10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2005

OR

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

For the transition period from              to             

Commission File Number: 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 No.)
220 Federal Drive, N.W., Corydon, Indiana	47112
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (812) 738-2198

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “large accelerated filer and accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  ¨    Accelerated Filer  ¨    Non-accelerated Filer  x

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates was $45.3 million, based upon the average bid and asked price of $19.07 as quoted on the Nasdaq Stock Market as of the last business day of the registrant’s most recently completed second fiscal quarter.

The number of shares outstanding of the registrant’s common stock as of March 1, 2006 was 2,588,029.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2005 Annual Report of Stockholders and of the Proxy Statement for the 2006 Annual Meeting of Stockholders are incorporated by reference in Parts II and III, respectively, of this Form 10-K.

INDEX

		Page
	Part I
Item 1.	Business	1
Item 1A.	Risk Factors	29
Item 1B.	Unresolved Staff Comments	30
Item 2.	Properties	31
Item 3.	Legal Proceedings	31
Item 4.	Submission of Matters to a Vote of Security Holders	32
	Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	32
Item 6.	Selected Financial Data	32
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	32
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 8.	Financial Statements and Supplementary Data	33
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	33
Item 9A.	Controls and Procedures	33
Item 9B.	Other Information	33
	Part III
Item 10.	Directors and Executive Officers of the Registrant	34
Item 11.	Executive Compensation	34
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	34
Item 13.	Certain Relationships and Related Transactions	35
Item 14.	Principal Accountant Fees and Services	35
	Part IV
Item 15.	Exhibits and Financial Statement Schedules	36
SIGNATURES
CERTIFICATIONS

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This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, rather statements based on First Capital, Inc.’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends; the general economic climate in the specific market area in which First Capital operates, as well as nationwide; First Capital’s ability to control costs and expenses; competitive products and pricing; loan delinquency rates and changes in federal and state legislation and regulation. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as may be required by applicable law or regulation, First Capital assumes no obligation to update any forward-looking statements.

PART I

ITEM 1. BUSINESS

General

First Capital, Inc. (also referred to as the “Company” or “First Capital”) was incorporated under Indiana law in September 1998. The Company was organized for the purpose of becoming the holding company for First Federal Bank, A Federal Savings Bank (also referred to as the “Bank”) upon the Bank’s reorganization as a wholly owned subsidiary of the Company resulting from the conversion of First Capital, Inc., M.H.C. (“MHC”), from a federal mutual holding company to a stock holding company (“Conversion and Reorganization”). On January 12, 2000, the Company completed a merger of equals with HCB Bancorp, the former holding company for Harrison County Bank. The Bank changed its name to First Harrison Bank in connection with the merger. On March 20, 2003, the Company consummated its acquisition of Hometown Bancshares, Inc. (“Hometown”), a bank holding company located in New Albany, Indiana. The acquisition expanded the Company’s presence in the New Albany and Floyd County, Indiana market area and expanded the banking services provided to the existing customers of Hometown.

The Company has no significant assets, other than all of the outstanding shares of the Bank and the portion of the net proceeds from the Offering retained by the Company, and no significant liabilities. Management of the Company and the Bank are substantially similar and the Company neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank in accordance with applicable regulations.

The Bank is regulated by the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s deposits are federally insured by the FDIC under the Savings Association Insurance Fund (“SAIF”) and the Bank Insurance Fund (BIF). The Bank is a member of the Federal Home Loan Bank (“FHLB”) System.

Availability of Information

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed with or furnished to the Securities and Exchange Commission are made available free of charge on the Company’s website,

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www.firstharrison.com, as soon as practicable after the Company electronically files such material, or furnishes it to, the Securities and Exchange Commission. The contents of the Company’s website shall not be incorporated by reference into this Form 10-K.

Market Area and Competition

The Bank considers Harrison, Floyd, Clark and Washington counties in Indiana its primary market area. All of its offices are located in these four counties, which results in most of the Bank’s loans being made in these four counties. The main office of the Bank is located in Corydon, Indiana, 35 miles west of Louisville, Kentucky. The Bank aggressively competes for business with local banks, as well as large regional banks. Its most direct competition for deposit and loan business comes from the commercial banks operating in these four counties. The Bank is the leader in deposit market share in Harrison County, its primary county of operation.

Lending Activities

General. The Bank is in the process of transforming its balance sheet from that of a traditional thrift institution to that of a commercial bank. On the asset side, this is being accomplished by selling in the secondary market the newly-originated qualified fixed-rate residential mortgage loans while retaining variable rate residential mortgage loans in the portfolio. This transformation is enhanced by an expanded commercial lending staff dedicated to growing commercial real estate and commercial business loans. The Bank also continues to originate consumer loans and residential construction loans for the loan portfolio.

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Loan Portfolio Analysis. The following table presents the composition of the Bank’s loan portfolio by type of loan at the dates indicated.

	At December 31,
	2005					2004					2003					2002				2001
	Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount		Percent of Total		Amount		Percent of Total
	(Dollars in thousands)
Mortgage Loans:
Residential(1)	$	178,329		53.93	%	$	179,816		55.10	%	$	176,569		55.77	%	$	145,467	65.79	%	$	132,350	64.35	%
Land		7,772		2.35			6,696		2.05			7,771		2.45			4,821	2.18			4,381	2.13
Commercial real estate		38,896		11.76			38,654		11.84			42,936		13.56			16,760	7.58			15,811	7.69
Residential construction(2)		19,513		5.90			23,215		7.11			25,077		7.92			9,783	4.42			10,477	5.09
Total mortgage loans		244,510		73.94			248,381		76.10			252,353		79.70			176,831	79.97			163,019	79.26
Consumer Loans:
Home equity and second mortgage loans		36,951		11.18			35,385		10.84			27,656		8.73			18,640	8.43			12,963	6.30
Automobile loans		14,526		4.39			13,726		4.20			12,863		4.06			9,598	4.34			10,376	5.04
Loans secured by savings accounts		1,950		0.59			1,611		0.49			1,248		0.39			1,249	0.56			1,309	0.64
Unsecured loans		2,932		0.89			2,307		0.71			1,855		0.59			1,193	0.54			1,721	0.84
Other(3)		5,142		1.56			4,154		1.27			4,543		1.43			4,176	1.89			4,949	2.41
Total consumer loans		61,501		18.61			57,183		17.51			48,165		15.20			34,856	15.76			31,318	15.23
Commercial business loans		24,626		7.45			20,866		6.39			16,162		5.10			9,440	4.27			11,339	5.51
Total gross loans		330,637		100.00	%		326,430		100.00	%		316,680		100.00	%		221,127	100.00	%		205,676	100.00	%
Less:
Due to borrowers on loans in process		6,197					6,933					10,085					3,887				2,727
Deferred loan fees net of direct costs		(117	)				(67	)				(38	)				26				116
Allowance for loan losses		2,104					2,478					2,433					1,218				1,103
Total loans, net	$	322,453				$	317,086				$	304,200				$	215,996			$	201,730

(1) Includes conventional one- to four-family and multi-family residential loans.

(2) Includes construction loans for which the Bank has committed to provide permanent financing.

(3) Includes loans secured by lawn and farm equipment, mobile homes and other personal property.

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Residential Loans. The Bank’s lending activities have concentrated on the origination of residential mortgages, both for sale and retention in the Bank’s loan portfolio. Residential mortgages secured by multi-family properties are an immaterial portion of the residential loan portfolio. Substantially all residential mortgages are collateralized by properties within the Bank’s market area.

The Bank offers both fixed-rate mortgage loans and adjustable rate mortgage (“ARM”) loans typically with terms of 15 to 30 years. The Bank uses loan documents approved by the Federal National Mortgage Corporation (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) whether the loan is originated for investment or sale in the secondary market.

Historically, the Bank has retained its residential loan originations in its portfolio. Retaining fixed-rate loans in its portfolio subjects the Bank to a higher degree of interest rate risk. See “Item 1A. Risk Factors–Above Average Interest Rate Risk Associated with Fixed-Rate Loans” for a further discussion of the risks of rising interest rates. Beginning in 2004, one of the Bank’s strategic goals was to expand its mortgage business by originating mortgage loans for sale, while offering a full line of mortgage products to prospective customers. This practice increases the Bank’s lending capacity and allows the Bank to more effectively manage its profitability since it is not required to predict the prepayment, credit or interest rate risks associated with retaining either the loan or the servicing asset. During 2005, the Bank hired a mortgage banking manager, charged with hiring more mortgage originators and increasing the Bank’s secondary market business in Southern Indiana. For the year ended December 31, 2005, the Bank originated and funded $15.4 million of residential mortgage loans for sale in the secondary market. The Bank also originated $10.2 million of residential mortgage loans as an agent for a third-party mortgage company. The third-party mortgage company funded such originations and the Bank received a fee for each loan funded by the third party mortgage company. For a full discussion of the Bank’s mortgage banking operations, see “Item 1. Business–Mortgage Banking Activities.”

ARM loans originated have interest rates that adjust at regular intervals of one year, with 2.0% annual and 6% lifetime caps, and at intervals of five years with 1.5% per adjustment period and 6% lifetime caps, based upon changes in the prevailing interest rates on United States Treasury Bills. The Bank may occasionally use below market interest rates and other marketing inducements to attract ARM loan borrowers. The majority of ARM loans provide that the amount of any increase or decrease in the interest rate is limited to 2.0% (upward or downward) per adjustment period and generally contains minimum and maximum interest rates. Borrower demand for ARMs versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and interest rates and loan fees for ARM loans. The relative amount of fixed-rate and ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment.

The Bank’s lending policies generally limit the maximum loan-to-value ratio on fixed-rate and ARM loans to 80% of the lesser of the appraised value or purchase price of the underlying residential property unless private mortgage insurance to cover the excess over 80% is obtained, in which case the mortgage is limited to 95% (or 97% under a Freddie Mac program) of the lesser of appraised value or purchase price. The loan-to-value ratio, maturity and other provisions of the loans made by the Bank are generally reflected in the policy of making less than the maximum loan permissible under federal regulations, in accordance with established lending practices, market conditions and underwriting standards maintained by the Bank. The Bank requires title, fire and

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extended insurance coverage on all mortgage loans originated. All of the Bank’s real estate loans contain due on sale clauses. The Bank generally obtains appraisals on all its real estate loans from outside appraisers.

Construction Loans. Although the Bank originates construction loans that are repaid with the proceeds of a limited number of mortgage loans obtained by the borrower from another lender, the majority of the construction loans that the Bank originates are permanently financed in the secondary market by the Bank. Construction loans originated without a commitment by the Bank to provide permanent financing are generally originated for a term of six to 12 months and at a fixed interest rate based on the prime rate.

The Bank originates speculative construction loans to a limited number of builders that are operating and based in the Bank’s primary market area and with whom the Bank has well-established business relationships. At December 31, 2005, speculative construction loans, for which there is not a commitment for permanent financing in place at the time the construction loan was originated, amounted to $5.2 million. The Bank limits the number of speculative construction loans outstanding to any one builder based on the builder’s capacity to service the debt.

Most construction loans are originated with a loan-to-value ratio not to exceed 80% of the appraised estimated value of the completed property. The construction loan documents require the disbursement of the loan proceeds in increments as construction progresses. Disbursements are based on periodic on-site inspections by an independent appraiser.

Construction lending is inherently riskier than one- to four-family mortgage lending. Construction loans, on average, generally have higher loan balances than one- to four-family mortgage loans. In addition, the potential for cost overruns because of the inherent difficulties in estimating construction costs and, therefore, collateral values and the difficulties and costs associated with monitoring construction progress, among other things, are major contributing factors to this greater credit risk. Speculative construction loans have the added risk that there is not an identified buyer for the completed home when the loan is originated, with the risk that the builder will have to service the construction loan debt and finance the other carrying costs of the completed home for an extended time period until a buyer is identified. Furthermore, the demand for construction loans and the ability of construction loan borrowers to service their debt depends highly on the state of the general economy, including market interest rate levels and the state of the economy of the Bank’s primary market area. A material downturn in economic conditions could be expected to have a material adverse effect on the credit quality of the construction loan portfolio.

Commercial Real Estate Loans. Commercial real estate loans are generally secured by small retail stores, professional office space and, in certain instances, farm properties. Commercial real estate loans are generally originated with a loan-to-value ratio not to exceed 75% of the appraised value of the property. Property appraisals are performed by independent appraisers approved by the Bank’s Board of Directors. The Bank attempts to originate commercial real estate loans at variable interest rates based on the United States Treasury Bill rate for terms ranging from ten to 15 years and with interest rate adjustment intervals of five years. The Bank also originates fixed-rate balloon loans with a short maturity, but a longer amortization schedule.

Commercial real estate lending affords the Bank an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending. However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to four-family residential mortgage loans.

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Because payments on loans secured by multi-family and commercial properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by limiting the maximum loan-to-value ratio to 75% and strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. The Bank also obtains loan guarantees from financially capable parties based on a review of personal financial statements.

Commercial Business Loans. Commercial business loans are generally secured by inventory, accounts receivable and business equipment such as trucks and tractors. Many commercial business loans also have real estate as collateral. The Bank generally requires a personal guaranty of payment by the principals of a corporate borrower, and reviews the personal financial statements and income tax returns of the guarantors. Commercial business loans are generally originated with loan-to-value ratios not exceeding 75%.

Aside from lines of credit, commercial business loans are generally originated for terms not to exceed seven years with variable interest rates based on the prime lending rate. Approved credit lines totaled $22.9 million at December 31, 2005, of which $13.5 million was outstanding. Lines of credit are originated at fixed and variable interest rates for one-year renewable terms.

A director of the Bank is a shareholder of a farm implement dealership that contracts with the Bank to provide sales financing to the dealership’s customers. The Bank does not grant preferential credit under this arrangement. All sales contracts are presented to the Bank on a 50% recourse basis, with the dealership responsible for the sale and disposition of any repossessed equipment. During the year ended December 31, 2005, the Bank granted approximately $1.1 million of credit to customers of the dealership and such loans had an aggregate outstanding balance of $2.4 million at December 31, 2005. At December 31, 2005, 15 loans were delinquent 30 days or more with an aggregate outstanding balance of $53,000.

Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral-based lending with loan amounts based on predetermined loan-to-collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary, and often insufficient, source of repayment. The Bank has three commercial lenders and one commercial credit analyst committed to growing commercial business loans to facilitate the changes desired in the Bank’s balance sheet. The Bank also uses an outside loan review company to review selected commercial credits on a semi-annual basis.

Consumer Loans. The Bank offers a variety of secured or guaranteed consumer loans, including automobile and truck loans, home equity loans, home improvement loans, boat loans, mobile home loans and loans secured by savings deposits. In addition, the Bank offers unsecured consumer loans. Consumer loans are generally originated at fixed interest rates and for terms not to exceed seven years. The largest portion of the Bank’s consumer loan portfolio consists of home

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equity and second mortgage loans followed by automobile and truck loans. Automobile and truck loans are originated on both new and used vehicles. Such loans are generally originated at fixed interest rates for terms up to five years and at loan-to-value ratios up to 80% of the blue book value in the case of used vehicles and 80% of the purchase price in the case of new vehicles.

Home equity and second mortgage loans are generally originated for terms not to exceed five years and at adjustable rates of interest. The loan-to-value ratio on such loans is limited to 95%, taking into account the outstanding balance on the first mortgage loan.

The Bank’s underwriting procedures for consumer loans includes an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loans. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, to the proposed loan amount. The Bank underwrites and originates the majority of its consumer loans internally, which management believes limits exposure to credit risks relating to loans underwritten or purchased from brokers or other outside sources.

Consumer loans generally entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by assets that depreciate rapidly, such as automobiles. In the latter case, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by the borrower against the Bank as the holder of the loan, and a borrower may be able to assert claims and defenses that it has against the seller of the underlying collateral.

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Loan Maturity and Repricing

The following table sets forth certain information at December 31, 2005 regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity, but does not include potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned income and allowance for loan losses.

	Within One Year		After One Year Through 3 Years		After 3 Years Through 5 Years		After 5 Years Through 10 Years		After 10 Years Through 15 Years		After 15 Years		Total
	(Dollars in thousands)
Mortgage loans:
Residential	$	9,679	$	16,834	$	19,909	$	42,418	$	33,217	$	56,272	$	178,329
Commercial real estate and land loans		8,709		10,112		7,939		7,921		7,079		4,908		46,668
Residential construction(1)		19,511		2		—		—		—		—		19,513
Consumer loans		14,379		21,932		23,116		1,564		152		358		61,501
Commercial business		11,444		6,869		2,837		1,366		1,937		173		24,626
Total gross loans	$	63,722	$	55,749	$	53,801	$	53,269	$	42,385	$	61,711	$	330,637

(1) Includes construction loans for which the Bank has committed to provide permanent financing. The contractual maturities reflect the principal payments due following the period of construction.

The following table sets forth the dollar amount of all loans due after December 31, 2006, which have fixed interest rates and have floating or adjustable interest rates.

	Fixed Rates		Floating or Adjustable Rates
	(Dollars in thousands)
Mortgage loans:
Residential	$	134,304	$	34,346
Commercial real estate and land loans		13,560		24,399
Residential construction		—		2
Consumer loans		18,502		28,620
Commercial business		10,551		2,631
Total gross loans	$	176,917	$	89,998

Loan Solicitation and Processing. A majority of the loans originated by the Bank are made to existing customers. Walk-ins and customer referrals are also a source of loan originations. Upon receipt of a loan application, a credit report is ordered to verify specific information relating to the loan applicant’s employment, income and credit standing. A loan applicant’s income is verified through the applicant’s employer or from the applicant’s tax returns. In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken, generally by an independent appraiser approved by the Bank. The mortgage loan documents used by the Bank conform to secondary market standards.

The Bank requires that borrowers obtain certain types of insurance to protect its interest in the collateral securing the loan. The Bank requires either a title insurance policy insuring that the Bank has a valid first lien on the mortgaged real estate or an opinion by an attorney regarding the validity of title. Fire and casualty insurance is also required on collateral for loans.

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The Bank’s lending practices generally limit the maximum loan to value ratio on conventional residential mortgage loans to 80% (or 90% under a Freddie Mac program) of the appraised value of the property as determined by an independent appraisal or the purchase price, whichever is less, and 75% for commercial real estate loans.

Loan Commitments and Letters of Credit. The Bank issues commitments for fixed- and adjustable-rate single-family residential mortgage loans conditioned upon the occurrence of certain events. Such commitments are made in writing on specified terms and conditions and are honored for up to 60 days from the date of application, depending on the type of transaction. The Bank had outstanding loan commitments of approximately $12.7 million at December 31, 2005.

As an accommodation to its commercial business loan borrowers, the Bank issues standby letters of credit or performance bonds usually in favor of municipalities for whom its borrowers are performing services. At December 31, 2005, the Bank had outstanding letters of credit of $1.0 million.

Loan Origination and Other Fees. The Bank, in most instances, receives loan origination fees or discount “points.” Loan fees and points are a percentage of the principal amount of the mortgage loan that is charged to the borrower for funding the loan. The Bank usually charges a fixed origination fee on one- to four-family residential real estate loans and long-term commercial real estate loans. On residential construction loans, the Bank usually charges one point. Current accounting standards require loan origination fees and certain direct costs of underwriting and closing loans to be deferred and amortized into interest income over the contractual life of the loan. Deferred fees and costs associated with loans that are sold are recognized as income at the time of sale. The Bank had $117,000 of net deferred loan costs at December 31, 2005.

Mortgage Banking Activities. Mortgage loans originated and funded by the Bank and intended for sale in the secondary market are carried at the lower of aggregate cost or market value. Aggregate market value is determined based on the quoted prices under a “best efforts” sales agreement with a third party. Net unrealized losses are recognized through a valuation allowance by charges to income. Realized gains on sales of mortgage loans are included in noninterest income.

Commitments to originate and fund mortgage loans for sale in the secondary market are considered derivative financial instruments to be accounted for at fair value. The Bank’s mortgage loan commitments subject to derivative accounting are fixed rate mortgage commitments at market rates when initiated. At December 31, 2005, the Bank had commitments to originate $1.1 million in fixed-rate mortgage loans intended for sale in the secondary market after the loans are closed. Fair value is estimated based on fees that would be charged on commitments with similar terms.

The Bank also serves as an agent for a third-party mortgage company. In this role, the Bank accepts and processes mortgage loan applications and performs other loan origination activities, except funding, on behalf of the third-party mortgage company. The third-party mortgage company funds such loans and the Bank receives a fee for each loan funded. The fee is typically 1.5 to 2.0% of the loan principal amount.

Delinquencies. The Bank’s collection procedures provide for a series of contacts with delinquent borrowers. A late charge is assessed and a late charge notice is sent to the borrower after the 15th day of delinquency. After 20 days, the collector places a phone call to the borrower. When a payment becomes 60 days past due, the collector issues a default letter. If a loan continues in a delinquent status for 90 days or more, the Bank generally initiates foreclosure or other litigation proceedings.

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Nonperforming Assets. Loans are reviewed regularly and when loans become 90 days delinquent, the loan is placed on nonaccrual status and the previously accrued interest income is reversed unless, in the opinion of management, the outstanding interest remains collectible. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan when the likelihood of further loss on the loan is remote. Otherwise, the Bank applies the cost recovery method and applies all payments as a reduction of the unpaid principal balance.

The following table sets forth information with respect to the Bank’s nonperforming assets for the periods indicated. During the periods shown, the Bank had no restructured loans within the meaning of Statement of Financial Accounting Standards (“SFAS”) No. 15.

