As filed with the Securities and Exchange Commission on January 30, 2003
Registration No. 333-101408
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------------------------
FIRST CAPITAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Indiana 6035 35-2056949
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification
Number)
220 Federal Drive, N.W.
Corydon, Indiana 47112
(812) 738-2198
(Address, including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principal Executive Offices)
William W. Harrod
President and Chief Executive Officer
220 Federal Drive, N.W.
Corydon, Indiana 47112
(812) 738-2198
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
Copies to:
Aaron M. Kaslow, Esq. Cynthia W. Young, Esq.
Muldoon Murphy & Faucette LLP Wyatt, Tarrant & Combs, LLP
5101 Wisconsin Avenue, N.W. PNC Plaza
Washington, D.C. 20016 500 West Jefferson Street
(202) 362-0840 Louisville, Kentucky 40202
(502) 589-5235
------------------------------------------
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after the effectiveness of this Registration
Statement and the satisfaction or waiver of all other conditions to the Merger
described in the Proxy Statement-Prospectus.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
-------------------------------------------------
Calculation of Registration Fee
---------------------------------------------------------------------------------------------
Proposed Proposed
Title of Each Maximum Maximum
Class of Securities To Be Amount Offering Aggregate Amount of
Registered To Be Price Offering Registration
Registered(1) Per Share(2) Price (2) Fee (2)(3)
---------------------------------------------------------------------------------------------
Common Stock, par
value $0.01 per share 345,000 N/A $2,038,963 $188
---------------------------------------------------------------------------------------------
(1) Represents the estimated maximum number of shares of common stock issuable
by First Capital, Inc. upon the consummation of the merger with Hometown
Bancshares, Inc. and computed based on the estimated maximum number of
shares. Pursuant to Rule 416, this Registration Statement also covers an
indeterminate number of shares of common stock as may become issuable as a
result of stock splits, stock dividends or similar transactions.
(2) Pursuant to Rule 457(f)(1), the registration fee for the First Capital,
Inc. common stock is based on the book value of Hometown Bancshares, Inc.
common stock, no par value, on September 30, 2002. Pursuant to Rule
457(f)(3), the cash portion of the merger consideration to be paid by First
Capital, Inc. in connection with the transaction has been deducted from the
value of the securities to be received by Hometown Bancshares, Inc. in the
transaction.
(3) Previously paid.
----------------------------------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
[HOMETOWN LOGO]
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
The boards of directors of First Capital, Inc. and Hometown Bancshares,
Inc. have agreed to a merger of our companies. In the merger, each share of
Hometown common stock will be converted into either $46.50 in cash or shares of
First Capital common stock having a value between $39.52 and $53.47 based on the
average closing price of First Capital common stock over the 20 trading days
ending on the third business day prior to the closing of the merger. On
January 27, 2003, the last reported sale price of First Capital common
stock was $22.19. If this were the average price over the measurement period,
each share of Hometown common stock that is exchanged for First Capital common
stock would be converted into 2.410 shares of First Capital common stock having
a value of $53.47. First Capital common stock is listed on The Nasdaq
SmallCap Market under the symbol "FCAP".
You will be able to elect to receive cash, First Capital common stock or
a combination of cash and First Capital common stock for your shares of Hometown
common stock. Regardless of your choice, however, elections will be limited by
the requirement that 50% of the shares of Hometown common stock be exchanged for
First Capital common stock. Therefore, the allocation of cash and First Capital
common stock that you will receive will depend on the elections of other
Hometown stockholders. The federal income tax consequences of the merger to you
will depend on whether you receive cash, stock or a combination of cash and
stock in exchange for your shares of Hometown common stock.
We cannot complete the merger unless we obtain the necessary government
approvals and unless the stockholders of Hometown approve the merger agreement.
Hometown will hold a special meeting of its stockholders on March 13, 2003 at
6:00 p.m., local time at the main office of Hometown National Bank, 3131 Grant
Line Road, New Albany, Indiana to consider and vote on this merger proposal.
Whether or not you plan to attend the meeting, please take the time to vote by
completing and mailing the enclosed proxy card to us. If you sign, date and mail
your proxy card without indicating how you want to vote, your proxy will be
counted as a vote "FOR" the merger and the transactions contemplated by the
merger agreement. If you do not return your proxy card, or if you do not
instruct your broker how to vote any shares held for you in "street name," the
effect will be a vote against the merger.
This document contains a more complete description of the stockholders'
meeting, the terms of the merger and the procedures for electing to receive
stock or cash. This document also contains information regarding the business of
First Capital and Hometown. In particular, see "Risk Factors" beginning on page
12. Please review this entire document carefully.
Your board of directors believes that the merger is in your best
interest, and recommends that you vote in favor of the merger.
