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FIRST CAPITAL, INC.
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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.......................... 5-13
Independent Auditor's Report............................................ 14
Consolidated Financial Statements....................................... 15-18
Notes to Consolidated Financial Statements.............................. 19-39
Board of Directors...................................................... 40
Corporate Information................................................... 41-42
BUSINESS OF THE COMPANY
First Capital, Inc. (the Company) is the thrift holding company of First
▇▇▇▇▇▇▇▇ Bank (formerly First Federal Bank, a Federal Savings Bank) (the Bank).
The Company became the holding company for the Bank on December 31, 1998 in
connection with the conversion of the Bank's former mutual holding company,
First Capital, Inc., MHC (the MHC), from the mutual to stock form of
organization and the simultaneous reorganization of the Bank as a wholly-owned
subsidiary of the Company (the Conversion and Reorganization).
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 ▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇.▇., ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇. The
telephone number is (▇▇▇) ▇▇▇-▇▇▇▇.
The Bank is a community-oriented financial institution offering traditional
financial services primarily to residents of ▇▇▇▇▇▇▇▇ 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 ▇▇▇▇▇▇▇▇ Financial Services, Inc., sells property
and casualty insurance and investment products.
-1-
Dear Shareholders:
During the past year we've learned a great deal about ourselves, and the
challenges of putting together the cultures of a savings bank and a commercial
bank. The experiences of this past year gave us knowledge and skills to move
forward to build an even stronger financial institution.
Shortly after the merger, our team successfully merged our operating systems
with minimal impact to our customers. All of our staff went through many hours
of training in preparation for serving the customers. Our Accounting and Data
Processing departments worked countless hours to bring the two banks reporting
systems together.
Our lending staff had an exceptional year, from the loan officers creating the
loan - to the staff managing the loan after it has been put on our books. We had
great success in expanding our lending efforts into the commercial mortgage
business as well as maintaining our continued strength as a leader in home
mortgages.
If there is one thing that continues to be clear, it is that banking continues
to be a very competitive business. We will continue to reach out in many ways to
all of our customers to build on those valued relationships.
Our efforts to develop First ▇▇▇▇▇▇▇▇ Financial Services will further help us
position your company as a full service financial products provider. First
▇▇▇▇▇▇▇▇ Financial Services can provide you home and auto insurance, while
managing your mutual funds and stocks. We hope you will consider using one of
our Investment Representatives or Insurance Agents for all your financial needs.
Management is confident our delivery system will continue to serve us well. We
launched our Internet banking site in June and continue to be very pleased with
the growth of this delivery system. We remodeled three offices to better serve
our customers and give the staff at each of those offices the needed lift from
new paint, carpet, and furniture. Our eight branch offices currently serve us
well, but we know we need to look for opportunities to expand our franchise and
utilize our capital in a safe and sound manner. The staff at each office is
second to none and ready to serve you with any financial need.
We are very proud of our most important asset, the staff at First ▇▇▇▇▇▇▇▇ Bank.
They have worked very hard this year to learn new products, new methods, and
just simply getting to know each other. This has been a great year to celebrate
our successes, but we know many challenges lay ahead. We look forward to serving
you as both shareholders and customers. If you have any questions, please feel
free to call on any of us.
Thank you for you continued support and confidence.
Sincerely,
/s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
---------------------
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
President and CEO
-2-
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SELECTED FINANCIAL AND OTHER DATA
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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,
---------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Total assets $248,582 $222,797 $191,350
Loans receivable, net 179,304 154,982 135,379
Securities held to maturity 11,229 12,325 6,140
Securities available for sale 34,779 30,097 22,302
Federal funds sold -- 4,000 1,900
Cash and interest-bearing deposits (1) 11,468 9,522 16,459
Deposits 185,368 175,342 155,495
Advances from Federal Home Loan Bank 30,074 16,750 5,250
Stockholders' equity, substantially restricted 31,107 28,877 28,930
OPERATING DATA: For the Year Ended
December 31,
---------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Interest income $ 17,363 $ 15,101 $ 13,506
Interest expense 9,267 7,566 6,848
------------------------------
Net interest income 8,096 7,535 6,658
Provision for loan losses 48 142 83
------------------------------
Net interest income after provision for loan losses 8,048 7,393 6,575
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Noninterest income 1,219 1,031 898
Noninterest expense (2) 5,629 5,574 4,390
------------------------------
Income before income taxes 3,638 2,850 3,083
Income tax expense 1,180 1,080 1,077
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Net Income $ 2,458 $ 1,770 $ 2,006
==============================
PER SHARE DATA:
Net income - basic $ 1.00 $ 0.72 $ 0.79
Net income - diluted 1.00 0.71 0.79
Dividends 0.41 0.35 N/A
Dividends of pooled affiliate N/A 0.39 0.39
Dividends to minority stockholders prior to conversion N/A N/A 0.27
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(1) Includes interest-bearing deposits in other depository institutions.
(2) Includes merger related expenses of $439,000 in 1999.
-3-
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SELECTED FINANCIAL AND OTHER DATA - CONTINUED
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At and For the Year Ended
December 31,
---------------------------
2000 1999 1998
---- ---- ----
SELECTED FINANCIAL RATIOS:
Performance Ratios:
Return on assets (1) 1.05% 0.84% 1.13%
Return on average equity (2) 8.27% 6.05% 8.85%
Dividend payout ratio (3) 41.40% 51.38% 42.78%
Average equity to average assets 12.64% 13.95% 12.81%
Interest rate spread (4) 2.88% 3.16% 3.18%
Net interest margin (5) 3.64% 3.86% 3.96%
Non-interest expense to average assets 2.39% 2.66% 2.48%
Average interest earning assets to
average interest bearing liabilities 118.30% 118.01% 119.11%
Regulatory Capital Ratios:
Tier I - adjusted total assets 11.92% 12.13% 13.51%
Tier I - risk based 19.97% 19.64% 22.90%
Total risk-based 20.63% 19.64% 23.91%
Asset Quality Ratios:
Nonperforming loans as a percent of
loans receivable, net (6) 0.32% 0.13% 0.23%
Nonperforming assets as a
percent of total assets (7) 0.28% 0.21% 0.16%
Allowance for loan losses as a percent
of gross loans receivable 0.64% 0.75% 0.91%
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(1) Net income divided by average assets.
(2) Net income divided by average equity.
(3) Dividend payout ratio is computed considering only the minority
shareholders' proportionate share of net income prior to conversion. Prior
to conversion on December 31, 1998, the majority shareholder, First
Capital, Inc., M.H.C., with the approval of the OTS, elected to waive the
receipt of dividends.
(4) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Nonperforming loans consist of loans accounted for on a nonaccrual basis
and accruing loans 90 days or more past due.
(7) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans, but exclude restructured loans.
-4-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Forward Looking Statements
This report may contain forward-looking statements within the meaning of the
federal securities laws. These statements are not historical facts, rather
statements based on the Company's current expectations regarding its business
strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends" and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous
risks and uncertainties could cause or contribute to the Company's actual
results, performance and achievements to be materially different from those
expressed or implied by the forward-looking statements. Factors that may cause
or contribute to these differences include, without limitation, general economic
conditions, including changes in market interest rates and changes in monetary
and fiscal policies of the federal government; legislative and regulatory
changes; and other factors disclosed periodically in the Company's filings with
the Securities and Exchange Commission.
Because of the risks and uncertainties inherent in forward-looking statements,
readers are cautioned not to place undue reliance on them, whether included in
this report or made elsewhere from time to time by the Company or on its behalf.
The Company assumes no obligation to update any forward-looking statements.
General
First Capital, Inc. (the Company) is the parent to its wholly owned subsidiary,
First ▇▇▇▇▇▇▇▇ Bank (formerly First Federal Bank, a Federal Savings Bank) (the
Bank), a community-oriented financial institution offering traditional financial
services primarily to residents of ▇▇▇▇▇▇▇▇ County, Indiana, and contiguous
counties. The Company has no other material income other than that generated by
the Bank and the Bank's wholly-owned subsidiary, First ▇▇▇▇▇▇▇▇ Financial
Services, Inc., which sells property and casualty insurance and investment
products. The Bank's primary business is attracting deposits from the general
public and using those funds to originate one-to-four family residential
mortgage loans. The Bank's lending activity also includes multi-family
residential loans, commercial real estate and business loans and consumer loans.