	At December 31,
	2005			2004			2003			2002			2001
	(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Residential real estate	$	792		$	882		$	964		$	494		$	172
Commercial real estate		805			485			1,056			36			566
Commercial business		92			525			569			—			49
Consumer		217			183			48			77			—
Total		1,906			2,075			2,637			607			787
Loans past due 90 days on accrual status:
Residential real estate		663			706			1,825			385			375
Commercial real estate		409			671			575			228			—
Commercial business		48			70			78			8			—
Consumer		173			38			188			151			97
Total		1,293			1,485			2,666			772			472
Foreclosed real estate, net		749			442			225			102			212
Total nonperforming assets	$	3,948		$	4,002		$	5,528		$	1,481		$	1,471
Total loans delinquent 90 days or more to net loans		0.99	%		1.12	%		1.74	%		0.64	%		0.62	%
Total loans delinquent 90 days or more to total assets		0.73	%		0.84	%		1.30	%		0.45	%		0.45	%
Total nonperforming assets to total assets		0.90	%		0.94	%		1.35	%		0.48	%		0.52	%

The increase in nonperforming assets during 2003 is primarily the result of $3.3 million in impaired loans that were acquired in the Hometown merger.

The Bank accrues interest on loans over 90 days past due when, in the opinion of management, the estimated value of collateral and collection efforts are deemed sufficient to ensure full recovery. The Bank recognized $99,000 in interest income on nonaccrual loans for the fiscal year ended December 31, 2005.

10

Classified Assets. The OTS has adopted various regulations regarding problem assets of savings institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OTS examiners have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard” assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. “Doubtful” assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified as loss, the insured institution establishes specific allowances for loan losses for the full amount of the portion of the asset classified as loss. All or a portion of general loan loss allowances established to cover possible losses related to assets classified substandard or doubtful can be included in determining an institution’s regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital.

Current accounting rules require that impaired loans be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or if expedient, at the loan’s observable market price or the fair value of collateral if the loan is collateral dependent. A loan is classified as “impaired” by management when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due in accordance with the terms of the loan agreement. If the fair value, as measured by one of these methods, is less than the recorded investment in the impaired loan, the Bank establishes a valuation allowance with a provision charged to expense. Management reviews the valuation of impaired loans on a quarterly basis to consider changes due to the passage of time or revised estimates. Assets that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated “special mention” by management.

An insured institution is required to establish and maintain an allowance for loan losses at a level that is adequate to absorb estimated credit losses associated with the loan portfolio, including binding commitments to lend. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities. When an insured institution classifies problem assets as “loss,” it is required either to establish an allowance for losses equal to 100% of the amount of the assets, or charge off the classified asset. The amount of its valuation allowance is subject to review by the OTS, which can order the establishment of additional general loss allowances. The Bank regularly reviews the loan portfolio to determine whether any loans require classification in accordance with applicable regulations.

11

At December 31, 2005, 2004 and 2003, the aggregate amounts of the Bank’s classified assets at those dates were as follows:

	At December 31,
	2005		2004		2003
	(Dollars in thousands)
Classified assets:
Loss	$	—	$	—	$	—
Doubtful		151		1,135		2,733
Substandard		4,158		2,807		3,628
Special mention		2,692		2,679		1,360

Loans classified as impaired in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan, included in the above regulatory classifications and the related allowance for loan losses are summarized below at the dates indicated:

	At December 31,
	2005		2004		2003
	(Dollars in thousands)
Impaired loans with related allowance	$	2,415	$	2,046	$	3,589
Impaired loans with no allowance		784		1,514		1,714
Total impaired loans	$	3,199	$	3,560	$	5,303
Allowance for loan losses:
Related to impaired loans		290		820		1,075
Related to other loans		1,814		1,658		1,358

Foreclosed Real Estate. Foreclosed real estate held for sale is carried at the lower of fair value minus estimated costs to sell, or cost. Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and an allowance is established by a charge to non-interest expense if the carrying value exceeds the fair value minus estimated costs to sell. The net income from operations of foreclosed real estate held for sale is reported in non-interest income. At December 31, 2005, the Bank had foreclosed real estate totaling $749,000.

Allowance for Loan Losses. Loans are the Company’s largest concentration of assets and continue to represent the most significant potential risk. In originating loans, the Bank recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral. The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance for loan losses represents management’s estimate of probable loan losses based on information available as of the date of the financial statements. The allowance for loan losses is based on management’s evaluation of the loan portfolio, including historical loan loss experience, delinquencies, known and inherent risks in the nature and volume of the loan portfolio, information about specific borrower situations, estimated collateral values and economic conditions.

The loan portfolio is reviewed quarterly by management to evaluate the adequacy of the allowance for loan losses to determine the amount of any adjustment required after considering the loan charge-offs and recoveries for the quarter. Management applies a systematic methodology that incorporates its current judgments about the credit quality of the loan portfolio. In addition, the

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OTS, as an integral part of its examination process, periodically reviews the Bank’s allowance for loan losses and may require the Bank to make additional provisions for estimated losses based on its judgments about information available to the OTS at the time of its examination.

The methodology used in determining the allowance for loan losses includes segmenting the loan portfolio by identifying risk characteristics common to groups of loans, determining and measuring impairment of individual loans based on the present value of expected future cash flows or the fair value of collateral, and determining and measuring impairment for groups of loans with similar characteristics by applying loss factors that consider the qualitative factors which may affect the loss rates. The Allowance for Loan Losses Analysis table below shows changes in the breakdown of the allowance for loan losses by loan category. Management continues to refine the methodology used to allocate loan losses by category and the methodology for allocating loan loss allowances by type of loan.

Specific allowances related to impaired loans and other classified loans are established where management has identified significant conditions or circumstances related to a loan that management believes indicate that a loss will occur. The identification of these loans results from the loan review process that identifies and monitors credits with weaknesses or conditions which call into question the full collection of the contractual payments due under the terms of the loan agreement. Factors considered by management include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.

For loans evaluated on a group basis, management applies loss factors to groups of loans with common risk characteristics (i.e., residential mortgage loans, home equity loans and credit card loans). The loss factors are derived from the Bank’s historical loss experience or, where the Bank does not have loss experience, the peer group loss experience. Peer group loss experience is used after evaluating the attributes of the Bank’s loan portfolio as compared to the peer group. Loss factors are adjusted for significant environmental factors that, in management’s judgment, affect the collectibility of the loan portfolio segment. The significant environmental factors include the levels and trends in charge-offs and recoveries, trends in volume and terms of loans, levels and trends in delinquencies, the effects of changes in underwriting standards and other lending practices or procedures, the experience and depth of the lending management and staff, effects of changes in credit concentration, changes in industry and market conditions and national and local economic trends and conditions. Management evaluates these conditions on a quarterly basis and evaluates and modifies the assumptions used in establishing the loss factors.

The allowance for loan losses was $2.1 million at December 31, 2005, $2.5 million at December 31, 2004 and $2.4 million at December 31, 2003. Management has deemed these amounts as adequate on those dates based on its evaluation methodology. At December 31, 2005, nonperforming loans totaled $3.2 million or 0.73% of total assets. Included in nonperforming loans are loans over 90 days past due secured by one- to-four family residential real estate in the amount of $792,000, commercial real estate loans totaling $805,000, commercial business loans totaling $92,000 and consumer loans in the amount of $217,000. These loans are accruing interest as the estimated value of the collateral and collection efforts are deemed sufficient to ensure full recovery.

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The following table sets forth an analysis of the Bank’s allowance for loan losses for the periods indicated.

	Year Ended December 31,
	2005			2004			2003			2002			2001
	(Dollars in thousands)
Allowance at beginning of period	$	2,478		$	2,433		$	1,218		$	1,103		$	1,184
Provision for loan losses		563			510			725			305			66
		3,041			2,943			1,943			1,408			1,250
Allowance for loan losses on loans acquired in the Hometown merger		—			—			1,065			—			—
Recoveries:
Residential real estate		—			—			4			—			8
Commercial real estate		—			—			—			—			—
Commercial business		—			—			3			22			—
Consumer		124			56			45			35			67
Total recoveries		124			56			52			57			75
Charge-offs:
Residential real estate		182			129			172			78			2
Commercial real estate		114			162			6			—			—
Commercial business		459			20			55			2			114
Consumer		306			210			394			167			106
Total charge-offs		1,061			521			627			247			222
Net (charge-offs) recoveries		(937	)		(465	)		(575	)		(190	)		(147	)
Balance at end of period	$	2,104		$	2,478		$	2,433		$	1,218		$	1,103
Ratio of allowance to total loans outstanding at the end of the period		0.64	%		0.76	%		0.77	%		0.55	%		0.54	%
Ratio of net charge-offs to average loans outstanding during the period		0.29	%		0.15	%		0.21	%		0.09	%		0.08	%

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Allowance for Loan Losses Analysis

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

	At December 31
	2005				2004				2003				2002				2001
	Amount		Percent of Outstanding Loans in Category		Amount		Percent of Outstanding Loans in Category		Amount		Percent of Outstanding Loans in Category		Amount		Percent of Outstanding Loans in Category		Amount		Percent of Outstanding Loans in Category
	(Dollars in thousands)
Residential real estate(1)	$	474	59.83	%	$	446	62.21	%	$	673	63.69	%	$	375	70.21	%	$	199	69.44	%
Commercial real estate and land loans		373	14.11			455	13.89			464	16.01			18	9.76			120	9.82
Commercial business		496	7.45			827	6.39			576	5.10			297	4.27			294	5.51
Consumer		761	18.61			750	17.51			720	15.20			528	15.76			490	15.23
Unallocated		—	—			—	—			—	—			—	—			—	—
Total allowance for loan losses	$	2,104	100.00	%	$	2,478	100.00	%	$	2,433	100.00	%	$	1,218	100.00	%	$	1,103	100.00	%

(1) Includes residential construction loans.

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Investment Activities

Federally chartered savings institutions have authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies and of state and municipal governments, deposits at the applicable FHLB, certificates of deposit of federally insured institutions, certain bankers’ acceptances and federal funds. Subject to various restrictions, such savings institutions may also invest a portion of their assets in commercial paper, corporate debt securities and mutual funds, the assets of which conform to the investments that federally chartered savings institutions are otherwise authorized to make directly. Savings institutions are also required to maintain minimum levels of liquid assets that vary from time to time. The Bank may decide to increase its liquidity above the required levels depending upon the availability of funds and comparative yields on investments in relation to return on loans.

The Bank is required under federal regulations to maintain a minimum amount of liquid assets and is also permitted to make certain other securities investments. The balance of the Bank’s investments in short-term securities in excess of regulatory requirements reflects management’s response to the significantly increasing percentage of deposits with short maturities. It is the intention of management to hold securities with short maturities in the Bank’s investment portfolio in order to enable the Bank to match more closely the interest-rate sensitivities of its assets and liabilities.

The Bank periodically invests in mortgage-backed securities, including mortgage-backed securities guaranteed or insured by Ginnie Mae, Fannie Mae or Freddie Mac. Mortgage-backed securities generally increase the quality of the Bank’s assets by virtue of the guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Bank. Of the Bank’s total mortgage-backed securities portfolio, securities with a book value of $205,000 have adjustable rates as of December 31, 2005.

At December 31, 2005, neither the Company nor the Bank had an investment in securities (other than United States Government and agency securities), which exceeded 10% of the Company’s stockholders’ equity at that date.

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The following table sets forth the securities portfolio at the dates indicated.

	At December 31,
	2005								2004								2003
	Fair Value		Amortized Cost		Percent of Portfolio		Weighted Average Yield(2)		Fair Value		Amortized Cost		Percent of Portfolio		Weighted Average Yield(2)		Fair Value		Amortized Cost		Percent of Portfolio		Weighted Average Yield(2)
	(Dollars in thousands)
Securities Held to Maturity(1)
Municipal:
Due in one year or less	$	39	$	37	0.05	%	9.44	%	$	38	$	37	0.05	%	9.17	%	$	169	$	167	0.25	%	8.40	%
Due after one year through five years		186		179	0.23		9.45			188		180	0.27		9.16			174		167	0.25		9.08
Due after five years through ten years		77		75	0.10		8.19			101		99	0.15		7.38			142		137	0.20		8.10
Due after ten years		892		800	1.02		8.33			883		800	1.21		8.33			880		811	1.21		8.02
Mortgage-backed securities(3)		99		103	0.13		3.45			139		142	0.21		3.71			220		225	0.34		4.10
	$	1,293	$	1,194	1.53	%			$	1,349	$	1,258	1.89	%			$	1,585	$	1,507	2.25	%
Securities Available for Sale
Debt securities:
U.S. agency:
Due in one year or less	$	3,471	$	3,489	4.47	%	3.86	%	$	2,022	$	2,011	3.03	%	3.85	%	$	2,562	$	2,515	3.75	%	4.42	%
Due after one year through five years		33,842		34,509	44.17		3.99			25,999		26,055	39.25		3.91			29,864		29,547	44.01		4.11
Due after five years through ten years		—		—	—		—			1,473		1,501	2.26		3.36			3,500		3,522	5.25		3.43
Due after ten years through fifteen years		933		1,000	0.01		5.39			946		1,000	1.51		5.26			951		1,000	1.49		5.14
Mortgage-backed securities (3)		17,643		18,107	23.17		4.00			17,939		18,064	27.21		3.71			15,506		15,581	23.21		3.60
Municipal:
Due in one year or less		568		565	0.72		7.11			115		115	0.17		6.82			177		175	0.26		7.02
Due after one year through five years		6,218		6,233	7.98		5.19			3,970		3,857	5.81		6.05			2,637		2,489	3.71		6.32
Due after five years through ten years		5,585		5,547	7.10		5.60			8,483		8,335	12.55		6.13			6,305		6,097	9.08		5.85
Due after ten years		3,627		3,621	4.64		5.72			2,894		2,852	4.30		7.22			3,449		3,401	5.07		5.91
Corporate notes:
Due in one year or less		2,450		2,453	3.14		3.49			—		—	—		—			—		—	—		—
Equity securities:
Mutual funds		1,384		1,404	1.80		N/A			1,351		1,342	2.02		N/A			1,293		1,287	1.92		N/A
	$	75,721	$	76,928	98.47	%			$	65,192	$	65,132	98.11	%			$	66,244	$	65,614	97.75	%

(1) Securities held to maturity are carried at amortized cost.

(2) Yields are calculated on a fully taxable equivalent basis using a marginal federal income tax rate of 34%. Weighted average yields are calculated using average prepayment rates for the most recent three-month period.

(3) The expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.

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Deposit Activities and Other Sources of Funds

General. Deposits and loan repayments are the major source of the Bank’s funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions. Borrowing may be used on a short-term basis to compensate for reductions in the availability of funds from other sources or may also be used on a longer-term basis for interest rate risk management.

Deposit Accounts. Deposits are attracted from within the Bank’s primary market area through the offering of a broad selection of deposit instruments, including non-interest bearing checking accounts, negotiable order of withdrawal (“NOW”) accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans. Deposit account terms vary, according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, the Bank considers the rates offered by its competition, profitability to the Bank, matching deposit and loan products and its customer preferences and concerns. The Bank generally reviews its deposit mix and pricing weekly.

The following table presents the maturity distributions of time deposits of $100,000 or more as of December 31, 2005.

Maturity Period	Amount at December 31, 2005
	(Dollars in thousands)
Three months or less	$	4,222
Over three through six months		5,457
Over six through 12 months		8,172
Over 12 months		21,596
Total	$	39,447

The following table sets forth the balances of deposits in the various types of accounts offered by the Bank at the dates indicated.

	At December 31,
	2005							2004							2003
	Amount		Percent of Total		Increase (Decrease)			Amount		Percent of Total		Increase (Decrease)			Amount		Percent of Total		Increase (Decrease)
	(Dollars in thousands)
Non-interest- bearing demand	$	35,111	11.07	%	$	1,310		$	33,801	10.68	%	$	3,266		$	30,535	10.10	%	$	10,483
NOW accounts		54,556	17.20			(4,824	)		59,380	18.77			14,652			44,728	14.79			10,950
Savings accounts		32,197	10.15			(3,803	)		36,000	11.38			4,563			31,437	10.39			11,362
Money market accounts		37,547	11.83			5,068			32,479	10.26			(3,645	)		36,124	11.94			1,527
Fixed rate time deposits which mature:
Within one year		65,806	20.74			4,007			61,799	19.53			(19,659	)		81,458	26.93			30,700
After one year, but within three years		65,603	20.68			(2,798	)		68,401	21.61			17,518			50,883	16.82			20,476
After three years, but within five years		25,384	8.00			1,765			23,619	7.46			(2,550	)		26,169	8.65			437
After five years		924	0.29			64			860	0.27			(186	)		1,046	0.35			345
Club accounts		136	0.04			13			123	0.04			35			88	0.03			(14	)
Total	$	317,264	100.00	%	$	802		$	316,462	100.00	%	$	13,994		$	302,468	100.00	%	$	86,266

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The following table sets forth the amount and maturities of time deposits by rates at December 31, 2005.

	Amount Due
	Less Than One Year		1 - 3 Years		3 - 5 Years		After 5 Years		Total		Percent of Total
	(Dollars in thousands)
1.00% — 1.99%	$	13,716	$	1,324	$	193	$	—	$	15,233	9.66	%
2.00% — 2.99%		14,289		5,410		10		—		19,709	12.50
3.00% — 3.99%		19,950		29,523		4,916		327		54,716	34.68
4.00% — 4.99%		9,931		20,100		19,514		287		49,832	31.61
5.00% — 5.99%		3,470		8,820		734		295		13,319	8.44
6.00% — 6.99%		4,417		406		—		—		4,823	3.06
7.00% — 7.99%		33		20		17		—		70	0.04
8.00% — 8.99%		—		—		—		15		15	0.01
Total	$	65,806	$	65,603	$	25,384	$	924	$	157,717	100.00	%

Borrowings. Deposits are the primary source of funds for the Bank’s lending and investment activities and for its general business purposes. The Bank has at times relied upon advances from the FHLB of Indianapolis to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB of Indianapolis are secured by certain first mortgage loans and investment and mortgage-backed securities. The Bank also uses retail repurchase agreements as a source of borrowings.

The FHLB functions as a central reserve bank providing credit for savings and loan associations and certain other member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the FHLB’s assessment of the institution’s creditworthiness. Under its current credit policies, the FHLB generally limits advances to 20% of a member’s assets, and short-term borrowing of less than one year may not exceed 10% of the institution’s assets. The FHLB determines specific lines of credit for each member institution.

The following table sets forth certain information regarding the Bank’s use of FHLB advances.

	At or For the Year Ended December 31,
	2005			2004			2003
	(Dollars in thousands)
Maximum balance at any month end	$	65,947		$	67,488		$	60,242
Average balance		61,535			63,122			54,722
Period end balance		65,947			65,099			60,242
Weighted average interest rate:
At end of period		4.71	%		4.84	%		5.05	%
During the period		4.94	%		5.07	%		5.41	%

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The following table sets forth certain information regarding the Bank’s use of retail repurchase agreements.

	At or For the Year Ended December 31,
	2005			2004			2003
	(Dollars in thousands)
Maximum balance at any month end	$	13,276		$	697		$	520
Average balance		7,986			296			156
Period end balance		10,704			640			520
Weighted average interest rate:
At end of period		4.05	%		1.99	%		0.68	%
During the period		3.42	%		1.36	%		0.76	%

Subsidiary Activities

As of December 31, 2005, the Bank was the Company’s only subsidiary. The Bank is wholly owned by the Company.

First Harrison Financial Services, Inc. is a former wholly-owned subsidiary of First Harrison Bank that sold property and casualty insurance, life insurance and non-deposit investment products. Effective January 1, 2004, First Harrison Financial Services, Inc. dissolved its charter and all accounts were combined with the Bank. During 2005, the Bank organized three wholly-owned subsidiaries to manage a portion of the investment securities portfolio. First Harrison Investments, Inc. and First Harrison Holdings, Inc. are Nevada corporations that jointly own First Harrison, LLC, a Nevada limited liability corporation that holds and manages an investment securities portfolio.

Personnel

As of December 31, 2005, the Bank had 124 full-time employees and 20 part-time employees. A collective bargaining unit does not represent the employees and the Bank considers its relationship with its employees to be good.

REGULATION AND SUPERVISION

General

As a savings and loan holding company, the Company is required by federal law to report to, and otherwise comply with the rules and regulations of, the Office of Thrift Supervision. The Bank is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision, as its primary federal regulator, and the Federal Deposit Insurance Corporation, as the deposit insurer. The Bank is a member of the Federal Home Loan Bank System and, with respect to deposit insurance, of the Savings Association Insurance Fund and the Bank Insurance Fund managed by the Federal Deposit Insurance Corporation. The Bank must file reports with the Office of Thrift Supervision and the Federal Deposit Insurance Corporation concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The Office of Thrift Supervision and/or the Federal Deposit Insurance Corporation conduct periodic examinations to test the Bank’s safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in

20

which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation or Congress, could have a material adverse impact on the Company, the Bank and their operations. Certain regulatory requirements applicable to the Bank and to the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth below and elsewhere in this document does not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Company and is qualified in its entirety by reference to the actual laws and regulations.

Holding Company Regulation

The Company is a nondiversified unitary savings and loan holding company within the meaning of federal law. Under prior law, a unitary savings and loan holding company, such as the Company, was not generally restricted as to the types of business activities in which it may engage, provided that the Bank continued to be a qualified thrift lender. See “Federal Savings Institution Regulation - QTL Test.” The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control of a savings institution after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Further, the Gramm-Leach-Bliley Act specifies that existing savings and loan holding companies may only engage in such activities. The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for activities with respect to unitary savings and loan holding companies existing prior to May 4, 1999, so long as the holding company’s savings institution subsidiary continues to comply with the QTL Test. The Company does qualify for the grandfathering. Upon any non-supervisory acquisition by the Company of another savings institution or savings bank that meets the qualified thrift lender test and is deemed to be a savings institution by the Office of Thrift Supervision, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would generally be limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Office of Thrift Supervision, and certain activities authorized by Office of Thrift Supervision regulation. However, the OTS has issued an interpretation concluding that multiple savings and loan holding companies may also engage in activities permitted for financial holding companies.