/s/ C. Ronald Clark
C. Ronald Clark
Chairman and Chief Executive Officer
Hometown Bancshares, Inc.
--------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued under this
proxy statement-prospectus or determined if this proxy statement-prospectus is
accurate or adequate. Any representation to the contrary is a criminal offense.
The securities we are offering through this document are not savings or deposit
accounts or other obligations of any bank or non-bank subsidiary of either of
our companies, and they are not insured by the Federal Deposit Insurance
Corporation, the Savings Association Insurance Fund, the Bank Insurance Fund or
any other governmental agency.
--------------------------------------------------------------------------------
Proxy Statement-Prospectus dated January 30, 2003
and first mailed to stockholders on or about February 5, 2003
This document incorporates important business and financial information
about First Capital from documents filed with the Securities and Exchange
Commission that have not been included in or delivered with this document. You
may read and copy these documents at the SEC's public reference facilities.
Please call the SEC at 1-800-SEC-0330 for information about these facilities.
This information is also available at the Internet site the SEC maintains at
http://www.sec.gov. See "Where You Can Find More Information" on page 72.
You also may request copies of these documents from First Capital. First
Capital will provide you with copies of these documents, without charge, upon
written or oral request to:
First Capital, Inc.
220 Federal Drive, NW
Corydon, Indiana 47112
Attention: Joel E. Voyles, Corporate Secretary
Telephone:(812) 738-2198
In order to receive timely delivery of the documents in advance of
Hometown's special meeting of stockholders, you should make your request no
later than March 6, 2003.
Hometown Bancshares, Inc.
3131 Grant Line Road
New Albany, Indiana 47150
(812) 949-2265
-----------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
-----------------------------------------
A special meeting of stockholders of Hometown Bancshares, Inc. will be held
at the main office of Hometown National Bank, 3131 Grant Line Road, New Albany,
Indiana on March 13, 2003, at 6:00 p.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement
and Plan of Merger, dated as of September 25, 2002, by and
between First Capital, Inc. and Hometown Bancshares, Inc.,
pursuant to which Hometown will merge with and into First
Capital and each share of common stock, no par value, of
Hometown will be converted into the right to receive, at the
election of the holder, either shares of common stock, par
value $.01 per share, of First Capital or cash, all on and
subject to the terms and conditions contained therein; and
2. To transact any other business as may properly come before the
meeting or any adjournment or postponement.
Only stockholders of record at the close of business on January 17, 2003
will be entitled to notice of and to vote at the meeting and at any adjournment
or postponement.
Hometown stockholders have the right to dissent from the merger and obtain
payment in cash of the fair value of their shares of Hometown common stock under
applicable provisions of Indiana law (Chapter 44 of the Indiana Business
Corporation Law). In order to perfect dissenters' rights, Hometown stockholders
must file a written objection to the merger with Hometown before the taking of
the vote on the merger at the special meeting and must not vote in favor of the
merger. A copy of the applicable Indiana statutory provisions is included as
Appendix C to the accompanying proxy statement-prospectus and a summary of the
provisions can be found under the caption "The Merger--Rights of Dissenting
Stockholders."
By Order of the Board of Directors
/s/ Anne M. Ragains
Anne M. Ragains
Corporate Secretary
New Albany, Indiana
February 5, 2003
The board of directors unanimously recommends that you vote "FOR" the
proposal to approve the merger agreement. Whether or not you plan to attend the
meeting, please complete, sign, date and return the enclosed proxy in the
accompanying pre-addressed postage-paid envelope.
