SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
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(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2002
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________to _____________
Commission File No. 0-25023
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First Capital, Inc.
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(Exact name of registrant as specified in its charter)
Indiana 35-2056949
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
220 Federal Drive NW, Corydon, Indiana 47112
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 1-812-738-2198
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Not applicable
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Former name, former address and former fiscal year, if changed
since last report
APPLICABLE ONLY TO CORPORATE ISSUERS; Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date: 2,542,688 shares of common stock were outstanding as of
October 31, 2002.
Transitional Small Business Issuer Format: Yes _____ No X
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FIRST CAPITAL, INC
INDEX
Part I Financial Information Page
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Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 (unaudited) 3
Consolidated Statements of Income for the three months and
nine months ended September 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001 (unaudited) 5
Notes to consolidated financial statements (unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
Item 3. Controls and Procedures 13
Part II Other Information 14
Signatures 15
Certifications 16-17
-2-
PART I - FINANCIAL INFORMATION
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
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2002 2001
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(In thousands)
ASSETS
Cash and due from banks $ 7,169 $ 7,184
Interest bearing deposits with banks 3,186 5,199
Securities available for sale, at fair value 67,714 54,891
Securities-held to maturity 1,647 1,836
Loans receivable, net 211,096 201,730
Federal Home Loan Bank stock, at cost 2,482 2,179
Foreclosed real estate 147 212
Premises and equipment 6,774 5,940
Accrued interest receivable:
Loans 1,026 1,043
Securities 702 798
Cash value of life insurance 1,254 1,214
Other assets 502 597
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Total Assets $ 303,699 $ 282,823
=========================
LIABILITIES
Deposits:
Noninterest-bearing $ 20,090 $ 18,629
Interest-bearing 195,835 185,493
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Total Deposits 215,925 204,122
Retail repurchase agreements 188 284
Advances from Federal Home Loan Bank 49,320 42,825
Accrued interest payable 1,207 1,253
Accrued expenses and other liabilities 1,269 859
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Total Liabilities 267,909 249,343
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STOCKHOLDERS' EQUITY
Preferred stock of $.01 par value per share
Authorized 1,000,000 shares; none issued - -
Common stock of $.01 par value per share
Authorized 5,000,000 shares; issued 2,551,103 shares
(2,545,961 shares in 2001) 26 25
Additional paid-in capital 12,938 12,878
Retained earnings-substantially restricted 22,551 21,127
Unearned ESOP shares (451) (482)
Unearned stock compensation (161) (212)
Accumulated other comprehensive income 1,004 231
Less treasury stock, at cost - 8,975 shares (7,146 shares in 2001) (117) (87)
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Total Stockholders' Equity 35,790 33,480
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Total Liabilities and Stockholders' Equity $ 303,699 $ 282,823
=========================
See accompanying notes to consolidated financial statements.
-3-
PART I - FINANCIAL INFORMATION
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
INTEREST INCOME (In thousands, except per share data)
Loans receivable, including fees $ 3,899 $ 3,926 $ 11,582 $ 11,526
Securities
Taxable 667 660 2,020 1,969
Tax-exempt 113 94 303 273
Federal Home Loan Bank dividends 38 33 107 95
Interest bearing deposits with banks 51 98 153 327
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Total interest income 4,768 4,811 14,165 14,190
INTEREST EXPENSE
Deposits 1,536 1,952 4,688 5,974
Retail repurchase agreements 1 1 2 3
Advances from Federal Home Loan Bank 697 563 1,996 1,531
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Total interest expense 2,234 2,516 6,686 7,508
Net interest income 2,534 2,295 7,479 6,682
Provision for loan losses 65 - 155 36
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Net interest income after provision for
loan losses 2,469 2,295 7,324 6,646
NON-INTEREST INCOME
Service charges on deposit accounts 355 309 1,013 888
Commission income 79 49 201 191
Gain on sale of securities - - - 15
Gain on sale of mortgage loans - 8 - 134
Other income 13 20 49 69
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Total non-interest income 447 386 1,263 1,297
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NON-INTEREST EXPENSE
Compensation and benefits 893 798 2,676 2,395
Occupancy and equipment 238 228 677 667
Other operating expenses 500 457 1,542 1,357
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Total non-interest expense 1,631 1,483 4,895 4,419
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Income before income taxes 1,285 1,198 3,692 3,524
Income tax expense 456 423 1,296 1,255
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Net Income $ 829 $ 775 $ 2,396 $ 2,269
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain on securities:
Unrealized holding gains arising during the period 345 484 773 784
Less: reclassification adjustment - - - -
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Other comprehensive income 345 484 773 784
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Comprehensive Income $ 1,174 $ 1,259 $ 3,169 $ 3,053
=================== ===================
Net income per common share, basic $ 0.33 $ 0.31 $ 0.97 $ 0.92
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Net income per common share, diluted $ 0.33 $ 0.31 $ 0.96 $ 0.92
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See accompanying notes to consolidated financial statements.