The Bank invests excess liquidity primarily in interest bearing deposits with
the Federal Home Loan Bank of Indianapolis and other financial institutions,
U.S. government and agency securities, local municipal obligations and, to a
lesser extent, mortgage-backed securities.
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company and the Bank. The information contained in
this section should be read in conjunction with the consolidated financial
statements and the accompanying notes to consolidated financial statements
included elsewhere in this report.
Operating Strategy
The Bank's results of operations depend primarily on net interest income, which
is the difference between the income earned on its interest-earning assets, such
as loans and investments, and the cost of its interest-bearing liabilities,
consisting of deposits and 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.
-5-
The Bank's current business strategy is to operate as a well-capitalized,
locally owned community bank that provides a reasonable return for shareholders.
This strategy has been implemented in recent years by sustained growth in
deposits, emphasizing the origination of residential and commercial real estate
mortgage loans in the Bank's primary market area, improving asset quality,
controlling operating expenses, and expanding customer services.
Merger with HCB Bancorp
On January 12, 2000, the Company completed the plan of merger with HCB Bancorp
(HCB), a bank holding company located in Palmyra, Indiana. HCB was the parent
company of ▇▇▇▇▇▇▇▇ County Bank, a state-chartered commercial bank, which was
merged with and into the Bank. The merger provided for an exchange of 15.5
shares of the Company's common stock for each share of HCB common stock. The
merger was accounted for as a pooling of interests and the consolidated
financial statements give effect to the merger as if the merger had been
consummated as of the earliest date presented. See the accompanying notes to
consolidated financial statements for additional information.
Comparison of Financial Condition at December 31, 2000 and 1999
Total assets increased 11.6% from $222.8 million at December 31, 1999 to $248.6
million at December 31, 2000, primarily as a result of increases in investment
securities and loans receivable, net, which were funded by a decrease in federal
funds sold, growth in deposits, and an increase in advances from the Federal
Home Loan Bank of Indianapolis.
Loans receivable, net, were $155.0 million at December 31, 1999 compared to
$179.3 million at December 31, 2000, a 15.7% increase. The loan growth is
attributable primarily to a 10.0% growth in residential mortgage and
construction loans, a 35.7% growth in commercial real estate loans and a 30.8%
increase in consumer loans. Residential mortgage and construction loans were
$108.6 million at December 31, 1999, compared to $119.5 million at December 31,
2000, commercial real estate loans increased from $15.0 million at December 31,
1999 to $20.4 million at December 31, 2000 and consumer loans grew from $23.4
million at December 31, 1999 to $30.6 million at December 31, 2000.
Securities available for sale, at fair value, consisting primarily of federal
agency mortgage-backed certificates, notes and bonds, and municipal obligations
increased $4.7 million or 15.6% from $30.1 million at December 31, 1999 to $34.8
million at December 31, 2000 as a result of purchases of $7.0 million net of
maturities and repayments of $3.4 million and a decrease in the net unrealized
loss of $1.1 million.
The investment in securities held to maturity, consisting of federal agency
mortgage-backed certificates, notes and bonds, and municipal obligations,
decreased from $12.3 million at December 31, 1999 to $11.2 million at December
31, 2000 due to maturities and repayments of $1.1 million.
Cash and interest-bearing deposits with banks increased from $9.5 million at
December 31, 1999 to $11.5 million at December 31, 2000 as a result of excess
liquidity funded by growth in deposits.
Total deposits increased from $175.3 million at December 31, 1999 to $185.4
million at December 31, 2000. The increase in deposits resulted from growth in
both demand deposit accounts and time deposits. Management attributes the growth
in demand deposits to the customers' positive reactions to the merger and
promotional efforts to attract lower cost accounts. Interest-bearing demand
deposits increased $2.4 million in 2000, while noninterest-bearing demand
deposits increased $3.0 million in 2000. Time deposits increased $4.7 million
from $90.3 million at December 31, 1999 to $95.1 million at December 31, 2000 as
depositors took advantage of higher rates in 2000.
Total stockholders' equity increased from $28.9 million at December 31, 1999 to
$31.1 million at December 31, 2000 as a result of retained net income of $1.4
million and a net unrealized gain on securities available for sale of $666,000.
-6-
Comparison of Operating Results for the Years Ended December 31, 2000 and 1999
Net Income. Net income was $2.5 million ($1.00 per share diluted) for the year
ended December 31, 2000 compared to $1.8 million ($.71 per share diluted) for
the year ended December 31, 1999. Net income increased for 2000 compared to 1999
primarily due to increases in net interest income and noninterest income.
Net Interest Income. Net interest income increased 7.5% from $7.5 million in
1999 to $8.1 million in 2000 as a result of the increase in interest-earning
assets during 2000 offset by an increase in interest-bearing liabilities and an
increase in the average cost of funds in 2000 compared 1999.
Total interest income increased $2.3 million, or 15.0%, to $17.4 million for
2000 compared to $15.1 million in 1999 as a result of a higher average balance
of interest-earning assets. Interest on loans receivable increased $2.0 million
and interest on investment securities increased $357,000 as a result of higher
average balances in 2000. The average balance of interest-earning assets
increased from $194.2 million in 1999 to $222.2 million in 2000. The average
yield on interest-earnings assets increased from 7.78% in 1999 to 7.81% in 2000
due to an increase in market rates.
Total interest expense increased $1.7 million, or 22.5%, to $9.3 million for
2000 compared to $7.6 million for 1999 as a result of the growth in deposits and
an increase in average borrowings from the Federal Home Loan Bank. The average
balances of interest-bearing deposits and advances from the Federal Home Loan
Bank were $168.7 million and $19.2 million, respectively, for 2000 compared to
$153.5 million and $11.8 million for 1999. The average cost of funds increased
from 4.58% in 1999 to 4.93% in 2000 due to the use of higher cost borrowed funds
and an increase in 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 2000 and 1999 are
shown in the schedule captioned "Rate/Volume Analysis" included herein.
Provision for Loan Losses. The provision for loan losses was $48,000 for 2000
compared to $142,000 for 1999. For 1999, the provision was recorded to bring the
allowance for loan losses to the level determined by applying the methodology
for estimating credit losses after reduction for net charge-offs during the
period. During 2000, a decline in net charge-offs and in the balance of
nonperforming loans reduced the recorded provision based on the application of
the allowance methodology, even though the Bank experienced overall growth in
the loan portfolio. During 2000, the net loan portfolio growth was $24.3
million. Commercial and residential real estate loans and consumer installment
loans increased $18.2 million and $7.2 million, respectively, during this
period, while commercial business loans decreased $1.6 million. The consistent
application of management's allowance methodology did not result in an increase
in the level of the allowance for loan losses due to lower levels of estimated
inherent credit losses in residential, consumer and commercial real estate loans
combined with the decrease in commercial business loans which have a higher
level of inherent credit risk. No provisions were made for the first two
quarters of 2000, but provisions of $24,000 were made during the third and
fourth quarters of 2000. 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 quarters.
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. At December 31, 2000, nonperforming loans totaled $572,000 or 0.23% 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 $280,000
and consumer loans in the amount of $41,000. These loans are accruing interest
as the estimated value of the collateral and collection efforts are deemed
sufficient to ensure full recovery.
-▇-
▇▇▇▇▇▇▇▇▇▇▇ income. Noninterest income increased 18.3% to $1.2 million for 2000
compared to $1.0 million for 1999. The increase is attributable primarily to an
increase in service charges on deposit accounts of $171,000 resulting from
growth in transaction accounts during 2000, and an increase in gain on sale of
mortgage loans of $45,000 due to an increase in the number of loans sold in the
second and fourth quarters of 2000.