A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company, without prior written approval of the Office of Thrift Supervision and from acquiring or retaining control of a depository institution that is not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision considers the financial and managerial resources and future prospects of the Company and institution involved, the effect of the acquisition on the risk to the deposit insurance funds, the convenience and needs of the community and competitive factors.

The Office of Thrift Supervision may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

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Although savings and loan holding companies are not currently subject to specific regulatory capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below. The Bank must notify the Office of Thrift Supervision 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the Office of Thrift Supervision and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.

Acquisition of the Company. Under the Federal Change in Bank Control Act, a notice must be submitted to the Office of Thrift Supervision if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company or savings association. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the Company’s outstanding voting stock, unless the Office of Thrift Supervision has found that the acquisition will not result in a change of control of the Company. Under the Change in Bank Control Act, the Office of Thrift Supervision has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that acquires control would then be subject to regulation as a savings and loan holding company.

Federal Savings Institution Regulation

Business Activities. The activities of federal savings banks are governed by federal law and regulations. These laws and regulations delineate the nature and extent of the activities in which federal savings banks may engage. In particular, certain lending authority for federal savings banks, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets.

Capital Requirements. The Office of Thrift Supervision capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital to total assets ratio, a 4% tier 1 capital to total assets leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The Office of Thrift Supervision regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.

The risk-based capital standard for savings institutions requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in the type of asset. Core (Tier 1) capital is generally defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries

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less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital (Tier 2 Capital) currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

The Office of Thrift Supervision also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular circumstances. At December 31, 2005, the Bank met each of its capital requirements.

The following table presents the Bank’s capital position at December 31, 2005.

	Actual Capital		Required Capital		Excess (Deficiency) Amount		Capital
							Actual Percent		Required Percent
	(Dollars in thousands)
Tangible	$	34,391	$	6,499	$	27,892	7.94	%	1.50	%
Core (Leverage)		34,391		17,332		17,059	7.94		4.00
Risk-based		35,796		21,395		14,401	13.39		8.00

Prompt Corrective Regulatory Action. The Office of Thrift Supervision is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, a savings institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the Office of Thrift Supervision is required to appoint a receiver or conservator within specified time frames for an institution that is “critically undercapitalized.” The regulation also provides that a capital restoration plan must be filed with the Office of Thrift Supervision within 45 days of the date a savings institution is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company in the amount of up to the lessor of 5% of the savings association’s total assets when it was deemed to be undercapitalized or the amount necessary to achieve compliance with applicable capital requirements. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The Office of Thrift Supervision could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.

Insurance of Deposit Accounts. The Bank is a member of the Savings Association Insurance Fund and the Bank Insurance Fund. The Federal Deposit Insurance Corporation maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their

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capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution’s assessment rate depends upon the categories to which it is assigned. Assessment rates for Savings Association Insurance Fund and Bank Insurance Fund member institutions are determined semi-annually by the Federal Deposit Insurance Corporation and currently range from zero basis points for the healthiest institutions to 27 basis points of assessable deposits for the riskiest.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize the predecessor to the Savings Association Insurance Fund. During fiscal 2005, Financing Corporation payments for Savings Association Insurance Fund members approximated 1.365 basis points of assessable deposits. Payments for Bank Insurance Fund members also approximated 1.365 basis points of assessable deposits.

The Bank’s total assessments paid for fiscal 2005 (including the Financing Corporation assessment) were $17,920 for the Savings Association Insurance Fund and $27,389 for the Bank Insurance Fund. The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in Savings Association Insurance Fund or Bank Insurance Fund insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

Federal Deposit Insurance Reform Act of 2005. The Federal Deposit Insurance Reform Act of 2005 (the “Act”), signed by the President on February 8, 2006, revised the laws governing the federal deposit insurance system. The Act provides for the consolidation of the Bank and Savings Association Insurance Funds into a combined “Deposit Insurance Fund.”

Under the Act, insurance premiums are to be determined by the Federal Deposit Insurance Corporation based on a number of factors, primarily the risk of loss that insured institutions pose to the Deposit Insurance Fund. The legislation eliminates the current minimum 1.25% reserve ratio for the insurance funds, the mandatory assessments when the ratio fall below 1.25% and the prohibition on assessing the highest quality banks when the ratio is above 1.25%. The Act provides the Federal Deposit Insurance Corporation with flexibility to adjust the new insurance fund’s reserve ratio between 1.15% and 1.5%, depending on projected losses, economic changes and assessment rates at the end of a calendar year.

The Act increased deposit insurance coverage limits from $100,000 to $250,000 for certain types of Individual Retirement Accounts, 401(k) plans and other retirement savings accounts. While it preserved the $100,000 coverage limit for individual accounts and municipal deposits, the Federal Deposit Insurance Corporation was furnished with the discretion to adjust all coverage levels to keep pace with inflation beginning in 2010. Also, institutions that become undercapitalized will be prohibited from accepting certain employee benefit plan deposits.

The consolidation of the Bank and Savings Association Insurance Funds must occur no later than the first day of the calendar quarter that begins 90-days after the date of the Act’s enactment, i.e., July 1, 2006. The Act also states that the FDIC must promulgate final regulations implementing the remainder of its provisions not later than 270 days after its enactment.

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At this time, management cannot predict the effect, if any, that the Act will have on insurance premiums paid by the Bank.

Loans to One Borrower. Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. Generally, subject to certain exceptions, a savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral. At December 31, 2005, the Bank’s limit on loans to one borrower was $5.4 million, and the Bank’s largest aggregate outstanding balance of loans to one borrower was $4.8 million.

QTL Test. Federal law requires savings institutions to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least nine months out of each 12-month period.

A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 2005, the Bank maintained 86.63% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered “qualified thrift investments.”

Limitation on Capital Distributions. Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if, like the Bank, it is a subsidiary of a holding company. In the event the Bank’s capital fell below its regulatory requirements or the Office of Thrift Supervision notified it that it was in need of increased supervision, the Bank’s ability to make capital distributions could be restricted. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determines that such distribution would constitute an unsafe or unsound practice.

Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the Office of Thrift Supervision determines

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that a savings institution fails to meet any standard prescribed by the guidelines, the Office of Thrift Supervision may require the institution to submit an acceptable plan to achieve compliance with the standard.

Transactions with Related Parties. The Bank’s authority to engage in transactions with “affiliates” (e.g., any entity that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type specified by federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must generally be on terms and under circumstances, that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

The Sarbanes-Oxley Act of 2002 generally prohibits loans by the Company to its executive officers and directors. However, the law contains a specific exception for loans by the Bank to its executive officers and directors in compliance with federal banking laws. Under such laws, the Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The law limits both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank’s capital position and requires certain board approval procedures to be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees.

Enforcement. The Office of Thrift Supervision has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The Federal Deposit Insurance Corporation has the authority to recommend to the Director of the Office of Thrift Supervision that enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

Assessments. Savings institutions are required to pay assessments to the Office of Thrift Supervision to fund the agency’s operations. The general assessments, paid on a semi-annual basis, are computed based upon the savings institution’s (including consolidated subsidiaries) total assets, financial condition and complexity of its portfolio. The OTS assessments paid by the Bank for the fiscal year ended December 31, 2005 totaled $100,164.

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Federal Home Loan Bank System

The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. The Bank, as a member of the Federal Home Loan Bank, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank. The Bank was in compliance with this requirement with an investment in Federal Home Loan Bank stock at December 31, 2005 of $3.7 million.

The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, the Bank’s net interest income would likely also be reduced.

Federal Reserve System

The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $48.3 million; a 10% reserve ratio is applied above $48.3 million. The first $7.8 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually. The Bank complies with the foregoing requirements.

FEDERAL AND STATE TAXATION

Federal Taxation

General. The Company and the Bank report their income on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank’s reserve for bad debts, as discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. The Bank has not been audited by the Internal Revenue Service (“IRS”) in the past five years.

Bad Debt Reserve. For taxable years beginning after December 31, 1995, the Bank is entitled to take a bad debt deduction for federal income tax purposes which is based on its current or historic net charge-offs by applying the experience reserve method for banks. For tax years beginning prior to December 31, 1995, the Bank as a qualifying thrift had been permitted to establish a reserve for bad debts and to make annual additions to such reserve, which were deductible for federal income tax purposes. Under such prior tax law, generally the Bank recognized a bad debt deduction equal to 8% of taxable income.

Under the 1996 Tax Act, the Bank was required to recapture all or a portion of its additions to its bad debt reserve made subsequent to the base year (which is the Bank’s last taxable year beginning before January 1, 1988). This recapture was required to be made, after a deferral period based on certain specified criteria, ratably over a six-year period commencing in the Bank’s calendar 1998 tax year. All post-1987 additions to the statutory bad debt reserve have been recaptured in taxable income as of December 31, 2002.

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Potential Recapture of Base Year Bad Debt Reserve. The Bank’s bad debt reserve as of the base year is not subject to automatic recapture as long as the Bank continues to carry on the business of banking. If the Bank no longer qualifies as a bank, the balance of the pre-1988 reserves (the base year reserves) are restored to income over a six-year period beginning in the tax year the Bank no longer qualifies as a bank. Such base year bad debt reserve is subject to recapture to the extent that the Bank makes “non-dividend distributions” that are considered as made from the base year bad debt reserve. To the extent that such reserves exceed the amount that would have been allowed under the experience method (“Excess Distributions”), then an amount based on the amount distributed will be included in the Bank’s taxable income. Non-dividend distributions include distributions in excess of the Bank’s current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Bank’s current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank’s bad debt reserve. Thus, any dividends to the Company that would reduce amounts appropriated to the Bank’s bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Bank. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. If the Bank makes a “non-dividend distribution,” then approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 34% corporate income tax rate (exclusive of state and local taxes). The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserve.

Corporate Alternative Minimum Tax. The Internal Revenue Code imposes a tax on alternative minimum taxable income (“AMTI”) at a rate of 20%. The excess of the bad debt reserve deduction claimed by the Bank over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating loss carry-overs, of which the Bank currently has none. AMTI is increased by an amount equal to 75% of the amount by which the Bank’s adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). In addition, for taxable years beginning after June 30, 1986 and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modifications) over $2.0 million is imposed on corporations, including the Bank, whether or not an Alternative Minimum Tax (“AMT”) is paid. The Bank does not expect to be subject to the AMT.

Dividends Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank own more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted.

Indiana Taxation

Indiana imposes an 8.5%] franchise tax based on a financial institution’s adjusted gross income as defined by statute. In computing adjusted gross income, deductions for municipal interest, United States Government interest, the bad debt deduction computed using the reserve method and pre-1990 net operating losses are disallowed. The Bank’s state income tax returns were audited for the years ended December 31, 1993, 1994 and 1995 without amendment and without additional tax liability. The Bank’s state income tax returns have not been audited for any subsequent period.

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ITEM 1A. RISK FACTORS

Above average interest rate risk associated with fixed-rate loans

At December 31, 2005, approximately 40.7% of the Bank’s assets consisted of residential mortgage loans held for investment. Such loans represented 53.9% of the total loan portfolio at that date. While generally considered to involve less risk than other types of lending, such as commercial mortgage loans, commercial business loans and consumer loans, residential mortgage loans provide relatively lower yields. The Bank’s loan portfolio also includes a significant amount of loans with fixed rates of interest. At December 31, 2005, $222.6 million, or 67.3%, of the Bank’s total loans receivable had fixed interest rates all of which were held for investment. The Bank offers ARM loans and fixed-rate loans. Unlike ARM loans, fixed-rate loans carry the risk that, because they do not reprice to market interest rates, their yield may be insufficient to offset increases in the Bank’s cost of funds during a rising interest rate environment. Accordingly, a material and prolonged increase in market interest rates could be expected to have a greater adverse effect on the Bank’s net interest income compared to other institutions that hold a materially larger portion of their assets in ARM loans or fixed-rate loans that are originated for committed sale in the secondary market. For a discussion of the Bank’s loan portfolio, see “Item 1. Business– Lending Activities.”

Commercial business lending risks

At December 31, 2005, the Bank’s commercial business loan portfolio amounted to $24.6 million, or 7.5% of total loans. Subject to market conditions and other factors, the Bank intends to expand its commercial business lending activities within its primary market area. Commercial business lending is inherently riskier than one- to four-family mortgage lending. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation value of these assets in the event of a borrower default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. See “Item 1. Business–Lending Activities–Commercial Business Loans.”

Commercial Real Estate Lending Risks

At December 31, 2005, the Bank’s commercial real estate loan portfolio amounted to $38.9 million, or 11.8% of total loans. Commercial real estate lending is inherently riskier than one- to-four family mortgage lending. Because payments on loans secured by commercial properties often depend upon the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy, among other things. See “Item 1. Business–Lending Activities–Commercial Real Estate Loans.”

A downturn in the local economy or a decline in real estate values could hurt the Company’s profits.

Nearly all of the Bank’s loans are secured by real estate or made to businesses in our primary market area. As a result of this concentration, a downturn in the local economy could cause significant increases in nonperforming loans, which would hurt profit. In recent years there has been a significant increase in real estate values in our market area. As a result of rising home prices, the Bank’s loans have been well collateralized. A decline in real estate values could cause some of the Bank’s mortgages to become inadequately collateralized, which would expose the Company to a greater risk of loss.

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Strong competition within the Bank’s market area could hurt the Company’s profit and growth.

The Bank faces intense competition both in making loans and attracting deposits. This competition has made it more difficult for it to make new loans and at times has forced it to offer higher deposit rates. Price competition for loans and deposits might result in the Bank earning less on loans paying more on deposits, which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits. Some of the institutions with which the Bank competes have substantially greater resources and lending limits than it has and may offer services that the Bank does not provide. Competition will likely increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. The Company’s profitability depends upon the Bank’s continued ability to compete successfully in its market area.

The Bank and the Company operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.

The Company and the Bank are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, their chartering authority, and by the Federal Deposit Insurance Corporation, as insurer of the Bank’s deposits. The Company and the Bank are both subject to regulation and supervision by the Office of Thrift Supervision. Such regulations and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including to imposition of restrictions on operations, the classification of assets and determination of the level of allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory claim may have a material impact on the Bank’s operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

The following table sets forth certain information regarding the Bank’s offices as of December 31, 2005.

Location	Year Opened	Net Book Value(1)		Owned/ Leased		Approximate Square Footage
	(Dollars in thousands)
Main Office:
220 Federal Drive, N.W. Corydon, Indiana 47112	1997	$	2,009	Owned		12,000
Branch Offices:
391 Old Capital Plaza, N.E. Corydon, Indiana 47112	1997		10	Leased	(2)	425
8095 State Highway 135, N.W. New Salisbury, Indiana 47161	1999		814	Owned		3,500
710 Main Street Palmyra, Indiana 47164	1991		1,106	Owned		6,000
6040 Main Street NE Crandall, Indiana 47114(3)	1938		81	Owned		1,000
9849 Highway 150 Greenville, Indiana 47124	1986		267	Owned		2,484
1058 North Luther Road Georgetown, Indiana 47122	1995		94	Leased	(4)	1,800
317 East U.S. Highway 150 Hardinsburg, Indiana 47125	1996		89	Owned		1,834
4303 Charlestown Crossing New Albany, Indiana 47150	1999		880	Owned		3,500
3131 Grant Line Road New Albany, Indiana 47150	2003		1,521	Owned		12,200
5609 Williamsburg Station Road Floyds Knobs, Indiana 47119	2003		653	Owned		4,160
2744 Allison Lane Jeffersonville, Indiana 47130	2003		1,494	Owned		4,090

(1) Represents the net value of land, buildings, furniture, fixtures and equipment owned by the Bank.

(2) Lease expires April 2010.

(3) This branch is scheduled to close on April 1, 2006.

(4) Lease expires November 2010.

ITEM 3. LEGAL PROCEEDINGS

At December 31, 2005, neither the Company nor the Bank was involved in any pending legal proceedings believed by management to be material to the Company’s financial condition or results of operations. From time to time, the Bank is involved in legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company’s financial condition, results of operations or cash flows.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2005.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The information regarding the market for First Capital’s common equity and related stockholder matters is incorporated herein by reference to First Capital’s 2005 Annual Report to Stockholders at “Corporate Information.”

The following table provides certain information with regard to shares repurchased by the Company in the fourth quarter of 2005.

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid Per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 1 through October 31, 2005	—		—	—	84,541
November 1 through November 30, 2005	3,925	$	17.50	3,925	80,616
December 1 through December 31, 2005	—		—	—	80,616
Total	3,925	$	17.50	3,925	80,616

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

ITEM 6. SELECTED FINANCIAL DATA

The information required by this item is incorporated herein by reference to the section captioned “Selected Financial and Other Data” in the 2005 Annual Report to Stockholders.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The information regarding management’s discussion and analysis of financial condition and results of operation is incorporated herein by reference to First Capital’s 2005 Annual Report to Stockholders in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

32

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this Item is incorporated herein by reference to the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2005 Annual Report to Stockholders.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this item are incorporated by reference to the Company’s Audited Financial Statements and the Notes thereto found in First Capital’s 2005 Annual Report to Stockholders.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

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

ITEM 9B. OTHER INFORMATION

None.

33

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item with respect to directors is incorporated herein by reference to the Proxy Statement under the heading “Proposal 1—Election of Directors.” The information contained under the section captioned “Other Information Relating to Directors and Executive Officers” in the Proxy Statement is incorporated herein by reference.

Executive Officers Who Are Not Directors

Name	Age(1)	Position
M. Chris Frederick	38	Senior Vice President, Chief Financial Officer and Treasurer
Joel E. Voyles	53	Senior Vice President - Retail and Corporate Secretary
Dennis L. Thomas	49	Senior Vice President - Lending

(1) As of December 31, 2005.

Biographical Information

M. Chris Frederick has been affiliated with the Bank since June 1990 and has served in his present position since 1997.

Joel E. Voyles has been affiliated with the Bank since December 1996 and has served in his present position since 1997.

Dennis L. Thomas has been affiliated with the Bank since January 2000. He was employed by Harrison County Bank from 1981 until the merger with the Bank.

Code of Ethics

The Company maintains a Code of Ethics and Business Conduct that applies to all directors, officers and employees of the Company and its affiliates. See Exhibit 14.0 to this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the Proxy Statement under the heading “Executive Compensation” and “Proposal 1 — Election of Directors.”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a) Security Ownership of Certain Beneficial Owners.

Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.

34

(b) Security Ownership of Management

Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.

(c) Changes in Control

Management of the Company knows of no arrangements, including any pledge by any person or securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.

(d) Equity Compensation Plan Information

Equity Compensation Plan Information as of December 31, 2005

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	101,654	$	16.10	47,483
Equity compensation plans not approved by security holders	—		—	—
Total	101,654	$	16.10	47,483

The Company does not maintain any equity compensation plans that have not been approved by security holders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated herein by reference to the Proxy Statement under the heading “Proposal 1 — Election of Directors” and “Other Information Relating to Directors and Executive Officers.”

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated herein by reference to the Proxy Statement under the heading “Proposal 2 — Ratification of Independent Auditors.”

35

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(1)	The financial statements required in response to this item are incorporated by reference from Item 8 of this report.
(2)	All financial statement schedules are omitted as the required information either is not required or applicable, or the required information is contained in the financial statements or related notes.
(3)	Exhibits
	3.1	Articles of Incorporation of First Capital, Inc. (1)
	3.2	Second Amended and Restated Bylaws of First Capital, Inc. (2)
	10.1	*Employment Agreement with James G. Pendleton (3)
	10.2	*Employment Agreement with Samuel E. Uhl (4)
	10.3	*Employment Agreement with M. Chris Frederick (4)
	10.4	*Employment Agreement with Joel E. Voyles (4)
	10.5	*Employee Severance Compensation Plan (3)
	10.6	*First Federal Bank, A Federal Savings Bank 1994 Stock Option Plan (as assumed by First Capital, Inc. effective December 31, 1998) (5)
	10.7	*First Capital, Inc. 1999 Stock-Based Incentive Plan (6)
	10.8	*1998 Officers’ and Key Employees’ Stock Option Plan for HCB Bancorp (6)
	10.9	*Employment Agreement with William W. Harrod (4)
	11.0	Statement Re: Computation of Per Share Earnings (incorporated by reference to Exhibit 13 to this Form 10-K)
	13.0	Annual Report to Stockholders
	14.0	Code of Ethics and Business Conduct (7)
	21.0	Subsidiaries of the Registrant (incorporated by reference to Part I, “Business—Subsidiary Activities” of this Form 10-K)
	23.0	Consent of Monroe Shine and Co., Inc.
	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
	32.0	Section 1350 Certification of Chief Executive Officer & Chief Financial Officer

* Management contract or compensatory plan, contract or arrangement.

(1) Incorporated by reference from the Exhibits filed with the Registration Statement on Form SB-2, and any amendments thereto, Registration No. 333-63515.

(2) Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 2001.

(3) Incorporated by reference to the Quarterly Report on Form 10-QSB for the quarter ended December 31, 1998.

(4) Incorporated by reference to the Annual Report on Form 10-KSB for the year ended December 31, 1999.

(5) Incorporated by reference from the Exhibits filed with the Registration Statement on Form S-8, and any amendments thereto, Registration Statement No. 333-76543.

(6) Incorporated by reference from the Exhibits filed with the Registration Statement on Form S-8, and any amendments thereto, Registration Statement No. 333-95987.

(7) Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2004.