-4-
PART I - FINANCIAL INFORMATION
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES (In thousands)
Net income $ 2,396 $ 2,269
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of premiums and accretion of discounts 143 16
Depreciation expense 346 342
Deferred income taxes (107) (25)
ESOP compensation expense 49 42
Stock compensation expense 52 53
Increase in cash value of life insurance (40) (39)
Provision for loan losses 155 36
Net gain on sale of securities held to maturity - (15)
Proceeds from sales of mortgage loans - 6,033
Mortgage loans originated for sale - (5,899)
Net gain on sale of mortgage loans - (134)
Decrease in accrued interest receivable 113 101
Increase (decrease) in accrued interest payable (46) 83
Net change in other assets/liabilities 107 317
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Net Cash Provided By Operating Activities 3,168 3,180
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CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits with banks 2,013 (1,029)
Purchase of securities available for sale (23,462) (33,482)
Proceeds from maturities of securities available for sale 10,577 15,588
Proceeds from sale of securities available for sale 235 -
Purchase of securities held to maturity (300) -
Proceeds from maturities of securities held to maturity 419 8,189
Proceeds from sale of maturities held to maturity - 356
Principal collected on mortgage-backed securities 1,034 1,173
Net increase in loans receivable (9,698) (16,568)
Purchase of Federal Home Loan Bank stock (303) (475)
Proceeds from sale of foreclosed real estate 242 -
Purchase of premises and equipment (1,179) (142)
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Net Cash Used By Investing Activities (20,422) (26,390)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 11,803 14,524
Net increase in advances from Federal Home Loan Bank 6,495 9,501
Net increase (decrease) in retail repurchase agreements (96) 93
Exercise of stock options 39 29
Purchase of treasury stock (30) (81)
Dividends paid (972) (870)
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Net Cash Provided By Financing Activities 17,239 23,196
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Net Decrease in Cash and Due From Banks (15) (14)
Cash and due from banks at beginning of period 7,184 6,010
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Cash and Due From Banks at End of Period $ 7,169 $ 5,996
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See accompanying notes to consolidated financial statements.
-5-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Presentation of Interim Information
First Capital, Inc. ("Company") is the holding company for First Harrison
Bank ("Bank"). The information presented in this report relates primarily
to the Bank's operations.
In the opinion of management, the unaudited consolidated financial
statements include all normal adjustments considered necessary to present
fairly the financial position as of September 30, 2002, and the results of
operations for the three months and nine months ended September 30, 2002
and 2001 and cash flows for the nine months ended September 30, 2002 and
2001. All of these adjustments are of a normal, recurring nature. Interim
results are not necessarily indicative of results for a full year.
The accompanying unaudited consolidated financial statements and notes have
been prepared in accordance with generally accepted accounting principles
for interim financial statements and are presented as permitted by the
instructions to Form 10-QSB. Accordingly, they do not contain certain
information included in the Company's annual audited consolidated financial
statements and related footnotes for the year ended December 31, 2001
included in the Form 10-KSB.
The consolidated financial statements include the accounts of the Company,
the Bank and the Bank's wholly owned subsidiary, First Harrison Financial
Services, Inc. All material intercompany balances and transactions have
been eliminated in consolidation.
2. Supplemental Disclosures of Cash Flow Information
Nine Months Ended
September 30,
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2002 2001
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(In thousands)
Cash payments for:
Interest $6,732 $7,424
Taxes 1,543 1,206
Noncash investing activity:
Amortized cost of securities transferred from held to
maturity to available for sale - 182
3. Pending Merger
On September 25, 2002, the Company and Hometown Bancshares, Inc.
