLMC REMICS 2,033,426 16,353 19,394 2,030,385
---------------------------------------------------------
6,609,052 31,995 49,597 6,591,450
---------------------------------------------------------
Other debt securities:
Federal agency 39,662,021 528,972 117,898 40,073,095
Municipal 7,061,710 71,290 72,106 7,060,894
---------------------------------------------------------
46,723,731 600,262 190,004 47,133,989
---------------------------------------------------------
Mutual funds 1,175,717 10,218 20,106 1,165,829
---------------------------------------------------------
Total securities available for sale $ 54,508,500 $ 642,475 $ 259,707 $ 54,891,268
=========================================================
-26-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(4 - continued)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
DECEMBER 31, 2001:
Securities held to maturity:
Mortgage-backed securities:
FNMA certificates $ 240,634 $ 1,554 $ 4,644 $ 237,544
GNMA certificates 152,014 1,610 736 152,888
---------------------------------------------------------
392,648 3,164 5,380 390,432
---------------------------------------------------------
Other debt securities:
Municipal 1,443,003 16,823 - 1,459,826
---------------------------------------------------------
Total securities held to maturity $ 1,835,651 $ 19,987 $ 5,380 $ 1,850,258
=========================================================
During 2002 and 2001, the Bank sold non-rated municipal securities
classified as held to maturity with an amortized cost of $149,897 and
$356,432, respectively, and realized gross gains of $853 and $15,555,
respectively. These securities were sold as a result of an Office of
Thrift Supervision (OTS) examination in 2000 which required divestiture
of these holdings within three years. The OTS limits the holdings of
non-rated municipal securities to those issued by a municipality in
which the institution has an office. Through the merger with HCB
Bancorp in January 2000, the Bank acquired certain non-rated municipal
securities issued by municipalities in which the Bank does not have an
office. At March 31, 2001, the Bank transferred from the held to
maturity category to the available for sale category certain non-rated
municipal securities with an amortized cost of $182,376.
During 2002, the Bank sold available for sale securities for total
proceeds of $693,402, resulting in gross realized gains of $17,376.
The amortized cost and fair value of debt securities as of December 31,
2002, by contractual maturity, are shown below. Expected maturities of
mortgage-backed securities may differ from contractual maturities
because the mortgages underlying the obligations may be prepaid without
penalty.
SECURITIES AVAILABLE FOR SALE SECURITIES HELD TO MATURITY
------------------------------- -------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
Due in one year or less $ 4,144,130 $ 4,275,271 $ 114,000 $ 114,150
Due after one year through five
years 38,843,276 39,990,125 188,508 194,335
Due after five years through
ten years 5,334,978 5,502,672 74,000 74,000
Due after ten years 2,979,050 3,001,842 800,000 875,671
-----------------------------------------------------------------
51,301,434 52,769,910 1,176,508 1,258,156
Mortgage-backed securities 10,832,533 10,963,443 297,728 295,092
-----------------------------------------------------------------
$ 62,133,967 $ 63,733,353 $ 1,474,236 $ 1,553,248
=================================================================
Investment securities with a carrying amount of $499,475 were pledged
to secure public deposits at December 31, 2002.
-27-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(5) LOANS
Loans receivable at December 31, 2002 and 2001 consisted of the
following:
2002 2001
-------------- --------------
Real estate mortgage loans:
Residential $ 145,467,644 $ 132,348,492
Land 4,820,715 4,381,011
Residential construction 9,782,878 10,476,939
Commercial real estate 16,760,389 15,810,867
Commercial business loans 9,440,238 11,339,361
Consumer loans:
Home equity and second mortgage loans 18,639,762 12,962,816
Automobile loans 9,597,787 10,376,402
Loans secured by savings accounts 1,249,277 1,309,396
Unsecured loans 1,192,579 1,721,400
Other consumer loans 4,176,322 4,949,299
-------------------------------
Gross loans receivable 221,127,591 205,675,983
-------------------------------
Less:
Deferred loan origination fees, net 25,864 116,189
Undisbursed portion of loans in process 3,887,288 2,726,924
Allowance for loan losses 1,218,246 1,102,653
-------------------------------
5,131,398 3,945,766
-------------------------------
Loans receivable, net $ 215,996,193 $ 201,730,217
===============================
Mortgage loans serviced for the benefit of others amounted to
$5,182,427 and $10,061,396 at December 31, 2002 and 2001, respectively.