Table of Contents
Questions and Answers about the Merger ....... 1 Opinion of Hometown's Financial
Advisor ....................................... 35
Summary ...................................... 3 Rights of Dissenting Stockholders ............... 39
Interests of Our Directors and Officers
Risk Factors ................................. 12 in the Merger that Differ From
Your Interests ................................ 42
Comparative Per Share Data ................... 14 Regulatory Approvals Needed to
Complete the Merger ........................... 43
Selected Historical Financial Information .... 15 Accounting Treatment of the Merger .............. 43
Selected Historical Financial Resale of First Capital Common Stock ............ 44
Information for First Capital ............ 16
Selected Historical Financial The Merger Agreement .............................. 45
Information for Hometown ................. 17 Terms of the Merger ............................. 45
When Will the Merger be Completed ............... 45
Summary Selected Pro Forma Conditions to Completing the Merger ............. 45
Combined Data .............................. 18 Conduct of Business Before the
Merger ........................................ 46
Market Price And Dividend Information ........ 19 Covenants of Hometown and First Capital
in the Merger Agreement ....................... 50
Recent Developments .......................... 20
Special Meeting of Hometown Stockholders ..... 21 Representations and Warranties Made
Place, Date and Time ....................... 21 by First Capital and Hometown in
Purpose of the Meeting ..................... 21 the Merger Agreement .......................... 52
Who Can Vote at the Meeting; Terminating the Merger Agreement ................ 52
Record Date .............................. 21 Termination Fee ................................. 53
Expenses ........................................ 54
Quorum and Vote Required ................... 21 Changing the Terms of the Merger
Shares Held by Hometown Officers and Agreement ..................................... 54
Directors and by First Capital ........... 21
Voting by Proxy ............................ 22 Pro Forma Financial Information ................... 55
Revocability of Proxies .................... 22
Solicitation of Proxies .................... 22 A Warning About Forward-Looking
Statements ...................................... 63
Ownership of Hometown Common Stock ........... 23
Description of First Capital Common Stock ......... 64
The Merger ................................... 24 General ......................................... 64
The Parties to the Merger .................. 24 Common Stock .................................... 64
Form of the Merger ......................... 24 Preferred Stock ................................. 64
Conversion of Hometown Common
Stock .................................... 25 Comparison of Rights of Stockholders .............. 65
Cash or Stock Election ..................... 27 Authorized Stock ................................ 65
Election Procedures; Surrender of Voting Rights ................................... 65
Stock Certificates ....................... 28 Required Vote for Authorization of
Material Federal Income Tax Certain Actions ............................... 66
Consequences of the Merger ............... 29 Dividends ....................................... 66
Background of the Merger ................... 32 Stockholders' Meetings .......................... 66
Reasons for the Merger ..................... 34 Action by Stockholders Without a
Meeting ....................................... 67
Board of Directors .............................. 67
i
Amendment of the Bylaws ................... 68 Preferred Stock ............................... 71
Amendment of the Articles of
Incorporation .......................... 68 Amendment of Articles of
Incorporation .............................. 71
Selected Provisions in the Articles of
Incorporation and Bylaws of First Capital ... 69 Legal Matters ..................................... 71
Business Combinations with Related
Persons ................................ 69 Experts ........................................... 71
Limitation on Voting Rights ............... 70
Board of Directors ........................ 70 Where You Can Find More Information ............... 72
Special Meetings of Stockholders .......... 70
Advance Notice Provisions for
Stockholder Nominations and
Proposals .............................. 70
APPENDIX A Agreement and Plan of Merger,
dated as of September 25, 2002,
by and between First Capital,
Inc. and Hometown Bancshares,
Inc.
APPENDIX B Fairness Opinion of David A.
Noyes & Company
APPENDIX C Chapter 23-1-44 of the
Indiana Business
Corporation Law
APPENDIX D Financial and Business
Information for Hometown
Bancshares, Inc.
APPENDIX E First Capital, Inc. 2001
Annual Report to Stockholders
and Quarterly Report for the
Quarter Ended September 30,
2002
ii
Questions and Answers about the Merger
What am I being asked to vote on and how does my board recommend that I vote?
You are being asked to vote FOR the approval of the Agreement and Plan of
Merger dated as of September 25, 2002 providing for the merger of Hometown with
and into First Capital. The Hometown board of directors has determined that the
proposed merger is in the best interests of Hometown stockholders, has approved
the merger agreement and recommends that Hometown stockholders vote FOR the
approval of the merger agreement.
What vote is required to approve the merger agreement?
The approval of the merger agreement requires the affirmative vote of at
least a majority of the outstanding shares of Hometown common stock.
What will I receive in the merger?
Under the merger agreement, at your election, each share of Hometown
common stock you own will be exchanged for either shares of First Capital common
stock or $46.50 in cash. You may elect either of these options and, if you
desire, you may elect to exchange some of your Hometown shares for cash and some
of your Hometown shares for First Capital shares. The number of shares of First
Capital common stock to be exchanged for each share of Hometown common stock
will be based on the average closing price of First Capital common stock over a
twenty day trading period shortly before the closing of the merger.
Elections will be limited by a requirement that 50% of the total number
of outstanding shares of Hometown common stock be exchanged for First Capital
common stock. Therefore, the form of consideration you receive will depend in
part on the elections of other Hometown stockholders.
First Capital will not issue fractional shares in the merger. Instead,
you will receive a cash payment, without interest, for the value of any fraction
of a share of First Capital common stock that you would otherwise be entitled to
receive.
How do I elect to receive cash, stock or a combination of both for my Hometown
stock?
A form for making an election will be sent to you separately on or about
the date this proxy statement-prospectus is mailed. For your election to be
effective, your properly completed election form, along with your Hometown stock
certificates or an appropriate guarantee of delivery, must be sent to and
received by Registrar and Transfer Company, the exchange agent, on or before
5:00 p.m., New York City time, on March 10, 2003. Do not send your election form
together with your proxy card. Instead, use the separate envelope specifically
provided for the election form and your stock certificates. If you do not make a
timely election you will be allocated First Capital common stock and/or cash
depending on the elections made by other stockholders.