Noninterest expense. Noninterest expense increased only $39,000 for 2000
compared to 1999. The increase results primarily from increases in compensation
and benefits and data processing expenses offset by a decrease in merger related
expenses for 2000 compared to 1999. Compensation and benefits expense increased
$336,000 due to normal compensation increases, compensation adjustments after
the merger, additional staff for the new branch office in New Albany, Indiana
opened during 1999 and the adoption of a stock-based compensation plan in the
fourth quarter of 1999. Data processing expenses increased due to excess
depreciation on data processing equipment purchases and retirements during 2000
as a result of the merger, increased automated teller machine processing fees
resulting from increased usage and the purchase of an additional machine for the
new branch, and expenses related to internet banking that the Bank did not incur
during 1999. Other operating expenses, excluding merger related expenses,
increased $62,000 for 2000 compared to 1999 primarily due to increases in office
supplies, postage, telephone expenses, loan administration expenses, and public
filing expenses. Office supplies increased because of the need to replace the
existing stationery and office products with those bearing the new bank logo.
Postage, telephone, and loan administration expenses increased in 2000 due to
increased loan origination activity and growth in deposits.
Income tax expense. Income tax expense for the year ended December 31, 2000 was
$1.2 million, compared to $1.1 million for the same period in 1999. The
effective tax rate for 2000 was 32.4% compared to 37.9 % for 1999. The higher
effective tax rates for 1999 compared to 2000 resulted from significant
nondeductible merger related expenses incurred during the third and fourth
quarters of 1999 and a change in state franchise tax law in 2000 providing for
the apportionment of income. See Note 10 in the accompanying Notes to
Consolidated Financial Statements.
-8-
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AVERAGE BALANCE SHEETS
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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 balances of assets or liabilities, respectively, for
the periods presented. Average balances are derived from daily balances.
Year ended December 31,
-----------------------------------------------------------------------
2000 1999
-------------------------------- -----------------------------------
Average Average
------- -------
(Dollars in thousands) Average Yield/ Average Yield/
------- ------ ------- ------
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable (1) $167,981 $13,994 8.33% $144,233 $12,026 8.34%
Investment securities:
Taxable (2) 40,580 2,608 6.43% 34,436 2,221 6.45%
Tax-exempt 7,325 376 5.13% 7,459 395 5.30%
------------------ -----------------
Total investment securities 47,905 2,984 6.23% 41,895 2,616 6.24%
------------------ -----------------
Federal funds sold 533 33 6.19% 3,354 166 4.95%
Interest-bearing deposits with banks 5,794 352 6.08% 5,559 293 5.27%
------------------ -----------------
Total interest-earning assets 222,213 17,363 7.81% 195,041 15,101 7.74%
------------------ -----------------
Noninterest-earning assets 12,964 14,508
-------- --------
Total assets $235,177 $209,549
======== ========
Interest-bearing liabilities:
Savings and interest-bearing demand deposits $ 75,231 $ 2,735 3.64% $ 64,685 $ 2,067 3.20%
Time deposits 93,450 5,300 5.67% 88,774 4,774 5.38%
------------------ -----------------
Total deposits 168,681 8,035 4.76% 153,459 6,841 4.46%
------------------ -----------------
FHLB advances 19,159 1,232 6.43% 11,820 725 6.13%
------------------ -----------------
Total interest-bearing liabilities 187,840 9,267 4.93% 165,279 7,566 4.58%
------------------ -----------------
Noninterest-bearing liabilities:
Noninterest-bearing deposits 15,243 12,651
Other liabilities 2,376 2,382
-------- --------
Total liabilities 205,459 180,312
Stockholders' equity 29,718 29,237
-------- --------
Total liabilities and stockholders' equity $235,177 $209,549
======== ========
Net interest income $ 8,096 $ 7,535
======= =======
Interest rate spread 2.88% 3.16%
======= =======
Net interest margin 3.64% 3.86%
======= =======
Ratio of average interest-earning assets
to average interest-bearing liabilities 118.30% 118.01%
======= =======
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(1) Average loans receivable includes nonperforming loans.
(2) Includes taxable debt and equity securities and Federal Home Loan Bank
Stock.
-9-
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RATE/VOLUME ANALYSIS
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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).
2000 Compared to 1999
Increase (Decrease) Due to
-------------------------------------------------
Rate/
-----
Rate Volume Volume Net
---- ------ ------ ---
(In thousands)
Interes-earning assets:
Loans receivable $ (14) $ 1,984 $ (2) $ 1,968
Investment securities:
Taxable (7) 395 (1) 387
Tax-exempt (12) (7) - (19)
-------------------------------------------------
Total investment securities (19) 388 (1) 368
-------------------------------------------------
Federal funds sold 42 (140) (35) (133)
Interest-bearing deposits with banks 45 12 2 59
-------------------------------------------------
Total net change in income
on interest-earning assets 54 2,244 (36) 2,262
-------------------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits 460 688 46 1,194
FHLB advances 35 450 22 507
-------------------------------------------------
Total net change in expense
on interest-bearing liabilities 495 1,138 68 1,701
-------------------------------------------------
Net change in net interest income $ (441) $ 1,106 $ (104) $ 561
=================================================
-10-
Quarterly Financial Data
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
Interest income $ 4,072 $ 4,218 $ 4,497 $ 4,576
Interest expense 2,111 2,216 2,449 2,491
----------------------------------------------------
Net interest income 1,961 2,002 2,048 2,085
Provision for loan losses - - 24 24
----------------------------------------------------
Net interest income after provision for loan losses 1,961 2,002 2,024 2,061
Noninterest income 284 289 326 320
Noninterest expenses 1,516 1,369 1,368 1,376
----------------------------------------------------
Income before income taxes 729 922 982 1,005
Income tax expense 254 333 350 243
----------------------------------------------------
Net income $ 475 $ 589 $ 632 $ 762
====================================================
Net income per common share, basic $ 0.19 $ 0.24 $ 0.26 $ 0.31
====================================================
Net income per common share, diluted $ 0.19 $ 0.24 $ 0.26 $ 0.31
----------------------------------------------------
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,
2000, the Bank had cash and interest-bearing deposits with banks of $11.5
million and securities available for sale with a fair value of $34.8 million. If
the Bank requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the FHLB of Indianapolis and 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, 2000, the Bank had total commitments to extend credit of $19.6
million. See Note 14 of Notes to Consolidated Financial Statements. At December
31, 2000, the Bank had certificates of deposit scheduled to mature within one
year of $45.1 million. Historically, the Bank has been able to retain a
significant amount of its deposits as they mature.
Current Office of Thrift Supervision (OTS) regulations require the Bank to
maintain an average daily balance of liquid assets (cash and eligible
investments) equal to at least 4.0% of the average daily balance of its net
withdrawable deposits and short-term borrowings. Historically, the Bank has
maintained liquidity levels in excess of regulatory requirements.
The Bank is required to maintain specific amounts of capital pursuant to OTS
requirements. As of December 31, 2000, the Bank was in compliance with all
regulatory capital requirements which were effective as of such date with
tangible, core and risk-based capital ratios of 11.9%, 11.9% and 20.6%,
respectively.
-11-
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.
Quantitative Aspects of Market Risk. The Bank does not maintain a trading
account for any class of financial instrument nor does the Bank engage in
hedging activities or purchase high-risk derivative instruments. Furthermore,
the Bank is not subject to foreign currency exchange rate risk or commodity
price risk.
The Bank uses interest rate sensitivity analysis to measure its interest rate
risk by computing changes in NPV(net portfolio value) of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained 100 to 300 basis point increase or decrease in
market interest rates with no effect given to any steps that management might
take to counter the effect of that interest rate movement. Using data compiled
by the OTS, the Bank receives a report which measures interest rate risk by
modeling the change in NPV (net portfolio value) over a variety of interest rate
scenarios. This procedure for measuring interest rate risk was developed by the
OTS to replace the "gap" analysis (the difference between interest-earning
assets and interest-bearing liabilities that mature or reprice within a specific
time period).
The following table is provided by the OTS and sets forth the change in the
Bank's NPV at December 31, 2000, 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.
At December 31, 2000
-------------------------------------------------------------
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 $ 22,295 $(10,996) (33)% 9.39% (378)bp
200bp 26,136 (7,155) (21) 10.77 (240)bp
100bp 29,897 (3,394) (10) 12.06 (111)bp
--bp 33,291 - - 13.17 --bp
(100)bp 34,727 1,436 4 13.57 40bp
(200)bp 35,649 2,358 7 13.79 62bp
(300)bp 37,386 4,095 12 14.27 110bp
-12-
The above table indicates that in the event of a sudden and sustained increase
in prevailing market interest rates, the Bank's NPV would be expected to
decrease, and that in the event of a sudden and sustained decrease in prevailing
market interest rates, the Bank's NPV would be expected to increase.