The balance of capitalized mortgage servicing rights, carried at
estimated fair value, included in other assets at December 31, 2002 and
2001, was $66,119 and $124,231, respectively. The estimated fair value
of mortgage servicing rights was determined using discount rates
ranging from 7.5 to 10 percent and prepayment speeds ranging from .06
percent to 33.48 percent, depending upon the stratification of the
specific rights. The Bank had no capitalized mortgage servicing rights
during 2002. The Bank capitalized mortgage servicing rights of $77,206
for the year ended December 31, 2001. The Bank recognized amortization
of $58,112 and $68,836, for the years ended December 31, 2002 and 2001,
respectively.
An analysis of the allowance for loan losses is as follows:
2002 2001
-------------- --------------
Beginning balances $ 1,102,653 $ 1,183,638
Provision 305,000 66,000
Recoveries 57,552 74,940
Loans charged-off (246,959) (221,925)
-------------------------------
Ending balances $ 1,218,246 $ 1,102,653
===============================
At December 31, 2002 and 2001, the total recorded investment in loans
on nonaccrual amounted to approximately $607,000 and $787,000,
respectively. The total recorded investment in loans past due ninety
days or more and still accruing interest amounted to approximately
$730,000 and $471,000 at December 31, 2002 and 2001, respectively. The
total recorded investment in loans specifically classified as impaired
amounted to $1,158,000 and $806,000 at December 31, 2002 and 2001,
respectively. The average recorded investment in impaired loans
amounted to approximately $1,085,000 and $356,000 for the years ended
December 31, 2002 and 2001, respectively. The Bank had a specific
allowance for loan losses related to impaired loans of $420,072 and
$165,729 at December 31, 2002 and 2001, respectively. Interest income
on impaired loans of $82,225 and $18,374 was recognized for cash
payments received in 2002 and 2001, respectively.
-28-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(5 - continued)
The Bank has entered into loan transactions with certain directors,
officers and their affiliates (related parties). In the opinion of
management, such indebtedness was incurred in the ordinary course of
business on substantially the same terms as those prevailing at the
time for comparable transactions with other persons.
The following table represents the aggregate activity for related party
loans during the year ended December 31, 2002:
Beginning balance $ 1,916,740
New loans 388,073
Payments (198,568)
------------
Ending balance $ 2,106,245
============
The Bank has purchased commercial paper from a corporation where a
director is considered a related party. In the opinion of management,
these transactions were made in the ordinary course of business on
substantially the same terms, including interest rate and collateral,
as those prevailing at the time for comparable transactions with
unrelated parties. During the year ended December 31, 2002, the Bank
granted- approximately $1,827,000, to customers of the corporation and
such loans had an aggregate outstanding balance of approximately
$3,295,000 and $1,957,000 at December 31, 2002 and 2001, respectively.
(6) PREMISES AND EQUIPMENT
Premises and equipment as of December 31 consisted of the following:
2002 2001
-------------- --------------
Land and land improvements $ 1,671,929 $ 1,146,490
Leasehold improvements 157,777 153,077
Office buildings 5,224,823 4,870,478
Furniture, fixtures and equipment 2,813,271 2,308,390
--------------------------------
9,867,800 8,478,435
Less accumulated depreciation 2,867,059 2,538,144
--------------------------------
Totals $ 7,000,741 $ 5,940,291
================================
(7) DEPOSITS
The aggregate amount of time deposit accounts with balances of $100,000
or more was approximately $25,129,000 and $24,592,000 at December 31,
2002 and 2001, respectively. Deposit account balances in excess of
$100,000 are not federally insured.
At December 31, 2002, scheduled maturities of time deposits were as
follows:
Year ending December 31:
2003 $ 50,757,566
2004 15,227,738
2005 15,180,207
2006 13,574,380
2007 and thereafter 12,857,933
-------------
Total $ 107,597,822
=============
The Bank held deposits of approximately $7,027,000, and $6,670,000 for
related parties at December 31, 2002 and 2001, respectively.
-29-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(8) RETAIL REPURCHASE AGREEMENTS
Retail repurchase agreements represent overnight borrowings from
deposit customers and the debt securities sold under the repurchase
agreements were under the control of the Bank at December 31, 2002 and
2001. Information concerning borrowings under repurchase agreements at
December 31, 2002 and 2001 and for the years then ended is summarized
as follows:
2002 2001
------------ -----------
Weighted average interest rate during the year 1.39% 3.12%
Average daily balance $ 185,929 $ 90,752
Maximum month-end balance during the year $ 456,732 $ 578,534
Amortized cost of debt securities underlying the agreements $ 1,009,365 $ 1,019,710
Fair value of debt securities underlying the agreements $ 1,040,721 $ 1,056,644
(9) ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 2002 and 2001, advances from the Federal Home Loan Bank
were as follows:
2002 2001
------------------------ -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
Fixed rate advances 5.49% $ 53,319,551 5.87% $ 42,824,645
======================== =======================
At December 31, 2002, advances from the Federal Home Loan Bank totaling
$20,000,000 were putable advances whereby the Federal Home Loan Bank
will automatically convert the fixed rate advance to a variable rate
should the market interest rate exceed a pre-determined strike rate.