How do I exchange my Hometown stock certificates?
If you make an election, you must return your Hometown stock certificates
or an appropriate guarantee of delivery with your election form. Shortly after
the merger, the exchange agent will allocate cash and First Capital common stock
among Hometown stockholders, consistent with their elections and
1
the allocation and proration procedures in the merger agreement. If you do not
submit an election form, you will receive instructions on where to surrender
your Hometown stock certificates from the exchange agent after the merger is
completed. In any event, you should not forward your Hometown stock certificates
with your proxy card.
What should I do now?
After you have read this document, please indicate on your proxy card how
you want to vote. Sign and mail the proxy card in the enclosed postage prepaid
envelope as soon as possible, so that your shares will be represented at the
special meeting.
If my shares are held in "street name" by my broker, bank or nominee, will my
broker, bank or nominee automatically vote my shares for me?
No. Your broker, bank or nominee will not be able to vote your shares of
Hometown common stock unless you provide instructions on how to vote. You should
instruct your broker, bank or nominee how to vote your shares by following the
procedures your broker provides. If you do not provide instructions to your
broker, bank or nominee, your shares will not be voted, and this will have the
effect of voting against adoption of the merger agreement. Please check the
voting form used by your broker, bank or nominee to see if it offers telephone
or internet voting.
Who can help answer my questions?
If you want additional copies of this document, or if you want to ask any
questions about the merger, you should contact:
C. Ronald Clark
Chairman and Chief Executive Officer
Hometown Bancshares, Inc.
3131 Grant Line Road
New Albany, Indiana 47150
Telephone:(812) 949-2265
2
Summary
This summary, which does not contain all of the information that is
important to you, highlights selected information from this proxy
statement-prospectus and the documents incorporated herein by reference. You
should carefully read this entire document and the other documents which
accompany this document to fully understand the merger. See "Where You Can Find
More Information."
The Companies
First Capital, Inc. First Capital is the savings and loan holding
220 Federal Drive, NW company for First Harrison Bank. First
Corydon, Indiana 47115 Harrison operates nine banking offices in
(812) 738-2198 southeastern Indiana. At September 30, 2002,
First Capital had total assets of $303.7
million, deposits of $215.9 million and
stockholders' equity of $35.8 million.
For financial statements and a discussion of
First Capital's recent results of operations,
see First Capital's 2001 annual report to
stockholders and Quarterly Report on Form
10-QSB for the quarter ended September 30,
2002, both of which accompany this proxy
statement-prospectus in Appendix E.
Hometown Bancshares, Inc. Hometown is the bank holding company for
3131 Grant Line Road Hometown National Bank. Hometown National
New Albany, Indiana operates two banking offices in New Albany and
(812) 949-2265 Floyds Knobs, Indiana. At September 30, 2002,
Hometown had total assets of $84.5 million,
deposits of $76.7 million and stockholders'
equity of $7.4 million.
See Appendix D for financial statements and a
discussion of Hometown's recent results of
operations.
The Special Meeting
Place, Date and Time (page 21) A special meeting of stockholders of Hometown
will be held at the main office of Hometown
National Bank, 3131 Grant Line Road, New
Albany, Indiana on March 13, 2003 at 6:00
p.m., local time.
Purpose of the Meeting At the special meeting, Hometown stockholders
(page 21) will be asked to approve the merger agreement
with First Capital and to transact any other
business that may properly come before
meeting.
Who Can Vote at the Meeting You can vote at the special meeting of
(page 21) Hometown stockholders if you owned Hometown
common stock at the close of business on
January 17, 2003. You will be able to cast one
vote for each share of Hometown common stock
you owned at that time. As of January 17,
2003, there were 229,550 shares of Hometown
common stock outstanding.
3
What Vote is Required for In order to approve the merger agreement, the
Approval of the Merger holders of at least a majority of the
Agreement (page 21) outstanding shares of Hometown common stock
entitled to vote must vote in its favor. You
can vote your shares by attending the special
meeting and voting in person or by completing
and mailing the enclosed proxy card. As of
January 17, 2003, directors and executive
officers of Hometown owned approximately 38.5%
of the outstanding common stock of Hometown.
The Merger
Overview of the Transaction We propose a business combination in which
(page 24) Hometown will merge with First Capital. First
Capital will be the surviving corporation in
the merger.
Each Hometown Share Will Be As a Hometown stockholder, upon the closing of
Exchanged for Either Shares of the merger, each of your shares of Hometown
First Capital or $46.50 in Cash common stock will automatically be converted
(page 25) into the right to receive either shares of
First Capital common stock or $46.50 in cash.