36

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

/s/ William W. Harrod

William W. Harrod

President, Chief Executive Officer and

Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/ William W. Harrod	President, Chief Executive	March 30, 2006
William W. Harrod	Officer and Director
	(principal executive officer)
/s/ J. Gordon Pendleton	Chairman	March 30, 2006
J. Gordon Pendleton
/s/ Michael C. Frederick	Chief Financial Officer and Treasurer	March 30, 2006
Michael C. Frederick	(principal accounting and financial officer)
/s/ Samuel E. Uhl	Director	March 30, 2006
Samuel E. Uhl
/s/ Mark D. Shireman	Director	March 30, 2006
Mark D. Shireman

/s/ Dennis L. Huber	Director	March 30, 2006
Dennis L. Huber
/s/ Kenneth R. Saulman	Director	March 30, 2006
Kenneth R. Saulman
/s/ John W. Buschemeyer	Director	March 30, 2006
John W. Buschemeyer
/s/ Gerald L. Uhl	Director	March 30, 2006
Gerald L. Uhl
/s/ James S. Burden	Director	March 30, 2006
James S. Burden
/s/ James E. Nett	Director	March 30, 2006
James E. Nett
/s/ Michael L. Shireman	Director	March 30, 2006
Michael L. Shireman
/s/ Kathryn W. Ernstberger	Director	March 30, 2006
Kathryn W. Ernstberger

EX-13.0

Exhibit 13.0

FIRST CAPITAL, INC.

TABLE OF CONTENTS

	Page
Letter to Shareholders	2
Selected Financial and Other Data	3-4
Management’s Discussion and Analysis of Financial Condition and Results of Operations	5-18
Report of Independent Registered Public Accounting Firm	19
Consolidated Financial Statements	20-24
Notes to Consolidated Financial Statements	25-52
Directors and Officers	53
Corporate Information	54-55

BUSINESS OF THE COMPANY

First Capital, Inc. (the “Company”) is the thrift holding company of First Harrison Bank (the “Bank”). The Bank is the primary business of the Company.

The Company’s principal executive office is located at 220 Federal Drive, N.W., Corydon, Indiana, and the telephone number at that address is (812) 738-2198.

The Bank’s deposit accounts are insured up to applicable legal limits by the Federal Deposit Insurance Corporation. The Bank is a member of the Federal Home Loan Bank System. The Bank, with its primary office located in Corydon, Indiana, conducts business from twelve locations in Harrison, Floyd, Clark and Washington Counties of southern Indiana. The Bank has notified the Office of Thrift Supervision of its intention to close the Crandall, Indiana office and consolidate its operations into the New Salisbury, Indiana office. The closing is expected to take place on or around April 1, 2006.

The Bank is a community-oriented financial institution providing a wide range of banking services with a focus on building customer relationships through a commitment to customer service and community involvement. The Bank’s primary business is attracting deposits from the general public and using those funds to originate one-to-four-family residential mortgage loans, multi-family and commercial real estate loans secured by properties located in southern Indiana, commercial business and consumer loans. First Harrison Insurance and Investments, a division of First Harrison Bank, sells property and casualty insurance and non-deposit investment products. During 2004, the Bank established three wholly-owned subsidiaries to manage a portion of its investment securities portfolio. First Harrison Investments, Inc. and First Harrison Holdings, Inc. are Nevada corporations that jointly own First Harrison, LLC, a Nevada limited liability corporation that holds and manages an investment securities portfolio.

- 1 -

Dear Shareholders:

Management and the Board of Directors of First Capital, Inc. would like to thank our shareholders, customers and staff for their continued support.

With rising interest rates and continued strong competition, our focus this past year was on managing our net interest margin consistent with safe and sound asset growth and on controlling our noninterest expenses.

Our efforts led to a 7.5% increase in net income over 2004. For 2005, the growth in noninterest income outpaced the increase in noninterest expenses, while net interest income improved by $325,000 over 2004.

We continued to sell mortgages in the secondary market while putting forth efforts to grow our other lending products, specifically commercial mortgages, small business loans and consumer loans.

We have recently hired a Secondary Market Manager to further expand the secondary mortgage business which will lead to improved noninterest fee income. Our commercial lending officers are focused on small business opportunities leading to improved commercial loan growth and increased noninterest-bearing deposits while our branches are focused on growing consumer loans and lower-cost deposit relationships.

The Board of Directors and management are very pleased with the 15.4% increase in diluted earnings per share. We look forward to the challenges ahead and anticipate many good years ahead for First Capital, Inc. and First Harrison Bank. Please remember to refer your family and friends to First Harrison Bank for all of their financial needs. We make decisions locally and serve our customers locally, not from some impersonal and remote 800 telephone number.

Sincerely,

William W. Harrod	J. Gordon Pendleton
President and CEO	Chairman of the Board

- 2 -

SELECTED FINANCIAL AND OTHER DATA

The financial data presented below is qualified in its entirety by the more detailed financial data appearing elsewhere in this report, including the Company’s audited consolidated financial statements. The following tables set forth certain information concerning the financial position and results of operations of the Company at the dates indicated.

FINANCIAL CONDITION DATA:

	At December 31,
	2005		2004		2003		2002		2001
	(In thousands)
Total assets	$	438,354	$	425,302	$	409,138	$	308,553	$	282,823
Cash and cash equivalents (1)		14,673		17,425		13,561		12,653		12,382
Securities available for sale		75,721		65,192		66,244		64,980		54,891
Securities held to maturity		1,194		1,258		1,507		1,474		1,836
Net loans		322,453		317,086		304,200		215,996		201,730
Deposits		317,264		316,462		302,468		216,202		204,122
Retail repurchase agreements		10,704		635		520		457		284
Advances from Federal Home Loan Bank		65,947		65,099		60,242		53,320		42,825
Total stockholders’ equity		41,957		40,714		43,895		36,330		33,481

OPERATING DATA:

	For the Year Ended December 31,
	2005		2004		2003		2002		2001
	(In thousands)
Interest income	$	23,659	$	22,109	$	21,303	$	18,912	$	18,960
Interest expense		10,343		9,117		8,715		8,802		9,842
Net interest income		13,316		12,992		12,588		10,110		9,118
Provision for loan losses		563		510		725		305		66
Net interest income after provision for loan losses		12,753		12,482		11,863		9,805		9,052
Noninterest income		2,961		2,666		2,276		1,737		1,706
Noninterest expense (2)		10,112		9,918		8,736		6,531		5,945
Income before income taxes		5,602		5,230		5,403		5,011		4,813
Income tax expense		1,914		1,799		1,870		1,763		1,714
Net Income	$	3,688	$	3,431	$	3,533	$	3,248	$	3,099
PER SHARE DATA:
Net income - basic	$	1.44	$	1.24	$	1.30	$	1.31	$	1.26
Net income - diluted		1.42		1.23		1.29		1.30		1.25
Dividends		0.62		0.60		0.56		0.52		0.48

(1) Includes cash and due from banks, interest-bearing deposits in other depository institutions and federal funds sold.

(2) Includes merger-related expenses of $97,000 in 2003.

- 3 -

SELECTED FINANCIAL AND OTHER DATA - CONTINUED

SELECTED FINANCIAL RATIOS:

	At and For the Year Ended December 31,
	2005		2004		2003		2002		2001
Performance Ratios:
Return on assets (1)	0.86	%	0.82	%	0.93	%	1.10	%	1.17	%
Return on average equity (2)	8.91	%	7.75	%	8.70	%	9.32	%	9.49	%
Dividend payout ratio (3)	43.05	%	47.65	%	43.03	%	39.90	%	38.52	%
Average equity to average assets	9.61	%	10.60	%	10.68	%	11.77	%	12.31	%
Interest rate spread (4)	3.02	%	3.06	%	3.25	%	3.16	%	3.01	%
Net interest margin (5)	3.39	%	3.42	%	3.62	%	3.70	%	3.73	%
Noninterest expense to average assets	2.35	%	2.38	%	2.30	%	2.20	%	2.24	%
Average interest earning assets to average interest bearing liabilities	114.11	%	115.03	%	115.02	%	117.39	%	118.41	%
Regulatory Capital Ratios:
Tier I - adjusted total assets	7.94	%	7.74	%	8.70	%	10.92	%	11.25	%
Tier I - risk based	12.86	%	12.47	%	13.42	%	18.83	%	19.67	%
Total risk-based	13.39	%	12.92	%	14.35	%	19.52	%	20.36	%
Asset Quality Ratios:
Nonperforming loans as a percent of net loans (6)	0.99	%	1.12	%	1.74	%	0.64	%	0.62	%
Nonperforming assets as a percent of total assets (7)	0.90	%	0.94	%	1.35	%	0.48	%	0.52	%
Allowance for loan losses as a percent of gross loans receivable	0.64	%	0.76	%	0.77	%	0.55	%	0.54	%

(1) Net income divided by average assets.

(2) Net income divided by average equity.

(3) Dividends declared per share divided by net income per share.

(4) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities.

(5) Net interest income as a percentage of average interest-earning assets.

(6) Nonperforming loans consist of loans accounted for on a nonaccrual basis and accruing loans 90 days or more past due.

(7) Nonperforming assets consist of nonperforming loans and real estate acquired in settlement of loans, but exclude restructured loans.

- 4 -

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, rather statements based on the Company’s current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance and achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; and other factors disclosed periodically in the Company’s filings with the Securities and Exchange Commission.

Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by the Company or on its behalf by its authorized officers. Except as may be required by applicable law and regulation, the Company assumes no obligation to update or revise any forward-looking statements subsequent to the date on which they are made.

General

As the holding company for the Bank, the Company conducts its business primarily through the Bank. The Bank’s results of operations depend primarily on net interest income, which is the difference between the income earned on its interest-earning assets, such as loans and investments, and the cost of its interest-bearing liabilities, consisting primarily of deposits and borrowings from the Federal Home Loan Bank of Indianapolis. The Bank’s net income is also affected by, among other things, fee income, provisions for loan losses, operating expenses and income tax provisions. The Bank’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government legislation and policies concerning monetary and fiscal affairs, housing and financial institutions and the intended actions of the regulatory authorities.

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company and the Bank. The information contained in this section should be read in conjunction with the consolidated financial statements and the accompanying notes to consolidated financial statements included elsewhere in this report.

- 5 -

Operating Strategy

The Company is the parent company of an independent community-oriented financial institution that delivers quality customer service and offers a wide range of deposit, loan and investment products to its customers. The commitment to customer needs, the focus on providing consistent customer service, and community service and support are the keys to the Bank’s past and future success. The Company has no other material income other than that generated by the Bank and its subsidiaries.

The Bank’s primary business strategy is attracting deposits from the general public and using those funds to originate one-to-four-family residential mortgage loans, multi-family residential loans, commercial real estate and business loans and consumer loans. The Bank invests excess liquidity primarily in interest-bearing deposits with the Federal Home Loan Bank of Indianapolis and other financial institutions, federal funds sold, U.S. government and agency securities, local municipal obligations and mortgage-backed securities.

In recent years, the Company’s operating strategy has also included strategies designed to enhance profitability by increasing sources of noninterest income and improving operating efficiency while managing its capital and limiting its credit risk and interest rate risk exposures. To accomplish these objectives, the Company has focused on the following:

• Control credit risk by focusing on the origination of one-to-four-family residential mortgage loans and consumer loans, consisting primarily of home equity loans and lines of credit, while increasing the market share of commercial real estate and small business loans.

• Focus on growth at the branch offices in commercial deposit and loan relationships.

• Capitalize on our branch locations to further expand our market share in Southern Indiana and particularly in Floyd County.

• Increase fee income from secondary market mortgage originations by having dedicated originators serving each office.

• Continue to invest in technology to increase productivity and efficiency, increase growth of our Internet banking service, bill payment service, and the Company’s ability to provide customer information at our teller lines in minutes versus days.

• Engage in a capital management strategy to repurchase Company stock and pay dividends to enhance shareholder value.

Critical Accounting Policies

The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding reported results. Critical accounting policies are those policies that require management to make assumptions about matters that are highly uncertain at the time an accounting estimate is made; and different estimates that the Company reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the Company’s financial condition, changes in financial condition or results of operations. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under generally accepted accounting principles.

Significant accounting policies, including the impact of recent accounting pronouncements, are discussed in Note 1 of the Notes to Consolidated Financial Statements. Those policies considered to be critical accounting policies are described below.

- 6 -

Allowances for Loan Losses. Management’s evaluation of the adequacy of the allowance for loan losses is the most critical of accounting estimates for a financial institution. The methodology for determining the allowance for loan losses and the related provision for loan losses is described below in “Allowance for Loan Losses.” This accounting estimate is highly subjective and requires a significant amount of judgment because a multitude of factors can influence the ultimate collection of a loan. The methodology for determining the allowance for loan losses attempts to identify the amount of probable losses in the loan portfolio. However, there can be no assurance that the methodology will successfully identify all probable losses as the factors and conditions that influence the estimate are subject to significant change and management’s judgments. As a result, additional provisions for loan losses may be required that would adversely impact earnings in future periods.

Valuation Methodologies. In the ordinary course of business, management applies various valuation methodologies to assets and liabilities that often involve a significant degree of judgment, particularly when active markets do not exist for the items being valued. Generally, in evaluating various assets for potential impairment, management compares the fair value to the carrying value. Quoted market prices are referred to when estimating fair values for certain assets, such as investment securities. However, for those items for which market-based prices do not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include capitalized servicing assets, goodwill and other intangible assets, estimated present value of impaired loans, deferred compensation plans, value ascribed to stock-based compensation and certain other financial investments. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Company’s results of operations. The assumptions and estimates utilized by management are discussed in detail in the accompanying notes 1, 4, 7, 15, 16 and 21 of Notes to Consolidated Financial Statements.

Income Taxes. The accounting for income taxes requires the asset and liability approach for financial accounting and reporting for deferred income taxes. See Notes 1 and 13 in the accompanying Notes to Consolidated Financial Statements. As part of the process of preparing the consolidated financial statements, management estimates the income taxes in each of the taxing jurisdictions in which the Company operates. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for financial accounting and tax purposes, such as depreciation, loan fees and costs, loan losses, compensation plans and unrealized securities gains and losses. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. Management must assess the likelihood that deferred tax assets will be recovered from future taxable income and, to the extent that recovery is not likely, establish a valuation allowance. Significant management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. To the extent a valuation allowance is recorded or increased, an expense is recognized within the tax provisions in the statement of income.

Comparison of Operating Results

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Net Income. Net income was $3.7 million ($1.42 per share diluted; weighted average common shares outstanding of 2,589,672, as adjusted) for the year ended December 31, 2005 compared to $3.4 million ($1.23 per share diluted; weighted average common shares outstanding of 2,798,253, as adjusted) for the year ended December 31, 2004. The increase was attributable primarily to increases in net interest income of $325,000 and noninterest income of $295,000 partially offset by an increase in noninterest expense of $194,000.

Net Interest Income. Net interest income increased $325,000, or 2.5%, from $13.0 million in 2004 to $13.3 million in 2005 primarily due to an increase in average interest-earning assets during 2005 offset by an increase in average interest-bearing liabilities and a decrease in the interest rate spread.

- 7 -

Total interest income increased 7.0% from $22.1 million in 2004 to $23.7 million in 2005. This increase was primarily a result of higher yields due to higher market interest rates. Interest on loans increased $1.0 million primarily as a result of an increase in the average yield on those loans from 6.13% in 2004 to 6.41% in 2005. Interest on investment securities increased $395,000 during 2005 due to an increase in the average balance of those investments during the year. Interest income on federal funds sold and interest-bearing deposits with banks increased $113,000 primarily due to an increase in the average yield on those earning assets from 1.52% in 2004 to 3.01% in 2005. The average balance of interest-earning assets increased 3.3% from $390.5 million in 2004 to $403.5 million in 2005. The average tax equivalent yield on interest-earning assets increased from 5.75% in 2004 to 5.95% in 2005. Management has continued to focus loan origination efforts on variable-rate loans. These loans now comprise 33% of the total loan portfolio, compared to 31% at the end of 2004. As market interest rates increased during 2005, the yield on variable-rate loans scheduled to reprice during the year increased.

Total interest expense increased from $9.1 million for 2004 to $10.3 million for 2005. This increase was primarily due to an increase in the average cost of funds from 2.69% in 2004 to 2.93% in 2005. This increase was primarily due to higher rates on savings and demand deposit accounts as the Federal Reserve Bank increased target interest rates by 2.00% during 2005. Any rate increase by the Bank on savings or demand deposit accounts has an immediate effect on depositor accounts while time deposits do not reprice until renewal. The average balances of deposits and borrowed funds were $284.0 million and $69.5 million, respectively, for 2005. In 2004, those average balances were $276.1 million and $63.4 million. For further information, see “Average Balance Sheets” below. The changes in interest income and interest expense resulting from changes in volume and changes in rates for 2005 and 2004 are shown in the schedule captioned “Rate/Volume Analysis” included herein.

Provision for Loan Losses. The provision for loan losses was $563,000 for 2005 compared to $510,000 for 2004. During 2005, the net loan portfolio growth was $5.4 million, primarily due to increases in consumer and commercial business loans. The consistent application of management’s allowance methodology resulted in an increase in the provision for loan losses due to net charge-offs during 2005 of $937,000 compared to $465,000 for 2004. This increase was partially offset by the improvement in asset quality as nonperforming loans decreased from $3.6 million at December 31, 2004 and to $3.2 million at December 31, 2005. The provisions were recorded to bring the allowance to the level determined in applying the allowance methodology after reduction for net charge-offs during the year. See “Asset Quality.”

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

Noninterest income. Noninterest income increased $295,000, or 11.1%, to $3.0 million for 2005 compared to $2.7 million in 2004 primarily due to increases in service charges on deposit accounts and gains on the sale of mortgage loans of $198,000 and $49,000, respectively. The increase in service charges on deposit accounts was due to the increased number of transaction accounts as there were no fee changes during the year. In 2005, the Bank continued its mortgage banking activities which began in 2003. The Bank is now able to offer an increased number of mortgage products to borrowers while continuing to reduce the concentration of long-term fixed rate mortgage loans. For a discussion of our mortgage banking operations, see Note 1 in the accompanying Notes to Consolidated Financial Statements.

Noninterest expense. Noninterest expense increased $194,000, or 2.0%, to $10.1 million for 2005 compared to $9.9 million in 2004. The increase results primarily from increases of $107,000 in occupancy and equipment and $61,000 in advertising expenses. The increase in occupancy costs is attributable to increases of $76,000 in equipment depreciation and maintenance and $23,000 in personal and property taxes.

Income tax expense. Income tax expense for the year ended December 31, 2005 was $1.9 million compared to $1.8 million for 2004. The effective tax rate for 2005 was 34.2% compared to 34.4% for 2004. See Note 13 in the accompanying Notes to Consolidated Financial Statements.

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Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Net Income. Net income was $3.4 million ($1.23 per share diluted; weighted average common shares outstanding of 2,798,253, as adjusted) for the year ended December 31, 2004 compared to $3.5 million ($1.29 per share diluted; weighted average common shares outstanding of 2,743,998, as adjusted) for the year ended December 31, 2003. The decrease was attributable primarily to an increase in noninterest expense of $1.2 million partially offset by increases in net interest income of $404,000 and noninterest income of $390,000 and a decrease in the provision for loan losses of $215,000.

Net Interest Income. Net interest income increased $404,000, or 3.2%, from $12.6 million in 2003 to $13.0 million in 2004 primarily due to an increase in average interest-earning assets during 2004 offset by an increase in average interest-bearing liabilities and a decrease in the interest rate spread.

Total interest income increased 3.8% from $21.3 million in 2003 to $22.1 million in 2004. This increase was a result of the higher average balances of interest-earning assets offset by lower yields due to lower market interest rates. Interest on loans increased $1.1 million primarily as a result of an increase in the average balance during the year offset by a lower average yield. Interest on investment securities decreased $262,000 during 2004 due to decreases in both the average balance and the average yield on those investments during the year. Interest income on federal funds sold and interest-bearing deposits with banks also decreased $64,000 due to decreases in both the average balance during the year and the average yield on those earning assets. The average balance of interest-earning assets increased 9.9% from $355.5 million in 2003 to $390.5 million in 2004. The average tax equivalent yield on interest-earning assets decreased from 6.07% in 2003 to 5.75% in 2004. During 2004, loan repayments and investment maturities were replaced by lower-yielding assets. Also during 2004, management sought to focus loan origination efforts on variable-rate loans which typically have a lower initial interest rate than fixed-rate loans. This focus was successful as total variable-rate loans increased $17.6 million to 31% of the loan portfolio, up from 28% of the portfolio at the end of 2003.

Total interest expense increased from $8.7 million for 2003 to $9.1 million for 2004. This increase was due to an increase in the average balance of interest-bearing liabilities partially offset by a decrease in the average cost of funds. The average balances of deposits and advances from the Federal Home Loan Bank were $276.1 million and $63.1 million, respectively, for 2004. In 2003, those average balances were $254.2 million and $54.7 million. The average cost of funds decreased from 2.82% in 2003 to 2.69% in 2004. This decrease was primarily due to growth in lower cost savings and demand deposit accounts versus time deposits. For further information, see “Average Balance Sheets” below. The changes in interest income and interest expense resulting from changes in volume and changes in rates for 2004 and 2003 are shown in the schedule captioned “Rate/Volume Analysis” included herein.

Provision for Loan Losses. The provision for loan losses was $510,000 for 2004 compared to $725,000 for 2003. During 2004, the net loan portfolio growth was $12.9 million, primarily due to increases in home equity lines of credit and commercial business loans. The consistent application of management’s allowance methodology resulted in a decrease in the provision for loan losses due to net charge-offs during 2004 of $465,000 compared to $575,000 for 2003 and the improvement in asset quality as nonperforming loans decreased from $5.3 million at December 31, 2003 to $3.6 million at December 31, 2004. The provisions were recorded to bring the allowance to the level determined in applying the allowance methodology after reduction for net charge-offs during the year. See “Asset Quality.”