The following is a schedule of maturities for advances outstanding as
of December 31, 2002:
Due in:
2003 $ 3,678,004
2004 3,142,497
2005 8,501,821
2006 4,061,097
2007 5,742,274
Thereafter 28,193,858
-------------
Total $ 53,319,551
=============
The advances are secured under a blanket collateral agreement. At
December 31, 2002, the carrying value of residential mortgage loans and
investment securities pledged as security for the advances was
$127,882,941 and $1,014,493, respectively.
(10) LEASE COMMITMENTS
On April 1, 1997, the Bank entered into a noncancellable sub-lease
agreement for a branch office for an initial lease term of eight years.
The sub-lessor has a fixed term lease with the owner with an initial
term expiring November 30, 2003. The Bank also has a noncancellable
lease agreement for a branch office dated December 1, 1995 that expires
in the year 2005.
-30-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(10 - continued)
The following is a schedule by years of future minimum rental payments
required under these operating leases:
Year ending December 31:
2003 $ 30,833
2004 19,200
2005 17,600
--------
Total minimum payments required $ 67,633
========
Total minimum rental expense for all operating leases for each of the
periods ended December 31, 2002 and 2001 amounted to $31,890.
(11) INCOME TAXES
The components of income tax expense were as follows:
2002 2001
-------------- --------------
Current $ 1,786,727 $ 1,695,451
Deferred (24,088) 18,971
--------------------------------
Totals $ 1,762,639 $ 1,714,422
================================
Significant components of the deferred tax assets and liabilities as of
December 31, 2002 and 2001 were as follows:
2002 2001
-------------- --------------
Deferred tax assets (liabilities):
Depreciation $ (262,907) $ (197,962)
Deferred loan fees and costs (68,474) (49,080)
Deferred compensation plans 163,496 153,176
Stock compensation plan 27,136 27,400
Allowance for loan losses 472,104 426,765
Post-1987 bad debt deduction (28,633) (57,266)
Unrealized gain on securities available for sale (636,867) (151,614)
Other (18,244) (42,641)
--------------------------------
Net deferred tax asset (liability) $ (352,389) $ 108,778
================================
The reconciliation of income tax expense with the amount which would
have been provided at the federal statutory rate of 34 percent follows:
2002 2001
-------------- --------------
Provision at federal statutory tax rate $ 1,703,739 $ 1,636,646
State income tax-net of federal tax benefit 229,184 227,740
Tax-exempt interest income (146,627) (135,758)
Increase in cash value of life insurance (17,903) (18,114)
Other (5,754) 3,908
--------------------------------
Totals $ 1,762,639 $ 1,714,422
================================
Effective tax rate 35.2% 35.6%
================================
-31-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(11 - continued)
Prior to July 1, 1996, the Bank was permitted by the Internal Revenue
Code to deduct from taxable income an annual addition to a statutory
bad debt reserve subject to certain limitations. Retained earnings at
December 31, 2002 includes approximately $1,040,000 of cumulative
deductions for which no deferred federal income tax liability has been
recorded. Reduction of these reserves for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating
losses would create income for tax purposes subject to the then current
corporate income tax rate. The unrecorded deferred liability on these
amounts was approximately $354,000 at December 31, 2002.
Federal legislation enacted in 1996 repealed the use of the qualified
thrift reserve method of accounting for bad debts for tax years
beginning after December 31, 1995. As a result, the Bank discontinued
the calculation of the annual addition to the statutory bad debt
reserve using the percentage-of-taxable-income method and adopted the
experience reserve method for banks. Under this method, the Bank
computes its federal tax bad debt deduction based on actual loss
experience over a period of years. The legislation required the Bank to
recapture into taxable income over a six-year period its post-1987
additions to the qualified thrift statutory bad debt reserve, thereby
generating additional tax liability. At December 31, 2002, the
remaining unamortized balance of the post-1987 reserves totaled $84,214
for which a deferred tax liability of $28,633 has been recorded.
The legislation also provided that the Bank will not be required to
recapture its pre-1988 statutory bad debt reserves if it ceases to meet
the qualifying thrift definitional tests as provided under prior law
and if the Bank continues to qualify as a "bank" under existing
provisions of the Internal Revenue Code.