Certain assumptions utilized by the OTS in assessing the interest rate risk of
savings associations within its region were utilized in preparing the preceding
table. These assumptions relate to interest rates, loan prepayment rates,
deposit decay rates, and the market values of certain assets under differing
interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates
could deviate significantly from those assumed in calculating the table.
-13-
[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, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 2000 and 1999. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, 2000 and 1999, and the results of their
operations and their cash flows for the period ended December 31, 2000 and 1999
in conformity with generally accepted accounting principles.
/s/ Monroe Shine
January 12, 2001
-14-
FIRST CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
---- ----
ASSETS
Cash and due from banks $ 6,010,281 $ 5,820,337
Interest-bearing deposits with banks 5,458,413 3,701,653
Securities available for sale, at fair value 34,778,541 30,096,859
Securities held to maturity (fair value $11,161,645, 1999 $11,980,393) 11,229,045 12,324,613
Federal funds sold - 4,000,000
Loans receivable, net of allowance for loan losses of
1,183,638 in 2000 and $1,193,606 in 1999 179,304,270 154,981,987
Federal Home Loan Bank stock, at cost 1,503,800 1,252,400
Foreclosed real estate 118,640 255,757
Premises and equipment 6,227,746 6,459,164
Accrued interest receivable:
Loans 1,154,869 839,334
Securities 790,552 739,134
Cash value of life insurance 1,160,985 1,110,587
Other assets 844,990 1,215,654
-----------------------------------
Total Assets $ 248,582,132 $ 222,797,479
===================================
LIABILITIES
Deposits:
Noninterest-bearing $ 17,123,415 $ 14,101,631
Interest-bearing 168,244,737 161,239,878
-----------------------------------
Total deposits 185,368,152 175,341,509
Advances from Federal Home Loan Bank 30,074,207 16,750,000
Accrued interest payable 1,306,006 970,682
Accrued expenses and other liabilities 726,070 858,618
-----------------------------------
Total Liabilities 217,474,435 193,920,809
-----------------------------------
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 2,537,324 shares
(2,506,574 shares in 1999) 25,373 25,066
Additional paid-in capital 12,811,494 12,445,776
Retained earnings-substantially restricted 19,221,842 17,781,325
Accumulated other comprehensive income-net unrealized loss
on securities available for sale (145,398) (811,737)
Unearned stock compensation (282,854) -
Unearned ESOP shares (522,760) (563,760)
-----------------------------------
Total Stockholders' Equity 31,107,697 28,876,670
-----------------------------------
Total Liabilities and Stockholders' Equity $ 248,582,132 $ 222,797,479
===================================
See notes to consolidated financial statements.
-15-
FIRST CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000 AND 1999
Accumulated
Additional Other Unearned Unearned
Common Paid-in Retained Comprehensive Stock ESOP
Stock Capital Earnings Income (Loss) Compensation Shares Total
Balances at January 1, 1999 $ 25,052 $ 12,432,554 $ 16,920,706 $ 106,714 $ - $ (604,760) $ 28,880,266
COMPREHENSIVE INCOME
Net income - - 1,770,136 - - - 1,770,136
Other comprehensive income:
Change in unrealized loss
on securities available for sale,
net of deferred income tax
benefit of $602,415 - - - (918,451) - - (918,451)
Less: reclassification adjustment - - - - - - -
------------
Total comprehensive income 851,685
------------
Cash dividends ($0.35 per share) - - (421,974) - - - (421,974)
Cash dividends of pooled affiliate - - (487,543) - - - (487,543)
Exercise of stock options 14 9,395 - - - - 9,409
Shares released by ESOP trust - 3,827 - - - 41,000 44,827
---------------------------------------------------------------------------------------------
Balances at December 31, 1999 25,066 12,445,776 17,781,325 (811,737) - (563,760) 28,876,670
COMPREHENSIVE INCOME
Net income - - 2,458,157 - - - 2,458,157
Other comprehensive income:
Change in unrealized loss
on securities available
for sale,
net of deferred income tax
expense of $437,055 - - - 666,339 - - 666,339
Less: reclassification
adjustment - - - - - - -
------------
Total comprehensive income 3,124,496
------------
Cash dividends ($0.41 per share) - - (1,017,640) - - - (1,017,640)
Restricted stock grants 307 353,318 - - (353,625) - -
Shares released by ESOP trust - 3,080 - - - 41,000 44,080
Stock compensation expense - 9,320 - - 70,771 - 80,091
--------------------------------------------------------------------------------------------
Balances at December 31, 2000 $ 25,373 $ 12,811,494 $ 19,221,842 $ (145,398) $(282,854) $ (522,760) $ 31,107,697
============================================================================================
See notes to consolidated financial statements.
-16-
FIRST CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
---- ----
INTEREST INCOME
Loans, including fees $ 13,993,666 $ 12,025,432
Securities:
Taxable 2,500,061 2,124,167
Tax-exempt 375,888 395,117
Federal funds sold 32,555 165,945
Federal Home Loan Bank dividends 108,522 97,196
Interest-bearing deposits with banks 352,076 293,264
------------------------------------
Total interest income 17,362,768 15,101,121
------------------------------------
INTEREST EXPENSE
Deposits 8,035,010 6,841,182
Advances from Federal Home Loan Bank 1,231,762 725,041
------------------------------------
Total interest expense 9,266,772 7,566,223
------------------------------------
Net interest income 8,095,996 7,534,898
Provision for loan losses 48,000 142,250
------------------------------------
Net interest income after provision for loan losses 8,047,996 7,392,648
------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 868,591 697,546
Commission income 201,002 220,047
Gain on sale of mortgage loans 87,266 42,461
Other income 62,437 70,547
------------------------------------
Total noninterest income 1,219,296 1,030,601
------------------------------------
NONINTEREST EXPENSES
Compensation and benefits 3,032,101 2,695,686
Occupancy and equipment 745,879 747,200
Data processing 412,933 336,030
Merger related expenses 20,453 438,644
Other expenses 1,417,558 1,356,028
------------------------------------
Total noninterest expenses 5,628,924 5,573,588
------------------------------------
Income before income taxes 3,638,368 2,849,661
Income tax expense 1,180,211 1,079,525
------------------------------------
Net Income $ 2,458,157 $ 1,770,136
====================================
Net income per common share, basic $ 1.00 $ 0.72
====================================
Net income per common share, diluted $ 1.00 $ 0.71
====================================
See notes to consolidated financial statements.
-17-
FIRST CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,458,157 $ 1,770,136
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of premiums and accretion of
discounts on securities, net (7,651) 29,099
Depreciation expense 488,948 539,529
Deferred income taxes (134,075) (2,124)
ESOP and stock compensation expense 124,171 44,827
Increase in cash value of life insurance (50,398) (48,922)
Provision for loan losses 48,000 142,250
Proceeds from the sale of mortgage loans 3,671,898 3,047,749
Mortgage loans originated for sale (3,584,632) (3,005,288)
Net gain on sale of mortgage loans (87,266) (42,461)
Increase in accrued interest receivable (366,953) (291,519)
Increase in accrued interest payable 287,105 107,692
Net change in other assets/liabilities (16,645) (162,258)
--------------------------------
Net Cash Provided By Operating Activities 2,830,659 2,128,710
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits with banks (1,756,760) 7,839,279
(Increase) decrease in federal funds sold 4,000,000 (2,100,000)
Purchase of securities available for sale (6,957,369) (18,239,933)
Proceeds from maturities of securities available for sale 2,800,000 9,863,380
Purchase of securities held to maturity - (8,975,000)
Proceeds from maturities of securities held to maturity 981,600 1,431,752
Principal collected on mortgage-backed securities 700,700 390,179
Net increase in loans receivable (24,308,654) (19,896,860)
Purchase of Federal Home Loan Bank stock (251,400) (399,000)
Proceeds on sale of foreclosed real estate 75,488 -
Purchase of premises and equipment (257,530) (1,586,430)
--------------------------------
Net Cash Used In Investing Activities (24,973,925) (31,672,633)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 10,026,643 19,846,215
Advances from Federal Home Loan Bank 42,000,000 24,500,000
Repayment of advances from Federal Home Loan Bank (28,675,793) (13,000,000)
Exercise of stock options - 9,409
Cash dividends paid (1,017,640) (909,517)
--------------------------------
Net Cash Provided By Financing Activities 22,333,210 30,446,107
--------------------------------
Net Increase in Cash and Due from Banks 189,944 902,184
Cash and due from banks at beginning of year 5,820,337 4,918,153
--------------------------------
Cash and Due From Banks at End of Year $ 6,010,281 $ 5,820,337
================================
See notes to consolidated financial statements.
