UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2019

OR

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

For the transition period from ____________________  to ____________________

Commission File No. 0-25023

First Capital, Inc.

(Exact name of registrant as specified in its charter)

	Indiana	35-2056949
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
	220 Federal Drive NW, Corydon, Indiana 47112	1-812-738-2198
(Address of principal executive offices, zip code, telephone number)
	Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X   No      

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   X   No      

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	[   ]	Accelerated filer	[X]
Non-accelerated filer	[   ]	Smaller reporting company	[X]
		Emerging growth company	[   ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	FCAP	The NASDAQ Stock Market LLC

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 3,364,494 shares of common stock were outstanding as of April 26, 2019.

FIRST CAPITAL, INC.

INDEX

		Page
Part I	Financial Information
	Item 1. Consolidated Financial Statements
	Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 (unaudited)	3
	Consolidated Statements of Income for the three months ended March 31, 2019 and 2018 (unaudited)	4
	Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2019 and 2018 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2019 and 2018 (unaudited)	6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8-38
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	39-43
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	44-47
	Item 4. Controls and Procedures	47
Part II	Other Information
	Item 1. Legal Proceedings	48
	Item 1A. Risk Factors	48
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 3. Defaults Upon Senior Securities	48
	Item 4. Mine Safety Disclosures	48
	Item 5. Other Information	48
	Item 6. Exhibits	49
Signatures

- 2 -

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC. 

CONSOLIDATED BALANCE SHEETS

(Unaudited)

		March 31, 2019			December 31, 2018
	(In thousands)
ASSETS
Cash and due from banks	$	13,551		$	17,394
Interest bearing deposits with banks		3,305			1,717
Federal funds sold		38,687			22,001
Total cash and cash equivalents		55,543			41,112
Interest-bearing time deposits		6,735			7,710
Securities available for sale, at fair value		255,035			261,841
Loans, net		449,781			434,260
Loans held for sale		1,377			2,849
Federal Home Loan Bank and other stock, at cost		1,988			1,988
Foreclosed real estate		2,999			3,142
Premises and equipment		14,351			14,364
Accrued interest receivable		2,835			2,828
Cash value of life insurance		8,107			8,059
Goodwill		6,472			6,472
Core deposit intangible		929			966
Other assets		7,709			8,571
Total Assets	$	813,861		$	794,162
LIABILITIES
Deposits:
Noninterest-bearing	$	152,725		$	143,249
Interest-bearing		565,806			558,397
Total deposits		718,531			701,646
Accrued interest payable		177			150
Accrued expenses and other liabilities		5,925			6,410
Total liabilities		724,633			708,206
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 7,500,000 shares; issued 3,791,283 shares (3,781,533 in 2018); outstanding 3,364,494 shares (3,354,744 in 2018)		38			38
Additional paid-in capital		40,723			40,215
Retained earnings-substantially restricted		59,511			58,137
Unearned stock compensation		(1,172	)		(720	)
Accumulated other comprehensive loss		(1,638	)		(3,477	)
Less treasury stock, at cost - 426,789 shares		(8,349	)		(8,349	)
Total First Capital, Inc. stockholders' equity		89,113			85,844
Noncontrolling interest in subsidiary		115			112
Total equity		89,228			85,956
Total Liabilities and Equity	$	813,861		$	794,162

See accompanying notes to consolidated financial statements.

- 3 -

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended March 31,
		2019			2018
INTEREST INCOME	(In thousands, except per share data)
Loans, including fees	$	6,057		$	5,301
Securities:
Taxable		984			952
Tax-exempt		391			378
Dividends		26			33
Other interest income		200			100
Total interest income		7,658			6,764
INTEREST EXPENSE
Deposits		456			321
Advances from Federal Home Loan Bank		-			21
Total interest expense		456			342
Net interest income		7,202			6,422
Provision for loan losses		450			197
Net interest income after provision for loan losses		6,752			6,225
NONINTEREST INCOME
Service charges on deposit accounts		461			509
ATM and debit card fees		647			600
Commission and fee income		98			88
Gain (loss) on sale of securities available for sale and time deposits		(97	)		1
Unrealized gain on equity securities		131			-
Gain on sale of loans		158			240
Increase in cash value of life insurance		48			43
Other income		59			45
Total noninterest income		1,505			1,526
NONINTEREST EXPENSE
Compensation and benefits		3,042			2,894
Occupancy and equipment		397			413
Data processing		838			744
Professional fees		229			178
Advertising		89			85
Net loss on foreclosed real estate		195			121
Other expenses		875			819
Total noninterest expense		5,665			5,254
Income before income taxes		2,592			2,497
Income tax expense		442			361
Net Income		2,150			2,136
Less: net income attributable to the noncontrolling interest in subsidiary		3			3
Net Income Attributable to First Capital, Inc.	$	2,147		$	2,133
Earnings per common share attributable to First Capital, Inc.:
Basic	$	0.64		$	0.64
Diluted	$	0.64		$	0.64
Dividends per share on common shares	$	0.23		$	0.23

See accompanying notes to consolidated financial statements.

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PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended
	March 31,
		2019			2018
	(In thousands)
Net Income	$	2,150		$	2,136
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period		2,347			(4,015	)
Income tax (expense) benefit		(584	)		999
Net of tax amount		1,763			(3,016	)
Less:  reclassification adjustment for realized (gains) losses included in net income		97			(1	)
Income tax expense (benefit)		(21	)		-
Net of tax amount		76			(1	)
Other Comprehensive Income (Loss), net of tax		1,839			(3,017	)
Comprehensive Income (Loss)		3,989			(881	)
Less: comprehensive income attributable to the noncontrolling interest in subsidiary		3			3
Comprehensive Income (Loss) Attributable to First Capital, Inc.	$	3,986		$	(884	)

See accompanying notes to consolidated financial statements.

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PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands, except share and per share data)	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Unearned Stock Compensation			Treasury Stock			Noncontrolling Interest		Total
Balances at January 1, 2018	$	38	$	39,515	$	51,972		$	(2,060	)	$	(212	)	$	(8,315	)	$	112	$	81,050
Net income		-		-		2,133			-			-			-			3		2,136
Other comprehensive loss		-		-		-			(3,017	)		-			-			-		(3,017	)
Cash dividends		-		-		(772	)		-			-			-			-		(772	)
Restricted stock grants		-		748		-			-			(748	)		-			-		-
Stock compensation expense		-		-		-			-			49			-			-		49
Balances at March 31, 2018	$	38	$	40,263	$	53,333		$	(5,077	)	$	(911	)	$	(8,315	)	$	115	$	79,446
Balances at January 1, 2019	$	38	$	40,215	$	58,137		$	(3,477	)	$	(720	)	$	(8,349	)	$	112	$	85,956
Net income		-		-		2,147			-			-			-			3		2,150
Other comprehensive income		-		-		-			1,839			-			-			-		1,839
Cash dividends		-		-		(773	)		-			-			-			-		(773	)
Restricted stock grants		-		508		-			-			(508	)		-			-		-
Stock compensation expense		-		-		-			-			56			-			-		56
Balances at March 31, 2019	$	38	$	40,723	$	59,511		$	(1,638	)	$	(1,172	)	$	(8,349	)	$	115	$	89,228

See accompanying notes to consolidated financial statements.

- 6 -

PART I - FINANCIAL INFORMATION

FIRST CAPITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
		2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES	(In thousands)
Net income	$	2,150		$	2,136
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Amortization of premiums and accretion of discounts on securities, net		391			431
Depreciation and amortization expense		264			312
Deferred income taxes		(74	)		(93	)
Stock compensation expense		56			49
Increase in cash value of life insurance		(48	)		(43	)
(Gain) loss on sale of securities and time deposits		97			(1	)
Provision for loan losses		450			197
Proceeds from sales of loans		7,942			16,547
Loans originated for sale		(6,312	)		(15,818	)
Gain on sale of loans		(158	)		(240	)
Amortization of tax credit investment		82			82
Unrealized gain on equity securities		(131	)		-
Net realized and unrealized loss on foreclosed real estate		136			29
Decrease (increase) in accrued interest receivable		(7	)		44
(Increase) decrease in accrued interest payable		27			(9	)
Net change in other assets/liabilities		66			(265	)
Net Cash Provided By Operating Activities		4,931			3,358
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of interest-bearing time deposits		490			1,239
Proceeds from sales of interest-bearing time deposits		1,460			-
Purchase of interest-bearing time deposits		(985	)		-
Purchase of securities available for sale		(17,862	)		(6,326	)
Proceeds from maturities of securities available for sale		15,645			520
Proceeds from sales of securities available for sale		5,437			1,458
Principal collected on mortgage-backed obligations		5,533			6,295
Investment in cash value of life insurance		-			(1,000	)
Net (increase) decrease in loans receivable		(15,972	)		2,176
Investment in tax credit entity		(152	)		(436	)
Proceeds from sale of foreclosed real estate		8			99
Purchase of premises and equipment		(214	)		(50	)
Net Cash Provided By (Used In) Investing Activities		(6,612	)		3,975
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		16,885			17,009
Repayment of advances from Federal Home Loan Bank		-			(10,000	)
Dividends paid		(773	)		(772	)
Net Cash Provided By Financing Activities		16,112			6,237
Net Increase in Cash and Cash Equivalents		14,431			13,570
Cash and cash equivalents at beginning of period		41,112			25,915
Cash and Cash Equivalents at End of Period	$	55,543		$	39,485

See accompanying notes to consolidated financial statements.