(12) EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLAN:
The Bank has a qualified contributory defined contribution plan
available to all eligible employees. The plan allows participating
employees to make tax-deferred contributions under Internal Revenue
Code Section 401(k). The Bank contributed $128,359 and $109,773 to the
plan for the years ended December 31, 2002 and 2001, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN:
On December 31, 1998, the Company established a leveraged employee
stock ownership plan (ESOP) covering substantially all employees. The
ESOP trust acquired 61,501 shares of Company common stock financed by a
term loan with the Company. The employer loan and the related interest
income are not recognized in the consolidated financial statements as
the debt is serviced from Company contributions. Dividends payable on
allocated shares are charged to retained earnings and are satisfied by
the allocation of cash dividends to participant accounts. Dividends
payable on unallocated shares are not considered dividends for
financial reporting purposes. Shares held by the ESOP trust are
allocated to participant accounts based on the ratio of the current
year principal and interest payments to the total of the current year
and future years principal and interest to be paid on the employer
loan.
Compensation expense is recognized based on the average fair value of
shares released for allocation to participant accounts during the year
with a corresponding credit to stockholders' equity. Compensation
expense recognized for the years ended December 31, 2002 and 2001
amounted to $68,327 and $50,251, respectively.
-32-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(12 - continued)
Company common stock held by the ESOP trust at December 31 was as
follows:
2002 2001
-------------- --------------
Allocated shares $ 17,425 $ 13,325
Shares committed to be released - -
Unearned shares 44,076 48,176
-------------------------------
Total ESOP shares 61,501 61,501
===============================
Fair value of unearned shares $ 896,065 $ 693,734
===============================
(13) DEFERRED COMPENSATION PLANS
The Bank has a deferred compensation plan whereby certain officers will
be provided specific amounts of income for a period of fifteen years
following normal retirement. The benefits under the agreements become
fully vested after four years of service beginning with the effective
date of the agreements. The Bank accrues the present value of the
benefits so the amounts required will be provided at the normal
retirement dates and thereafter.
Assuming normal retirement, the benefits under the plan will be paid in
varying amounts between 1999 and 2022. The Bank is the owner and
beneficiary of insurance policies on the lives of these officers which
may provide funds for a portion of the required payments. The
agreements also provide for payment of benefits in the event of
disability, early retirement, termination of employment or death.
Deferred compensation expense for this plan was $30,839 and $28,051 for
the years ended December 31, 2002 and 2001, respectively.
The Bank also has a directors' deferred compensation plan whereby a
director defers into a retirement account a portion of his monthly
director fees for a specified period to provide a specified amount of
income for a period of fifteen years following normal retirement. The
Bank also accrues the interest cost on the deferred obligation so the
amounts required will be provided at the normal retirement dates and
thereafter.
Assuming normal retirement, the benefits under the plan will be paid in
varying amounts between 1995 and 2037. The agreements also provide for
payment of benefits in the event of disability, early retirement,
termination of service or death. Deferred compensation expense for this
plan was $7,914 and $12,208 for the years ended December 31, 2002 and
2001, respectively.
(14) STOCK-BASED COMPENSATION PLANS
The Company applies APB No. 25 and related interpretations in
accounting for its stock-based compensation plans. In accordance with
SFAS No. 123, the Company elected to continue to apply the provisions
of APB No. 25. However, pro forma disclosures as if the Company adopted
the compensation cost recognition provisions of SFAS No. 123, are
presented along with a summary of the plans and awards.
RESTRICTED STOCK COMPENSATION PLAN
The Company has a restricted stock compensation plan as an
encouragement for directors, officers and key employees to remain in
the employment or service of the Bank. The shares granted under the
plan were in the form of restricted stock vesting over a five-year
period beginning one year after
-33-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(14 - continued)
the date of grant of the award. Since the stock issued is held in
escrow by the Company before some or all of the services are performed,
unearned compensation is recorded as a reduction of stockholders'
equity. Compensation expense is recognized pro rata over the period
during which the shares are earned. The terms of the restricted stock
compensation plan include a provision whereby all unearned shares
become fully vested upon a change in control. Compensation expense of
$70,024 and $70,771 was recognized for the years ended December 31,
2002 and 2001, respectively.
STOCK OPTION PLAN
The Company's stock option plan provides for issuance of up to 138,876
shares of the Company's authorized but unissued common stock to all
employees, including any officer or employee-director. Under the plan,
the Company may grant both non-qualified and qualified (i.e. incentive)
stock options. In the case of incentive stock options, the aggregate
fair value of the stock (determined at the time the incentive stock
option is granted) for which any optionee may be granted incentive
options which are first exercisable during any calendar year shall not
exceed $100,000. Option prices may not be less than the fair market
value of the underlying stock at the date of the grant.