(Hometown), the bank holding company for Hometown National Bank in New
Albany, Indiana, entered into an Agreement and Plan of Merger whereby each
of the issued and outstanding common shares of Hometown will be exchanged
for shares of the Company or $46.50 in cash per share. The number of shares
of the Company's common stock to be exchanged for each share of Hometown
common stock will be based on the average closing price of the Company's
common stock over a twenty day trading period shortly before the closing of
the merger. Elections to receive stock, cash or a combination of stock and
cash by the shareholders of Hometown will be limited by a requirement that
50% of the total number of outstanding shares of Hometown common stock be
exchanged for the Company's common stock. The merger is subject to
regulatory and stockholder approvals. It is anticipated that the merger
will be consummated in March 2003.
-6-
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Comprehensive Income
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. Comprehensive income for the Company includes net
income and other comprehensive income representing the net unrealized gains
and losses on securities available for sale. The following tables set forth
the components of other comprehensive income and the allocated tax amounts
for the three and nine months ended September 30, 2002 and 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
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2002 2001 2002 2001
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Unrealized gains on securities: (In thousands)
Unrealized holding gains
arising during the period $ 571 $ 802 $ 1,208 $ 1,298
Income tax expense (226) (318) (507) (514)
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Net of tax amount 345 484 773 784
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Less: reclassification
adjustment for (gains)
losses included in net income -- -- -- --
Income tax expense (benefit) -- -- -- --
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Other comprehensive income $ 345 $ 484 $ 773 $ 784
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5. Supplemental Disclosure for Earnings Per Share
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
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(Dollars in thousands, except per share data)
Basic:
Net income $ 829 $ 775 $ 2,396 $ 2,269
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Shares:
Weighted average common shares outstanding 2,477,636 2,462,891 2,474,692 2,463,318
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Net income per common share, basic $ 0.33 $ 0.31 $ 0.97 $ 0.92
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Diluted:
Net income $ 829 $ 775 $ 2,396 $ 2,269
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Shares:
Weighted average common shares outstanding 2,477,636 2,462,891 2,474,692 2,463,318
Add: Dilutive effect of outstanding options 30,894 19,162 27,794 12,447
Add: Dilutive effect of restricted share awards 5,268 3,921 4,192 1,979
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Weighted average common shares
outstanding, as adjusted 2,513,798 2,485,974 2,506,678 2,477,744
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Net income per common share, diluted $ 0.33 $ 0.31 $ 0.96 $ 0.92
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-7-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC. AND SUBSIDIARIES
Safe Harbor Statement for Forward Looking Statements
This report may contain forward-looking statements within the meaning of the
federal securities laws. These statements are not historical facts, rather
statements based on the Company's current expectations regarding its business
strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends" and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous
risks and uncertainties could cause or contribute to the Company's actual
results, performance and achievements to be materially different from those
expressed or implied by the forward-looking statements. Factors that may cause
or contribute to these differences include, without limitation, general economic
conditions, including changes in market interest rates and changes in monetary
and fiscal policies of the federal government; legislative and regulatory
changes; and other factors disclosed periodically in the Company's filings with
the Securities and Exchange Commission.
Because of the risks and uncertainties inherent in forward-looking statements,
readers are cautioned not to place undue reliance on them, whether included in
this report or made elsewhere from time to time by the Company or on its behalf.
Except as may be required by applicable law or regulation, the Company assumes
no obligation to update any forward-looking statements.
Financial Condition
Total assets increased 7.4% from $282.8 million at December 31, 2001 to
$303.7 million at September 30, 2002. Investment securities and net loans
receivable provided the majority of this growth. The funding was provided by
increases in deposits and borrowings from the Federal Home Loan Bank of
Indianapolis.
Net loans receivable grew from $201.7 million at December 31, 2001 to
$211.1 million at September 30, 2002, a 4.6% increase. Residential mortgages and
home equity lines of credit increased $10.3 million and $5.4 million,
respectively, during this time period. Commercial and installment loans
decreased by $1.8 million and $1.3 million, respectively, to offset some of the
loan growth.
Securities available for sale increased $12.8 million from $54.9 million at
December 31, 2001 to $67.7 million at September 30, 2002. The increase was
primarily due to purchases of $23.5 million offset by maturities of $10.6
million, principal repayments of $965,000 and sales of $235,000.
Investment securities held-to-maturity decreased $189,000 as a result of
purchases of $300,000, offset by maturities of $419,000 and principal repayments
of $68,000.