-18-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
First Capital, Inc. (the Company) is the thrift holding company of
First ▇▇▇▇▇▇▇▇ 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 ▇▇▇▇▇▇▇▇ Financial Services, Inc., sells property and casualty
insurance and investment products.
Basis of Presentation and Consolidation
Certain prior year amounts have been reclassified to conform with
current year presentation. The consolidated financial statements for
1999 have been restated to reflect a change in fiscal year to the
calendar year and include the results of operations, financial position
and cash flows of HCB Bancorp which merged into the Company on January
12, 2000. The merger was accounted for as a pooling of interests (See
note 2).
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
Statements of Cash Flows
For purposes of the statements of cash flows, the Bank has defined cash
and cash equivalents as those amounts included in the balance sheet
caption "Cash and due from banks."
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.
-19-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(1 - continued)
Securities Available for Sale
Securities available for sale consist of debt and equity securities and
are stated at fair value. Amortization of premium and accretion of
discount are recognized in interest income using the interest method
over the remaining period to maturity, adjusted for anticipated
prepayments. 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.
Securities Held to Maturity
Debt securities for which the Bank has the positive intent and ability
to hold to maturity are carried at cost, adjusted for amortization of
premium and accretion of discount using the interest method over the
remaining period to maturity, adjusted for anticipated prepayments.
Mortgage-backed securities represent participating interests in pools
of long-term first mortgage loans originated and serviced by issuers of
the securities.
Loans
Loans receivable are stated at unpaid principal balances, less net
deferred loan fees and the allowance for loan losses. The Bank's real
estate loan portfolio consists primarily of long-term loans,
collateralized by first mortgages on single-family residences and
multi-family residential properties located in the southern Indiana
area and commercial real estate loans. In addition to real estate
loans, the Bank makes commercial loans and consumer loans.
Loan origination fees and certain direct costs of underwriting and
closing loans are deferred and the net fee or cost is recognized as an
adjustment to interest income over the contractual life of the loans
using the interest method.
The accrual of interest is discontinued on a loan when, in the judgment
of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. The Bank does not accrue
interest on loans past due 90 days or more except when the estimated
value of collateral and collection efforts are deemed sufficient to
ensure full recovery. When a loan is placed on non accrual status,
previously accrued but unpaid interest is deducted from interest
income.
Subsequent receipts on nonaccrual loans, including specific impaired
loans are recorded as a reduction of principal, and interest income is
only recorded once principal recovery is reasonably assured.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specified impaired loans, and economic
conditions. 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.
-20-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(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
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
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.
Amortization of Intangibles
Goodwill, included in other assets, represents the excess of the cost
of acquired branch banking facilities over the fair value of the net
assets acquired and is amortized over 15 years using the straight-line
method.
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.
-21-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(1 - continued)
Stock-Based Compensation
Under the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company measures and recognizes 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 No. 123. Accordingly, no compensation cost is
charged against earnings for stock options granted under the Company's
stock-based compensation plans.
Advertising
Advertising costs are charged to operations when incurred
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS 133),
Accounting for Derivative Instruments and Hedging Activities. SFAS 133,
as amended by SFAS 138 in June 2000, establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of condition and measure
those instruments at fair value. The FASB issued SFAS 137, Accounting
for Derivative Investments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133, which extended the effective date of
implementation of SFAS 133 to fiscal quarters of fiscal years beginning
after June 15, 2000. SFAS 133 also provides that as of the date of
initial application of the standard, an entity may transfer any held to
maturity securities into the available for sale or trading categories
to allow for future designation of the available for sale category as a
hedged item and facilitate the transition to this standard. Management
has determined that the implementation of this standard will have no
impact on the Company's financial condition and results of operations.
In September 2000, FASB issued SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. The
statement replaces SFAS 125, Accounting for Transfers and Servicing
Financial Assets and Extinguishments of Liabilities. It revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but
it carries over most of SFAS 125's provisions without reconsideration.
The statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that
approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. The
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings.
The statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31,
2001. The statement is effective for recognition and reclassification
of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15,
2000. Disclosures about securitization and collateral accepted need not
be reported for periods ending on or before December 15, 2000, for
which financial statements are presented for comparative purposes.
-22-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(1 - continued)
The statement is to be applied prospectively with certain exceptions.
Other than those exceptions, earlier or retroactive application of its
accounting provisions is not permitted. The implementation of this
standard has no impact on the Company's financial condition or results
of operations.
(2) MERGER WITH HCB BANCORP
On January 12, 2000, the Company completed a merger with HCB Bancorp
(HCB), a bank holding company located in Palmyra, Indiana. HCB was the
parent company of ▇▇▇▇▇▇▇▇ County Bank, a state-chartered commercial
bank which was merged with and into First ▇▇▇▇▇▇▇▇ Bank. The merger
provided for an exchange of 15.5 shares of the Company's common stock
for each share of HCB common stock. The merger was accounted for as a
pooling of interests.
The following table sets forth the previously reported financial
information for the Company and HCB:
(In thousands) 1999
----
Revenue
Company $ 9,132
HCB 7,009
Net Income
Company $ 849
HCB 930
(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, 2000 and 1999 were approximately $757,000 and
$525,000 respectively.