Options granted generally vest ratably over five years and are
exercisable in whole or in part for a period up to ten years from the
date of the grant.
The following is a summary of the Company's stock options as of
December 31, 2002 and 2001, and the changes for the years then ended:
2002 2001
--------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
Outstanding at beginning
of year 84,736 $ 10.46 93,629 $ 7.88
Granted 750 14.25 -- --
Exercised 5,802 7.98 8,638 5.83
Forfeited 5,761 10.69 256 7.81
------------ ------------
Outstanding at end of year 73,923 $ 10.67 84,736 $ 10.46
============ ============
Exercisable at end of year 37,555 $ 10.40 25,533 $ 9.52
============ ============
For options outstanding at December 31, 2002, the following information
is provided by range of exercise price:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF EXERCISE CONTRACTUAL EXERCISE
EXERCISE PRICES NUMBER PRICE LIFE NUMBER PRICE
$6.24 - $7.41 4,364 $ 6.95 4.1 years 4,364 $ 6.95
$9.42 - $11.00 68,809 10.88 6.9 years 33,191 10.86
$14.25 750 14.25 9.1 years - -
------------ ------------
$6.24 - $14.25 73,923 $ 10.68 6.8 years 37,555 $ 10.40
============ ============
-34-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(14 - continued)
The Company accounts for the stock option plan under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. No stock-based
employee compensation cost is reflected in net income, as all options
granted under the stock option plan had an exercise price equal to the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per
share as if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation.
YEARS ENDED DECEMBER 31,
2002 2001
-------------- --------------
Net income, as reported $ 3,248,359 $ 3,099,243
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (12,327) (13,502)
--------------------------------
Pro forma net income $ 3,236,032 $ 3,085,742
================================
Earnings per share:
Basic - as reported $ 1.31 $ 1.26
================================
Basic - pro forma $ 1.31 $ 1.25
================================
Diluted - as reported $ 1.30 $ 1.25
================================
Diluted - pro forma $ 1.29 $ 1.24
================================
For purposes of providing the pro forma disclosures required under SFAS
No. 123, the fair market value of stock options granted was estimated
at the date of grant using the Black-Scholes option pricing model. The
Black-Scholes option pricing model was originally developed for use in
estimating the fair value of traded options which have different
characteristics from the Company's employee stock options and require
the use of highly subjective assumptions which can materially affect
the fair value estimate. As a result, management believes that the
Black-Scholes model may not necessarily provide a reliable measure of
the fair value of employee stock options.
The following assumptions were used for grants for the year ended
December 31, 2002:
Expected dividend yields 3.14%
Risk-free interest rates 4.27%
Expected volatility 10.65%
Expected life of options 7 years
Weighted average fair value at grant date $ 1.71
-35-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(15) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding various
commitments and contingent liabilities, such as commitments to extend
credit and legal claims, which are not reflected in the financial
statements.
Commitments under outstanding standby letters of credit totaled
$689,460 at December 31, 2002.
The following is a summary of the commitments to extend credit at
December 31, 2002 and 2001:
2002 2001
-------------- --------------
Loan commitments:
Fixed rate $ 5,499,450 $ 7,599,459
Adjustable rate 297,350 617,550
Undisbursed commercial and personal lines of credit 6,462,186 8,857,316
Undisbursed portion of construction loans in process 3,887,288 2,726,924
Undisbursed portion of home equity lines of credit 10,370,924 8,416,594
-------------------------------
Total commitments to extend credit $ 26,517,198 $ 28,217,843
===============================
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve,
to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend
credit and standby letters of credit is represented by the contractual
notional amount of those instruments (see Note 15). The Bank uses the
same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount and type of collateral obtained, if
deemed necessary by the Bank upon extension of credit, varies and is
based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
Standby letters of credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Bank's
policy for obtaining collateral, and the nature of such collateral, is
essentially the same as that involved in making commitments to extend
credit.
The Bank has not been required to perform on any financial guarantees
and has not incurred any losses on its commitments during the years
ended December 31, 2002 and 2001.
-36-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(17) DIVIDEND RESTRICTION
As an Indiana corporation, the Company is subject to Indiana law with
respect to the payment of dividends. Under Indiana law, the Company may
pay dividends so long as it is able to pay its debts as they become due
in the usual course of business and its assets exceed the sum of its
total liabilities, plus the amount that would be needed, if the Company
were to be dissolved at the time of the dividend, to satisfy any rights
that are preferential to the rights of the persons receiving the
dividend. The ability of the Company to pay dividends depends primarily
on the ability of the Bank to pay dividends to the Company.