Cash and interest bearing deposits with banks decreased from $12.4 million
at December 31, 2001 to $10.4 million at September 30, 2002 due to excess
liquidity being invested in securities which generate higher yields than
overnight funds.
Total deposits grew 5.8%, from $204.1 million at December 31, 2001 to
$215.9 million at September 30, 2002. Checking and savings accounts increased
$6.6 million while time deposits increased $5.2 million during the period.
-8-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC. AND SUBSIDIARIES
Federal Home Loan Bank borrowings increased $6.5 million from $42.8 million
at December 31, 2001 to $49.3 million at September 30, 2002. The new advances
were drawn primarily to fund loan growth while taking advantage of historically
low interest rates at favorable terms.
Total stockholders' equity increased from $33.5 million at December 31,
2001 to $35.8 million at September 30, 2002 primarily as a result of retained
net income of $1.4 million and net unrealized gains of $773,000 on securities
available for sale.
Results of Operations
Net income for the nine month periods ended September 30, 2002 and 2001.
Net income was $2.4 million ($.96 per share diluted) for the nine months ended
September 30, 2002 compared to $2.3 million ($.92 per share diluted) for the
nine months ended September 30, 2001. Net income increased due to an increase in
net interest income partially offset by increases in noninterest expense and the
provision for loan losses and a decrease in noninterest income.
Net income for the three month periods ended September 30, 2002 and 2001.
Net income was $829,000 ($.33 per share diluted) for the three months ended
September 30, 2002 compared to $775,000 ($.31 per share diluted) for the three
months ended September 30, 2001. Net income increased for 2002 compared to 2001
due to increases in net interest income and noninterest income offset by
increases in noninterest expense and the provision for loan losses.
Net interest income for the nine month periods ended September 30, 2002 and
2001. Net interest income increased 11.9% from $6.7 million in 2001 to $7.5
million in 2002 primarily as a result of a decrease in the average cost of funds
partially offset by an increase in interest-earning assets.
Total interest income decreased $25,000 during the nine months ended
September 30, 2002 compared to the nine months ended September 30, 2001. The
average balance of interest-earning assets was $276.6 million for the nine month
period ended September 30, 2002 compared to $246.8 for the same period in 2001.
However, the average tax-equivalent yield on interest-earning assets decreased
from 7.76% in 2001 to 6.92% in 2002 due to the markedly lower interest rate
environment.
Total interest expense decreased $822,000 to $6.7 million for the nine
months ended September 30, 2002 compared to $7.5 million for the same period in
2001. Interest on deposits decreased by $1.3 million while the interest on
Federal Home Loan Bank advances increased by $465,000 when comparing the first
nine months of 2002 against the same period in 2001. The average balance of
interest-bearing liabilities increased from $208.2 million in 2001 to $235.7
million in 2002 while the average rate on interest-bearing liabilities decreased
from 4.81% in 2001 to 3.78% in 2002. The Bank's tax-equivalent interest rate
spread increased from 2.95% to 3.14% when comparing the first nine months
results of 2001 with the same period in 2002 primarily due to the Bank's
interest-bearing liabilities repricing faster than the interest-earning assets.
-9-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC. AND SUBSIDIARIES
Net interest income for the three month periods ended September 30, 2002
and 2001. Net interest income increased from $2.3 million for the three months
ended September 30, 2001 to $2.5 million for the same period in 2002 due
primarily to a decrease in the average cost of funds.
Total interest income decreased $43,000 for the three months ended
September 30, 2002 compared to the same period in 2001. The decrease was a
result of a lower average yield on interest-earning assets which was offset by
higher average balances in these interest-earning assets. The average balance of
net loans receivable and investment securities increased from $193.2 million and
$54.5 million, respectively, for the three months ended September 30, 2001 to
$209.3 million and $66.5 million for the three months ended September 30, 2002.
The average yield on interest-earning assets decreased from 7.60% for the three
months ended September 30, 2001 to 6.84% for the same period in 2002.
Total interest expense decreased $282,000 to $2.2 million for the three
months ended September 30, 2002 compared to $2.5 million for the same period in
2001 due to the average cost of interest-bearing liabilities decreasing from
4.65% for the three months ended September 30, 2001 to 3.71% for the same period
in 2002.