(4) DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the balance sheets
according to management's intent. Investment securities at December 31,
2000 and 1999 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2000:
Securities available for sale:
Mortgage-backed securities:
FHLMC certificates $ 581,685 $ - $ 3,072 $ 578,613
GNMA certificates 2,928,927 - 37,328 2,891,599
--------------------------------------------------------
3,510,612 - 40,400 3,470,212
--------------------------------------------------------
Other debt securities:
Federal agency 25,448,400 124,526 297,549 25,275,377
Municipal 4,954,187 39,417 51,092 4,942,512
--------------------------------------------------------
30,402,587 163,943 348,641 30,217,889
--------------------------------------------------------
Mutual funds 1,106,106 - 15,666 1,090,440
--------------------------------------------------------
Total securities available
for sale $ 35,019,305 $ 163,943 $ 404,707 $ 34,778,541
=========================================================
-23-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(4 - continued)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities held to maturity:
Mortgage-backed securities:
FHLMC certificates $ 22,142 $ 15 $ - $ 22,157
GNMA certificates 207,993 - 5,039 202,954
FNMA certificates 280,244 933 14,780 266,397
-------------------------------------------------------------
510,379 948 19,819 491,508
-------------------------------------------------------------
Other debt securities:
Federal agency 8,485,359 - 97,442 8,387,917
Municipal 2,233,307 48,913 - 2,282,220
-------------------------------------------------------------
10,718,666 48,913 97,442 10,670,137
-------------------------------------------------------------
Total securities held to
maturity $ 11,229,045 $ 49,861 $ 117,261 $ 11,161,645
=============================================================
December 31, 1999:
Securities available for sale:
Mortgage-backed securities:
FHLMC certificates $ 707,221 $ - $ 13,237 $ 693,984
GNMA certificates 3,405,966 - 146,611 3,259,355
-------------------------------------------------------------
4,113,187 - 159,848 3,953,339
-------------------------------------------------------------
Other debt securities:
US Treasury 499,640 516 - 500,156
Federal agency 20,834,647 - 940,851 19,893,796
Municipal 4,957,614 5,037 213,830 4,748,821
-------------------------------------------------------------
26,291,901 5,553 1,154,681 25,142,773
-------------------------------------------------------------
Mutual funds 1,035,929 - 35,182 1,000,747
-------------------------------------------------------------
Total securities available
for sale $ 31,441,017 $ 5,553 $ 1,349,711 $ 30,096,859
=============================================================
Securities held to maturity:
Mortgage-backed securities:
FHLMC certificates $ 52,485 $ 161 $ - $ 52,646
GNMA certificates 251,456 - 12,431 239,025
FNMA certificates 323,004 902 12,829 311,077
-------------------------------------------------------------
626,945 1,063 25,260 602,748
-------------------------------------------------------------
Other debt securities:
Federal agency 8,983,936 - 380,888 8,603,048
Municipal 2,713,732 61,282 417 2,774,597
-------------------------------------------------------------
11,697,668 61,282 391,305 11,377,645
-------------------------------------------------------------
Total securities held to
maturity $ 12,324,613 $ 62,345 $ 406,565 $ 11,980,393
=============================================================
-24-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND JUNE 30, 2000 AND 1999
(4-continued)
The amortized cost and fair value of debt securities as of December 31,
2000, 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 $ 3,881,205 $ 3,873,950 $ 307,227 $ 308,240
Due after one year through five
years 9,521,080 9,593,953 1,472,322 1,505,392
Due after five years through
ten years 12,911,703 12,761,356 8,925,117 8,842,505
Due after ten years 4,088,599 3,988,630 14,000 14,000
----------------------------------------------------------------
30,402,587 30,217,889 10,718,666 10,670,137
Mortgage-backed securities 3,510,612 3,470,212 510,379 491,508
----------------------------------------------------------------
$ 33,913,199 $33,688,101 $ 11,229,045 $ 11,161,645
================================================================
Certain debt securities were pledged to secure advances from the Federal
Home Loan Bank at December 31, 2000. (See Note 8)
(5) LOANS
Loans receivable at December 31, 2000 and 1999 consisted of the following:
2000 1999
---- ----
Real estate mortgage loans:
Residential $109,812,449 $ 99,797,081
Land 3,356,389 1,379,372
Residential construction 9,665,497 8,773,567
Commercial real estate 20,371,994 15,014,260
Commercial business loans 9,815,614 11,376,372
Consumer loans:
Home equity and second mortgage loans 11,348,657 6,946,516
Automobile loans 10,156,005 7,922,875
Loans secured by savings accounts 1,554,237 1,155,655
Unsecured loans 1,609,396 1,084,297
Other consumer loans 5,919,878 6,283,668
--------------------------
Gross loans receivable 183,610,116 159,733,663
--------------------------
Less:
Deferred loan origination fees, net 228,992 251,192
Undisbursed portion of loans in process 2,893,217 3,306,878
Allowance for loan losses 1,183,637 1,193,606
--------------------------
4,305,846 4,751,676
--------------------------
Loans receivable, net $179,304,270 $154,981,987
==========================
Mortgage loans serviced for the benefit of others amounted to $10,265,945 and
$7,688,245 at December 31, 2000 and 1999, respectively.
-25-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(5-continued)
An analysis of the allowance for loan losses is as follows:
2000 1999
____ ____
Beginning balances $ 1,193,606 $ 1,240,027
Provision 48,000 142,250
Recoveries 17,778 35,192
Loans charged-off (75,746) (224,163)
--------------------------
Ending balances $ 1,183,638 $ 1,193,606
==========================
The Bank had loans amounting to approximately $251,000 and $197,000
specifically classified as impaired at December 31, 2000 and 1999,
respectively. The average recorded investment in impaired loans amounted to
approximately $132,000 and $387,000 for the years ended December 31, 2000
and 1999, respectively. The Bank had no specific allowance for loan losses
related to impaired loans at December 31, 2000 and December 31, 1999.
Interest income on impaired loans of $15,043 was recognized in 1999 for
cash payments received. No interest income on impaired loans was recognized
in 2000.
The Bank has entered into loan transactions with certain directors,
officers and their affiliates (related parties). In the opinion of
management, such indebtedness was incurred in the ordinary course of
business on substantially the same terms as those prevailing at the time
for comparable transactions with other persons and does not involve more
than normal risk of collectibility or present other unfavorable features.
The following table represents the aggregate activity for related party
loans which during the year ended December 31, 2000:
Beginning balance $ 1,780,284
New loans 1,591,686
Payments (1,328,126)
-------------
Ending balance $ 2,043,844
=============
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, 2000, the Bank granted approximately $1,695,000, to
customers of the dealership and such loans had an aggregate outstanding
balance of approximately $1,359,000 at December 31, 2000.
-26-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(6) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
2000 1999
---- ----
Land and land improvements $ 1,146,490 $ 1,146,490
Leasehold improvements 148,283 49,169
Office building 4,819,652 4,858,847
Furniture, fixtures and equipment 2,241,964 2,606,789
----------------------------
8,356,389 8,661,295
Less accumulated depreciation 2,128,643 2,202,131
----------------------------
Totals $ 6,227,746 $ 6,459,164
============================
(7) DEPOSITS
The aggregate amount of time deposit accounts with balances of $100,000 or
more was approximately $19,454,000 and $17,752,000 at December 31, 2000 and
1999, respectively. Deposit account balances in excess of $100,000 are not
federally insured.
At December 31, 2000, scheduled maturities of time deposits were as
follows:
Year ending December 31:
2001 $45,075,485
2002 26,352,599
2003 12,780,564
2004 4,765,057
2005 and thereafter 6,079,028
-----------
Total $95,052,733
===========
The Bank held deposits of approximately $4,387,000 and $4,412,000 for
related parties at December 31, 2000 and 1999, respectively.
(8) ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 2000 and 1999, advances from the Federal Home Loan Bank
were as follows:
2000 1999
---------------------- --------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
Fixed rate advances 6.30% $ 30,074,207 5.73% $ 13,750,000
Adjustable rate advances - - 5.13% 3,000,000
------------ ------------
Totals $ 30,074,207 $ 16,750,000
============ ============
-27-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(8 - continued)
The following is a schedule of maturities for advances outstanding as of
December 31, 2000:
Due in:
2001 $ 1,750,000
2002 1,000,000
2003 -
2004 2,418,848
2005 6,000,000
Thereafter 18,905,359
----------
Total $ 30,074,207
==========
The advances are secured under a blanket collateral agreement. At December 31,
2000, eligible collateral pledged as security for the advances included the
following:
Carrying
Value
Residential mortgage loans $104,181,394
Available for sale securities 29,611,242
Held to maturity securities 8,995,738
-----------
Total pledged assets $142,788,374
===========
(9) 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.
The following is a schedule by years of future minimum rental payments
required under these operating leases:
Year ending December 31:
2001 $ 31,890
2002 31,890
2003 30,833
2004 19,200
2005 17,600
------------
Total minimum payments required $ 131,413
============
Total minimum rental expense for all operating leases for each of the
periods ended December 31, 2000 and 1999 amounted to $31,890.
(10) INCOME TAXES
The components of income tax expense were as follows:
2000 1999
---- ----
Current $ 1,314,286 $ 1,081,649
Deferred (134,075) (2,124)
-------------------------------
Totals $ 1,180,211 $ 1,079,525
===============================
-28-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(10 - continued)
Significant components of the Bank's deferred tax assets and liabilities as
of December 31, 2000 and 1999 were as follows:
2000 1999
---- ----
Deferred tax assets (liabilities):
Depreciation $ (199,869) $ (180,073)
Deferred loan fees (33,299) (34,474)
Deferred compensation plans 141,524 136,647
Allowance for loan losses 458,254 370,380
Post-1987 bad debt deduction (85,898) (114,531)
Unrealized loss on securities available for sale 95,367 532,421
Other (28,748) (32,660)
----------------------------
Net deferred tax asset $ 347,331 $ 677,710
============================
The reconciliation of income tax expense with the amount which would have been
provided at the federal statutory rate of 34 percent follows:
2000 1999
---- ----
Provision at federal statutory tax rate $ 1,237,045 $ 968,885
State income tax-net of federal tax benefit 107,817 174,906
Change in state tax law - net of federal benefit (18,730) -
Tax-exempt interest income (127,660) (134,132)
Increase in cash value of life insurance (17,135) (16,634)
Nondeductible merger expenses 6,954 90,759
Other (8,080) (4,259)
----------------------------
Totals $ 1,180,211 $ 1,079,525
============================
Effective tax rate 32.4% 37.9%
============================
In 2000, the Indiana financial institution tax law was amended to treat resident
financial institutions the same as nonresident financial institutions by
providing for apportionment of Indiana income based on receipts in Indiana.