The payment of dividends by the Bank is subject to regulation by the
Office of Thrift Supervision (OTS). The Bank may not declare or pay a
cash dividend or repurchase any of its capital stock if the effect
thereof would cause the regulatory capital of the Bank to be reduced
below regulatory capital requirements imposed by the OTS or below the
amount of the liquidation account established upon completion of a
conversion from mutual to stock form on December 31, 1998.
(18) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involved quantitative measures of the assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification
are also subject to quantitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 2002, that the Bank meets all capital
adequacy requirements to which it is subject. As of December 31, 2002,
the most recent notification from the OTS categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table below. There are no conditions or events
since that notification that management believes have changed the
institutions' categories.
The actual capital amounts and ratios are also presented in the table.
No amounts were deducted from capital for interest-rate risk in either
year.
MINIMUM
TO BE WELL
MINIMUM CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
(Dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
AS OF DECEMBER 31, 2002:
Total capital (to risk
weighted assets) $ 34,782 19.52% $ 14,257 8.00% $ 17,821 10.00%
Tier I capital (to risk
weighted assets) $ 33,564 18.83% $ 7,128 4.00% $ 10,692 6.00%
Tier I capital (to adjusted
total assets) $ 33,564 10.92% $ 12,299 4.00% $ 15,373 5.00%
Tangible capital (to
adjusted total assets) $ 33,564 10.92% $ 4,612 1.50% N/A
-37-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(18 - continued)
MINIMUM
TO BE WELL
MINIMUM CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
(Dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
AS OF DECEMBER 31, 2001:
Total capital (to risk
weighted assets) $ 32,921 20.36% $ 12,938 8.00% $ 16,172 10.00%
Tier I capital (to risk
weighted assets) $ 31,818 19.67% $ 6,469 4.00% $ 9,703 6.00%
Tier I capital (to adjusted
total assets) $ 31,818 11.25% $ 11,311 4.00% $ 14,138 5.00%
Tangible capital (to
adjusted total assets) $ 31,818 11.25% $ 4,241 1.50% N/A
(19) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying value and estimated fair
value of financial instruments at December 31:
2002 2001
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
Financial assets:
Cash and due from banks $ 6,610 $ 6,610 $ 7,184 $ 7,184
Interest bearing deposits in banks 6,044 6,044 5,198 5,198
Securities available for sale 64,980 64,980 54,891 54,891
Securities held to maturity 1,474 1,553 1,836 1,850
Loans receivable 217,214 216,596 202,833 201,663
Less: allowance for loan losses 1,218 1,218 1,103 1,103
-------------------------------------------------
Loans receivable, net 215,996 215,378 201,730 200,560
-------------------------------------------------
Federal Home Loan Bank stock 2,716 2,716 2,179 2,179
Financial liabilities:
Deposits 216,202 221,795 204,122 206,690
Retail repurchase agreements 457 457 284 285
Advances from Federal Home Loan Bank 53,320 58,762 42,825 45,017
Off-balance-sheet financial instruments:
Asset related to commitments to extend credit - 70 - 90
-38-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(19 - continued)
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable
to estimate that value:
CASH AND SHORT-TERM INVESTMENTS
For short-term investments, including cash and due from banks, interest
bearing deposits with banks, and federal funds sold, the carrying
amount is a reasonable estimate of fair value.
DEBT AND EQUITY SECURITIES
For debt securities, including mortgage-backed securities, the fair
values are based on quoted market prices. For restricted equity
securities held for investment, the carrying amount is a reasonable
estimate of fair value.
LOANS RECEIVABLE
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
DEPOSITS
The fair value of demand deposits, savings accounts, money market
deposit accounts and other transaction accounts is the amount payable
on demand at the balance sheet date. The fair value of fixed-maturity
certificates of deposit is estimated by discounting the future cash
flows using the rates currently offered for deposits of similar
remaining maturities.
BORROWED FUNDS
The fair value of advances from Federal Home Loan Bank is estimated by
discounting the future cash flows using the current rates at which
similar loans with the same remaining maturities could be obtained.
COMMITMENTS TO EXTEND CREDIT
The majority of commitments to extend credit would result in loans with
a market rate of interest if funded. The fair value of these
commitments are the fees that would be charged to customers to enter
into similar agreements. For fixed rate loan commitments, the fair
value also considers the difference between current levels of interest
rates and the committed rates.