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FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Presentation of Interim Information

First Capital, Inc. (“Company”) is the financial holding company for First Harrison Bank (“Bank”), an Indiana chartered commercial bank and wholly owned subsidiary. First Harrison Investments, Inc. and First Harrison Holdings, Inc. are wholly-owned Nevada corporate subsidiaries of the Bank that jointly own First Harrison, LLC, a Nevada limited liability corporation that holds and manages an investment portfolio. First Harrison REIT, Inc. (“REIT”) is a wholly-owned subsidiary of First Harrison Holdings, Inc. that holds a portion of the Bank’s real estate mortgage loan portfolio. FHB Risk Mitigation Services, Inc. (“Captive”) is a wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company, the Bank and the Bank’s subsidiaries, and reinsurance to eight other third party insurance captives for which insurance may not be currently available or economically feasible in the insurance marketplace. Heritage Hill, LLC is a wholly-owned subsidiary of the Bank that holds and manages certain foreclosed real estate properties.

In the opinion of management, the unaudited consolidated financial statements include all adjustments considered necessary to present fairly the financial position as of March 31, 2019, and the results of operations for the three months ended March 31, 2019 and 2018 and the cash flows for the three months ended March 31, 2019 and 2018. All of these adjustments are of a normal, recurring nature. Such adjustments are the only adjustments included in the unaudited consolidated financial statements. Interim results are not necessarily indicative of results for a full year or any other period.

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and are presented as permitted by the instructions to Form 10-Q. Accordingly, they do not contain certain information included in the Company’s annual audited consolidated financial statements and related footnotes for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K.

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current period presentation. The reclassifications had no effect on net income or stockholders’ equity.

- 8 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. Investment Securities

Investment securities have been classified in the consolidated balance sheets according to management’s intent. Investment securities at March 31, 2019 and December 31, 2018 are summarized as follows:

(In thousands)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2019
Securities available for sale:
Agency mortgage-backed securities	$	89,739	$	1	$	2,365	$	87,375
Agency CMO		36,356		91		351		36,096
Other debt securities:
Agency notes and bonds		65,791		149		739		65,201
Municipal obligations		65,319		1,200		156		66,363
Total securities available for sale	$	257,205	$	1,441	$	3,611	$	255,035
December 31, 2018
Securities available for sale:
Agency mortgage-backed securities	$	94,746	$	-	$	3,489	$	91,257
Agency CMO		33,222		152		382		32,992
Other debt securities:
Agency notes and bonds		75,461		59		1,016		74,504
Municipal obligations		63,008		651		571		63,088
Total securities available for sale	$	266,437	$	862	$	5,458	$	261,841

Agency notes and bonds, agency mortgage-backed securities and agency collateralized mortgage obligations (“CMO”) include securities issued by the Government National Mortgage Association (“GNMA”), a U.S. government agency, and the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal Home Loan Bank (“FHLB”), which are government-sponsored enterprises.

- 9 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(2 – continued)

The amortized cost and fair value of debt securities as of March 31, 2019, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities and CMO may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.

	Securities Available for Sale
		Amortized Cost		Fair Value
(In thousands)
Due in one year or less	$	18,773	$	18,667
Due after one year through five years		56,424		56,002
Due after five years through ten years		32,260		32,636
Due after ten years		23,653		24,259
		131,110		131,564
Mortgage-backed securities and
CMO		126,095		123,471
	$	257,205	$	255,035

Information pertaining to investment securities available for sale with gross unrealized losses at March 31, 2019, aggregated by investment category and the length of time that individual investment securities have been in a continuous position, follows.

	Number of Investment Positions			Fair Value		Gross Unrealized Losses
(Dollars in thousands)
Continuous loss position less than twelve months:
Agency CMO		5	$	8,429	$	24
Agency notes and bonds		1		2,997		3
Muncipal obligations		1		275		1
Total less than twelve months		7		11,701		28
Continuous loss position more than twelve months:
Agency mortgage-backed securities		91		85,872		2,365
Agency CMO		20		11,313		327
Agency notes and bonds		16		52,946		736
Muncipal obligations		31		17,130		155
Total more than twelve months		158		167,261		3,583
Total securities available for sale		165	$	178,962	$	3,611

- 10 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(2 – continued)

Information pertaining to investment securities available for sale with gross unrealized losses at December 31, 2018, aggregated by investment category and the length of time that individual investment securities have been in a continuous position, follows.

	Number of Investment Positions			Fair Value		Gross Unrealized Losses
(Dollars in thousands)
Continuous loss position less than twelve months:
Agency mortgage-backed securities		1	$	1,563	$	13
Agency CMO		4		2,870		1
Agency notes and bonds		1		499		1
Muncipal obligations		11		3,552		12
Total less than twelve months		17		8,484		27
Continuous loss position more than twelve months:
Agency mortgage-backed securities		97		89,680		3,476
Agency CMO		24		12,168		381
Agency notes and bonds		22		67,927		1,015
Muncipal obligations		49		25,316		559
Total more than twelve months		192		195,091		5,431
Total securities available for sale		209	$	203,575	$	5,458

Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recover in fair value.

At March 31, 2019, the U.S. government agency debt securities, including agency notes and bonds, mortgage-backed securities and CMO, and municipal obligations in a loss position had depreciated approximately 2.0% from the amortized cost basis. All of the U.S. government agency securities and municipal obligations are issued by U.S. government agencies, government-sponsored enterprises and municipal governments, or are secured by first mortgage loans and municipal project revenues. These unrealized losses related principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As the Company has the ability to hold the debt securities until maturity, or the foreseeable future if classified as available for sale, no declines are deemed to be other-than-temporary.

While management does not anticipate any credit-related impairment losses at March 31, 2019, additional deterioration in market and economic conditions may have an adverse impact on credit quality in the future.

- 11 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(2 – continued)

During the three months ended March 31, 2019, the Company realized gross losses of $86,000 on sales of available for sale securities and gross losses of $11,000 on sales of time deposits. During the three months ended March 31, 2018, the Company realized gross gains of $7,000 and gross losses of $6,000 on sales of available for sale securities.

Certain available for sale debt securities were pledged to secure public fund deposits at March 31, 2019 and December 31, 2018.

Equity Securities

In September 2018, the Company acquired 90,000 shares of common stock in another bank holding company, representing approximately 5% of the outstanding common stock of the entity, for a total investment of $1.9 million. During the three months ended March 31, 2019, the Company recognized an unrealized gain of $131,000 on this equity investment. At March 31, 2019, the equity investment had a fair value of $1.8 million and is included in other assets on the consolidated balance sheet.

3. Loans and Allowance for Loan Losses

The Company’s loan and allowance for loan loss policies are as follows:

Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses. The Company originates real estate mortgage, commercial business and consumer loans. A substantial portion of the loan portfolio is represented by mortgage loans to customers in the Louisville, Kentucky metropolitan statistical area (MSA). The ability of the Company’s customers to honor their loan agreements is largely dependent upon the real estate and general economic conditions in this area.

Loan origination and commitment fees, as well as certain direct costs of underwriting and closing loans, are deferred and amortized as a yield adjustment to interest income over the lives of the related loans using the interest method. Amortization of net deferred loan fees is discontinued when a loan is placed on nonaccrual status.

The recognition of income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments become 90 days past due unless, in the opinion of management, the outstanding interest remains collectible. Past due status is determined based on contractual terms. Generally, by applying the cash receipts method, interest income is subsequently recognized only as received until the loan is returned to accrual status. The cash receipts method is used when the likelihood of further loss on the loan is remote. Otherwise, the Company applies the cost recovery method and applies all payments as a reduction of the unpaid principal balance until the loan qualifies for return to accrual status. Interest income on impaired loans is recognized using the cost recovery method, unless the likelihood of further loss on the loan is remote.