Receipts for Indiana were defined to exclude receipts from out of state sources
and federal government and agency obligations. This change was effective
retroactively to January 1, 1999. The provision of income taxes for 2000
includes a credit of $18,730 in recognition of this change.
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, 2000 includes
approximately $909,000 of cumulative deductions for which no deferred federal
income tax liability has been recorded. Reduction of these reserves for purposes
other than tax bad debt losses or adjustments arising from carryback of net
operating losses would create income for tax purposes subject to the then
current corporate income tax rate. The unrecorded deferred liability on these
amounts was approximately $309,000 at December 31, 2000.
-29-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(10 - continued)
Federal legislation repealed the reserve method of accounting for bad
debts by qualified thrift institutions for tax years beginning after
December 31, 1995. As a result, the Bank cannot use the
percentage-of-taxable-income method to calculate the annual addition to
the statutory bad debt reserve. Instead, the Bank is required to
compute its federal tax bad debt deduction based on actual loss
experience over a period of years. The legislation required the Bank to
recapture into taxable income over a six-year period its post-1987
additions to the statutory bad debt reserve, thereby generating
additional tax liability. At December 31, 2000, the remaining
unamortized balance of the post-1987 reserves totaled $252,642 for
which a deferred tax liability of $85,898 has been recorded.
The legislation also provided that the Bank will not be required to
recapture its pre-1988 statutory bad debt reserves if it ceases to meet
the qualifying thrift definitional tests and if the Bank continues to
qualify as a "bank" under existing provisions of the Internal Revenue
Code.
(11) 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 $86,856 and $55,833 to the
plan for the years ended December 31, 2000 and 1999, 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, 2000 and 1999
amounted to $44,320 and $44,826, respectively.
Company common stock held by the ESOP trust was as follows:
2000 1999
---- ----
Allocated shares 9,225 5,125
Shares committed to be released - -
Unearned shares 52,276 56,376
-------------------
Total ESOP shares 61,501 61,501
===================
Fair value of unearned shares $ 575,036 $ 676,512
===================
-30-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(12) 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 $20,909 and $16,501 for
the years ended December 31, 2000 and 1999, 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 $9,691 and $8,365 for the years ended December 31, 2000 and
1999, respectively.
(13) STOCK-BASED COMPENSATION PLAN
The Company applies ▇▇▇ ▇▇. ▇▇ and related interpretations in
accounting for its stock-based compensation plans. In accordance with
SFAS No. 123, the Company elected to continue to apply the provisions
of APB No. 25. However, pro forma disclosures as if the Company adopted
the compensation cost recognition provisions of SFAS No. 123, are
presented along with a summary of the plans and awards.
The Company's stock incentive 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 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 vest
ratably over five to ten years and are exercisable in whole or in part
for a period up to ten years from the date of the grant.
-31-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(13 - continued)
The following is a summary of the Company's stock options as of December
31, 2000 and 1999, and the changes for the years then ended:
2000 1999
-------------- -------------
Weighted Weighte
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
Outstanding at beginning
of year 30,005 $ 7.88 29,243 $ 6.86
Granted 66,500 11.00 5,817 12.65
Exercised - - 1,311 7.18
Forfeited 2,876 10.05 3,744 7.60
------ ------
Outstanding at end of year 93,629 $10.03 30,005 $ 7.88
====== ======
Exercisable at end of year 16,392 $ 6.73 11,806 $ 6.13
====== ======
For options outstanding at December 31, 2000, the option price per share ranged
from $5.07 to $12.65 and the weighted average remaining contractual life of the
options was 4.8 years.
For purposes of providing the pro forma disclosures required under SFAS No. 123,
the fair market value of stock options granted for the years ended December 31,
2000 and 1999, 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 years ended December 31,
2000 and 1999:
2000 1999
---- ----
Expected dividend yields 3.88% 3.11%
Risk-free interest rates 6.65% 5.50%
Expected volatility 11.69% 11.68%
Expected life of options 5 years 5 years
Weighted average fair value at grant date $ 1.59 $ 1.78
Had compensation cost for the Company's stock-based compensation plans been
determined in accordance with the fair value based accounting method provided by
SFAS No. 123, the net income and net income per common share for the years ended
December 31, 2000 and 1999 would have been as follows:
(In thousands, except per share amounts) 2000 1999
---- ----
Pro forma net income $ 2,446 $ 1,768
Pro forma net income per share:
Basic $ 1.00 $ 0.71
Diluted $ 0.99 $ 0.71
-32-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(14) 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
$240,085 at December 31, 2000.
The following is a summary of the commitments to extend credit at
December 31, 2000 and 1999:
2000 1999
---- ----
Loan commitments:
Fixed rate $ 1,774,680 $ 1,480,055
Adjustable rate 865,500 342,500
Undisbursed commercial and personal
lines of credit 8,210,294 4,432,524
Undisbursed portion of construction
loans in process 2,893,217 3,306,878
Other loans in process 5,884,984 7,138,963
---------------------------
Total commitments to extend credit $ 19,628,675 $ 16,700,920
===========================
(15) 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 14). 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, 2000 and 1999.
-33-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(16) STOCKHOLDERS' EQUITY
Conversion and Offering
On December 31, 1998, the Bank's former mutual holding company, First
Capital, Inc., M.H.C. (MHC), and Bank completed a conversion and stock
offering whereby the MHC was merged with and into the Bank with the
Bank becoming a wholly-owned subsidiary of the Company which offered
common stock to certain current and former depositor and borrower
customers of the Bank in a subscription offering. Prior to the
conversion, the MHC owned 59.5% of the outstanding common stock of the
Bank. Upon consummation of the conversion, the Company issued 768,551
shares of common stock (including 61,501 shares issued to the ESOP
trust) for gross offering proceeds of $7,685,510. Total expenses in
connection with the conversion and offering amounted to $449,382 and
were charged against the gross offering proceeds. The conversion was
accounted for as a pooling of interests.
The Company also issued 532,057 common shares in exchange for the
204,015 common shares held by the public stockholders of the Bank
pursuant to an exchange ratio resulting in the public stockholders of
the Bank owning in the aggregate approximately 40.5% of the Company
after the conversion and offering.
Dividends
The payment of dividends by the Bank is subject to regulation by the
Office of Thrift Supervision (OTS). The Bank may not declare or pay a
cash dividend or repurchase any of its capital stock if the effect
thereof would cause the regulatory capital of the Bank to be reduced
below regulatory capital requirements imposed by the OTS or below the
amount of the liquidation account.
Liquidation Account
Upon completion of the conversion and offering, the Bank established a
liquidation account in an amount equal to the amount of the cumulative
dividends with respect to the Bank's common stock waived by First
Capital, Inc. MHC plus 59.5% of the Bank's stockholders' equity as of
September 30, 1999, which together totaled $7.5 million. The
liquidation account is maintained for the benefit of depositors as of
the March 31, 1997 eligibility record date (or the September 30, 1999
supplemental eligibility record date) who maintain their deposits in
the Bank after the conversion and offering.
In the event of complete liquidation, and only in such an event, each
eligible depositor will be entitled to receive a liquidation
distribution from the liquidation account in the proportionate amount
of the then current adjusted balance for deposits held, before any
liquidation distribution may be made with respect to the stockholders.
Except for the repurchase of stock and payment of dividends by the
Bank, the existence of the liquidation account does not restrict the
use or application of retained earnings of the Bank.
(17) 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, 2000, that the Bank meets all capital
adequacy requirements to which it is subject.