You may elect either of these options and, if
you desire, you may elect to exchange some of
your Hometown shares for cash and some of your
Hometown shares for First Capital shares. The
number of shares of First Capital common stock
to be exchanged for each share of Hometown
common stock will be based on the average
closing price of First Capital common stock
over a twenty day trading period shortly
before the closing of the merger as follows:
If the average closing
price of First Capital then Hometown
common stock during the stockholders will
measurement period is: receive:
. $14.45 or less . a number of shares
of First Capital
common stock equal
to $39.52 divided
by the average
closing price.
. between $14.45 and . 2.735 shares of
$19.55 First Capital
common stock.
. $19.55 or more . a number of shares
of First Capital
common stock equal
to $53.47 divided
by the average
closing price.
4
On January 27, 2003, First Capital common
stock closed at $22.19 per share on The
Nasdaq SmallCap Market. If this were the
average closing price of First Capital
common stock during the measurement period,
then, because the price is above $19.55,
Hometown stockholders who receive First
Capital common stock would receive 2.410
shares of First Capital common stock for
each share of Hometown common stock that
they own.
The amount of cash and/or stock that you
receive may differ from the amounts that you
elect due to the allocation and proration
procedures in the merger agreement. The
merger agreement provides that 50% of the
Hometown common stock will be converted into
First Capital common stock and 50% of the
Hometown common stock will be converted into
cash. Because the tax consequences of
receiving cash will differ from the tax
consequences of receiving stock, you should
carefully read the tax information beginning
on page 29.
How to Elect to Receive Cash or The exchange agent or, if your Hometown
Stock and Exchange Your common stock is held in "street name," your
Hometown Stock Certificates broker, bank or nominee, will send you a
(page 28) form for making the election on or about the
date this proxy statement-prospectus is
being mailed. The election form allows you
to elect to receive cash, First Capital
common stock, or a combination of cash and
stock or to make no election.
For your election to be effective, you must
return your properly completed election
form, along with your Hometown stock
certificates or an appropriate guarantee of
delivery to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
on or before 5:00 p.m., New York City, on
March 10, 2003. Registrar and Transfer
Company will act as exchange agent in the
merger and in that role will process the
exchange of Hometown stock certificates for
either cash or First Capital common stock.
Shortly after the merger, the exchange agent
will allocate cash and First Capital common
stock among Hometown stockholders,
consistent with their elections and the
allocation and proration procedures in the
merger agreement. If you do not submit an
election form, you will receive instructions
on where to surrender your Hometown stock
certificates from the
5
exchange agent after the merger is
completed. In any event, you should not
forward your Hometown stock certificates
with your proxy card.
If you have a preference for receiving
either First Capital stock or cash for your
Hometown stock, you should complete and
return the election form. If you do not make
an election you will be allocated First
Capital common stock and/or cash depending
on the elections made by other Hometown
stockholders. Please remember, however, that
even if you do make an election, you might
not receive the amount of cash and/or stock
that you elect due to the requirement that
exactly 50% of the shares of Hometown common
stock be exchanged for First Capital common
stock.
We make no recommendation as to whether you
should elect to receive cash or stock in the
merger. You must make your own decision with
respect to your election.
Market Prices and Share The following table shows the closing price
Information per share of First Capital common stock and
the equivalent per share price for Hometown
common stock assuming a stockholder receives
only First Capital common stock in exchange
for his or her Hometown common stock and
giving effect to the merger on (1) September
24, 2002, which is the last day on which
First Capital common stock traded preceding
the public announcement of the proposed
merger; and (2) January 27, 2003, which is
the last practicable trading day before the
printing of this document. The equivalent
per share price of Hometown common stock was
computed by multiplying the price of First
Capital common stock by the exchange ratio
that would be used if the average closing
price of First Capital common stock during
the measurement period used to calculate the
exchange ratio were equal to the closing
price of First Capital common stock on the
date indicated.
Equivalent
First Price
Capital Per Share of
Common Hometown
Stock Stock
------- -------------
September 24, 2002... $19.00 $51.97
January 27, 2003..... $22.19 $53.47
Tax Consequences of the Merger Your federal income tax treatment will
(page 29) depend primarily on whether you exchange
your Hometown common stock solely for First
Capital common stock, solely for cash or for
6
a combination of First Capital common stock
and cash. If you exchange your Hometown
shares solely for First Capital common
stock, you should not recognize gain or loss
except with respect to the cash you receive
instead of a fractional share. If you
exchange your Hometown shares solely for
cash, you should recognize capital gain or
loss on the exchange. If you exchange your
Hometown shares for a combination of First
Capital common stock and cash, you should
recognize capital gain, but not any loss, on
the exchange. The actual federal income tax
consequences to you of electing to receive
cash, First Capital common stock or a
combination of cash and stock will not be
ascertainable at the time you make your
election because we will not know at that
time if, or to what extent, the allocation
and proration procedures will apply.