(20) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information for First Capital,
Inc. (parent company only) follows:
BALANCE SHEETS
(In thousands)
AS OF DECEMBER 31,
-------------------------------
2002 2001
-------------- --------------
Assets:
Cash and interest bearing deposits $ 1,318 $ 1,037
Other assets 339 155
Investment in subsidiaries 34,704 32,289
-------------------------------
$ 36,361 $ 33,481
===============================
Liabilities and Stockholders' Equity:
Other liabilities $ 31 $ -
Stockholders' equity 36,330 33,481
-------------------------------
$ 36,361 $ 33,481
===============================
-39-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(20 - continued)
STATEMENTS OF INCOME
(In thousands)
YEARS ENDED DECEMBER 31,
2002 2001
-------------- --------------
Interest income $ 18 $ 28
Dividend income 1,706 1,030
Other operating expenses (265) (253)
--------------------------------
Income before income taxes and equity in
undistributed net income of subsidiaries 1,459 805
Income tax credit 114 79
--------------------------------
Income before equity in undistributed net
income of subsidiaries 1,573 884
Equity in undistributed net income of subsidiaries 1,675 2,215
--------------------------------
Net income $ 3,248 $ 3,099
================================
STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED DECEMBER 31,
2002 2001
-------------- --------------
Operating Activities:
Net income $ 3,248 $ 3,099
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (1,675) (2,215)
ESOP and stock compensation expense 136 128
Net change in other assets/liabilities (153) (28)
--------------------------------
Net cash provided by operating activities 1,556 984
--------------------------------
Financing Activities:
Exercise of stock options 50 50
Purchase of treasury stock (29) (87)
Cash dividends paid (1,296) (1,194)
--------------------------------
Net cash provided by financing activities (1,275) (1,231)
--------------------------------
Net increase (decrease) in cash 281 (247)
Cash at beginning of year 1,037 1,284
--------------------------------
Cash at end of year $ 1,318 $ 1,037
================================
-40-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(21) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
YEARS ENDED DECEMBER 31,
2002 2001
-------------- --------------
Basic:
Earnings:
Net income $ 3,248,359 $ 3,099,243
===============================
Shares:
Weighted average common shares outstanding 2,475,938 2,463,343
===============================
Net income per common share, basic $ 1.31 $ 1.26
===============================
Diluted:
Earnings:
Net income $ 3,248,359 $ 3,099,243
===============================
Shares:
Weighted average common shares outstanding 2,475,938 2,463,433
Add: Dilutive effect of outstanding options 25,327 15,717
Dilutive effect of restricted stock 4,729 3,009
-------------------------------
Weighted average common shares
outstanding, as adjusted 2,505,994 2,482,069
===============================
Net income per common share, diluted $ 1.30 $ 1.25
===============================
Unearned ESOP shares are not considered as outstanding for purposes
of computing weighted average common shares outstanding.
(22) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
YEARS ENDED DECEMBER 31,
2002 2001
-------------- --------------
CASH PAYMENTS FOR:
Interest $ 8,926,680 $ 9,895,455
Income taxes 1,965,453 1,581,824
NONCASH INVESTING ACTIVITIES:
Transfers from loans to real estate
acquired through foreclosure $ 318,631 $ 126,398
Proceeds from sales of foreclosed
real estate financed through loans 87,400 34,222
(23) ADVERTISING COSTS
Advertising costs are expensed when incurred. Advertising expense was
$104,644 and $124,435 for the years ended December 31, 2002 and 2001,
respectively.
-41-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(24) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
2002 (In Thousands, Except Per Share Data)
Interest income $ 4,677 $ 4,720 $ 4,768 $ 4,747
Interest expense 2,225 2,227 2,234 2,116
------------ ------------ ------------ ------------
Net interest income 2,452 2,493 2,534 2,631
Provision for loan losses 45 45 65 150
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 2,407 2,448 2,469 2,481
Noninterest income 399 420 447 471
Noninterest expenses 1,601 1,666 1,631 1,633
------------ ------------ ------------ ------------
Income before income taxes 1,205 1,202 1,285 1,319
Income tax expense 412 428 456 467
------------ ------------ ------------ ------------
Net income $ 793 $ 774 $ 829 $ 852
============ ============ ============ ============
Net income per common share, basic $ 0.32 $ 0.31 $ 0.33 $ 0.35
============ ============ ============ ============
Net income per common share, diluted $ 0.32 $ 0.31 $ 0.33 $ 0.34
============ ============ ============ ============
2001
Interest income $ 4,678 $ 4,701 $ 4,811 $ 4,770
Interest expense 2,530 2,462 2,516 2,334
------------ ------------ ------------ ------------
Net interest income 2,148 2,239 2,295 2,436
Provision for loan losses 36 -- -- 30
------------ ------------ ------------ ------------
Net interest income after
provision of loan losses 2,112 2,239 2,295 2,406
Noninterest income 455 435 381 404
Noninterest expenses 1,453 1,462 1,478 1,521
------------ ------------ ------------ ------------
Income before income taxes 1,114 1,212 1,198 1,289
Income tax expense 397 435 423 459
------------ ------------ ------------ ------------
Net income $ 717 $ 777 $ 775 $ 830
============ ============ ============ ============
Net income per common share, basic $ 0.29 $ 0.32 $ 0.31 $ 0.34
============ ============ ============ ============
Net income per common share, diluted $ 0.29 $ 0.31 $ 0.31 $ 0.34
============ ============ ============ ============
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BOARD OF DIRECTORS/OFFICERS
DIRECTORS AND DIRECTORS EMERITUS
James G. Pendleton
Chairman of the Board and retired Chief Executive
Officer of First Harrison Bank
Dennis L. Huber
President and Publisher of O'Bannon Publishing
Company, Inc.