A loan is restored to accrual status when all principal and interest payments are brought current and the borrower has demonstrated the ability to make future payments of principal and interest as scheduled, which generally requires that the borrower demonstrate a period of performance of at least six consecutive months.

- 12 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

For portfolio segments other than consumer loans, the Company’s practice is to charge-off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or for other reasons. A partial charge-off is recorded on a loan when the uncollectibility of a portion of the loan has been confirmed, such as when a loan is discharged in bankruptcy, the collateral is liquidated, a loan is restructured at a reduced principal balance, or other identifiable events that lead management to determine the full principal balance of the loan will not be repaid. A specific reserve is recognized as a component of the allowance for estimated losses on loans individually evaluated for impairment. Partial charge-offs on nonperforming and impaired loans are included in the Company’s historical loss experience used to estimate the general component of the allowance for loan losses as discussed below. Specific reserves are not considered charge-offs in management’s analysis of the allowance for loan losses because they are estimates and the outcome of the loan relationship is undetermined.

Consumer loans not secured by real estate are typically charged off at 90 days past due, or earlier if deemed uncollectible, unless the loans are in the process of collection. Overdrafts are charged off after 45 days past due. Charge-offs are typically recorded on loans secured by real estate when the property is foreclosed upon.

The allowance for loan losses reflects management’s judgment of probable loan losses inherent in the loan portfolio at the balance sheet date. Additions to the allowance for loan losses are made by the provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company uses a disciplined process and methodology to evaluate the allowance for loan losses on at least a quarterly basis that is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated for impairment or loans otherwise classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the underlying discounted collateral value (or present value of estimated future cash flows) of the impaired loan is lower than the carrying value of that loan.

- 13 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

The general component covers loans not considered to be impaired. Such loans are pooled by segment and losses are modeled using annualized historical loss experience adjusted for qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior five years. The Company’s historical loss experience is then adjusted for qualitative factors that are reviewed on a quarterly basis based on the risks present for each portfolio segment. Management considers changes and trends in the following qualitative loss factors: underwriting standards, economic conditions, changes and trends in past due and classified loans, collateral valuations, loan concentrations and other internal and external factors.

Management also applies additional loss factor multiples to loans classified as watch, special mention and substandard that are not individually evaluated for impairment. The loss factor multiples for classified loans are based on management’s assessment of historical trends regarding losses experienced on classified loans in prior periods. See below for additional discussion of the qualitative factors utilized in management’s allowance for loan loss methodology at March 31, 2019 and December 31, 2018.

Management exercises significant judgment in evaluating the relevant historical loss experience and the qualitative factors. Management also monitors the differences between estimated and actual incurred loan losses for loans considered impaired in order to evaluate the effectiveness of the estimation process and make any changes in the methodology as necessary.

Management utilizes the following portfolio segments in its analysis of the allowance for loan losses: residential real estate, land, construction, commercial real estate, commercial business, home equity and second mortgage, and other consumer loans. Additional discussion of the portfolio segments and the risks associated with each segment can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

A loan is considered impaired when, based on current information and events, it is probable that the Company 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 discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

- 14 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

Values for collateral dependent loans are generally based on appraisals obtained from independent licensed real estate appraisers, with adjustments applied for estimated costs to sell the property, costs to complete unfinished or repair damaged property and other factors. New appraisals are generally obtained for all significant properties when a loan is identified as impaired, and a property is considered significant if the value of the property is estimated to exceed $200,000. Subsequent appraisals are obtained as needed or if management believes there has been a significant change in the market value of the property. In instances where it is not deemed necessary to obtain a new appraisal, management bases its impairment and allowance for loan loss analysis on the original appraisal with adjustments for current conditions based on management’s assessment of market factors and management’s inspection of the property.

At March 31, 2019 and December 31, 2018, the balance of foreclosed real estate includes $15,000 and $33,000, respectively, of residential real estate properties where physical possession has been obtained. At March 31, 2019 and December 31, 2018, the recorded investment in loans secured by residential real estate properties for which formal foreclosure proceedings are in process was $331,000 and $365,000, respectively.

Loans at March 31, 2019 and December 31, 2018 consisted of the following:

(In thousands)		March 31, 2019			December 31, 2018
Real estate mortgage loans:
Residential	$	141,511		$	136,445
Land		22,148			22,607
Residential construction		30,297			31,459
Commercial real estate		106,787			107,445
Commercial real estate contruction		22,075			20,591
Commercial business loans		40,053			36,297
Consumer loans:
Home equity and second mortgage loans		53,467			51,731
Automobile loans		42,835			42,124
Loans secured by savings accounts		1,383			1,399
Unsecured loans		3,510			3,638
Other consumer loans		10,247			10,169
Gross loans		474,313			463,905
Less undisbursed portion of loans in process		(21,299	)		(26,675	)
Principal loan balance		453,014			437,230
Deferred loan origination fees, net		1,106			1,095
Allowance for loan losses		(4,339	)		(4,065	)
Loans, net	$	449,781		$	434,260

- 15 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

The following table provides the components of the Company’s recorded investment in loans at March 31, 2019:

		Residential Real Estate		Land		Construction			Commercial Real Estate			Commercial Business		Home Equity & 2nd Mtg		Other Consumer		Total
	(In thousands)
Recorded Investment in Loans:
Principal loan balance	$	141,511	$	22,148	$	31,073		$	106,787		$	40,053	$	53,467	$	57,975	$	453,014
Accrued interest receivable		495		113		102			244			123		266		219		1,562
Net deferred loan origination fees and costs		105		19		(9	)		(39	)		-		1,030		-		1,106
Recorded investment in loans	$	142,111	$	22,280	$	31,166		$	106,992		$	40,176	$	54,763	$	58,194	$	455,682
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	2,329	$	189	$	525		$	457		$	422	$	25	$	-	$	3,947
Collectively evaluated for impairment		139,500		22,091		30,641			106,490			39,754		54,738		58,194		451,408
Acquired with deteriorated credit quality		282		-		-			45			-		-		-		327
Ending balance	$	142,111	$	22,280	$	31,166		$	106,992		$	40,176	$	54,763	$	58,194	$	455,682

- 16 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

The following table provides the components of the Company’s recorded investment in loans at December 31, 2018:

		Residential Real Estate		Land		Construction			Commercial Real Estate			Commercial Business		Home Equity & 2nd Mtg		Other Consumer		Total
	(In thousands)
Recorded Investment in Loans:
Principal loan balance	$	136,445	$	22,607	$	25,375		$	107,445		$	36,297	$	51,731	$	57,330	$	437,230
Accrued interest receivable		475		119		76			265			120		247		228		1,530
Net deferred loan origination fees and costs		99		18		(9	)		(38	)		-		1,025		-		1,095
Recorded investment in loans	$	137,019	$	22,744	$	25,442		$	107,672		$	36,417	$	53,003	$	57,558	$	439,855
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	2,184	$	152	$	521		$	466		$	427	$	35	$	-	$	3,785
Collectively evaluated for impairment		134,553		22,592		24,921			107,158			35,990		52,968		57,558		435,740
Acquired with deteriorated credit quality		282		-		-			48			-		-		-		330
Ending balance	$	137,019	$	22,744	$	25,442		$	107,672		$	36,417	$	53,003	$	57,558	$	439,855

- 17 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

An analysis of the allowance for loan losses as of March 31, 2019 is as follows:

		Residential Real Estate		Land		Construction		Commercial Real Estate		Commercial Business		Home Equity & 2nd Mtg		Other Consumer		Total
	(In thousands)
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	28	$	-	$	-	$	39	$	1	$	-	$	-	$	68
Collectively evaluated for impairment		699		164		291		1,352		540		450		775		4,271
Acquired with deteriorated credit quality		-		-		-		-		-		-		-		-
Ending balance	$	727	$	164	$	291	$	1,391	$	541	$	450	$	775	$	4,339

An analysis of the allowance for loan losses as of December 31, 2018 is as follows:

		Residential Real Estate		Land		Construction		Commercial Real Estate		Commercial Business		Home Equity & 2nd Mtg		Other Consumer		Total
	(In thousands)
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	3	$	-	$	-	$	44	$	1	$	-	$	-	$	48
Collectively evaluated for impairment		690		162		224		1,357		458		443		683		4,017
Acquired with deteriorated credit quality		-		-		-		-		-		-		-		-
Ending balance	$	693	$	162	$	224	$	1,401	$	459	$	443	$	683	$	4,065

- 18 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

An analysis of the changes in the allowance for loan losses for the three months ended March 31, 2019 is as follows:

		Residential Real Estate			Land		Construction		Commercial Real Estate			Commercial Business		Home Equity & 2nd Mtg		Other Consumer			Total
	(In thousands)
Allowance for loan losses:
Beginning balance	$	693		$	162	$	224	$	1,401		$	459	$	443	$	683		$	4,065
Provisions for loan losses		71			2		67		(10	)		82		5		233			450
Charge-offs		(39	)		-		-		-			-		-		(181	)		(220	)
Recoveries		2			-		-		-			-		2		40			44
Ending balance	$	727		$	164	$	291	$	1,391		$	541	$	450	$	775		$	4,339

An analysis of the changes in the allowance for loan losses for the three months ended March 31, 2018 is as follows:

		Residential Real Estate			Land		Construction		Commercial Real Estate			Commercial Business			Home Equity & 2nd Mtg			Other Consumer			Total
	(In thousands)
Allowance for loan losses:
Beginning balance	$	219		$	133	$	245	$	1,622		$	291		$	710		$	414		$	3,634
Provisions for loan losses		139			23		46		(110	)		(15	)		(33	)		147			197
Charge-offs		(60	)		-		-		-			(1	)		-			(196	)		(257	)
Recoveries		3			-		-		8			1			3			42			57
Ending balance	$	301		$	156	$	291	$	1,520		$	276		$	680		$	407		$	3,631

- 19 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

At March 31, 2019 and December 31, 2018, management applied qualitative factor adjustments to various portfolio segments which increased the estimated allowance for loan losses related to those portfolio segments by approximately $3.2 million and $3.1 million at March 31, 2019 and December 31, 2018, respectively. These changes were made to reflect management’s estimates of inherent losses in these portfolio segments at March 31, 2019 and December 31, 2018.

Management also adjusts the historical loss factors for loans classified as watch, special mention and substandard that are not individually evaluated for impairment. The adjustments consider the increased likelihood of loss on classified loans based on the Company’s separate historical experience for classified loans. The effect of the adjustments for classified loans was to increase the estimated allowance for loan losses by $329,000 and $333,000 at March 31, 2019 and December 31, 2018, respectively. These factors were not adjusted during the period from December 31, 2018 to March 31, 2019.

- 20 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

The following table summarizes the Company’s impaired loans as of March 31, 2019 and for the three months ended March 31, 2019 and 2018. The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the three month periods ended March 31, 2019 and 2018:

	At March 31, 2019						Three Months Ended March 31, 2019				Three Months Ended March 31, 2018
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Loans with no related allowance recorded:
Residential	$	2,192	$	2,478	$	-	$	2,181	$	3	$	2,610	$	7
Land		189		191		-		171		-		47		-
Construction		525		525		-		523		-		-		-
Commercial real estate		251		258		-		253		2		383		5
Commercial business		396		447		-		398		3		152		4
Home equity/2nd mortgage		25		34		-		30		-		69		-
Other consumer		-		-		-		-		-		4		-
		3,578		3,933		-		3,556		8		3,265		16
Loans with an allowance recorded:
Residential		137		145		28		76		-		245		-
Land		-		-		-		-		-		-		-
Construction		-		-		-		-		-		-		-
Commercial real estate		206		212		39		103		-		-		-
Commercial business		26		30		1		119		-		29		-
Home equity/2nd mortgage		-		-		-		14		-		13		-
Other consumer		-		-		-		-		-		-		-
		369		387		68		312		-		287		-
Total:
Residential		2,329		2,623		28		2,257		3		2,855		7
Land		189		191		-		171		-		47		-
Construction		525		525		-		523		-		-		-
Commercial real estate		457		470		39		356		2		383		5
Commercial business		422		477		1		517		3		181		4
Home equity/2nd mortgage		25		34		-		44		-		82		-
Other consumer		-		-		-		-		-		4		-
	$	3,947	$	4,320	$	68	$	3,868	$	8	$	3,552	$	16

- 21 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

The following table summarizes the Company’s impaired loans as of December 31, 2018:

		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
Loans with no related allowance recorded:
Residential	$	2,170	$	2,409	$	-
Land		152		153		-
Construction		521		521		-
Commercial real estate		255		260		-
Commercial business		400		451		-
Home equity/2nd mortgage		35		44		-
Other consumer		-		-		-
		3,533		3,838		-
Loans with an allowance recorded:
Residential		14		15		3
Land		-		-		-
Construction		-		-		-
Commercial real estate		211		213		44
Commercial business		27		30		1
Home equity/2nd mortgage		-		-		-
Other consumer		-		-		-
		252		258		48
Total:
Residential		2,184		2,424		3
Land		152		153		-
Construction		521		521		-
Commercial real estate		466		473		44
Commercial business		427		481		1
Home equity/2nd mortgage		35		44		-
Other consumer		-		-		-
	$	3,785	$	4,096	$	48

- 22 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

Nonperforming loans consists of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at March 31, 2019 and December 31, 2018:

	March 31, 2019						December 31, 2018
		Nonaccrual Loans		Loans 90+ Days Past Due Still Accruing		Total Nonperforming Loans		Nonaccrual Loans		Loans 90+ Days Past Due Still Accruing		Total Nonperforming Loans
	(In thousands)
Residential	$	2,065	$	59	$	2,124	$	1,769	$	-	$	1,769
Land		189		-		189		152		-		152
Construction		525		-		525		521		-		521
Commercial real estate		362		-		362		371		-		371
Commercial business		205		-		205		207		-		207
Home equity/2nd mortgage		25		-		25		35		-		35
Other consumer		-		3		3		-		2		2
Total	$	3,371	$	62	$	3,433	$	3,055	$	2	$	3,057

The following table presents the aging of the recorded investment in loans at March 31, 2019:

		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Purchased Credit Impaired Loans		Total Loans
	(In thousands)
Residential	$	2,936	$	96	$	1,396	$	4,428	$	137,401	$	282	$	142,111
Land		284		12		153		449		21,831		-		22,280
Construction		394		-		525		919		30,247		-		31,166
Commercial real estate		509		-		-		509		106,438		45		106,992
Commercial business		167		-		145		312		39,864		-		40,176
Home equity/2nd mortgage		148		-		25		173		54,590		-		54,763
Other consumer		194		57		3		254		57,940		-		58,194
Total	$	4,632	$	165	$	2,247	$	7,044	$	448,311	$	327	$	455,682

- 23 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

The following table presents the aging of the recorded investment in loans at December 31, 2018:

		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Purchased Credit Impaired Loans		Total Loans
	(In thousands)
Residential	$	2,617	$	926	$	1,189	$	4,732	$	132,005	$	282	$	137,019
Land		247		39		152		438		22,306		-		22,744
Construction		-		-		-		-		25,442		-		25,442
Commercial real estate		450		-		-		450		107,174		48		107,672
Commercial business		377		-		145		522		35,895		-		36,417
Home equity/2nd mortgage		191		-		35		226		52,777		-		53,003
Other consumer		491		50		2		543		57,015		-		57,558
Total	$	4,373	$	1,015	$	1,523	$	6,911	$	432,614	$	330	$	439,855

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the institution’s books as an asset is not warranted.

Loans not meeting the criteria above that are analyzed individually as part of the described process are considered to be pass rated loans.

- 24 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

The following table presents the recorded investment in loans by risk category as of the date indicated:

		Residential Real Estate		Land		Construction		Commercial Real Estate		Commercial Business		Home Equity & 2nd Mtg		Other Consumer		Total
	(In thousands)
March 31, 2019
Pass	$	139,056	$	21,891	$	30,598	$	104,154	$	38,822	$	54,687	$	57,978	$	447,186
Special Mention		131		65		43		1,495		869		-		216		2,819
Substandard		788		135		-		981		280		51		-		2,235
Doubtful		2,136		189		525		362		205		25		-		3,442
Loss		-		-		-		-		-		-		-		-
Total	$	142,111	$	22,280	$	31,166	$	106,992	$	40,176	$	54,763	$	58,194	$	455,682
December 31, 2018
Pass	$	133,878	$	22,458	$	24,921	$	104,843	$	35,162	$	52,859	$	57,529	$	431,650
Special Mention		133		65		-		1,520		763		-		29		2,510
Substandard		1,168		69		-		938		285		109		-		2,569
Doubtful		1,840		152		521		371		207		35		-		3,126
Loss		-		-		-		-		-		-		-		-
Total	$	137,019	$	22,744	$	25,442	$	107,672	$	36,417	$	53,003	$	57,558	$	439,855

- 25 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

The following table summarizes the Company’s troubled debt restructurings (TDRs) by accrual status as of March 31, 2019 and December 31, 2018:

	March 31, 2019								December 31, 2018
		Accruing		Nonaccrual		Total		Related Allowance for Loan Losses		Accruing		Nonaccrual		Total		Related Allowance for Loan Losses
	(In thousands)
Troubled debt restructurings:
Residential real estate	$	146	$	297	$	443	$	-	$	295	$	302	$	597	$	-
Commercial real estate		190		362		552		39		190		371		561		44
Commercial business		216		-		216		-		218		-		218		-
Total	$	552	$	659	$	1,211	$	39	$	703	$	673	$	1,376	$	44

At March 31, 2019 and December 31, 2018, there were no commitments to lend additional funds to debtors whose loan terms have been modified in a TDR.