Noninterest income. Noninterest income increased $390,000, or 17.2%, for 2004 compared to 2003 primarily due to increases in gains on the sale of mortgage loans and mortgage brokerage fees of $154,000 and $82,000, respectively. In mid-2003, the Bank resumed its mortgage banking activities and 2004 was the first full year with a mortgage banking operation. Since the resumption of this business, we have improved our interest rate risk, reduced our concentration in long-term fixed-rate mortgage loans, increased fee income, and expanded our mortgage products to potential borrowers. For a discussion of our mortgage banking operations, see Note 1 in the accompanying Notes to Consolidated Financial Statements. Service charges on deposits increased during 2004 by $142,000 primarily due to the increased number of transaction accounts. During 2004, the Bank also recognized a $43,000 gain on the sale of a parcel of land adjacent to a branch office.

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Noninterest expense. Noninterest expense increased $1.2 million, or 13.5%, to $9.9 million for 2004 compared to $8.7 million in 2003. The increase results primarily from a $930,000 increase in compensation and benefits expense. A large part of the compensation and benefits increase can be attributed to the March 2003 acquisition of Hometown. The expenses associated with the additional employees from the acquisition were on the books for the entire year during 2004 compared to nine months in 2003. Another significant factor in the increase in compensation and benefits was the reduction in the deferral of direct loan origination costs in 2004. The low interest rates and corresponding large number of mortgage refinancings during 2003 reduced compensation and benefits by $529,000 in that period. During 2004, the Bank recorded deferrals of direct loan origination costs of $293,000 as the pace of loan originations declined due to an increase in market interest rates. Professional fees increased $49,000 for 2004 compared to the prior year primarily due to costs associated with the organization of subsidiaries formed to manage a portion of the Bank’s investment securities portfolio and legal services related to problem loans. Other operating expenses increased $179,000 during 2004 including an increase in charitable contributions of $63,000 as the Bank fulfilled commitments to help fund the construction of a local YMCA and youth baseball fields. Expenses and losses recognized on foreclosed real estate also increased from $18,000 for 2003 to $76,000 for 2004 as the Bank continued its efforts to reduce nonperforming assets.

Income tax expense. Income tax expense for the year ended December 31, 2004 was $1.8 million compared to $1.9 million for 2003. The effective tax rate for 2004 was 34.4% compared to 34.6% for 2003. See Note 13 in the accompanying Notes to Consolidated Financial Statements.

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AVERAGE BALANCE SHEETS

The following table sets forth certain information for the periods indicated regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average historical cost balances of assets or liabilities, respectively, for the periods presented and do not give effect to changes in fair value that are included as a separate component of stockholders’ equity. Average balances are derived from daily balances. Tax-exempt income on loans and investment securities has been adjusted to a tax equivalent basis using the federal marginal tax rate of 34%.

	Year ended December 31,
	2005						2004						2003
(Dollars in thousands)	Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost		Average Balance		Interest		Average Yield/ Cost
Interest-earning assets:
Loans (1) (2)	$	318,616	$	20,410	6.41	%	$	316,700	$	19,405	6.13	%	$	276,460	$	18,249	6.60	%
Investment securities:
Taxable (3)		62,092		2,421	3.90	%		53,741		2,059	3.83	%		58,146		2,382	4.10	%
Tax-exempt		16,147		973	6.03	%		14,440		904	6.26	%		12,414		812	6.54	%
Total investment securities		78,239		3,394	4.34	%		68,181		2,963	4.35	%		70,560		3,194	4.53	%
Federal funds sold and interest-bearing deposits with banks		6,609		199	3.01	%		5,642		86	1.52	%		8,464		150	1.77	%
Total interest-earning assets		403,464		24,003	5.95	%		390,523		22,454	5.75	%		355,484		21,593	6.07	%
Noninterest-earning assets		27,420						26,994						24,567
Total assets	$	430,884					$	417,517					$	380,051
Interest-bearing liabilities:
Interest-bearing demand deposits	$	91,177	$	1,171	1.28	%	$	84,375	$	724	0.86	%	$	73,743	$	724	0.98	%
Savings accounts		34,261		263	0.77	%		35,455		278	0.78	%		27,109		234	0.86	%
Time deposits		158,609		5,598	3.53	%		156,257		4,912	3.14	%		153,323		4,793	3.13	%
Total deposits		284,047		7,032	2.48	%		276,087		5,914	2.14	%		254,175		5,751	2.26	%
Retail repurchase agreements		7,986		273	3.42	%		295		4	1.36	%		157		1	0.64	%
FHLB advances		61,535		3,038	4.94	%		63,120		3,199	5.07	%		54,722		2,963	5.41	%
Total interest-bearing liabilities		353,568		10,343	2.93	%		339,502		9,117	2.69	%		309,054		8,715	2.82	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		33,265						29,869						26,418
Other liabilities		2,656						3,876						3,983
Total liabilities		389,489						373,247						339,455
Stockholders’ equity		41,395						44,270						40,596
Total liabilities and stockholders’ equity	$	430,884					$	417,517					$	380,051
Net interest income			$	13,660					$	13,337					$	12,878
Interest rate spread					3.02	%					3.06	%					3.25	%
Net interest margin					3.39	%					3.42	%					3.62	%
Ratio of average interest-earning assets to average interest-bearing liabilities					114.11	%					115.03	%					115.02	%

(1) Interest income on loans includes fee income of $383,000, $400,000 and $554,000 for the years ended December 31, 2005, 2004 and 2003 respectively.

(2) Average loans includes loans held for sale and nonperforming loans.

(3) Includes taxable debt and equity securities and Federal Home Loan Bank Stock.

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RATE/VOLUME ANALYSIS

The following table sets forth the effects of changing rates and volumes on net interest income and interest expense computed on a tax-equivalent basis. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) effects attributable to changes in rate and volume (change in rate multiplied by changes in volume). Tax exempt income on loans and investment securities has been adjusted to a tax-equivalent basis using the federal marginal tax rate of 34%.

	2005 Compared to 2004 Increase (Decrease) Due to												2004 Compared to 2003 Increase (Decrease) Due to
	Rate			Volume			Rate/ Volume			Net			Rate			Volume			Rate/ Volume			Net
	(In thousands)
Interest-earning assets:
Loans	$	886		$	114		$	5		$	1,005		$	(1,308	)	$	2,653		$	(189	)	$	1,156
Investment securities:
Taxable		36			320			6			362			(155	)		(180	)		12			(323	)
Tax-exempt		(34	)		107			(4	)		69			(35	)		133			(6	)		92
Total investment securities		2			427			2			431			(190	)		(47	)		6			(231	)
Federal funds sold and interest-bearing deposits with banks		84			15			14			113			(21	)		(50	)		7			(64	)
Total net change in income on interest-earning assets		972			556			21			1,549			(1,519	)		2,556			(176	)		861
Interest-bearing liabilities:
Interest-bearing deposits		927			164			27			1,118			(306	)		495			(26	)		163
Retail repurchase agreements		6			105			158			269			1			1			1			3
FHLB advances		(83	)		(80	)		2			(161	)		(188	)		453			(29	)		236
Total net change in expense on interest-bearing liabilities		850			189			187			1,226			(493	)		949			(54	)		402
Net change in net interest income	$	122		$	367		$	(166	)	$	323		$	(1,026	)	$	1,607		$	(122	)	$	459

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Comparison of Financial Condition at December 31, 2005 and 2004

Total assets increased 3.1% from $425.3 million at December 31, 2004 to $438.4 million at December 31, 2005 primarily due to an increase in securities available for sale funded by an increase in retail repurchase agreements.

Net loans increased 1.7% from $317.1 million at December 31, 2004 to $322.5 million at December 31, 2005. The largest area of loan growth was in commercial business lending which increased $3.8 million, or 18.0%, to $24.6 million at December 31, 2005. Small business lending was a key focus of management during 2005 and will remain so for 2006. The Bank’s loans secured by commercial business assets grew as a result of marketing efforts and a growing presence in the Floyd and Clark County, Indiana markets. Consumer loans increased $4.3 million during 2005 primarily due to increases in home equity and second mortgage loans and automobile loans. Residential mortgage loans decreased $1.5 million during 2005 as the Bank continued to expand its mortgage banking activities. The Bank originated $27.0 million in new residential mortgages for the secondary market during 2005. These loans were either originated and funded by us and sold in the secondary market or originated as an agent for a third-party mortgage company. Of this total, $14.4 million paid off existing loans in the Bank’s portfolio. Originating mortgage loans for sale or serving as an agent for a third-party mortgage company allows us to better manage our interest rate risk, while offering a full line of mortgage products to prospective customers.

Securities available for sale, at fair value, consisting primarily of U. S. agency mortgage-backed obligations, U. S. agency notes and bonds, municipal obligations, and corporate notes increased $10.5 million, or 16.2%, from $65.2 million at December 31, 2004 to $75.7 million at December 31, 2005. Purchases of securities available for sale at both the Bank and First Harrison Investments totaled $23.6 million in 2005. These purchases were offset by maturities of $6.5 million and principal repayments of $5.2 million. We invest excess cash in securities that provide safety, liquidity and yield. Accordingly, we purchase mortgage-backed securities to provide cash flow for loan demand and deposit changes, purchase federal agency notes for short-term yield and low risk, municipals are purchased to improve our tax equivalent yield focusing on longer term profitability, and corporate notes are utilized primarily to match maturities with short-term funds provided by depositors.

The investment in securities held to maturity, consisting of federal agency mortgage-backed certificates and municipal obligations, totaled $1.2 million at December 31, 2005 compared to $1.3 million at December 31, 2004. During 2004, the Bank had maturities of $25,000 and principal repayments of $38,000.

Cash and cash equivalents decreased from $17.4 million at December 31, 2004 to $14.7 million at December 31, 2005 as excess funds were invested in higher-yielding loans and investment securities.

Total deposits remained relatively flat, increasing from $316.5 million at December 31, 2004 to $317.3 million at December 31, 2005. Noninterest-bearing demand deposits increased 3.9% to $35.1 million at December 31, 2005. Time deposits and money market accounts increased $3.0 million and $5.1 million, respectively, during 2005 while interest-bearing demand deposits and savings accounts decreased $4.8 million and $3.8 million, respectively, during the period. As market rates increased during 2005, many customers who had been keeping funds in savings and interest-bearing demand deposit accounts began to move those funds into certificates of deposit and money market accounts.

Federal Home Loan Bank borrowings increased $848,000 from $65.1 million at December 31, 2004 to $65.9 million at December 31, 2005. New advances of $28.0 million were drawn during the year, primarily to meet short-term liquidity needs. Principal payments on advances totaled $27.2 million during 2005.

Retail repurchase agreements increased from $635,000 at December 31, 2004 to $10.7 million at December 31, 2005. This increase was due to the successful efforts to acquire public funds which were put out for bid during the year.

Total stockholders’ equity increased from $40.7 million at December 31, 2004 to $42.0 million at December 31, 2005 primarily as a result of retained net income of $2.1 million partially offset by a $795,000 unrealized loss on available for sale securities. During 2005, the Company also repurchased 14,656 shares of its stock at a weighted average price of $18.54 per share. As of December 31, 2005, the Company had repurchased 264,398 shares of the 345,000 authorized by the Board of Directors under the current stock repurchase program.

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Asset Quality

At December 31, 2005, nonperforming assets, consisting of nonaccrual loans, loans 90 days past due and still accruing and real estate owned, totaled $3.9 million, or 0.90% of total assets compared to a total of $4.0 million, or 0.94% of total assets, at December 31, 2004. At December 31, 2005 and 2004, impaired loans totaled $3.2 million and $3.6 million, respectively, as defined by Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan. Impaired loans at December 31, 2005 and 2004 included nonaccrual loans of $1.9 million and $2.1 million, respectively, and loans 90 days past due still accruing interest of $1.3 million and $1.5 million, respectively. Loans 90 days past due may continue to accrue interest as long as the estimated value of the collateral and collection efforts are deemed sufficient to ensure full recovery. The related allowance for loan losses on impaired loans was $290,000 at December 31, 2005 and $820,000 at December 31, 2004. The average carrying value of impaired loans was $2.9 million and $4.2 million during the years ended December 31, 2005 and 2004, respectively, and interest income of $99,000 and $189,000 has been recognized on impaired loans during the period of impairment under the cash receipts method during 2005 and 2004, respectively. The reduction in nonperforming loans during 2005 primarily results from collection and recovery efforts including foreclosure or repossession activity. The Bank’s net charge-offs were $937,000, or 0.29% of average loans outstanding for the year ended December 31, 2005, compared to $465,000, or 0.15% of average loans outstanding for the year ended December 31, 2004. The allowance for loan losses was $2.1 million, or 0.64% of total loans, at December 31, 2005 compared to $2.5 million, or 0.76% of total loans, at December 31, 2004. The decrease in the ratio of the allowance for loan losses to total loans primarily results from a decrease in the specific allowances related to nonperforming loans which were reduced by charge-offs due to collection or recovery efforts in 2005. As a result of those recovery efforts, foreclosed real estate increased to $749,000 at December 31, 2005 compared to $442,000 at December 31, 2004. Foreclosed real estate consists of residential properties held for sale. During 2005 and 2004, foreclosure losses included in net charge-offs to the allowance for loan losses amounted to $235,000 and $152,000, respectively.

The following table presents an analysis of nonperforming assets as of December 31, 2005 and 2004:

(Dollars in thousands)	2005			2004
Nonperforming loans:
Nonaccrual loans	$	1,906		$	2,075
Loans 90 days past due still accruing interest		1,293			1,485
Total nonperforming loans		3,199			3,560
Foreclosed real estate, net		749			442
Total nonperforming assets	$	3,948		$	4,002
Nonperforming loans to net loans		0.99	%		1.12	%
Nonperforming loans to total assets		0.73	%		0.84	%
Nonperforming assets to total assets		0.90	%		0.94	%
Allowance for loan losses as a percentage of:
Outstanding loans		0.64	%		0.76	%
Nonperforming loans		65.77	%		69.61	%
Net charge-offs		224.55	%		532.90	%

Regulations require that the Bank classify its assets on a regular basis. There are three regulatory classifications for problem assets: substandard, doubtful and loss. Management regularly reviews the loan portfolio to determine whether any loans require classification or a change in classification. At December 31, 2005, the Bank had $151,000 in doubtful loans and $4.2 million in substandard loans, of which all but $359,000 are included in total nonperforming loans reported above. In addition to regulatory classifications, the Bank also classifies loans as “special mention” or “watch” when they are currently performing in accordance with their contractual terms but exhibit potential weaknesses that must be monitored by management on an ongoing basis. At December 31, 2005, the Bank identified $2.7 million as special mention or watch loans.

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Allowance for Loan Losses

Loans are the Bank’s largest concentration of assets and continue to represent the most significant potential risk. In originating loans, the Bank recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral. The Bank maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance for loan losses represents management’s estimate of probable loan losses based on information available as of the date of the financial statements. The allowance for loan losses is based on management’s evaluation of the loan portfolio, including historical loan loss experience, delinquencies, known and inherent risks in the nature and volume of the loan portfolio, information about specific borrower situations, estimated collateral values, and economic conditions.

The loan portfolio is reviewed quarterly by management to evaluate the adequacy of the allowance for loan losses to determine the amount of any adjustment required after considering the loan charge-offs and recoveries for the quarter. Management applies a systematic methodology that incorporates its current judgments about the credit quality of the loan portfolio. In addition, the Office of Thrift Supervision (OTS), as an integral part of its examination process, periodically reviews the Bank’s allowance for loan losses and may require the Bank to make additional provisions for estimated losses based on their judgments about information available to them at the time of their examination.

The methodology used in determining the allowance for loan losses includes segmenting the loan portfolio by identifying risk characteristics common to pools 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 pools of loans with similar characteristics by applying loss factors that consider the qualitative factors which may affect the loss rates.

Specific allowances related to impaired loans and other classified loans are established where management has identified significant conditions or circumstances related to a loan that management believes indicate that a loss has been incurred. The identification of these loans results from the loan review process that identifies and monitors credits with weaknesses or conditions which call into question the full collection of the contractual payments due under the terms of the loan agreement. Factors considered by management include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.

For loans evaluated on a pool basis, management applies loss factors to pools of loans with common risk characteristics (i.e., residential mortgage loans, home equity loans, credit card loans). The loss factors are derived from the Bank’s historical loss experience or, where the Bank does not have loss experience, the peer group historical loss experience. Peer group historical loss experience is used after evaluating the attributes of the Bank’s loan portfolio as compared to the peer group which is considered to be community banks located in the central region of the United States. Loss factors are adjusted for significant environmental factors that, in management’s judgment, affect the collectibility of the loan portfolio segment. The significant environmental factors include the levels and trends in charge-offs and recoveries, trends in volume and terms of loans, levels and trends in delinquencies, the effects of changes in underwriting standards and other lending practices or procedures, the experience and depth of the lending management and staff, effects of changes in credit concentration, changes in industry and market conditions and national and local economic trends and conditions. Management evaluates these conditions on a quarterly basis and evaluates and modifies the assumptions used in establishing the loss factors.

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Off-Balance-Sheet Arrangements

The Company is a party to financial instruments with off-balance-sheet risk including commitments to extend credit under existing lines of credit and commitments to originate loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements.

Off-balance-sheet financial instruments whose contract amounts represent credit and interest rate risk are summarized as follows:

	At December 31,
	2005		2004
	(In thousands)
Commitments to originate new loans	$	12,720	$	3,823
Undisbursed portion of construction loans		6,133		6,607
Unfunded commitments to extend credit under existing commercial and personal lines of credit		34,061		27,236
Standby letters of credit		1,029		1,338

The Company does not have any special purpose entities, derivative financial instruments or other forms of off-balance-sheet financing arrangements.

Commitments to originate new loans or to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally expire within 30 to 45 days. Most equity line commitments are for a term of 5 to 10 years and commercial lines of credit are generally renewable on an annual basis. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amounts of collateral obtained, if deemed necessary by the Company upon extension of credit, are based on management’s credit evaluation of the borrower.

Contractual Obligations

The following table summarizes information regarding the Company’s contractual obligations as of December 31, 2005:

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(In thousands)
Deposits	$	317,264	$	225,353	$	65,603	$	25,384	$	924
Federal Home Loan Bank advances		65,947		13,486		15,631		24,101		12,729
Retail repurchase agreements		10,704		10,704		—		—		—
Operating lease obligations		186		39		79		68		—
Total contractual obligations	$	394,101	$	249,582	$	81,313	$	49,553	$	13,653

- 16 -

Liquidity and Capital Resources

Liquidity refers to the ability of a financial institution to generate sufficient cash flow to fund current loan demand, meet deposit withdrawals and pay operating expenses. The Bank’s primary sources of funds are new deposits and proceeds from loan repayments and prepayments and from the maturity of securities. The Bank may also borrow from the Federal Home Loan Bank of Indianapolis. While loan repayments and maturities of securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. At December 31, 2005, the Bank had cash and interest-bearing deposits with banks of $14.7 million and securities available for sale with a fair value of $75.7 million. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the Federal Home Loan Bank of Indianapolis and collateral eligible for repurchase agreements.

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. At December 31, 2005, the Bank had total commitments to extend credit of $52.9 million. See Note 17 in the accompanying Notes to Consolidated Financial Statements. At December 31, 2005, the Bank had certificates of deposit scheduled to mature within one year of $65.8 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

The Bank is required to maintain specific amounts of capital pursuant to OTS regulations. As of December 31, 2005, the Bank was in compliance with all regulatory capital requirements which were effective as of such date with tangible, core and risk-based capital ratios of 7.9%, 7.9% and 13.4%, respectively. See Note 20 in the accompanying Notes to Consolidated Financial Statements.

Effect of Inflation and Changing Prices

The financial statements and related financial data presented in this report have been prepared in accordance with generally accepted accounting principles, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in the increased cost of the Bank’s operations. Unlike most industrial companies, virtually all the assets and liabilities of the financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the financial institutions performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Market Risk Analysis

Qualitative Aspects of Market Risk. The Bank’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Bank has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. In order to reduce the exposure to interest rate fluctuations, the Bank has developed strategies to manage its liquidity, shorten its effective maturities of certain interest-earning assets and decrease the interest rate sensitivity of its asset base. Management has sought to decrease the average maturity of its assets by emphasizing the origination of short-term commercial and consumer loans, all of which are retained by the Bank for its portfolio. The Bank relies on retail deposits as its primary source of funds. Management believes retail deposits, compared to brokered deposits, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds.

Quantitative Aspects of Market Risk. The Bank does not maintain a trading account for any class of financial instrument nor does the Bank engage in hedging activities or purchase high-risk derivative instruments. Furthermore, the Bank is not subject to foreign currency exchange rate risk or commodity price risk.

- 17 -

The Bank uses interest rate sensitivity analysis to measure its interest rate risk by computing changes in net portfolio value (NPV) of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 200 basis point decrease to a 300 basis point increase in market interest rates with no effect given to any steps that management might take to counter the effect of that interest rate movement. Using data compiled by the OTS, the Bank receives a report that measures interest rate risk by modeling the change in NPV over a variety of interest rate scenarios. This procedure for measuring interest rate risk was developed by the OTS to replace the “gap” analysis (the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a specific time period).

The following tables are provided by the OTS and set forth the change in the Bank’s NPV at December 31, 2005 and 2004, based on OTS assumptions that would occur in the event of an immediate change in interest rates, with no effect given to any steps that management might take to counteract that change. Due to the level of market interest rates at the given dates, the tables provide information for only a sustained 100 basis point decrease in market interest rates at December 31, 2004 and sustained 100 and 200 basis point decreases at December 31, 2005.