Provision for loan losses. The provision for loan losses was $155,000 for
the nine month period ended September 30, 2002 compared to $36,000 for the same
period in 2001. During 2002, net loans receivable increased by $9.4 million
primarily due to increases in residential mortgages and home equity lines of
credit by $15.7 million. Offsetting these increases were decreases of $3.1
million in commercial and consumer loans. Residential mortgage loans and home
equity lines of credit have an inherently lower degree of credit risk than
commercial and consumer loans. However, the consistent application of
management's allowance methodology resulted in an increase in the provision for
loan losses due to net charge-offs during the nine months ended September 30,
2002 of $150,000 compared to $118,000 for the same period in 2001 and the
general weakening of economic conditions.
Provisions for loan losses are charges to earnings to maintain the total
allowance for loan losses at a level considered reasonable by management to
provide for probable known and inherent loan losses based on management's
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical loss experience,
specified impaired loans, and economic conditions. Although management uses the
best information available, future adjustments to the allowance may be necessary
due to changes in economic, operating, regulatory and other conditions that may
be beyond the Bank's control. While the Bank maintains the allowance for loan
losses at a level which it considers adequate to provide for estimated losses,
there can be no assurance that further additions will not be made to the
allowance for loan losses and that actual losses will not exceed the estimated
amounts.
-10-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC. AND SUBSIDIARIES
The methodology used in determining the allowance for loan losses includes
segmenting the loan portfolio by identifying risk characteristics common to
groups of loans, determining and measuring impairment of individual loans based
on the present value of expected future cash flows or the fair value of
collateral, and determining and measuring impairment for groups of loans with
similar characteristics by applying loss factors that consider the qualitative
factors which may effect the loss rates.
The allowance for loan losses was $1.1 million at both September 30, 2002
and December 31, 2001. Management has deemed these amounts as adequate on those
dates based on its risk analysis. At September 30, 2002 nonperforming loans
totaled $1.4 million, compared to $1.3 million at December 31, 2001. Included in
nonperforming loans are loans over 90 days past due secured by one-to-four
family residential real estate in the amount of $680,000, nonresidential
mortgages amounting to $176,000 and consumer and commercial loans of $171,000.
These loans are accruing interest as the estimated value of the collateral and
collection efforts are deemed sufficient to ensure full recovery.
Noninterest income for the nine month periods ended September 30, 2002 and
2001. Noninterest income decreased 2.6%, or $34,000, for the nine months ended
September 30, 2002 compared to the same period of 2001. The Bank recognized
gains of $134,000 on the sale of loans during the first nine months of 2001. The
Bank sold no loans during the same period in 2002 in an effort to better
leverage the Bank's capital. Service charges on deposits increased to $1.0
million for the nine months ended September 30, 2002 compared to $888,000 for
the nine months ended September 30, 2001. Overdraft charges on the new "Carefree
checking" account offered by the Bank is the primary reason for this increase.
Noninterest income for the three month periods ended September 30, 2002 and
2001. Noninterest income increased 15.8% to $447,000 for the three months ended
September 30, 2002 compared to $386,000 during the same period in 2001. Service
charges on deposits and commission income increased $46,000 and $30,000,
respectively, when comparing the three months ended September 30, 2002 to the
same period in 2001.
Noninterest expense for the nine month periods ended September 30, 2002 and
2001. Noninterest expense increased 10.8% to $4.9 million for the nine month
period ended September 30, 2002, compared to $4.4 million for the same period in
2001 primarily due to increases in compensation and benefits and other operating
expenses.
Compensation and benefits increased by $281,000 when comparing the first
nine months of 2002 and 2001. This increase is due to normal salary increases,
an increase in staff, an increase in the cost of employee health insurance and a
reduction in compensation and benefit costs deferred in connection with loan
originations. The refinancing wave the Bank experienced during the first nine
months of 2001 resulted in a reduction of compensation and benefits of $364,000
during that time period due to the deferral of these costs associated with
underwriting loans. During the first nine months of 2002, that figure has
decreased by $81,000 as the pace of loan originations has declined.
-11-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC. AND SUBSIDIARIES
Other operating expenses increased $185,000 compared to the same period in
2001 primarily due to increases in ATM processing fees, office supplies,
correspondent banking expenses and consulting fees.
Noninterest expense for the three month periods ended September 30, 2002
and 2001. Noninterest expense increased 10.0%, or $148,000, for the three month
period ended September 30, 2002 compared to the three month period ended
September 30, 2001. Compensation and benefits increased $95,000 compared to the
same quarter last year. Normal salary increases and an increase in staff were
the primary factors in this increase. Other operating expenses increased $43,000
due to increases in postage, ATM processing fees, consulting fees and community
donations.