There were no TDRs that were restructured during the three months ended March 31, 2019. The Company restructured one commercial business loan during the three months ended March 31, 2018, with a pre-modification and post-modification outstanding balance of $179,000. For the TDR restructured in 2018, the terms of modification included the deferral of contractual principal payments.

There were no principal charge-offs recorded as a result of TDRs and there was no specific allowance for loan losses related to TDRs modified during the three months ended March 31, 2019 or 2018.

- 26 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

There were no TDRs modified within the previous 12 months for which there was a subsequent payment default (defined as the loan becoming more than 90 days past due, being moved to nonaccrual status, or the collateral being foreclosed upon) during the three months ended March 31, 2019 and 2018. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan.

Purchased Credit Impaired (PCI) Loans

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. Such loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit score, loan type and date of origination. In determining the estimated fair value of purchased loans or pools, management considers a number of factors including the remaining life, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows expected to be received, among others. Purchased loans that have evidence of credit deterioration since origination for which it is deemed probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-30. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. The difference between the expected cash flows and the fair value at acquisition is recorded as interest income over the remaining life of the loan or pool of loans and is referred to as the accretable yield. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which is recognized as future interest income.

The following table presents the carrying amount of PCI loans accounted for under ASC 310-30 at March 31, 2019 and December 31, 2018:

(In thousands)		March 31, 2019		December 31, 2018
Residential real estate	$	282	$	282
Commercial real estate		45		48
Carrying amount		327		330
Allowance for loan losses		-		-
Carrying amount, net of allowance	$	327	$	330

The outstanding balance of PCI loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties was $511,000 and $519,000 at March 31, 2019 and December 31, 2018, respectively.

There was no allowance for loan losses related to PCI loans at March 31, 2019 and December 31, 2018. There was a $2,000 reduction of the allowance for loan losses related to PCI loans for the three-month period ended March 31, 2018. There were no net provisions for loan losses related to PCI loans for the three-month period ended March 31, 2019.

- 27 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3 – continued)

Accretable yield, or income expected to be collected, is as follows for the three month periods ended March 31, 2019 and 2018:

		2019			2018
Balance at beginning of period	$	423		$	470
New loans purchased		-			-
Accretion to income		(12	)		(14	)
Disposals and other adjustments		-			-
Reclassification from nonaccretable difference		(2	)		3
Balance at end of period	$	409		$	459

4. Qualified Affordable Housing Project Investment

On January 19, 2018, the Bank entered into an agreement to invest in qualified affordable housing projects through a limited liability company. At March 31, 2019 and December 31, 2018, the balance of the Bank’s investment was $3.5 million and $3.6 million, respectively, and is reflected in other assets on the consolidated balance sheet. The unfunded commitment related to the qualified affordable housing project investment at March 31, 2019 and December 31, 2018 was $2.8 million and $2.9 million, respectively, and is reflected in other liabilities on the consolidated balance sheet. The Bank expects to fulfill the commitment as capital calls are made through 2029.

The investment is accounted for using the proportional amortization method. During each of the three month periods ended March 31, 2019 and 2018, the Bank recognized amortization expense of $82,000, which was included in income tax expense on the consolidated statements of income. Additionally, during the three month periods ended March 31, 2019 and 2018, the Bank recognized tax credits and other tax benefits from its qualified affordable housing project investment of $125,000 and $98,000, respectively.

- 28 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5. Supplemental Disclosure for Earnings Per Share

	Three Months Ended March 31,
	2019		2018
(Dollars in thousands, exept per share data)
Basic
Earnings:
Net income attributable to First Capital, Inc.	$	2,147	$	2,133
Shares:
Weighted average common shares outstanding		3,329,844		3,326,464
Net income attributable to First Capital, Inc. per common share, basic	$	0.64	$	0.64
Diluted
Earnings:
Net income attributable to First Capital, Inc.	$	2,147	$	2,133
Shares:
Weighted average common shares outstanding		3,329,844		3,326,464
Add: Dilutive effect of restricted stock		10,100		5,671
Weighted average common shares outstanding, as adjusted		3,339,944		3,332,135
Net income attributable to First Capital, Inc. per common share, diluted	$	0.64	$	0.64

Nonvested restricted stock shares are not considered as outstanding for purposes of computing weighted average common shares outstanding. No shares were excluded from the calculations of diluted net income per share because their effect would be anti-dilutive for the three-month periods ended March 31, 2019 and 2018.

6. Stock-Based Compensation Plan

On May 20, 2009, the Company adopted the 2009 Equity Incentive Plan (the “Plan”). The Plan provides for the award of stock options, restricted stock, performance shares and stock appreciation rights. The aggregate number of shares of the Company’s common stock available for issuance under the Plan may not exceed 223,000 shares.

- 29 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(6 – continued)

At March 31, 2019, 176,150 shares of the Company’s common stock were available for issuance under the Plan. The Company may grant both non-statutory and statutory stock options which may not have a term exceeding ten years. 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. An award of a performance share is a grant of a right to receive shares of the Company’s common stock which is contingent upon the achievement of specific performance criteria or other objectives set at the grant date. Stock appreciation rights are equity or cash settled share-based compensation arrangements whereby the number of shares that will ultimately be issued or the cash payment is based upon the appreciation of the Company’s common stock. Awards granted under the Plan may be granted either alone, in addition to, or in tandem with, any other award granted under the Plan. The terms of the Plan also include provisions whereby all unearned options and restricted shares become immediately exercisable and fully vested upon a change in control.

The fair market value of stock options granted is estimated at the date of grant using an option pricing model. Expected volatilities are based on historical volatility of the Company's stock. The expected term of options granted represents the period of time that options are expected to be outstanding and is based on historical trends. The risk free rate for the expected life of the options is based on the U.S. Treasury yield curve in effect at the time of grant. As of March 31, 2019, no stock options had been granted under the Plan.

On February 19, 2019, the Company granted 9,750 restricted stock shares to directors, officers and key employees at a grant-date price of $52.09 per share for a total of $508,000. The restricted stock vests ratably from the grant date through July 1, 2024, with 20% of the shares vesting each year on July 1 beginning July 1, 2020. On February 20, 2018, the Company granted 20,000 restricted stock shares to directors, officers and key employees at a grant-date price of $37.42 per share for a total of $748,000. The restricted stock vests ratably from the grant date through July 1, 2023, with 20% of the shares vesting each year on July 1 beginning July 1, 2019. Compensation expense is measured based on the fair market value of the restricted stock at the grant date and is recognized ratably over the period during which the shares are earned (the vesting period). Compensation expense related to restricted stock recognized for the three-month periods ended March 31, 2019 and 2018 amounted to $56,000 and $49,000, respectively.

A summary of the Company’s nonvested restricted shares under the Plan as of March 31, 2019 and changes during the three-month period then ended is presented below.

	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2019		24,900	$	34.10
Granted		9,750		52.09
Vested		-		-
Forfeited		-		-
Nonvested at March 31, 2019		34,650	$	39.16

- 30 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(6 – continued)

At March 31, 2019, there was $1.1 million of unrecognized compensation expense related to nonvested restricted shares. The compensation expense is expected to be recognized over the remaining vesting period of 5.25 years.

7. Supplemental Disclosures of Cash Flow Information

	Three Months Ended March 31,
	2019		2018
	(In thousands)
Cash payments for:
Interest	$	428	$	351
Taxes (net of refunds received)		0		0
Noncash investing activities:
Transfers from loans to real estate acquired through foreclosure		0		27

8. Fair Value Measurements

FASB ASC Topic 820, Fair Value Measurements, provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are described as follows:

Level 1:	Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted market price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
Level 2:	Inputs to the valuation methodology include quoted market prices for similar assets or liabilities in active markets; quoted market prices for identical or similar assets or liabilities in markets that are not active; or inputs that are derived principally from or can be corroborated by observable market data by correlation or other means.
Level 3:	Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth on the following page. These valuation methodologies were applied to all of the Company’s financial and nonfinancial assets carried at fair value or the lower of cost or fair value. The table below presents the balances of assets measured at fair value on a recurring and nonrecurring basis as of March 31, 2019 and December 31, 2018. The Company had no liabilities measured at fair value as of March 31, 2019 or December 31, 2018.