	At December 31, 2005
	Net Portfolio Value							Net Portfolio Value as a Percent of Present Value of Assets
Change In Rates	Dollar Amount		Dollar Change			Percent Change		NPV Ratio		Change
	(Dollars in thousands)
300bp	$	39,849	$	(12,408	)	(24	)%	9.33	%	(230)bp
200bp		44,647		(7,610	)	(15	)	10.27		(136)bp
100bp		49,055		(3,202	)	(6	)	11.09		(54)bp
—bp		52,257		—		—		11.63		—bp
(100)bp		52,955		698		1		11.66		3 bp
(200)bp		50,286		(1,971	)	(4	)	11.03		(60)bp
	At December 31, 2004
	Net Portfolio Value							Net Portfolio Value as a Percent of Present Value of Assets
Change In Rates	Dollar Amount		Dollar Change			Percent Change		NPV Ratio		Change
	(Dollars in thousands)
300bp	$	39,696	$	(9,568	)	(19	)%	9.50	%	(173)bp
200bp		44,144		(5,138	)	(10	)	10.36		(87)bp
100bp		47,771		(1,511	)	(3	)	11.02		(21)bp
—bp		49,282		—		—		11.23		—bp
(100)bp		47,665		(1,617	)	(3	)	10.79		(44)bp

The preceding tables indicate that the Bank’s NPV would be expected to decrease in the event of a sudden and sustained increase or 200-basis point decrease in prevailing market interest rates, but would be expected to increase in the event of a sudden and sustained 100-basis point decrease in rates. The expected decrease in the Bank’s NPV given an increase in rates is primarily attributable to the relatively high percentage of fixed-rate loans in the Bank’s loan portfolio. At December 31, 2005, approximately 67% of the loan portfolio consisted of fixed-rate loans.

Certain assumptions utilized by the OTS in assessing the interest rate risk of savings associations within its region were utilized in preparing the preceding tables. These assumptions relate to interest rates, loan prepayments, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the tables.

- 18 -

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

First Capital, Inc.

Corydon, Indiana

We have audited the accompanying consolidated balance sheets of First Capital, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Capital, Inc. and Subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

New Albany, Indiana

January 13, 2006

- 19 -

MONROE SHINE & CO., INC. ¨ CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

FIRST CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2005 AND 2004

	2005			2004
ASSETS
Cash and due from banks	$	12,625,002		$	14,191,132
Interest bearing deposits with banks		1,779,706			2,174,786
Federal funds sold		268,000			1,059,000
Total cash and cash equivalents		14,672,708			17,424,918
Securities available for sale, at fair value		75,720,846			65,192,107
Securities-held to maturity (fair value $1,292,809; $1,349,452 in 2004)		1,193,732			1,257,656
Loans held for sale		—			509,900
Loans, net of allowance for loan losses of $2,104,201 in 2005 and $2,478,081 in 2004		322,452,904			317,086,336
Federal Home Loan Bank stock, at cost		3,745,900			3,668,200
Foreclosed real estate		749,301			441,957
Premises and equipment		9,287,373			9,896,137
Accrued interest receivable		2,462,279			2,103,856
Cash value of life insurance		1,308,154			1,268,569
Goodwill		5,386,279			5,386,279
Core deposit intangibles		462,784			535,692
Other assets		911,267			530,462
Total Assets	$	438,353,527		$	425,302,069
LIABILITIES
Deposits:
Noninterest-bearing	$	35,110,588		$	33,800,920
Interest-bearing		282,153,736			282,660,921
Total deposits		317,264,324			316,461,841
Retail repurchase agreements		10,704,273			635,053
Advances from Federal Home Loan Bank		65,947,229			65,099,050
Accrued interest payable		1,497,711			1,285,812
Accrued expenses and other liabilities		983,277			1,105,971
Total Liabilities		396,396,814			384,587,727
STOCKHOLDERS’ EQUITY
Preferred stock of $.01 par value per share authorized 1,000,000 shares; none issued		—			—
Common stock of $.01 par value per share authorized 5,000,000 shares; issued 2,852,509 shares (2,846,457 shares in 2004)		28,525			28,465
Additional paid-in capital		19,403,031			19,278,166
Retained earnings-substantially restricted		28,988,881			26,888,417
Accumulated other comprehensive income (loss)		(765,764	)		29,150
Unearned stock compensation		(1,714	)		(3,281	)
Unearned ESOP shares		(246,010	)		(328,010	)
Less treasury stock, at cost - 264,398 shares (249,742 shares in 2004)		(5,450,236	)		(5,178,565	)
Total Stockholders’ Equity		41,956,713			40,714,342
Total Liabilities and Stockholders’ Equity	$	438,353,527		$	425,302,069

See notes to consolidated financial statements.

- 20 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

	2005		2004		2003
INTEREST INCOME
Loans, including fees	$	20,397,143	$	19,367,478	$	18,234,189
Securities
Taxable		2,258,113		1,908,963		2,231,258
Tax-exempt		642,112		596,469		536,203
Federal Home Loan Bank dividends		162,884		149,739		150,734
Interest-bearing deposits in banks		198,762		86,141		150,236
Total interest income		23,659,014		22,108,790		21,302,620
INTEREST EXPENSE
Deposits		7,031,521		5,914,057		5,750,558
Retail repurchase agreements		272,864		3,575		1,180
Advances from Federal Home Loan Bank		3,038,178		3,199,488		2,963,185
Total interest expense		10,342,563		9,117,120		8,714,923
Net interest income		13,316,451		12,991,670		12,587,697
Provision for loan losses		563,415		510,000		725,000
Net interest income after provision for loan losses		12,753,036		12,481,670		11,862,697
NONINTEREST INCOME
Service charges on deposit accounts		2,121,020		1,923,415		1,781,611
Commission income		336,478		317,607		310,668
Gain on sale of securities		—		—		50,938
Gain on sale of mortgage loans		214,562		165,145		11,581
Mortgage brokerage fees		157,781		141,165		58,948
Other income		130,859		118,809		62,105
Total noninterest income		2,960,700		2,666,141		2,275,851
NONINTEREST EXPENSE
Compensation and benefits		5,701,897		5,662,764		4,733,067
Occupancy and equipment		1,154,413		1,047,305		1,014,574
Data processing		711,801		777,491		769,511
Professional fees		368,720		325,611		276,738
Advertising		325,643		264,867		280,591
Other expenses		1,849,253		1,839,654		1,660,858
Total noninterest expense		10,111,727		9,917,692		8,735,339
Income before income taxes		5,602,009		5,230,119		5,403,209
Income tax expense		1,913,762		1,798,737		1,870,145
Net Income	$	3,688,247	$	3,431,382	$	3,533,064
Net income per common share, basic	$	1.44	$	1.24	$	1.30
Net income per common share, diluted	$	1.42	$	1.23	$	1.29

See notes to consolidated financial statements.

- 21 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Unearned Stock Compensation			Unearned ESOP Shares			Treasury Stock			Total
Balances at January 1, 2003	$	25,518	$	12,954,838	$	23,079,438		$	970,977		$	(143,582	)	$	(440,760	)	$	(116,655	)	$	36,329,774
COMPREHENSIVE INCOME
Net income		—		—		3,533,064			—			—			—			—			3,533,064
Other comprehensive income:
Change in unrealized gain on securities available for sale, net of deferred income tax benefit of $367,113		—		—		—			(559,737	)		—			—			—			(559,737	)
Less: Reclassification adjustment net of deferred income tax benefit of $20,177		—		—		—			(30,761	)		—			—			—			(30,761	)
Total comprehensive income																					2,942,566
Acquisition of Hometown Bancshares, Inc.		2,854		6,105,473		—			—			—			—			—			6,108,327
Cash dividends ($0.56 per share)		—		—		(1,520,399	)		—			—			—			—			(1,520,399	)
Options exercised		66		85,051		—			—			—			—			—			85,117
Shares released by ESOP trust		—		37,426		—			—			—			41,000						78,426
Stock compensation expense		—		—		—			—			70,156			—			—			70,156
Purchase of 9,659 treasury shares		—		—		—			—			—			—			(198,742	)		(198,742	)
Balances at December 31, 2003		28,438		19,182,788		25,092,103			380,479			(73,426	)		(399,760	)		(315,397	)		43,895,225
COMPREHENSIVE INCOME
Net income		—		—		3,431,382			—			—			—			—			3,431,382
Other comprehensive income:
Change in unrealized gain on securities available for sale, net of deferred income tax benefit of $230,438		—		—		—			(351,329	)		—			—			—			(351,329	)
Less: Reclassification adjustment		—		—		—			—			—			—			—			—
Total comprehensive income																					3,080,053
Cash dividends ($0.60 per share)		—		—		(1,635,068	)		—			—			—			—			(1,635,068	)
Options exercised		27		31,228		—			—			—			—			—			31,255
Shares released by ESOP trust		—		64,150		—			—			—			71,750						135,900
Stock compensation expense		—		—		—			—			70,145			—			—			70,145
Purchase of 231,103 treasury shares		—		—		—			—			—			—			(4,863,168	)		(4,863,168	)
Balances at December 31, 2004	$	28,465	$	19,278,166	$	26,888,417		$	29,150		$	(3,281	)	$	(328,010	)	$	(5,178,565	)	$	40,714,342

See notes to consolidated financial statements.

- 22 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - CONTINUED

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Unearned Stock Compensation			Unearned ESOP Shares			Treasury Stock			Total
Balances at December 31, 2004	$	28,465	$	19,278,166	$	26,888,417		$	29,150		$	(3,281	)	$	(328,010	)	$	(5,178,565	)	$	40,714,342
COMPREHENSIVE INCOME
Net income		—		—		3,688,247			—			—			—			—			3,688,247
Other comprehensive income:
Change in unrealized gain on securities available for sale, net of deferred income tax benefit of $472,668		—		—		—			(794,914	)		—			—			—			(794,914	)
Less: Reclassification adjustment		—		—		—			—			—			—			—			—
Total comprehensive income																					2,893,333
Cash dividends ($0.62 per share)		—		—		(1,587,783	)		—			—			—			—			(1,587,783	)
Options exercised		60		68,081		—			—			—			—			—			68,141
Shares released by ESOP trust		—		56,784		—			—			—			82,000						138,784
Stock compensation expense		—		—		—			—			1,567			—			—			1,567
Purchase of 14,656 treasury shares		—		—		—			—			—			—			(271,671	)		(271,671	)
Balances at December 31, 2005	$	28,525	$	19,403,031	$	28,988,881		$	(765,764	)	$	(1,714	)	$	(246,010	)	$	(5,450,236	)	$	41,956,713

See notes to consolidated financial statements.

- 23 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

	2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,688,247		$	3,431,382		$	3,533,064
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premium and accretion of discount on securities, net		137,240			224,042			376,025
Depreciation and amortization expense		820,870			818,109			723,963
Deferred income taxes		181,814			235,159			(212,976	)
ESOP and stock compensation expense		155,012			226,321			154,929
(Increase) decrease in cash value of life insurance		(39,585	)		(40,978	)		39,326
Provision for loan losses		563,415			510,000			725,000
Gain on sale of securities		—			—			(50,938	)
Proceeds from sale of mortgage loans		16,113,992			10,656,851			702,581
Mortgage loans originated for sale		(15,389,530	)		(11,001,606	)		(691,000	)
Net gain on sale of mortgage loans		(214,562	)		(165,145	)		(11,581	)
Stock dividends on Federal Home Loan Bank stock		(77,700	)		(149,500	)		(114,700	)
(Increase) decrease in accrued interest receivable		(358,423	)		69,970			(50,970	)
Increase (decrease) in accrued interest payable		211,899			126,086			(196,079	)
Net change in other assets/liabilities		(220,015	)		306,137			551,086
Net Cash Provided By Operating Activities		5,572,674			5,246,828			5,477,730
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale		(23,639,163	)		(27,634,588	)		(34,646,974	)
Proceeds from maturities of securities available for sale		6,523,000			23,735,600			23,140,000
Proceeds from maturities of securities held to maturity		25,000			166,100			118,000
Proceeds from sale of securities available for sale		—			—			2,550,938
Principal collected on mortgage-backed obligations		5,221,528			4,240,182			10,771,270
Net increase in loans receivable		(7,083,170	)		(14,312,151	)		(24,939,542	)
Purchase of Federal Home Loan Bank stock		—			(424,200	)		(63,800	)
Proceeds from sale of Federal Reserve Bank stock		—			—			179,650
Proceeds from sale of foreclosed real estate		845,843			698,980			268,893
Purchase of premises and equipment		(139,198	)		(350,705	)		(1,307,904	)
Net cash and cash equivalents acquired in merger		—			—			12,428,883
Net Cash Used In Investing Activities		(18,246,160	)		(13,880,782	)		(11,500,586	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		802,483			13,993,529			1,593,263
Advances from Federal Home Loan Bank		28,000,000			22,270,000			11,600,000
Repayment of advances from Federal Home Loan Bank		(27,151,821	)		(17,412,497	)		(4,678,004	)
Net increase in retail repurchase agreements		10,069,220			114,822			63,499
Exercise of stock options		60,848			30,274			70,950
Purchase of treasury stock		(271,671	)		(4,863,168	)		(198,742	)
Dividends paid		(1,587,783	)		(1,635,066	)		(1,520,399	)
Net Cash Provided By Financing Activities		9,921,276			12,497,894			6,930,567
Net Increase (Decrease) in Cash and Cash Equivalents		(2,752,210	)		3,863,940			907,711
Cash and cash equivalents at Beginning of Year		17,424,918			13,560,978			12,653,267
Cash and Cash Equivalents at End of Year	$	14,672,708		$	17,424,918		$	13,560,978

See notes to consolidated financial statements.

- 24 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

First Capital, Inc. (the Company) is the thrift holding company of First Harrison Bank (the Bank), a wholly-owned subsidiary. The Bank is a federally-chartered savings bank which provides a variety of banking services to individuals and business customers through twelve locations in southern Indiana. The Bank’s primary source of revenue is real estate mortgage loans. The Bank originates mortgage loans for sale in the secondary market and also serves as an agent for a mortgage company. The Bank also provides property and casualty insurance and non-deposit investment products through a financial services division of the Bank. Effective January 1, 2004, First Harrison Financial Services, Inc., a wholly-owned subsidiary of the Bank that formerly provided these services, dissolved its charter and all accounts were combined with the Bank. During 2004, the Bank organized three wholly-owned subsidiaries to manage a portion of the investment securities portfolio. First Harrison Investments, Inc. and First Harrison Holdings, Inc. are Nevada corporations that jointly own First Harrison, LLC, a Nevada limited liability corporation that holds and manages an investment securities portfolio.

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared in accordance with generally accepted accounting principles and conform to general practices in the banking industry. Intercompany balances and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation.

Statements of Cash Flows

For purposes of the statements of cash flows, the Company considers all cash and amounts due from depository institutions, and federal funds sold to be cash and cash equivalents.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties.

While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

- 25 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(1 - continued)

Investment Securities

Securities Available for Sale: Securities available for sale consist of federal agency mortgage-backed and other debt securities, municipal debt securities, and mutual funds that are reported at fair value. Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities or their agents. Amortization of premium and accretion of discount are recognized in interest income using methods approximating the interest method over the period to maturity. Unrealized gains and losses, net of tax, on securities available for sale are included in other comprehensive income and the accumulated unrealized holding gains and losses are reported as a separate component of equity until realized. Realized gains and losses on the sale of securities available for sale are determined using the specific identification method and are included in other noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income.

Securities Held to Maturity: Federal agency mortgage-backed securities and municipal debt securities for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premium and accretion of discount that are recognized in interest income using methods approximating the interest method over the period to maturity, adjusted for anticipated prepayments. Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities or their agents.

Declines in the fair value of individual available for sale and held to maturity securities below their amortized cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans and Allowance for Loan Losses

The Bank grants real estate mortgage, commercial business and consumer loans. A substantial portion of the loan portfolio is represented by mortgage loans to customers in southern Indiana. The ability of the Bank’s customers to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses.

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 deferred loan fees is discontinued when a loan is placed on nonaccrual status.

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(1 - continued)

The accrual of interest income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments become ninety (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 Bank 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. 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. The Bank’s practice is to charge off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loans classification as a loss by regulatory examiners, or for other reasons.

The allowance for loan losses is established as losses are estimated to have occurred through a 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 allowance for loan losses is evaluated on a regular basis by management and 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 classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows 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.

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(1 - continued)

Foreclosed Real Estate

Foreclosed real estate includes both formally foreclosed property and in-substance foreclosed property held for sale. In-substance foreclosed properties are those properties for which the institution has taken physical possession, regardless of whether formal foreclosure proceedings have taken place.

At the time of foreclosure, foreclosed real estate is recorded at the lower of fair value less estimated costs to sell or cost, which becomes the property’s new basis. Any write-downs based on the property’s fair value at date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Costs incurred in maintaining foreclosed real estate and subsequent impairment adjustments to the carrying amount of a property, if any, are included in other noninterest expense.

Premises and Equipment

The Bank uses the straight line method of computing depreciation at rates adequate to amortize the cost of the applicable assets over their estimated useful lives. Items capitalized as part of premises and equipment are valued at cost. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of assets sold, or otherwise disposed of, are removed from the related accounts and any gain or loss is included in earnings.

Goodwill and Other Intangibles

Goodwill recognized in a business combination represents the excess of the cost of the acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. Goodwill is carried at its implied fair value and is evaluated for possible impairment at least annually or more frequently upon the occurrence of an event or change in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. If the carrying amount of the goodwill exceeds its implied fair value, an impairment loss is recognized in earnings equal to that excess amount. The loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis.

Other intangible assets consist of acquired core deposit intangibles. Core deposit intangibles are amortized over the estimated economic lives of the acquired core deposits. The carrying amount of core deposit intangibles and the remaining estimated economic life are evaluated annually or whenever events or circumstances indicate the carrying amount may not be recoverable or the remaining period of amortization requires revision. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset is its new accounting basis.

Mortgage Banking Activities

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market value. Aggregate market value is determined based on the quoted prices under a “best efforts” sales agreement with a third party. Net unrealized losses are recognized through a valuation allowance by charges to income. Realized gains on sales of mortgage loans are included in noninterest income.

Commitments to originate mortgage loans held for sale are considered derivative financial instruments to be accounted for at fair value. The Bank’s mortgage loan commitments subject to derivative accounting are fixed-rate mortgage loan commitments at market rates when initiated. At December 31, 2005, the Bank had commitments to originate $1.1 million in fixed-rate mortgage loans intended for sale in the secondary market after the loans are closed. Fair value is estimated based on fees that would be charged on commitments with similar terms.

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(1 - continued)

Mortgage Servicing Rights and Loan Servicing

Rights to service mortgage loans for others are recorded as separate assets, whether those rights are acquired through activities or through purchase activities when there is a definitive plan to sell the underlying loan. Capitalized mortgage servicing rights are periodically evaluated for impairment based on the fair value of those rights. Capitalized mortgage servicing rights are amortized in proportion to, and over the period of, estimated future net servicing income of the underlying mortgage loans. Loan servicing fees are recognized in income as monthly principal and interest payments are collected on mortgages. Costs of loan servicing are charged to expense as incurred.

Income Taxes

Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of available-for-sale securities, allowance for loan losses, estimated losses on foreclosed real estate, accumulated depreciation, and accrued income and expenses for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Stock-Based Compensation

Under the provisions of Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock-Based Compensation, the Company elects to measure and recognize compensation cost related to stock-based compensation plans using the intrinsic value method and discloses the pro forma effect of applying the fair value method contained in SFAS 123. Accordingly, no compensation cost is charged against earnings for stock options granted under the Company’s stock-based compensation plans.

Advertising Costs

Advertising costs are charged to operations when incurred.

Recent Accounting Pronouncements

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

In December 2004, FASB revised SFAS 123, Share-Based Payment. SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements based on the grant date fair value of the award. The compensation cost will be recognized over the period which an employee is required to provide service in exchange for the award (the requisite service period) which is usually the vesting period. In 2005, the FASB issued further guidance on the classification and measurement of freestanding financial instruments originally issued for employee service and the application of grant date as defined in SFAS 123R. This statement must be applied as of the first interim or annual reporting period of the first fiscal year that begins after June 15, 2005. Accordingly, this statement will apply to the Company’s stock option plan awards effective January 1, 2006. Under the statement’s transition provisions, compensation cost is recognized on or after the effective date for the portion of outstanding awards, for which the requisite service has not yet been rendered, based on the grant date fair value of those awards calculated under this statement. The adoption of this statement is not expected to have a material impact on the Company’s financial condition or results of operations.

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(1 - continued)

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

In May 2005, FASB issued SFAS 154, Accounting Changes and Error Corrections. The statement replaces APB Opinion No. 20 (APB 20), Accounting Changes, and SFAS 3, Reporting Accounting Changes in Interim Financial Statements, and applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement that does not include specific transition provisions. The statement requires retrospective application of most voluntary changes in accounting principle, so that those changes will be reflected in financial statements presented for comparative purposes. The statement carries forward the guidance contained in APB 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005 with earlier application permitted for fiscal years beginning after June 1, 2005. The adoption of this statement is not expected to have a material impact on the Company’s financial condition or results of operations.

In November 2005, FASB issued FASB Staff Position (FSP) 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP provides additional guidance on when an investment in a debt or equity security should be considered impaired and when that impairment should be considered other-than-temporary and recognized as a loss in earnings. Specifically, the guidance clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. The FSP also requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP was applied in 2005.

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(2) MERGER WITH HOMETOWN BANCSHARES, INC.