This tax treatment may not apply to all
Hometown stockholders. Determining the
actual tax consequences of the merger to you
can be complicated. You should consult your
own tax advisor for a full understanding of
the merger's tax consequences that are
particular to you.
We will not be obligated to complete the
merger unless we each receive a legal
opinion, dated the closing date, that the
merger will be treated as a transaction of a
type that is generally tax-free to First
Capital and Hometown for U.S. federal income
tax purposes. In that case, the U.S. federal
income tax treatment of the merger will be
as we have described it above. This opinion,
however, will not bind the Internal Revenue
Service and thus the tax consequences could
be different than set forth in the opinion.
Hometown's Board of Directors Hometown's board of directors believes
Recommends That Stockholders that the merger is fair and in the
Approve the Merger stockholders' best interests, and
unanimously recommends that you vote "FOR"
the proposal to approve the merger
agreement.
For a discussion of the circumstances
surrounding the merger and the factors
considered by Hometown's board of directors
in approving the merger agreement see page
32.
Hometown's Financial Advisor David A. Noyes & Company has delivered to
Believes the Merger Consideration Hometown's board of directors its opinion
Is Fair to Stockholders that, as of the date of this document, the
(page 35) merger consideration is fair to the holders
of Hometown common stock from a financial
point of view. A copy of this opinion is
provided as Appendix B to this document. You
should read this opinion and the description
of it in this proxy statement-prospectus
7
completely to understand the procedures
followed, assumptions made, matters
considered, and qualifications and
limitations on the review made by David A.
Noyes in providing this opinion. Hometown
has agreed to pay David A. Noyes $168,343
plus expenses for its services in connection
with the merger.
You Have Dissenters' Rights in the Indiana law provides you with dissenters'
Merger (page 39) appraisal rights in the merger. This means
that if you are not satisfied with the
amount you are receiving in the merger, you
are legally entitled to receive payment in
cash of the fair value of your shares,
excluding any appreciation in value that
results from the merger. To exercise your
dissenters' rights you must deliver written
notice of your intent to demand payment for
your shares to Hometown at or before the
special meeting of Hometown stockholders and
you must not vote in favor of the merger.
Notices should be addressed to Hometown's
Corporate Secretary and sent to Hometown at
3131 Grant Line Road, New Albany, Indiana
47150. Your failure to follow exactly the
procedures specified under Indiana law will
result in the loss of your dissenters'
rights. A copy of the dissenters' rights
provisions of Indiana law is provided as
Appendix C to this document.
Interests of Hometown's Some of Hometown's directors and officers
Directors and Officers in the have interests in the merger that are
Merger That Differ From Your different from, or are in addition to, their
Interests (page 42) interests as stockholders in Hometown. The
members of Hometown's board of directors
knew about these additional interests, and
considered them, when they approved the
merger. These include:
. a severance payment to C. Ronald Clark,
Chairman and Chief Executive Officer of
Hometown, under a termination agreement
between Mr. Clark and Hometown;
. consideration to be paid to C. Ronald
Clark under a Non-Competition Agreement
with First Capital;
. an employment agreement between First
Capital and Robert E. Kleehamer, which
will go into effect upon completion of the
merger;
. provisions in the merger agreement
relating to the indemnification of
directors and officers and insurance for
directors and officers of Hometown for
events occurring before the merger; and
8
. First Capital's maintenance of an
advisory board consisting of all of
the non-employee Hometown directors
for a period of at least two years.
Regulatory Approval Needed to We cannot complete the merger unless it
Complete the Merger is first approved by the Office of
(page 43) Thrift Supervision. First Capital has
filed the required application with the
Office of Thrift Supervision. As of the
date of this document, we have not
received the approval of the Office of
Thrift Supervision. While we do not
know of any reason why we would not be
able to obtain this approval in a
timely manner, we cannot be certain
when or if we will receive it.
Purchase Accounting First Capital will account for the
Treatment (page 43) merger using the purchase
method accounting. Under this method of
accounting, First Capital will record
the fair market value of Hometown's
assets and liabilities on its financial
statements. The difference between the
purchase price paid by First Capital
and the fair market value of Hometown's
tangible and identifiable intangible
assets net of its liabilities will be
recorded on First Capital's books as
"goodwill."
The Merger Agreement
A copy of the merger agreement is provided as Appendix A to this proxy
statement-prospectus. Please read the entire merger agreement carefully. It is
the legal document that governs the merger.
Conditions to Completing the The completion of the merger depends
Merger (page 45) on a number of conditions being met.
These conditions include:
. approval of the merger agreement by
Hometown's stockholders;
. approval of the merger by
regulatory authorities;
. receipt of a tax opinion that the
merger qualifies as a tax-free
reorganization;
. the continued accuracy of certain
representations and warranties made
on the date of the merger
agreement; and
. Hometown stockholders' equity being
at least $6.8 million as of
December 31, 2002 according to its
audited balance sheet, subject to
certain adjustments.