- 31 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(8 – continued)

	Carrying Value
(In thousands)	Level 1		Level 2		Level 3		Total
March 31, 2019
Assets Measured on a Recurring Basis
Securities available for sale:
Agency mortgage-backed securities	$	-	$	87,375	$	-	$	87,375
Agency CMO		-		36,096		-		36,096
Agency notes and bonds		-		65,201		-		65,201
Municipal obligations		-		66,363		-		66,363
Total securities available for sale	$	-	$	255,035	$	-	$	255,035
Equity securities	$	1,845	$	-	$	-		1,845
Assets Measured on a Nonrecurring Basis
Impaired loans:
Residential real estate	$	-	$	-	$	2,301	$	2,301
Land		-		-		189		189
Construction		-		-		525		525
Commercial real estate		-		-		418		418
Commercial business		-		-		421		421
Home equity and second mortgage		-		-		25		25
Total impaired loans	$	-	$	-	$	3,879	$	3,879
Loans held for sale	$	-	$	1,377	$	-	$	1,377
Foreclosed real estate:
Residential real estate	$	-	$	-	$	15	$	15
Commercial real estate		-		-		2,984		2,984
Total foreclosed real estate	$	-	$	-	$	2,999	$	2,999
December 31, 2018
Assets Measured on a Recurring Basis
Securities available for sale:
Agency mortgage-backed securities	$	-	$	91,257	$	-	$	91,257
Agency CMO		-		32,992		-		32,992
Agency notes and bonds		-		74,504		-		74,504
Municipal obligations		-		63,088		-		63,088
Total securities available for sale	$	-	$	261,841	$	-	$	261,841
Equity securities	$	1,715	$	-	$	-		1,715
Assets Measured on a Nonrecurring Basis
Impaired loans:
Residential real estate	$	-	$	-	$	2,181	$	2,181
Land		-		-		152		152
Construction		-		-		521		521
Commercial real estate		-		-		422		422
Commercial business		-		-		426		426
Home equity and second mortgage		-		-		35		35
Total impaired loans	$	-	$	-	$	3,737	$	3,737
Loans held for sale	$	-	$	2,849	$	-	$	2,849
Foreclosed real estate:
Residential real estate	$	-	$	-	$	33	$	33
Commercial real estate		-		-		3,109		3,109
Total foreclosed real estate	$	-	$	-	$	3,142	$	3,142

- 32 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(8 – continued)

Fair value is based upon quoted market prices, where available. If quoted market prices are not available, fair value is based on internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters or a matrix pricing model that employs the Bond Market Association’s standard calculations for cash flow and price/yield analysis and observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, or the lower of cost or fair value. These adjustments may include unobservable parameters. Any such valuation adjustments have been applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available for Sale and Equity Securities. Securities classified as available for sale and equity securities are reported at fair value on a recurring basis.  These securities are classified as Level 1 of the valuation hierarchy where quoted market prices from reputable third-party brokers are available in an active market. If quoted market prices are not available, the Company obtains fair value measurements from an independent pricing service.  These securities are reported using Level 2 inputs and the fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. For securities where quoted market prices, market prices of similar securities or prices from an independent third party pricing service are not available, fair values are calculated using discounted cash flows or other market indicators and are classified within Level 3 of the fair value hierarchy. Changes in fair value of securities available for sale are recorded in other comprehensive income, net of income tax effect. Changes in fair value of equity securities are recorded in noninterest income on the consolidated statements of income.

Impaired Loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of impaired loans is classified as Level 3 in the fair value hierarchy.

Impaired loans are carried at the present value of estimated future cash flows using the loan's effective interest rate or the fair value of collateral less estimated costs to sell if the loan is collateral dependent. At March 31, 2019 and December 31, 2018, all impaired loans were considered to be collateral dependent for the purpose of determining fair value. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable. The fair value of the collateral is generally determined based on real estate appraisals or other independent evaluations by qualified professionals, adjusted for estimated costs to sell the property, costs to complete or repair the property and other factors to reflect management’s estimate of the fair value of the collateral given the current market conditions and the condition of the collateral.

- 33 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(8 – continued)

At March 31, 2019, the significant unobservable inputs used in the fair value measurement of impaired loans included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the collateral ranging from 14% to 66%, with a weighted average discount of 46%. At December 31, 2018, the significant unobservable inputs used in the fair value measurement of impaired loans included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the collateral ranging from 20% to 62%, with a weighted average discount of 39%. The Company recognized provisions for loan losses for impaired loans for the three months ended March 31, 2019 and 2018 of $20,000 and $65,000, respectively.

Loans Held for Sale. Loans held for sale are carried at the lower of cost or market value. The portfolio is comprised of residential real estate loans and fair value is based on specific prices of underlying contracts for sales to investors.  These measurements are classified as Level 2.

Foreclosed Real Estate. Foreclosed real estate is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. The fair value of foreclosed real estate is classified as Level 3 in the fair value hierarchy.

Foreclosed real estate is reported at fair value less estimated costs to dispose of the property. The fair values are determined by real estate appraisals which are then discounted to reflect management’s estimate of the fair value of the property given current market conditions and the condition of the collateral. At March 31, 2019, the significant unobservable inputs used in the fair value measurement of foreclosed real estate included a discount from appraised value for estimates of changes in market conditions, the condition of the collateral and estimated costs to sell the property ranging from 17% to 50%, with a weighted average of 17%. At December 31, 2018, the discount from appraised value ranged from 10% to 79%, with a weighted average of 51%. The Company recognized losses of $137,000 to write down foreclosed real estate for the three months ended March 31, 2019. There were no charges to write down foreclosed real estate recognized in income for the three months ended March 31, 2018.

There have been no changes in the valuation techniques and related inputs used for assets measured at fair value on a recurring and nonrecurring basis during the three month periods ended March 31, 2019 and 2018. There were no transfers into or out of the Company’s Level 3 financial assets for the three month periods ended March 31, 2019 and 2018. In addition, there were no transfers into or out of Levels 1 and 2 of the fair value hierarchy during the three month periods ended March 31, 2019 and 2018.

- 34 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(8 – continued)

GAAP requires disclosure of the fair value of financial assets and financial liabilities, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The estimated fair values of the Company's financial instruments are as follows:

	Carrying		Fair		Fair Value Measurements Using
(In thousands)	Value		Value		Level 1		Level 2		Level 3
March 31, 2019
Financial assets:
Cash and cash equivalents	$	55,543	$	55,543	$	55,543	$	-	$	-
Interest-bearing time deposits		6,735		6,757		-		6,757		-
Securities available for sale		255,035		255,035		-		255,035		-
Loans held for sale		1,377		1,401		-		1,401		-
Loans, net		449,781		458,899		-		-		458,899
FHLB and other restricted stock		1,988		N/A		N/A		N/A		N/A
Accrued interest receivable		2,835		2,835		-		2,835		-
Equity securities (included in other assets)		1,845		1,845		1,845		-		-
Financial liabilities:
Deposits		718,531		717,117		-		-		717,117
Accrued interest payable		177		177		-		177		-
December 31, 2018:
Financial assets:
Cash and cash equivalents	$	41,112	$	41,112	$	41,112	$	-	$	-
Interest-bearing time deposits		7,710		7,650		-		7,650		-
Securities available for sale		261,841		261,841		-		261,841		-
Loans held for sale		2,849		2,900		-		2,900		-
Loans, net		434,260		427,200		-		-		427,200
FHLB and other restricted stock		1,988		N/A		N/A		N/A		N/A
Accrued interest receivable		2,828		2,828		-		2,828		-
Equity securities (included in other assets)		1,715		1,715		1,715		-		-
Financial liabilities:
Deposits		701,646		699,864		-		-		699,864
Accrued interest payable		150		150		-		150		-

- 35 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9. Revenue from Contracts with Customers

Substantially all of the Company’s revenue from contracts with customers in the scope of FASB ASC 606 is recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the three months ended March 31, 2019 and 2018:

	Three Months Ended March 31,
	2019		2018
	(In thousands)
Service charges on deposit accounts	$	461	$	509
ATM and debit card fees		647		600
Investment advisory income		98		88
Other		34		35
Revenue from contracts with customers		1,240		1,232
Net gains on loans and investments		192		241
Increase in cash value of life insurance		48		43
Other		25		10
Other noninterest income		265		294
Total noninterest income	$	1,505	$	1,526

A description of the Company’s revenue streams accounted for under FASB ASC 606 follows:

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as stop payment charges and statement rendering, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.