Income tax expense. Income tax expense for the nine month periods ended
September 30, 2002 and September 30, 2001 was $1.3 million. The effective tax
rate decreased from 35.6% for 2001 to 35.1% for 2002. Income tax expense for the
three month period ended September 30, 2002 was $456,000, compared to $423,000
for the same quarter in 2001. The effective tax rate for the three month period
in 2002 was 35.5% compared to 35.3% for 2001.
Liquidity and Capital Resources
The Bank's primary sources of funds are customer deposits, proceeds from
loan repayments, maturing securities and FHLB advances. While loan repayments
and maturities are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by market interest rates, general economic
conditions and competition. At September 30, 2002, the Bank had cash and
interest-bearing deposits with banks of $10.4 million and securities
available-for-sale with a fair value of $67.7 million. If the Bank requires
funds beyond its ability to generate them internally, it has additional
borrowing capacity with the FHLB of Indianapolis and collateral eligible for
repurchase agreements.
The Bank's primary investing activity is the origination of one-to-four
family mortgage loans and, to a lesser extent, consumer, multi-family,
commercial real estate and residential construction loans. The Bank also invests
in U.S. Government and agency securities and mortgage-backed securities issued
by U.S. Government agencies.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. Historically, the Bank has been able to retain a significant
amount of its deposits as they mature.
The Bank is required to maintain specific amounts of capital pursuant to
OTS requirements. As of September 30, 2002, the Bank was in compliance with all
regulatory capital requirements, which were effective as of such date with
tangible, core and risk-based capital ratios of 10.8%, 10.8% and 19.2%,
respectively. The regulatory requirements at that date were 1.5%, 3.0% and 8.0%,
respectively.
-12-
PART I - ITEM 3
CONTROLS AND PROCEDURES
FIRST CAPITAL, INC. AND SUBSIDIARIES
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined on Section 13(a) -
14(c) of the Securities and Exchange Act of 1934 (the "Act") was carried out
under the supervision and with the participation of the Company's Chief
Executive Officer, Chief Financial Officer and several other members of the
Company's senior management within the 90-day period preceding the filing date
of this quarterly report. The Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures as currently in effect are effective in ensuring that the information
required to be disclosed by the Company in the reports it files or submits under
the Act is (i) accumulated and communicated to the Company's management
(including the Chief Executive Officer and Chief Financial Officer) in a timely
manner, and (ii) recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended September 30, 2002,
the Company did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
significantly affect these controls.
-13-
PART II
OTHER INFORMATION
FIRST CAPITAL, INC.
Item 1. Legal Proceedings
The Company is not a party to any legal proceedings. Periodically,
there have been various claims and lawsuits involving the Bank, mainly
as a plaintiff, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests,
claims involving the making and servicing of real property loans and
other issues incident to the Bank's business. The Bank is not a party
to any pending legal proceedings that it believes would have a
material adverse affect on its financial condition or operations.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of First Capital, Inc. (incorporated
by reference to Registration Statement on Form SB-2, and
amendments thereto, File Number 333-63515)
3.2 Second Amended and Restated Bylaws of First Capital, Inc.
(incorporated by reference to Form 10-KSB filed on April 1,
2002)
99.1 CEO Certifications required under Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 CFO Certifications required under Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On September 30, 2002, the Company filed a Form 8-K to announce a
merger agreement with Hometown Bancshares, Inc. under which Hometown
will merge with and into the Company.
-14-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST CAPITAL, INC.
(Registrant)
Dated November 13, 2002 BY: /s/ William W. Harrod
-------------------------------- ---------------------------------
William W. Harrod
President and CEO
Dated November 13, 2002 BY: /s/ Michael C. Frederick
--------------------------------- ---------------------------------
Michael C. Frederick
Senior Vice President
and Treasurer
-15-
CERTIFICATION
I, William W. Harrod, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of First Capital, Inc.
and Subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATE: November 13, 2002 BY: /s/ William W. Harrod
------------------- -----------------------
William W. Harrod
President and Chief Executive Officer
-16-
CERTIFICATION
I, Michael C. Frederick, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of First Capital, Inc.
and Subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
e) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATE: November 13, 2002 BY: /s/ Michael C. Frederick
------------------- ------------------------
Michael C. Frederick
Senior Vice President and Treasurer
-17-