We cannot be certain when or if the
conditions to the merger will be
satisfied or waived, or that the merger
will be completed.
9
Terminating the Merger First Capital and Hometown can agree at
Agreement (page 52) any time not to complete the merger,
even if Hometown's stockholders have
approved it. Also, either of us can
decide, without the consent of the
other, to terminate the merger
agreement if:
. the stockholders of Hometown do not
approve the merger;
. a required regulatory approval is
denied or a governmental authority
blocks the merger;
. we do not complete the merger by
June 30, 2003; or
. the other party makes a
misrepresentation, breaches a
warranty or fails to satisfy or
fulfill a covenant that would have
a material adverse effect on the
party seeking to terminate the
merger agreement.
First Capital may also terminate the
merger agreement if the Hometown board
of directors withdraws or revises its
recommendation to its stockholders to
approve the merger agreement.
Termination Fee (page 53) Hometown must pay First Capital a
termination fee of $175,000 if First
Capital terminates the merger agreement
as a result of the failure of
Hometown's board of directors to
recommend approval of the merger or the
withdrawal, qualification or revision
of its recommendation to approve the
merger. If within 12 months after such
termination, Hometown consummates or
enters into any agreement with respect
to an acquisition proposal, Hometown
must pay an additional termination fee
of $175,000 to First Capital.
Hometown must pay First Capital a
termination fee of $350,000 if within
12 months after the merger agreement is
terminated, Hometown consummates or
enters into any agreement with respect
to an acquisition proposal and if the
merger agreement is terminated under
either of the following circumstances:
. if First Capital terminates the
merger agreement as a result of a
willful breach of the merger
agreement by Hometown, and an
acquisition proposal from a third
party has been publicly announced,
disclosed or communicated or made
known to Hometown at any time after
the date of the merger agreement
and prior to the date of
termination; or
. if either party terminates the
merger agreement as a result of the
failure of Hometown's stockholders
to
10
approve the merger, and an acquisition
proposal from a third party has been publicly
announced, disclosed or communicated or made
known to Hometown at any time after the date
of the merger agreement and prior to the date
of the Hometown stockholders' meeting.
Under no circumstances will Hometown be required
to pay more than $350,000 in the aggregate under
the termination fee provisions.
The merger agreement requires First Capital to
pay Hometown a fee of $350,000 if Hometown
terminates the merger agreement as a result of
First Capital's willful breach of the merger
agreement and an acquisition proposal from a
third party to First Capital has been publicly
announced, disclosed or communicated or made
known to First Capital at any time after the date
of the merger agreement and prior to the date of
termination, and if within 12 months after such
termination, First Capital consummates or enters
into any agreement with respect to an acquisition
proposal.
We May Amend the Terms of the We can agree to amend the merger agreement, and
Merger and Waive Some each of us can waive our right to require the
Conditions (page 54) other party to adhere to the terms and conditions
of the merger agreement, where the law allows.
However, if the Hometown stockholders approve the
merger agreement, they must approve any amendment
or waiver that reduces or changes the
consideration to be received by the Hometown
stockholders in the merger.
11
Risk Factors
In addition to the other information included in this proxy
statement-prospectus (including the matters addressed in "A Warning About
Forward-Looking Statements"), you should carefully consider the matters
described below in determining whether to approve the merger agreement.
You may receive a form of consideration different from what you elect
The consideration to be received by Hometown stockholders in the merger is
subject to the requirement that 50% of the shares of Hometown common stock be
exchanged for First Capital common stock and 50% be exchanged for cash. The
merger agreement contains proration and allocation methods to achieve this
desired result. If you elect all cash and the available cash is oversubscribed,
then you will receive a portion of the merger consideration in First Capital
common stock. If you elect all stock and the available stock is oversubscribed,
then you will receive a portion of the merger consideration in cash. Therefore,
you may not receive exactly the form of consideration that you elect.
Because the market price of First Capital common stock may fluctuate, you cannot
be sure of the market value of the First Capital common stock that you may
receive in the merger
Upon the closing of the merger, each of your shares of Hometown common
stock will automatically be converted into the right to receive either shares of
First Capital common stock or $46.50 in cash. The number and value of shares of
First Capital common stock to be exchanged for each share of Hometown common
stock will be based on the average closing price of First Capital common stock
over a twenty day trading period shortly before the closing of the merger.
Changes in the price of First Capital common stock from the date of the merger
agreement and from the date of this proxy statement-prospectus may affect the
market value of First Capital common stock that you will receive in the merger.