On March 20, 2003, the Company acquired 100% of the outstanding common shares of Hometown Bancshares, Inc. (Hometown), a bank holding company located in New Albany, Indiana, pursuant to an Agreement and Plan of Merger dated September 25, 2002. Hometown was the parent company of Hometown National Bank, which was merged with and into the Bank. The acquisition was made for the purpose of expanding the Company’s presence in the New Albany and Floyd County, Indiana market area, as the Company expected to benefit from growth in this market area, as well as from expansion of the banking services provided to the existing customers of Hometown.

Pursuant to the terms of the merger agreement, Hometown stockholders who elected to receive Company stock received 2.487 shares of Company common stock and Hometown stockholders who elected to receive cash received $46.50 in cash for each share of Hometown common stock. Hometown stockholders who did not submit properly completed election forms within the required time frame received 0.773 shares of Company common stock and $32.05 in cash for each share of Hometown common stock. The Company issued 285,370 shares of common stock and paid approximately $5.4 million in cash consideration to former Hometown stockholders. The value assigned to the common shares issued in the transaction was approximately $6.1 million determined by the average closing price of the Company’s common stock over a twenty-day period ended March 17, 2003. The transaction was accounted for using the purchase method of accounting. Accordingly, the results of operations of Hometown have been included in the Company’s results of operations since the date of acquisition. Under the purchase method of accounting, the purchase price is assigned to the assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. The excess of cost over the fair value of the acquired net assets of approximately $5.4 million has been recorded as goodwill.

Following is a condensed balance sheet showing the fair values of the assets acquired and the liabilities assumed as of the date of acquisition:

	(In thousands)
Cash and interest-bearing deposits with banks	$	18,059
Investment securities		4,533
Loans, net		64,301
Premises and equipment		2,647
Goodwill arising in the acquisition		5,386
Core deposit intangibles		566
Other assets		1,393
Total assets acquired		96,885
Deposit accounts		84,673
Other liabilities		449
Total liabilities assumed		85,122
Net assets acquired	$	11,763

In accounting for the acquisition, $566,491 was assigned to core deposit intangibles which are amortized over a weighted-average estimated economic life of 9.3 years. It is not anticipated that the core deposit intangibles will have significant residual values. No amount of the goodwill arising in the acquisition is deductible for income tax purposes.

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(2 – continued)

The following pro forma information assumes that the acquisition was consummated on January 1, 2002:

(In thousands, except per share data)	2003		2002
Interest income	$	22,307	$	23,826
Interest expense		9,582		10,675
Net interest income		12,725		13,151
Provision for loan losses		754		1,828
Net interest income after provision for loan losses		11,971		11,323
Noninterest income		2,347		2,208
Noninterest expenses		9,408		8,399
Income before income taxes		4,910		5,132
Income tax expense		1,767		1,836
Net income	$	3,143	$	3,296
Net income per common share, basic	$	1.05	$	1.19
Net income per common share, diluted	$	1.04	$	1.18

In addition to combining the historical results of operations, the pro forma calculations consider the purchase accounting adjustments and nonrecurring charges directly related to the acquisition and the related tax effects. The pro forma calculations do not include any anticipated cost savings as a result of the acquisition. The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the Hometown acquisition actually been consummated on January 1, 2002, or results that may occur in the future.

(3) RESTRICTION ON CASH AND DUE FROM BANKS

The Bank is required to maintain reserve balances on hand and with the Federal Reserve Bank which are noninterest bearing and unavailable for investment. The average amount of those reserve balances for the years ended December 31, 2005 and 2004 were approximately $5,652,000 and $4,565,000, respectively.

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(4) INVESTMENT SECURITIES

Debt and equity securities have been classified in the balance sheets according to management’s intent. Investment securities at December 31, 2005 and 2004 are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
December 31, 2005:
Securities available for sale:
Federal agency mortgage-backed securities	$	18,107,178	$	5,394	$	469,119	$	17,643,453
Other debt securities:
Federal agency notes or bonds		38,998,351		951		752,825		38,246,477
Corporate notes		2,453,143		—		3,086		2,450,057
Municipal		15,965,706		134,223		102,649		15,997,280
Subtotal, debt securities		75,524,378		140,568		1,327,679		74,337,267
Mutual funds		1,403,901		—		20,322		1,383,579
Total securities available for sale	$	76,928,279	$	140,568	$	1,348,001	$	75,720,846
Securities held to maturity:
Federal agency mortgage-backed securities	$	102,732	$	472	$	3,950	$	99,254
Other debt securities:
Municipal		1,091,000		102,555		—		1,193,555
Total securities held to maturity	$	1,193,732	$	103,027	$	3,950	$	1,292,809
December 31, 2004:
Securities available for sale:
Federal agency mortgage-backed securities	$	18,064,436	$	20,025	$	145,072	$	17,939,389
Other debt securities:
Federal agency notes or bonds		30,566,601		71,057		197,845		30,439,813
Municipal		15,159,183		343,648		40,710		15,462,121
Subtotal, debt securities		63,790,220		434,730		383,627		63,841,323
Mutual funds		1,341,738		22,637		13,591		1,350,784
Total securities available for sale	$	65,131,958	$	457,367	$	397,218	$	65,192,107
Securities held to maturity:
Federal agency Mortgage-backed securities	$	141,656	$	2,850	$	5,481	$	139,025
Other debt securities:
Municipal		1,116,000		94,427		—		1,210,427
Total securities held to maturity	$	1,257,656	$	97,277	$	5,481	$	1,349,452

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(4 – continued)

During the year ended December 31, 2003, securities available for sale were sold for total proceeds of $2,550,938 resulting in gross realized gain of $50,938.

The amortized cost and fair value of debt securities as of December 31, 2005, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.

	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	6,506,924	$	6,489,450	$	36,964	$	38,479
Due after one year through five years		40,742,303		40,059,266		178,966		186,334
Due after five years through ten years		5,547,427		5,585,287		75,070		76,787
Due after ten years		4,620,546		4,559,811		800,000		891,955
		57,417,200		56,693,814		1,091,000		1,193,555
Mortgage-backed securities		18,107,178		17,643,453		102,732		99,254
	$	75,524,378	$	74,337,267	$	1,193,732	$	1,292,809

Investment securities with a carrying amount of $500,593 were pledged to secure public deposits at December 31, 2005. Also see notes 10 and 11 regarding investment securities pledged for other purposes.

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Information pertaining to securities with gross unrealized losses at December 31, 2005, aggregated by investment category and the length of time that individual securities have been in a continuous loss position, follows:

	Number Of Investment Positions	Fair Value		Gross Unrealized Losses
Securities available for sale:
Continuous loss position less than twelve months:
Federal agency mortgage-backed securities	9	$	6,278,988	$	116,502
Federal agency notes or bonds	26		19,232,241		196,377
Corporate notes	4		2,450,057		3,086
Municipal obligations	15		4,754,595		51,889
Mutual funds	1		1,111,442		7,006
Total less than twelve months	55		33,827,323		374,860
Continuous loss position more than twelve months:
Federal agency mortgage-backed securities	20		11,075,137		352,617
Federal agency notes or bonds	23		18,013,128		556,448
Municipal obligations	7		2,066,764		50,760
Mutual fund	1		272,138		13,316
Total more than twelve months	51		31,427,167		973,141
Total securities available for sale	106	$	65,254,490	$	1,348,001
Securities held to maturity:
Continuous loss position more than twelve months:
Federal agency mortgage-backed securities	2	$	72,573	$	3,950

At December 31, 2005, the 104 debt securities in the available for sale classification in a loss position had depreciated approximately 2% from the amortized cost basis. The two debt securities in the held to maturity classification in a loss position at December 31, 2004 had depreciated approximately 5% from the amortized cost basis. All of the debt securities in a loss position at December 31, 2005 were backed by federal or state governments or secured by mortgage loans. 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 management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other-than-temporary.

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(5) LOANS

Loans at December 31, 2005 and 2004 consisted of the following:

	2005			2004
Real estate mortgage loans:
Residential	$	178,328,745		$	179,815,687
Land		7,772,265			6,696,041
Residential construction		19,513,107			23,215,094
Commercial real estate		37,696,604			38,653,718
Commercial real estate construction		1,199,489			—
Commercial business loans		24,625,646			20,865,682
Consumer loans:
Home equity and second mortgage loans		36,951,344			35,384,786
Automobile loans		14,525,908			13,726,193
Loans secured by savings accounts		1,951,029			1,611,492
Unsecured loans		2,931,641			2,307,278
Other consumer loans		5,141,683			4,154,483
Gross loans		330,637,461			326,430,454
Less:
Deferred loan origination fees, net		(117,089	)		(66,982	)
Undisbursed portion of loans in process		6,197,445			6,933,019
Allowance for loan losses		2,104,201			2,478,081
Loans, net	$	322,452,904		$	317,086,336

At December 31, 2005, residential mortgage loans secured by one-to-four family residential properties without private mortgage insurance or government guarantee and with loan-to-value ratios exceeding 90% amounted to approximately $6,378,000.

Mortgage loans serviced for the benefit of others amounted to $898,173 and $1,150,000 at December 31, 2005 and 2004, respectively. The balance of capitalized mortgage servicing rights, carried at estimated fair value, included in other assets at December 31, 2005 and 2004, was $7,467 and $10,271, respectively. The estimated fair value of mortgage servicing rights was determined using discount rates ranging from 7.5 to 10% and prepayment speeds ranging from .02% to 12.09%, depending upon the stratification of the specific rights. During 2001, the Bank discontinued the origination of mortgage loans for sale in the secondary market with servicing retained by the Bank. The Bank capitalized no mortgage servicing rights during the years 2005, 2004 and 2003. The Bank recognized amortization of $2,804, $11,693 and $44,155 for the years ended December 31, 2005, 2004 and 2003, respectively.

An analysis of the allowance for loan losses is as follows:

	2005			2004			2003
Beginning balances	$	2,478,081		$	2,433,329		$	1,218,246
Allowance related to acquired loans		—			—			1,065,400
Provision for loan losses		563,415			510,000			725,000
Recoveries		123,726			55,991			52,176
Loans charged-off		(1,061,021	)		(521,239	)		(627,493	)
Ending balances	$	2,104,201		$	2,478,081		$	2,433,329

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(5 – continued)

At December 31, 2005 and 2004, the total recorded investment in loans on nonaccrual amounted to approximately $1,906,000 and $2,075,000, respectively. The total recorded investment in loans past due ninety days or more and still accruing interest amounted to approximately $1,293,000 and $1,485,000 at December 31, 2005 and 2004, respectively. Information about impaired loans and the related allowance for loan losses is presented below.

	2005		2004		2003
	(In thousands)
At end of year:
Impaired loans with related allowance	$	784	$	2,046	$	3,589
Impaired loans with no allowance		2,415		1,514		1,714
Total	$	3,199	$	3,560	$	5,303
Allowance related to impaired loans	$	290	$	820	$	1,075
Average balance of impaired loans during the year		2,906		4,192		3,941
Interest income recognized in the statements of income during the periods of impairment		81		113		168
Interest income recognized during the periods of impairment – cash method		99		189		210

The Bank has entered into loan transactions with certain directors, officers and their affiliates (i.e., related parties). In the opinion of management, such indebtedness was incurred in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons.

The following table represents the aggregate activity for related party loans during the year ended December 31, 2005:

Beginning balance	$	3,113,894
New loans		2,769,783
Payments		(4,588,536	)
Ending balance	$	1,295,141

The Bank has purchased commercial paper from a corporation where a director is considered a related party. In the opinion of management, these transactions were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with unrelated parties. During the year ended December 31, 2005, the Bank granted approximately $1,053,000 to customers of the corporation and such loans had an aggregate outstanding balance of approximately $2,416,000 and $2,692,000 at December 31, 2005 and 2004, respectively.

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(6) PREMISES AND EQUIPMENT

Premises and equipment as of December 31 consisted of the following:

	2005		2004
Land and land improvements	$	2,530,155	$	2,549,417
Leasehold improvements		157,777		157,777
Office buildings		7,449,414		7,432,714
Furniture, fixtures and equipment		3,634,482		3,822,160
		13,771,828		13,962,068
Less accumulated depreciation		4,484,455		4,065,931
Totals	$	9,287,373	$	9,896,137

Depreciation expense was $747,962, $745,201 and $661,873 for the years ended December 31, 2005, 2004 and 2003, respectively.

(7) FORECLOSED REAL ESTATE

At December 31, 2005 and 2004, the Bank had foreclosed real estate held for sale of $749,301 and $441,957, respectively. During the years ended December 31, 2005, 2004 and 2003, foreclosure losses in the amount of $235,482, $152,274 and $19,939, respectively, were charged off to the allowance for loan losses. Losses on subsequent write downs of foreclosed real estate are aggregated with realized gains and losses from the sale of foreclosed real estate. No losses on subsequent write downs of foreclosed real estate were recognized in 2005, 2004 and 2003. The net gain on foreclosed real estate is reported in other noninterest income. Real estate taxes and other expenses of holding foreclosed real estate are included in other noninterest expenses and amounted to $60,976, $48,151 and $11,767 in 2005, 2004 and 2003, respectively.

(8) GOODWILL AND OTHER INTANGIBLES

As discussed in Note 2, the Company acquired goodwill in the acquisition of Hometown Bancshares, Inc. during 2003. Goodwill is evaluated for impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the carrying amount is greater than its fair value. No impairment of goodwill was recognized during 2005 or 2004.

The following is a summary of other intangible assets subject to amortization as of December 31, 2005 and 2004:

	2005			2004
Core deposit intangibles:
Acquired in branch acquisition	$	180,899		$	180,899
Acquired in Hometown merger		566,491			566,491
Gross carrying amount		747,390			747,390
Accumulated amortization		(284,606	)		(211,698	)
	$	462,784		$	535,692

Amortization expense was $72,908, $59,395 and $12,060 for the years ended December 31, 2005, 2004 and 2003, respectively. Estimated amortization expense for each of the ensuing years through December 31, 2009 is $72,908.

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FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(9) DEPOSITS

The aggregate amount of time deposit accounts with balances of $100,000 or more was approximately $39,447,000 and $39,243,000 at December 31, 2005 and 2004, respectively. Deposit account balances in excess of $100,000 are not federally insured.

At December 31, 2005, scheduled maturities of time deposits were as follows:

Year ending December 31:
2006	$	65,805,460
2007		45,174,401
2008		20,429,829
2009		13,266,956
2010 and thereafter		13,039,931
Total	$	157,716,577

The Bank held deposits of approximately $5,478,000, and $4,641,000 for related parties at December 31, 2005 and 2004, respectively.

(10) RETAIL REPURCHASE AGREEMENTS

Retail repurchase agreements represent overnight borrowings from deposit customers and the debt securities sold under the repurchase agreements are under the control of the Bank. Information concerning borrowings under repurchase agreements is summarized as follows:

	2005			2004			2003
Weighted average interest rate during the year		3.44	%		1.21	%		0.76	%
Average daily balance	$	7,933,935		$	295,410		$	156,388
Maximum month-end balance during the year	$	13,275,677		$	696,821		$	520,230
Debt securities underlying the agreements at December 31:
Amortized cost	$	16,964,254		$	2,006,936		$	2,014,347
Fair value	$	16,592,227		$	2,015,033		$	2,061,898

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FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(11) ADVANCES FROM FEDERAL HOME LOAN BANK

At December 31, 2005 and 2004, advances from the Federal Home Loan Bank were as follows:

	2005				2004
	Weighted Average Rate		Amount		Weighted Average Rate		Amount
Fixed rate advances	4.78	%	$	58,447,229	4.98	%	$	62,099,050
Variable rate advances	4.18	%		7,500,000	1.95	%		3,000,000
			$	65,947,229			$	65,099,050

At December 31, 2005, advances from the Federal Home Loan Bank totaling $20,000,000 carried a put option whereby the Federal Home Loan Bank will automatically convert the fixed rate advance to a variable rate should the market interest rate exceed a pre-determined strike rate.

The following is a schedule of maturities for advances outstanding as of December 31, 2005:

Due in:
2006	$	13,486,097
2007		9,767,274
2008		5,864,224
2009		7,053,592
2010		17,047,233
Thereafter		12,728,809
Total	$	65,947,229

The advances are secured under a blanket collateral agreement. At December 31, 2005, the carrying value of residential mortgage loans and investment securities pledged as security for the advances was $142,062,746 and $1,111,442, respectively.

(12) LEASE COMMITMENTS

During 2005, the Bank extended a noncancellable lease agreement for branch office space which expires in 2010. The Bank also has a noncancellable sub-lease agreement for branch office space which expires in 2010.

The subsidiary companies headquartered in Nevada lease office space under two-year noncancellable sub-lease agreements which expire in October 2006.

The following is a schedule by years of future minimum rental payments required under these operating leases:

Year ending December 31:
2006	$	39,353
2007		39,353
2008		39,353
2009		39,353
2010		27,783
Total minimum payments required	$	185,195

Total rental expense for all operating leases for the years ended December 31, 2005, 2004 and 2003 amounted to $43,945, $35,291 and $33,528, respectively.

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FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(13) INCOME TAXES

The components of income tax expense were as follows:

	2005		2004		2003
Current	$	1,724,655	$	1,562,598	$	2,068,954
Tax benefit allocated to additional paid-in capital related to exercise of options		7,293		980		14,167
Deferred		181,814		235,159		(212,976	)
Totals	$	1,913,762	$	1,798,737	$	1,870,145

Significant components of the deferred tax assets and liabilities as of December 31, 2005 and 2004 were as follows:

	2005			2004
Deferred tax assets (liabilities):
Depreciation	$	(562,536	)	$	(611,384	)
Deferred loan fees and costs		(97,613	)		(28,349	)
Deferred compensation plans		174,935			170,044
Stock compensation plan		562			27,314
Federal Home Loan Bank stock dividends		(133,333	)		(117,896	)
Allowance for loan losses		824,207			966,762
Unrealized gain on securities available for sale		441,667			(31,000	)
Acquisition purchase accounting adjustments		(154,711	)		(160,769	)
Net operating loss carryovers acquired		—			23,602
Other		28,973			(7,026	)
Net deferred tax asset	$	522,151		$	231,298

The reconciliation of income tax expense with the amount which would have been provided at the federal statutory rate of 34% follows:

	2005			2004			2003
Provision at federal statutory tax rate	$	1,904,683		$	1,778,240		$	1,837,091
State income tax-net of federal tax benefit		244,763			255,172			254,279
Tax-exempt interest income		(198,942	)		(200,710	)		(170,650	)
Increase in cash value of life insurance		(13,459	)		(13,932	)		(20,629	)
Other		(23,283	)		(20,033	)		(29,946	)
Totals	$	1,913,762		$	1,798,737		$	1,870,145
Effective tax rate		34.2	%		34.4	%		34.6	%

The acquisition of Hometown during 2003 qualified for tax-free exchange treatment and the Company acquired federal and state net operating loss carryovers of $1,012,854 and $696,380, respectively. The utilization of the net operating loss carryovers is subject to an annual limitation under Internal Revenue Code Section 382. The federal and state net operating loss carryovers were set to expire in 2023 and 2018, respectively. The Company fully utilized the remaining net operating loss carryovers during 2005.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(13 - continued)

Prior to July 1, 1996, the Bank was permitted by the Internal Revenue Code to deduct from taxable income an annual addition to a statutory bad debt reserve subject to certain limitations. Retained earnings at December 31, 2005 includes approximately $1,040,000 of cumulative deductions for which no deferred federal income tax liability has been recorded. Reduction of these reserves for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes subject to the then current corporate income tax rate. The unrecorded deferred liability on these amounts was approximately $354,000 at December 31, 2005.

Federal legislation enacted in 1996 repealed the use of the qualified thrift reserve method of accounting for bad debts for tax years beginning after December 31, 1995. As a result, the Bank discontinued the calculation of the annual addition to the statutory bad debt reserve using the percentage-of-taxable-income method and adopted the experience reserve method for banks. Under this method, the Bank computes its federal tax bad debt deduction based on actual loss experience over a period of years. The legislation also provided that the Bank will not be required to recapture its pre-1988 statutory bad debt reserves if it ceases to meet the qualifying thrift definitional tests as provided under prior law and if the Bank continues to qualify as a “bank” under existing provisions of the Internal Revenue Code.

(14) EMPLOYEE BENEFIT PLANS

Defined Contribution Plan:

The Bank has a qualified contributory defined contribution plan available to all eligible employees. The plan allows participating employees to make tax-deferred contributions under Internal Revenue Code Section 401(k). The Bank contributed $187,990, $184,992 and $162,327 to the plan for the years ended December 31, 2005, 2004 and 2003, respectively.

Employee Stock Ownership Plan:

On December 31, 1998, the Company established a leveraged employee stock ownership plan (ESOP) covering substantially all employees. The ESOP trust acquired 61,501 shares of Company common stock financed by a term loan with the Company. The employer loan and the related interest income are not recognized in the consolidated financial statements as the debt is serviced from Company contributions. Dividends payable on allocated shares are charged to retained earnings and are satisfied by the allocation of cash dividends to participant accounts. Dividends payable on unallocated shares are not considered dividends for financial reporting purposes. Shares held by the ESOP trust are allocated to participant accounts based on the ratio of the current year principal and interest payments to the total of the current year and future year’s principal and interest to be paid on the employer loan.

Compensation expense is recognized based on the average fair value of shares released for allocation to participant accounts during the year with a corresponding credit to stockholders’ equity. Compensation expense recognized for the years ended December 31, 2005, 2004 and 2003 amounted to $153,445, $156,176 and $84,773, respectively.

Company common stock held by the ESOP trust at December 31 was as follows:

	2005		2004
Allocated shares		33,477		26,362
Unearned shares		24,601		32,801
Total ESOP shares		58,078		59,163
Fair value of unearned shares	$	440,358	$	688,821

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FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(15) DEFERRED COMPENSATION PLANS

The Bank has a deferred compensation plan whereby certain officers will be provided specific amounts of income for a period of fifteen years following normal retirement. The benefits under the agreements become fully vested after four years of service beginning with the effective date of the agreements. The Bank accrues the present value of the benefits so the amounts required will be provided at the normal retirement dates and thereafter.