Kenneth R. Saulman
Supervisor for Clark County REMC
Gerald L. Uhl
Business Manager for Jacobi Sales, Inc.
James E. Nett
Accountant for Koetter Woodworking, Inc.
Earl H. Book, Director Emeritus
President of Carriage Ford, Inc.
Mark D. Shireman
President of James L. Shireman, Inc.
Michael L. Shireman
President of Uhl Truck Sales, Inc.
John W. Buschemeyer
President and Majority Owner of Hurst Lumber
Company
James S. Burden
Owner of Tracy's Mobile Home Park
Marvin E. Kiesler, Director Emeritus
Retired Senior Vice President of Harrison
County Bank
EXECUTIVE OFFICERS
William W. Harrod
President and Chief Executive Officer of First
Capital, Inc. and Chief Operating Officer of First
Harrison Bank
Samuel E. Uhl
President and Chief Executive Officer of First
Harrison Bank and Chief Operating Officer of
First Capital, Inc.
Dennis L. Thomas
Senior Vice President, Consumer Lending
Processing and Servicing
M. Chris Frederick
Senior Vice President, Chief Financial Officer and
Treasurer
Joel E. Voyles
Senior Vice President, Retail Banking Operations
and Corporate Secretary
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CORPORATE INFORMATION
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GENERAL COUNSEL INDEPENDENT AUDITORS
Thompson & Byrd Monroe Shine & Co., Inc.
303 N. Capitol Avenue 222 East Market Street
Corydon, Indiana 47112 New Albany, Indiana 47150
SPECIAL COUNSEL TRANSFER AGENT
Muldoon Murphy & Faucette LLP Registrar and Transfer Company
5101 Wisconsin Ave., N.W. 10 Commerce Drive
Washington, D.C. 20016 Crawford, New Jersey 07016
1-800-368-5948
COMMON SHARES AND DIVIDEND INFORMATION
The common shares of the Company are traded on the Nasdaq SmallCap Market under
the symbol "FCAP." As of December 31, 2002, the Company has 1,288 stockholders
of record and 2,551,763 common shares outstanding. This does not reflect the
number of persons whose shares are in nominee or "street" name accounts through
brokers.
The following table lists quarterly market price and dividend information per
common share for the years ended December 31, 2002 and 2001 as reported by
Nasdaq. The market prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
HIGH LOW MARKET PRICE
BID BID DIVIDENDS END OF PERIOD
2002:
First Quarter $ 15.10 $ 14.05 $ 0.13 $ 15.00
Second Quarter 16.70 15.10 0.13 16.50
Third Quarter 19.00 15.20 0.13 19.00
Fourth Quarter 20.25 17.00 0.13 20.33
2001:
First Quarter $ 12.13 $ 10.00 $ 0.11 $ 11.88
Second Quarter 11.50 10.50 0.12 10.80
Third Quarter 14.00 10.90 0.12 13.37
Fourth Quarter 14.15 12.01 0.13 14.40
Dividend payments by the Company depend primarily on dividends received by the
Company from the Bank. See Note 17 to Consolidated Financial Statements for
information regarding the dividend restrictions applicable to the Bank.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 2:00 p.m., Wednesday, April
23, 2003, at the office of the Bank, 220 Federal Drive, N.W., Corydon, Indiana
47112.
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GENERAL INQUIRIES AND REPORTS
The Company is required to file an Annual Report on Form 10-KSB for its fiscal
year ended December 31, 2002 with the Securities and Exchange Commission. Copies
of this Annual Report and the Company's annual reports on Form 10-KSB (without
exhibits) and quarterly reports on Form 10-QSB (without exhibits) may be
obtained without charge by writing:
William W. Harrod
President and CEO
First Capital, Inc.
220 Federal Drive, N.W.
Corydon, Indiana 47112
(812) 738-2198
The Company's Annual Reports and Quarterly Reports are also available through
the Securities and Exchange Commission's internet website (www.sec.gov).
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