-34-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(17 - continued)
As of December 31, 2000, 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, 2000:
Total capital (to risk
weighted assets) $ 30,783 20.63% $ 11,935 8.00% $ 14,919 10.00%
Tier I capital (to risk
weighted assets) $ 29,599 19.97% $ 5,967 4.00% $ 8,951 6.00%
Tier I capital (to adjusted
total assets) $ 29,599 11.92% $ 9,934 4.00% $ 12,417 5.00%
Tangible capital (to
adjusted total assets) $ 29,599 11.92% $ 3,725 1.50% N/A
As of December 31, 1999:
Total capital (to risk
weighted assets) $ 28,297 19.64% $ 11,524 8.00% $ 14,406 10.00%
Tier I capital (to risk
weighted assets) $ 27,103 18.81% $ 5,762 4.00% $ 8,643 6.00%
Tier I capital (to adjusted
total assets) $ 27,103 12.13% $ 6,704 3.00% $ 11,173 5.00%
Tangible capital (to
adjusted total assets) $ 27,103 12.13% $ 3,352 1.50% N/A
-35-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(18) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of financial instruments are
as follows:
2000 1999
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands)
Financial assets:
Cash and due from banks $ 6,010 $ 6,010 $ 5,820 $ 5,820
Interest bearing deposits in banks 5,458 5,458 3,702 3,702
Securities available for sale 34,779 34,779 30,097 30,097
Securities held to maturity 11,229 11,162 12,325 11,980
Federal funds sold - - 4,000 4,000
Loans receivable 180,488 180,794 156,176 152,292
Less: allowance for loan losses 1,184 1,184 1,194 1,194
---------------------------------------------------
Loans receivable, net 179,304 179,610 154,982 151,098
---------------------------------------------------
Federal Home Loan Bank stock 1,504 1,504 1,252 1,252
Financial liabilities:
Deposits 185,368 187,398 175,342 174,548
Advances from Federal Home Loan Bank 30,074 30,239 16,750 16,027
Unrecognized credit related financial instruments:
Commitments to extend credit - 46 - 10
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.
-36-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(18 - continued)
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.
(19) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information for First Capital, Inc. (parent company
only) follows:
Balance Sheets
(In thousands)
2000 1999
---- ----
Assets:
Cash and interest bearing deposits $ 1,284 $ 2,418
Other assets 126 62
Investment in subsidiaries 29,697 26,435
----------------------
$ 31,107 $ 28,915
======================
Liabilities and Stockholders' Equity:
Other liabilities $ - $ 38
Stockholders' equity 31,107 28,877
----------------------
$ 31,107 $ 28,915
======================
Statements of Income
(In thousands)
2000 1999
---- ----
Interest income $ 72 $ 96
Dividend income - 590
Other operating expenses 284 488
----------------------
Income (loss) before income taxes and equity in
undistributed net income of subsidiaries (212) 198
Income tax credit 74 54
----------------------
Loss before equity in undistributed net
income of subsidiaries (138) 252
Equity in undistributed net income of subsidiaries 2,596 1,518
----------------------
Net income $ 2,458 $ 1,770
======================
-37-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(19 - continued)
Statements of Cash Flows
(In thousands)
2000 1999
---- ----
Operating Activities:
Net income $ 2,458 $ 1,770
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (2,596) (1,518)
ESOP and stock compensation expense 124 45
Net change in other assets/liabilities (103) (32)
--------------------------
Net cash used by operating activities (117) 265
--------------------------
Financing Activities:
Exercise of stock options - 9
Cash dividends paid (1,017) (910)
--------------------------
Net cash provided by financing activities (1,017) (901)
--------------------------
Net decrease in cash (1,134) (636)
Cash at beginning of year 2,418 3,054
--------------------------
Cash at end of year $ 1,284 $ 2,418
==========================
(20) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
2000 1999
---- ----
Basic:
Earnings:
Net income $2,458,157 $1,771,176
==========================
Shares:
Weighted average common shares outstanding 2,452,248 2,473,377
==========================
Net income per common share, basic $ 1.00 $ 0.72
==========================
Diluted:
Earnings:
Net income $2,458,157 $1,771,176
==========================
Shares:
Weighted average common shares outstanding 2,452,248 2,473,377
Add: Dilutive effect of outstanding options 8,503 11,074
Dilutive effect of restricted stock 1,657 -
--------------------------
Weighted average common shares
outstanding, as adjusted 2,462,408 2,484,451
==========================
Net income per common share, diluted $ 1.00 $ 0.71
==========================
-38-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999
(20 - continued)
Unearned ESOP shares are not considered as outstanding for purposes of
computing weighted average common shares outstanding.
(21) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2000 1999
---- ----
Cash payments for:
Interest $ 8,979,668 $ 7,424,005
Income taxes 1,229,710 1,215,945
Noncash investing activities:
Transfers from loans to real estate
acquired through foreclosure $ 118,640 $ -
Proceeds from sales of foreclosed
real estate financed through loans 213,220 -
-39-
---------------------------------------------------------------------------------------------------
BOARD OF DIRECTORS/OFFICERS
---------------------------------------------------------------------------------------------------
Directors
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Chairman of the Board and retired Chief Executive President of ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Inc.
Officer of First ▇▇▇▇▇▇▇▇ Bank
▇▇▇▇▇▇ ▇. ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
President and Publisher of ▇'▇▇▇▇▇▇ Publishing President of ▇▇▇ Truck Sales, Inc.
Company, Inc.
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇▇
Supervisor for ▇▇▇▇▇ County REMC President and Majority Owner of ▇▇▇▇▇ Lumber
Company
▇▇▇▇▇▇ ▇. ▇▇▇ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Business Manager for ▇▇▇▇▇▇ Sales, Inc. Retired President of ▇▇▇▇▇▇▇▇ County Bank
▇▇▇▇ ▇. Book ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
President of Carriage Ford, Inc. Owner of Tracy's Mobile Home Park
▇▇▇▇▇ ▇. ▇▇▇▇ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Accountant for ▇▇▇▇▇▇▇ Woodworking, Inc. Retired Senior Vice President of ▇▇▇▇▇▇▇▇
County Bank
Executive Officers
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ M. ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
President and Chief Executive Officer of First Senior Vice President, Chief Financial Officer and
Capital, Inc. and Chief Operating Officer of First Treasurer
▇▇▇▇▇▇▇▇ Bank
▇▇▇▇▇▇ ▇. ▇▇▇ ▇▇▇▇ ▇. ▇▇▇▇▇▇
President and Chief Executive Officer of First Senior Vice President, Retail Banking Operations
▇▇▇▇▇▇▇▇ Bank and Chief Operating Officer of
First Capital, Inc.
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
Senior Vice President, Consumer Lending Senior Vice President, Data Information Systems
Processing and Servicing
-40-
--------------------------------------------------------------------------------
CORPORATE INFORMATION
--------------------------------------------------------------------------------
General Counsel Independent Auditors
▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ Shine & Co., Inc.
▇▇▇ ▇. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Special Counsel Transfer Agent
▇▇▇▇▇▇▇ ▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇ LLP Registrar and Transfer Company
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇., ▇.▇. ▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇.▇. ▇▇▇▇▇ ▇-▇▇▇-▇▇▇-▇▇▇▇
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, 2000, the Company has 1,311 stockholders
of record and 2,537,324 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, 2000 and 1999. The dividends
presented for the fourth quarter of 1999 exclude a $0.39 per share dividend paid
by HCB Bancorp prior to the merger.
Market price
High Low Dividends end of period
2000:
First Quarter 11.06 10.31 0.10 10.92
Second Quarter 11.16 9.71 0.10 10.53
Third Quarter 11.39 10.04 0.10 10.63
Fourth Quarter 11.00 10.14 0.11 11.00
1999:
First Quarter $ 10.08 $ 7.98 $ 0.07 $ 8.33
Second Quarter 10.85 8.45 0.08 10.73
Third Quarter 12.02 10.55 0.10 11.30
Fourth Quarter 11.78 10.46 0.10 11.54
Dividend payments by the Company depend primarily on dividends received by the
Company from the Bank. See Note 16 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 12:00 p.m., Wednesday, April
18, 2001, at the office of the Bank, ▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇.▇., ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇
▇▇▇▇▇.
-41-
General Inquiries and Reports
The Company is required to file an Annual Report on Form 10-KSB for its fiscal
year ended December 31, 2000 with the Securities and Exchange Commission. Copies
of this Annual Report and the Company's quarterly reports on Form 10-QSB may be
obtained without charge by contacting:
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
President and CEO
First Capital, Inc.
▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇.▇.
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
(▇▇▇) ▇▇▇-▇▇▇▇
The Company's Annual Report and Quarterly Reports are also available through the
Securities and Exchange Commission's internet website (▇▇▇.▇▇▇.▇▇▇).
-42-