Assuming normal retirement, the benefits under the plan will be paid in varying amounts between 1999 and 2022. The Bank is the owner and beneficiary of insurance policies on the lives of these officers which may provide funds for a portion of the required payments. The agreements also provide for payment of benefits in the event of disability, early retirement, termination of employment or death. Deferred compensation expense for this plan was $36,029, $34,270 and $32,503 for the years ended December 31, 2005, 2004 and 2003, respectively.

The Bank also has a directors’ deferred compensation plan whereby a director defers into a retirement account a portion of his monthly director fees for a specified period to provide a specified amount of income for a period of fifteen years following normal retirement. The Bank also accrues the interest cost on the deferred obligation so the amounts required will be provided at the normal retirement dates and thereafter.

Assuming normal retirement, the benefits under the plan will be paid in varying amounts between 1995 and 2037. The agreements also provide for payment of benefits in the event of disability, early retirement, termination of service or death. Deferred compensation expense for this plan was $12,599, $11,751 and $14,420 for the years ended December 31, 2005, 2004 and 2003, respectively.

(16) STOCK-BASED COMPENSATION PLANS

The Company applies APB No. 25 and related interpretations in accounting for its stock-based compensation plans. In accordance with SFAS No. 123, the Company elected to continue to apply the provisions of APB No. 25. However, pro forma disclosures as if the Company adopted the compensation cost recognition provisions of SFAS No. 123 are presented along with a summary of the plans and awards.

Restricted Stock Compensation Plan

The Company has a restricted stock compensation plan as an encouragement for directors, officers and key employees to remain in the employment or service of the Bank. The shares granted under the plan were in the form of restricted stock vesting over a five-year period beginning one year after the date of grant of the award. Since the stock issued is held in escrow by the Company before some or all of the services are performed, unearned compensation is recorded as a reduction of stockholders’ equity. Compensation expense is recognized pro rata over the period during which the shares are earned. The terms of the restricted stock compensation plan include a provision whereby all unearned shares become fully vested upon a change in control. Compensation expense of $1,568, $70,145 and $70,156 was recognized for the years ended December 31, 2005, 2004 and 2003, respectively.

Stock Option Plan

The Company’s stock option plan provides for issuance of up to 190,174 shares of the Company’s authorized but unissued common stock to all employees, including any officer or employee-director. Under the plan, the Company may grant both non-qualified and qualified (i.e., incentive) stock options. In the case of incentive stock options, the aggregate fair value of the stock (determined at the time the incentive stock option is granted) for which any optionee may be granted incentive options which are first exercisable during any calendar year shall not exceed $100,000. Option prices may not be less than the fair market value of the underlying stock at the date of the grant.

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(16 - continued)

Options granted generally vest ratably over five years and are exercisable in whole or in part for a period up to ten years from the date of the grant.

The following is a summary of the Company’s stock options as of December 31, 2005, 2004 and 2003 and the changes for the years then ended:

	2005			2004			2003
	Number of Shares	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
Outstanding at beginning of year	110,894	$	15.81	70,138	$	10.40	73,923	$	10.68
Granted	750		20.45	45,150		23.00	3,000		21.60
Exercised	6,052		10.05	2,694		11.24	6,630		10.70
Forfeited	3,938		17.88	1,700		21.59	155		12.65
Outstanding at end of year	101,654	$	16.10	110,894	$	15.81	70,138	$	11.14
Exercisable at end of year	65,784	$	12.41	52,990	$	10.66	42,476	$	10.40

For options outstanding at December 31, 2005, the following information is provided by range of exercise price:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Number of Shares	Weighted Average Exercise Price
$6.24 - $7.41	3,582	$	7.10	1.2 years	3,582	$	7.10
$7.80 - $12.65	52,672		10.88	3.9 years	52,672		10.88
$21.60	3,000		21.60	7.2 years	1,200		21.60
$23.00	41,650		23.00	8.5 years	8,330		23.00
$20.45	750		20.45	9.1 years	—		—
$6.24 - $23.00	101,654	$	16.10	6.7 years	65,784	$	12.41

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(16 - continued)

The Company accounts for the stock option plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the stock option plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.

	Years Ended December 31,
	2005			2004			2003
Net income, as reported	$	3,688,247		$	3,431,382		$	3,533,064
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(23,665	)		(22,685	)		(12,385	)
Pro forma net income	$	3,664,582		$	3,408,697		$	3,520,679
Earnings per share:
Basic - as reported	$	1.44		$	1.24		$	1.30
Basic - pro forma	$	1.43		$	1.23		$	1.30
Diluted - as reported	$	1.42		$	1.23		$	1.29
Diluted - pro forma	$	1.42		$	1.22		$	1.28

For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair market value of stock options granted was estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model was originally developed for use in estimating the fair value of traded options which have different characteristics from the Company’s employee stock options and require the use of highly subjective assumptions which can materially affect the fair value estimate. As a result, management believes that the Black-Scholes model may not necessarily provide a reliable measure of the fair value of employee stock options.

The following assumptions were used for grants for the years ended December 31, 2005, 2004 and 2003:

	2005			2004			2003
Expected dividend yields		3.30	%		2.61	%		2.71	%
Risk-free interest rates		3.72	%		3.62	%		3.02	%
Expected volatility		10.01	%		17.60	%		13.56	%
Expected life of options		7 years			7 years			7 years
Weighted average fair value at grant date	$	1.93		$	4.10		$	2.71

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(17) COMMITMENTS AND CONTINGENCIES

In the normal course of business, there are outstanding various commitments and contingent liabilities, such as commitments to extend credit and legal claims, which are not reflected in the financial statements.

Commitments under outstanding standby letters of credit totaled $1,029,432 at December 31, 2005.

The following is a summary of the commitments to extend credit at December 31, 2005 and 2004:

	2005		2004
Loan commitments:
Fixed rate	$	11,117,300	$	3,222,332
Adjustable rate		1,602,255		600,600
Unused lines of credit on credit cards		2,189,351		2,312,889
Undisbursed commercial and personal lines of credit		13,938,196		10,117,990
Undisbursed portion of construction loans in process		6,132,524		6,607,474
Undisbursed portion of home equity lines of credit		17,933,516		14,804,728
Total commitments to extend credit	$	52,913,142	$	37,666,013

(18) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments (see Note 17). The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Bank upon extension of credit, varies and is based on management’s credit evaluation of the counterparty.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.

The Bank has not been required to perform on any financial guarantees and has not incurred any losses on its commitments during the years ended December 31, 2005, 2004 and 2003.

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(19) DIVIDEND RESTRICTION

As an Indiana corporation, the Company is subject to Indiana law with respect to the payment of dividends. Under Indiana law, the Company may pay dividends so long as it is able to pay its debts as they become due in the usual course of business and its assets exceed the sum of its total liabilities, plus the amount that would be needed, if the Company were to be dissolved at the time of the dividend, to satisfy any rights that are preferential to the rights of the persons receiving the dividend. The ability of the Company to pay dividends depends primarily on the ability of the Bank to pay dividends to the Company.

The payment of dividends by the Bank is subject to regulation by the Office of Thrift Supervision (OTS). The Bank may not declare or pay a cash dividend or repurchase any of its capital stock if the effect thereof would cause the regulatory capital of the Bank to be reduced below regulatory capital requirements imposed by the OTS or below the amount of the liquidation account established upon completion of a conversion from mutual to stock form on December 31, 1998.

(20) REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involved quantitative measures of the assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to quantitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2005, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2005, the most recent notification from the OTS categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution’s categories.

The actual capital amounts and ratios are also presented in the table. No amounts were deducted from capital for interest-rate risk in either year.

	Actual				Minimum For Capital Adequacy Purposes:				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions:
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2005:
Total capital (to risk weighted assets)	$	35,796	13.39	%	$	21,395	8.00	%	$	26,743	10.00	%
Tier I capital (to risk weighted assets)	$	34,391	12.86	%	$	10,697	4.00	%	$	16,046	6.00	%
Tier I capital (to adjusted total assets)	$	34,391	7.94	%	$	17,332	4.00	%	$	21,665	5.00	%
Tangible capital (to adjusted total assets)	$	34,391	7.94	%	$	6,499	1.50	%		N/A

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(20 - continued)

	Actual				Minimum For Capital Adequacy Purposes:				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions:
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2004:
Total capital (to risk weighted assets)	$	33,638	12.92	%	$	20,821	8.00	%	$	26,026	10.00	%
Tier I capital (to risk weighted assets)	$	32,461	12.47	%	$	10,411	4.00	%	$	15,616	6.00	%
Tier I capital (to adjusted total assets)	$	32,461	7.74	%	$	16,778	4.00	%	$	20,973	5.00	%
Tangible capital (to adjusted total assets)	$	32,461	7.74	%	$	6,292	1.50	%		N/A

(21) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table summarizes the carrying value and estimated fair value of financial instruments at December 31, 2005 and 2004:

	2005				2004
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Cash and cash equivalents	$	14,673	$	14,673	$	17,425	$	17,425
Securities available for sale		75,721		75,721		65,192		65,192
Securities held to maturity		1,194		1,293		1,258		1,349
Loans held for sale		—		—		510		510
Loans, net of allowance for loan losses		322,453		314,549		317,086		312,432
Federal Home Loan Bank stock		3,746		3,746		3,668		3,668
Accrued interest receivable		2,462		2,462		2,104		2,104
Financial liabilities:
Deposits		317,264		317,927		316,462		319,186
Retail repurchase agreements		10,704		10,704		635		635
Advances from Federal Home Loan Bank		65,947		64,003		65,099		65,020
Accrued interest payable		1,498		1,498		1,286		1,286
Off-balance-sheet financial instruments:
Asset related to commitments to extend credit		—		10		—		12

The carrying amounts in the preceding table are included in the consolidated balance sheets under the applicable captions. The contractual or notional amounts of financial instruments with off-balance-sheet risk are disclosed in Note 17.

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(21 - continued)

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

Cash and Cash Equivalents

For cash and cash equivalents, including cash and due from banks, interest-bearing deposits with banks, and federal funds sold, the carrying amount is a reasonable estimate of fair value.

Debt and Equity Securities

For debt and marketable equity securities, the fair values are based on quoted market prices. For Federal Home Loan Bank stock, a restricted equity security, the carrying amount is a reasonable estimate of fair value because it is not marketable.

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amount of accrued interest receivable approximates its fair value.

Deposits

The fair value of demand deposits, savings accounts, money market deposit accounts and other transaction accounts is the amount payable on demand at the balance sheet date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

Borrowed Funds

The carrying amount of retail repurchase agreements approximate its fair value. The fair value of advances from Federal Home Loan Bank is estimated by discounting the future cash flows using the current rates at which similar loans with the same remaining maturities could be obtained.

Commitments to Extend Credit

The majority of commitments to extend credit would result in loans with a market rate of interest if funded. The fair value of these commitments are the fees that would be charged to customers to enter into similar agreements. For fixed rate loan commitments, the fair value also considers the difference between current levels of interest rates and the committed rates.

(22) PARENT COMPANY CONDENSED FINANCIAL INFORMATION

Condensed financial information for First Capital, Inc. (parent company only) follows:

Balance Sheets

(In thousands)

	As of December 31,
	2005		2004
Assets:
Cash and interest bearing deposits	$	2,278	$	2,078
Other assets		197		214
Investment in subsidiaries		39,482		38,422
	$	41,957	$	40,714
Stockholders’ equity	$	41,957	$	40,714

- 49 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(22 - continued)

Statements of Income

(In thousands)

	Years Ended December 31,
	2005			2004			2003
Interest income	$	13		$	14		$	16
Dividend income		2,000			1,641			2,100
Other operating expenses		(332	)		(404	)		(331	)
Income before income taxes and equity in undistributed net income of subsidiaries		1,681			1,251			1,785
Income tax credit		146			176			155
Income before equity in undistributed net income of subsidiaries		1,827			1,427			1,940
Equity in undistributed net income of subsidiaries		1,861			2,004			1,593
Net income	$	3,688		$	3,431		$	3,533

Statements of Cash Flows

(In thousands)

	Years Ended December 31,
	2005			2004			2003
Operating Activities:
Net income	$	3,688		$	3,431		$	3,533
Adjustments to reconcile net income to cash provided by operating activities:
Equity in undistributed net income of subsidiaries		(1,861	)		(2,004	)		(1,593	)
ESOP and stock compensation expense		155			226			155
Net (increase) decrease in other assets and liabilities		17			(22	)		81
Net cash provided by operating activities		1,999			1,631			2,176
Investing Activities:
Cash paid in acquisition of Hometown Bancshares, Inc.		—			—			(5,631	)
Financing Activities:
Cash distributions from bank subsidiary:
Acquisition of Hometown Bancshares, Inc.		—			—			6,000
Purchase of treasury stock		—			4,700			—
Exercise of stock options		61			30			71
Purchase of treasury stock		(272	)		(4,863	)		(199	)
Cash dividends paid		(1,588	)		(1,635	)		(1,520	)
Net cash provided by (used in) financing activities		(1,799	)		(1,768	)		4,352
Net increase (decrease) in cash		200			(137	)		897
Cash at beginning of year		2,078			2,215			1,318
Cash at end of year	$	2,278		$	2,078		$	2,215

- 50 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(23) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE

	Years Ended December 31,
	2005		2004		2003
Basic:
Earnings:
Net income	$	3,688,247	$	3,431,382	$	3,533,064
Shares:
Weighted average common shares outstanding		2,565,247		2,763,983		2,708,356
Net income per common share, basic	$	1.44	$	1.24	$	1.30
Diluted:
Earnings:
Net income	$	3,688,247	$	3,431,382	$	3,533,064
Shares:
Weighted average common shares outstanding		2,565,247		2,763,983		2,708,356
Add: Dilutive effect of outstanding options		24,220		31,402		31,212
Dilutive effect of restricted stock		205		2,868		4,430
Weighted average common shares outstanding, as adjusted		2,589,672		2,798,253		2,743,998
Net income per common share, diluted	$	1.42	$	1.23	$	1.29

Unearned ESOP shares are not considered as outstanding for purposes of computing weighted average common shares outstanding.

(24) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

	Years Ended December 31,
	2005		2004		2003
Cash payments for:
Interest	$	10,130,663	$	8,991,034	$	8,682,750
Income taxes		1,852,459		1,430,352		1,542,270
Noncash investing activities:
Transfers from loans to real estate acquired through foreclosure	$	1,347,945	$	1,182,775	$	340,678
Proceeds from sales of foreclosed real estate financed through loans		85,000		160,676		—

- 51 -

FIRST CAPITAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(26) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
2005	(In thousands, except per share data)
Interest income	$	5,620	$	5,865	$	6,046	$	6,128
Interest expense		2,401		2,537		2,665		2,740
Net interest income		3,219		3,328		3,381		3,388
Provision for loan losses		150		163		150		100
Net interest income after provision for loan losses		3,069		3,165		3,231		3,288
Noninterest income		786		755		727		693
Noninterest expenses		2,591		2,592		2,465		2,464
Income before income taxes		1,264		1,328		1,493		1,517
Income tax expense		408		456		518		532
Net income	$	856	$	872	$	975	$	985
Net income per common share, basic	$	0.33	$	0.34	$	0.38	$	0.39
Net income per common share, diluted	$	0.33	$	0.34	$	0.38	$	0.37
2004
Interest income	$	5,439	$	5,418	$	5,530	$	5,722
Interest expense		2,226		2,233		2,290		2,368
Net interest income		3,213		3,185		3,240		3,354
Provision for loan losses		125		120		100		165
Net interest income after provision for loan losses		3,088		3,065		3,140		3,189
Noninterest income		588		704		675		699
Noninterest expenses		2,439		2,445		2,516		2,518
Income before income taxes		1,237		1,324		1,299		1,370
Income tax expense		404		463		443		489
Net income	$	833	$	861	$	856	$	881
Net income per common share, basic	$	0.30	$	0.31	$	0.31	$	0.32
Net income per common share, diluted	$	0.30	$	0.31	$	0.30	$	0.32

- 52 -

DIRECTORS AND OFFICERS

Board of Directors

James G. Pendleton

Chairman of the Board and retired

Chief Executive Officer of First Harrison Bank

Dennis L. Huber

Retired President and Publisher of

O’Bannon Publishing Company, Inc.

Kenneth R. Saulman

Supervisor for Clark County REMC

Gerald L. Uhl

Business Manager and Controller for Jacobi Sales, Inc.

James E. Nett

Accountant for Koetter Woodworking, Inc.

Mark D. Shireman

President of James L. Shireman, Inc.

Michael L. Shireman

President of Uhl Truck Sales, Inc.

John W. Buschemeyer

Retired President of Hurst Lumber Company

James S. Burden

Owner of Tracy’s Mobile Home Park

Kathryn W. Ernstberger

Associate Professor of Business Administration

at Indiana University Southeast

William W. Harrod

Executive Officer of First Capital, Inc. and

First Harrison Bank

Samuel E. Uhl

Executive Officer of First Capital, Inc. and

First Harrison Bank

Executive Officers

William W. Harrod

President and Chief Executive Officer of

First Capital, Inc. and Chief Operating Officer of

First Harrison Bank

Samuel E. Uhl

President and Chief Executive Officer of

First Harrison Bank and Chief Operating Officer of

First Capital, Inc.

M. Chris Frederick

Senior Vice President, Chief Financial Officer and Treasurer

Dennis L. Thomas

Senior Vice President, Lending

Processing and Servicing

Joel E. Voyles

Senior Vice President, Retail Banking

Operations and Corporate Secretary

- 53 -

CORPORATE INFORMATION

Independent Registered Public

General Counsel

Simpson & Thompson

303 N. Capitol Avenue

Corydon, Indiana 47112

Special Counsel

Muldoon Murphy & Aguggia LLP

5101 Wisconsin Ave., N.W.

Washington, D.C. 20016

Accounting Firm

Monroe Shine & Co., Inc.

222 East Market Street

New Albany, Indiana 47150

Transfer Agent

Registrar and Transfer Company

10 Commerce Drive

Cranford, New Jersey 07016

1-800-368-5948

Common Shares and Dividend Information

The common shares of the Company are traded on the NASDAQ Capital Market under the symbol “FCAP.” As of December 31, 2005, the Company had 1,309 stockholders of record and 2,588,111 common shares outstanding. This does not reflect the number of persons whose shares are in nominee or “street” name accounts through brokers.

The following table lists quarterly market price and dividend information per common share for the years ended December 31, 2005 and 2004 as reported by NASDAQ. The market prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

	High Bid		Low Bid		Dividends		Market price end of period
2005:
First Quarter	$	20.42	$	17.21	$	0.15	$	18.90
Second Quarter		19.76		18.15		0.15		19.38
Third Quarter		19.37		17.02		0.16		17.50
Fourth Quarter		18.00		16.60		0.16		17.90
2004:
First Quarter	$	24.99	$	18.75	$	0.15	$	22.50
Second Quarter		24.00		21.00		0.15		22.50
Third Quarter		22.25		18.64		0.15		21.00
Fourth Quarter		21.40		19.60		0.15		21.00

Dividend payments by the Company depend primarily on dividends received by the Company from the Bank. See Note 19 to Consolidated Financial Statements for information regarding the dividend restrictions applicable to the Company and the Bank.

Annual Meeting

The Annual Meeting of Stockholders will be held at 12:00 Noon, local time, Wednesday, April 19, 2006, at the main office of the Bank, 220 Federal Drive, N.W., Corydon, Indiana 47112.

- 54 -

General Inquiries and Reports

The Company is required to file an Annual Report on Form 10-K for its fiscal year ended December 31, 2005 with the Securities and Exchange Commission. Copies of this Annual Report and the Company’s annual reports on Form 10-K (without exhibits) and quarterly reports on Form 10-Q (without exhibits) may be obtained without charge by writing:

William W. Harrod

President and CEO

First Capital, Inc.

220 Federal Drive, N.W.

Corydon, Indiana 47112

(812) 738-2198

The Company’s Annual Reports and Quarterly Reports are also available through the Company’s internet website (www.firstharrison.com) and the Securities and Exchange Commission’s internet website (www.sec.gov).

- 55 -

EX-23.0

EXHIBIT 23.0

[LETTERHEAD OF MONROE SHINE & CO., INC.]

We consent to the incorporation by reference in First Capital, Inc.’s Registration Statement No. 333-76543 on Form S-8 and in First Capital, Inc.’s Registration Statement No. 333-95987 on Form S-8 of our report dated January 13, 2006 contained in the annual report for the year ended December 31, 2005 appearing in this Form 10-K.

/s/ MONROE SHINE & CO., INC.

New Albany, Indiana

March 27, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION

I, William W. Harrod, certify that:

1. I have reviewed this report on Form 10-K of First Capital, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer[s] and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15)(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer[s] and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2006	/s/ William W. Harrod
	William W. Harrod
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Michael C. Frederick, certify that:

1. I have reviewed this report on Form 10-K of First Capital, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer[s] and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15)(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer[s] and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2006	/s/ Michael C. Frederick
	Michael C. Frederick
	Senior Vice President, Chief Financial Officer
	and Treasurer
	(principal financial officer)

EX-32.0

Exhibit 32.0

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of First Capital, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2005, as filed with the Securities and Exchange Commission (the “Report”), the undersigned hereby certify, pursuant to 18 U.S.C. § 1350, as added by § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

Date: March 30, 2006	/s/ William W. Harrod
	William W. Harrod
	President and Chief Executive Officer
	/s/ Michael C. Frederick
	Michael C. Frederick
	Senior Vice President, Chief Financial Officer
	and Treasurer