ATM and Debit Card Fees: The Company earns ATM usage fees and interchange fees from debit cardholder transactions conducted through a payment network. ATM fees are recognized at the point in time the transaction occurs. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Investment Advisory Income: The Company earns trust, insurance commissions, brokerage commissions and annuities income from its contracts with customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company provides the contracted services and are generally assessed based on the market value of assets under management. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed. Other related fees, which are based on a fixed fee schedule, are recognized when the services are rendered.

- 36 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(9 – continued)

Other Income: Other income from contracts with customers includes safe deposit box fees and ACH origination fees. This revenue is recognized at the time the transaction is executed or over the period the Company satisfies the performance obligation.

10. Recent Accounting Pronouncements

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

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this update as of January 1, 2019 did not have a material impact on the Company’s consolidated financial position or results of operations. The Company also adopted all applicable practical expedients, including the option to not recognize lease assets and liabilities for short-term leases.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). The update replaces the incurred loss methodology for recognizing credit losses under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost. The impairment model for available-for-sale debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary. For the Company, the amendments in the update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the impact the guidance will have upon adoption, but management expects to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective. However, the magnitude of the adjustment is unknown. In planning for the implementation of ASU 2016-13, the Company has formed a current expected credit loss (“CECL”) implementation team consisting of members of senior management that meets on a periodic basis and is currently evaluating software solutions, data requirements and loss methodologies.

- 37 -

FIRST CAPITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(10 – continued)

In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) – Premium Amortization on Purchased Callable Debt Securities. The update shortens the amortization period for certain callable debt securities held at a premium. Specifically, the update requires the premium to be amortized to the earliest call date. The update does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in the update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this update effective January 1, 2019 did not have a material impact on the Company’s consolidated financial position or results of operations.

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The update removes, modifies and adds certain disclosure requirements for fair value measurements. Among other changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements, but will be required to disclose the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. The amendments in the update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

- 38 -

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

Safe Harbor Statement for Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts nor guarantees of future performance; rather they are statements based on the Company’s current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements can be identified by use of the words “expects,” “believes,” “anticipates,” “intends,” “could,” “should” and similar expressions. Forward-looking statements also include, but are not limited to, statements regarding estimated cost savings, plans and objectives for future operations, and the Company’s business and growth strategies.

Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance and achievements being 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; the ability of the Company to execute its business plan; legislative and regulatory changes; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed in Part II of this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2018 under “Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. These forward-looking statements are made only as of the date of this Quarterly Report on Form 10-Q and, except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

Critical Accounting Policies

During the three months ended March 31, 2019, there was no significant change in the Company’s critical accounting policies or the application of critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Financial Condition

Total assets increased $19.7 million from $794.2 million at December 31, 2018 to $813.9 million at March 31, 2019, an increase of 2.5%.

Net loans receivable (excluding loans held for sale) increased $15.5 million from $434.3 million at December 31, 2018 to $449.8 million at March 31, 2019. Construction loans, residential mortgage loans and commercial business loans increased $5.7 million, $5.1 million and $3.8 million, respectively, during the three months ended March 31, 2019.

Securities available for sale decreased $6.8 million from $261.8 million at December 31, 2018 to $255.0 million at March 31, 2019. Purchases of $17.9 million of securities classified as available for sale were made during the three months ended March 31, 2019 and consisted primarily of municipal bonds, U.S. government agency notes and bonds and mortgage-backed CMO’s. Maturities and principal repayments of available for sale securities totaled $15.6 million and $5.5 million, respectively, during the three months ended March 31, 2019. Municipal bonds, U.S. government agency notes, bonds, mortgage-backed securities and CMO’s with a value of $5.4 million were sold during the three months ended March 31, 2019.

- 39 -

PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

Cash and cash equivalents increased from $41.1 million at December 31, 2018 to $55.5 million at March 31, 2019, primarily due to excess liquidity from increases in deposit balances.

Total deposits increased from $701.6 million at December 31, 2018 to $718.5 million at March 31, 2019. Noninterest-bearing checking accounts, interest bearing checking accounts and savings accounts increased $9.5 million, $5.9 million and $2.5 million, respectively, during the three months ended March 31, 2019 primarily due to new accounts and normal balance fluctuations, while time deposits decreased $610,000 during the period.

Total stockholders' equity attributable to the Company increased from $85.8 million at December 31, 2018 to $89.1 million at March 31, 2019, primarily due to a $1.8 million decrease in the net unrealized loss on available for sale securities and a $1.4 million increase in retained net income during the three months ended March 31, 2019. The decrease in the net unrealized loss on available for sale securities during the period is primarily due to changes in long-term market interest rates.

Results of Operations

Net income for the three-month periods ended March 31, 2019 and 2018. Net income attributable to the Company was $2.1 million ($0.64 per diluted share) for the three months ended March 31, 2019 compared to $2.1 million ($0.64 per diluted share) for the same time period in 2018. An increase in net interest income was offset by increases in provision for loan losses, noninterest expense and income tax expense.

Net interest income for the three-month periods ended March 31, 2019 and 2018. Net interest income increased $780,000 for the three months ended March 31, 2019 compared to the same period in 2018 primarily due to increases in the average balance and average tax-equivalent yield of interest-earning assets partially offset by increases in the average balance and average cost of interest-bearing liabilities.

Total interest income increased $894,000 for the three months ended March 31, 2019 compared to the same period in 2018. For the three months ended March 31, 2019, the average balance of interest-earning assets and their tax-equivalent yield were $741.0 million and 4.19%, respectively. During the same period in 2018, the average balance of those assets was $710.9 million and the tax-equivalent yield was 3.87%. Total interest expense increased $114,000 for the three months ended March 31, 2019 compared to the same period in 2018. The average balance of interest-bearing liabilities increased from $540.8 million for 2018 to $558.6 million for 2019. The average rate paid on interest-bearing liabilities increased from 0.25% to 0.33% when comparing the two periods.

As a result of the changes in interest-earning assets and interest-bearing liabilities, the interest rate spread on a tax-equivalent basis increased from 3.62% for the three months ended March 31, 2018 to 3.86% for the same period in 2019.

Provision for loan losses. Based on management’s analysis of the allowance for loan losses, the provision for loan losses increased from $197,000 for the three-month period ended March 31, 2018 to $450,000 for the same period in 2019 due primarily to loan growth. The Bank recognized net charge-offs of $176,000 for the three months ended March 31, 2019 compared to $200,000 during the same period in 2018.

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

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

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

The allowance for loan losses was $4.3 million at March 31, 2019 and $4.1 million at December 31, 2018. Management has deemed these amounts as adequate at each date based on its best estimate of probable known and inherent loan losses at each date. At March 31, 2019, nonperforming loans amounted to $3.4 million compared to $3.1 million at December 31, 2018. Included in nonperforming loans were loans 90 days or more past due and still accruing interest of $62,000 and $2,000 at March 31, 2019 and December 31, 2018, respectively. These loans were accruing interest because the estimated value of the collateral and collection efforts are deemed sufficient to ensure full recovery. At March 31, 2019 and December 31, 2018, nonaccrual loans amounted to $3.4 million and $3.1 million, respectively.

Noninterest income for the three-month periods ended March 31, 2019 and 2018. Noninterest income for the quarter ended March 31, 2019 decreased $21,000 compared to the quarter ended March 31, 2018. Gains on the sale of securities and gains on the sale of loans decreased $98,000 and $82,000, respectively, when comparing the two periods. This was partially offset by a $131,000 unrealized gain on equity securities recognized during the first quarter of 2019.

Noninterest expense for the three-month periods ended March 31, 2019 and 2018. Noninterest expense for the quarter ended March 31, 2019 increased $411,000 compared to the quarter ended March 31, 2018. Compensation and benefits expense, data processing expense and net losses on foreclosed real estate increased $148,000, $94,000 and $74,000, respectively, when comparing the two periods.

Income tax expense. Income tax expense increased $81,000 for the first quarter of 2019 as compared to the first quarter of 2018 primarily due to a reduction in benefits from a tax credit entity recognized for the quarter ended March 31, 2019. As a result, the effective tax rate for the quarter ended March 31, 2019 was 17.1% as compared to 14.5% for the same period in 2018.

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

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 March 31, 2019, the Bank had cash and cash equivalents of $55.5 million and securities available-for-sale with a fair value of $255.0 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB of Indianapolis and additional collateral eligible for repurchase agreements.

The Bank’s primary investing activity is the origination of one-to-four family mortgage loans and commercial real estate loans and, to a lesser extent, consumer, multi-family, 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. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company, on a stand-alone basis, is responsible for paying any dividends declared to its shareholders. The Board of Directors of the Company also has authorized the repurchase of shares of its common stock. The Company’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the Indiana Department of Financial Institutions (“IDFI”), cannot exceed net income for that year to date plus retained net income (as defined under Indiana law) for the preceding two calendar years. On a stand-alone basis, the Company had liquid assets of $2.9 million at March 31, 2019.

The Bank is required to maintain specific amounts of capital pursuant to regulatory requirements. As of March 31, 2019, the Bank was in compliance with all regulatory capital requirements that were effective as of such date with Tier 1 capital to average assets, common equity Tier 1 capital to risk-weighted assets, Tier 1 capital to risk-weighted assets and total capital to risk-weighted assets ratios of 9.7%, 13.8%, 13.8% and 14.6%, respectively. The regulatory requirements at that date to be considered “well-capitalized” under applicable regulations were 5.0%, 6.5%, 8.0% and 10.0%, respectively. At March 31, 2019, the Bank was considered “well-capitalized” under applicable regulatory guidelines.

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FIRST CAPITAL, INC.

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded on the Company’s financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are primarily used to manage customers’ requests for funding and take the form of loan commitments and letters of credit. A further presentation of the Company’s off-balance sheet arrangements is presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

For the three months ended March 31, 2019, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.

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PART I – ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

FIRST CAPITAL, INC.

Qualitative Aspects of Market Risk. Market risk is the risk that the estimated fair value of the Company’s assets and liabilities will decline as a result of changes in interest rates or financial market volatility, or that the Company’s net income will be significantly reduced by interest rate changes.

The Company’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Company 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 Company 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 Company for its portfolio. The Company 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 Company does not maintain a trading account for any class of financial instrument nor does the Company engage in hedging activities or purchase high-risk derivative instruments. Furthermore, the Company is not subject to foreign currency exchange rate risk or commodity price risk.

Potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits, extending loans and investing in investment securities. Many factors affect the Company’s exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. The Company’s earnings can also be affected by the monetary and fiscal policies of the U.S. Government and its agencies, particularly the Board of Governors of the Federal Reserve System.

An element in the Company’s ongoing process is to measure and monitor interest rate risk using a Net Interest Income at Risk simulation to model the interest rate sensitivity of the balance sheet and to quantify the impact of changing interest rates on the Company. The model quantifies the effects of various possible interest rate scenarios on projected net interest income over a one-year horizon. The model assumes a semi-static balance sheet and measures the impact on net interest income relative to a base case scenario of hypothetical changes in interest rates over twelve months and provides no effect given to any steps that management might take to counter the effect of the interest rate movements. The scenarios include prepayment assumptions, changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates in order to capture the impact from re-pricing, yield curve, option, and basis risks.

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PART I – ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

FIRST CAPITAL, INC.

Results of the Company’s simulation modeling, which assumes an immediate and sustained parallel shift in market interest rates, project that the Company’s net interest income could change as follows over a one-year horizon, relative to our base case scenario, based on March 31, 2019 and December 31, 2018 financial information:

	At March 31, 2019						At December 31, 2018
Immediate Change	One Year Horizon						One Year Horizon
in the Level	Dollar			Percent			Dollar		Percent
of Interest Rates	Change			Change			Change		Change
	(Dollars in thousands)
300bp	$	3,381			11.26	%	$	790		2.91	%
200bp		2,078			6.92			318		1.17
100bp		1,062			3.54			176		0.65
Static		-			-			-		-
(100)bp		(1,099	)		(3.66	)		876		3.23
(200)bp		(2,526	)		(8.41	)		139		0.51

At March 31, 2019, the Company’s simulated exposure to a change in interest rates shows that an immediate and sustained increase in rates of 1.00%, 2.00% or 3.00% would increase the Company’s net interest income over a one year horizon compared to a flat interest rate scenario. Alternatively, an immediate and sustained decrease in rates of 1.00% or 2.00% would decrease the Company’s net interest income over a one year horizon compared to a flat interest rate scenario. At December 31, 2018, all scenarios described would have resulted in an increase of the Company’s net interest income over a one year horizon compared to a flat interest scenario. During the three months ended March 31, 2019, the Company updated discount rates and betas on loan and deposits to better reflect the market and also updated deposit decay rates to levels indicated in a third-party study of customer accounts.

The Company also has longer term interest rate risk exposure, which may not be appropriately measured by Net Interest Income at Risk modeling. Therefore, the Company also uses an Economic Value of Equity (“EVE”) interest rate sensitivity analysis in order to evaluate the impact of its interest rate risk on earnings and capital. This is measured by computing the changes in net EVE for its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. EVE modeling involves discounting present values of all cash flows for on and off balance sheet items under different interest rate scenarios and provides no effect given to any steps that management might take to counter the effect of the interest rate movements. The discounted present value of all cash flows represents the Company’s EVE and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. The amount of base case EVE and its sensitivity to shifts in interest rates provide a measure of the longer term re-pricing and option risk in the balance sheet.

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PART I – ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

FIRST CAPITAL, INC.

Results of the Company’s simulation modeling, which assumes an immediate and sustained parallel shift in market interest rates, project that the Company’s EVE could change as follows, relative to the Company’s base case scenario, based on March 31, 2019 and December 31, 2018 financial information:

	At March 31, 2019
Immediate Change	Economic Value of Equity								Economic Value of Equity as a
in the Level	Dollar		Dollar			Percent			Percent of Present Value of Assets
of Interest Rates	Amount		Change			Change			EVE Ratio			Change
300bp	$	195,241	$	43,010			28.25	%		25.27	%		630	bp
200bp		183,042		30,811			20.24			23.37			440	bp
100bp		168,903		16,672			10.95			21.29			232	bp
Static		152,231		-			-			18.97			0	bp
(100)bp		132,291		(19,940	)		(13.10	)		16.31			(266	)bp
(200)bp		109,975		(42,256	)		(27.76	)		13.40			(557	)bp

	At December 31, 2018
Immediate Change	Economic Value of Equity								Economic Value of Equity as a
in the Level	Dollar		Dollar			Percent			Percent of Present Value of Assets
of Interest Rates	Amount		Change			Change			EVE Ratio			Change
300bp	$	106,468	$	3,885			3.79	%		14.67	%		142	bp
200bp		106,176		3,593			3.50			14.31			106	bp
100bp		104,978		2,395			2.33			13.85			60	bp
Static		102,583		-			-			13.25			0	bp
(100)bp		102,230		(353	)		(0.34	)		12.95			(30	)bp
(200)bp		93,763		(8,820	)		(8.60	)		11.63			(162	)bp

The previous tables indicate that at March 31, 2019 and December 31, 2018 the Company would expect an increase in its EVE in the event of a sudden and sustained 100, 200 or 300 basis point increase in prevailing interest rates and a decrease in its EVE in the event of a sudden and sustained 100 or 200 basis point decrease in prevailing interest rates. As previously mentioned in this report, during the three months ended March 31, 2019, the Company updated discount rates and betas on loan and deposits to better reflect the market and also updated deposit decay rates to levels indicated in a third-party study of customer accounts.

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PART I – ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

FIRST CAPITAL, INC.

The models are driven by expected behavior in various interest rate scenarios and many factors besides market interest rates affect the Company’s net interest income and EVE. For this reason, the Company models many different combinations of interest rates and balance sheet assumptions to understand its overall sensitivity to market interest rate changes. Therefore, as with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables and it is recognized that the model outputs are not guarantees of actual results. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in the modeling scenarios.

PART I - ITEM 4

CONTROLS AND PROCEDURES

FIRST CAPITAL, INC.

Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

FIRST CAPITAL, INC.

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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

None.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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PART II

OTHER INFORMATION

FIRST CAPITAL, INC.

Item 6. Exhibits

3.1	Articles of Incorporation of First Capital, Inc. (1)
3.2	Fifth Amended and Restated Bylaws of First Capital, Inc. (2)
11.0	Statement Re: Computation of Per Share Earnings (incorporated by reference to Note 5 of the Unaudited Consolidated Financial Statements contained herein)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer
101.0	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

___________________

(1) Incorporated by reference to Exhibit 3.1 filed with the Registration Statement on Form SB-2 on September 16, 1998, and any amendments thereto, Registration No. 333-63515, as amended by that Amendment to Articles of Incorporation provided as Exhibit 3.1 to the Report on Form 8-K files with the Securities and Exchange Commission on May 19, 2016.

(2) Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 18, 2013.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FIRST CAPITAL, INC.
	(Registrant)
Dated May 9, 2019	BY:	/s/ William W. Harrod
		William W. Harrod
		President and CEO
Dated May 9, 2019	BY:	/s/ Michael C. Frederick
		Michael C. Frederick
		Executive Vice President, CFO and Treasurer