Stock price changes may result from a variety of factors, including general
market and economic conditions, changes in First Capital's businesses,
operations and prospects, and regulatory considerations. Many of these factors
are beyond First Capital's control. In addition, there will be a time period
between the completion of the merger and the time when Hometown stockholders
receiving stock consideration actually receive certificates evidencing First
Capital common stock. Until stock certificates are received, Hometown
stockholders will not be able to sell their First Capital shares in the open
market and, thus, will not be able to avoid losses resulting from any decline in
the trading price of First Capital common stock during this period.
The price of First Capital common stock might decrease after the merger
Following the merger, many holders of Hometown common stock will become
stockholders of First Capital. First Capital common stock could decline in value
after the merger. For example, during the twelve-month period ending on
January 27, 2003 (the most recent practicable date prior to the printing
of this proxy statement-prospectus), the closing price of First Capital common
stock varied from a low of $14.10 to a high of $22.19 and ended that period
at $22.19. The market value of First Capital common stock fluctuates based
upon general market economic conditions, First Capital's business and prospects,
and other factors.
Directors and officers of Hometown have potential conflicts of interest in the
merger
You should be aware that some directors and officers of Hometown have
interests in the merger that are different from, or in addition to, the
interests of Hometown stockholders generally. For example,
12
certain executive officers have entered into agreements that provide for either
severance payments or continued employment following the merger. These
agreements may create potential conflicts of interest. These and certain other
additional interests of Hometown's directors and officers may cause some of
these persons to view the proposed transaction differently than you view it.
The opinion obtained by Hometown from its financial advisor will not reflect
changes in circumstances prior to the merger
On September 25, 2002, and as updated on the date of this proxy
statement-prospectus, David A. Noyes & Company delivered to the Hometown board
its opinion as to the fairness from a financial point of view to the
stockholders of Hometown, as of that date, of the aggregate merger consideration
to be received by them under the merger agreement. This opinion did not reflect
changes that may occur or may have occurred after the date of this document, to
the operations and prospects of First Capital or Hometown, general market and
economic conditions and other factors. Moreover, Hometown does not intend to
request an updated opinion from David A. Noyes. As a result of the foregoing,
Hometown stockholders should be aware that the opinion of David A. Noyes does
not address the fairness of the aggregate merger consideration at any time other
than as of the date of this document.
First Capital may experience difficulties in managing its growth and in
effectively integrating Hometown
There can be no assurances that First Capital will be able to adequately
and profitably manage its growth, and effectively integrate the operations of
Hometown. Acquiring Hometown will involve risks commonly associated with
acquisitions, including:
. potential exposure to liabilities of Hometown;
. difficulty and expense of integrating the operations and personnel of
Hometown;
. potential disruption to the business of First Capital;
. potential diversion of the time and attention of management of First
Capital; and
. impairment of relationships with, and the possible loss of, key
employees and customers of Hometown.
13
Comparative Per Share Data
The following table shows information about our income per common share,
dividends per share and book value per share, and similar information as if the
merger had occurred on the date indicated (which we refer to as "pro forma"
information). In presenting the comparative pro forma information for certain
time periods, we assumed that we had been merged throughout those periods and
made certain other assumptions. See "Pro Forma Financial Information."
The information listed as "per equivalent Hometown share" was obtained by
multiplying the pro forma amounts by an exchange ratio of 2.735. We present this
information to reflect the fact that some Hometown stockholders will receive
shares of First Capital common stock for each share of Hometown common stock
exchanged in the merger. Because the exchange ratio will be based on the price
of First Capital common stock during a measurement period prior to the
completion of the merger, the actual exchange ratio may be more or less than
2.735. We also anticipate that the combined company will derive financial
benefits from the merger that include reduced operating expenses and the
opportunity to earn more revenue. The pro forma information, while helpful in
illustrating the financial characteristics of the new company under one set of
assumptions, does not reflect these benefits and, accordingly, does not attempt
to predict or suggest future results. The pro forma information also does not
necessarily reflect what the historical results of the combined company would
have been had our companies been combined during these periods.
The information in the following table is based on, and should be read
together with, the historical financial information that we have presented in
this document. See "Pro Forma Financial Information."
Per Equivalent
First Capital Hometown Pro Forma Hometown
Historical Historical Combined Share/(1)/
------------- ---------- --------- --------------
Book value per share:
At September 30, 2002 $14.08 $ 32.14 $14.38(2) $39.33
Cash dividends declared per share:
Nine months ended September 30, 2002 $ 0.39 -- $ 0.39(3) $ 1.07
Year ended December 31, 2001 $ 0.48 -- $ 0.48(3) $ 1.31
Diluted net income per share:
Nine months ended September 30, 2002 $ 0.96 $ 1.51 $ 0.97 $ 2.65
Year ended December 31, 2001 $ 1.25 $ 2.32 $ 1.29 $ 3.53
------------------------
(1) The per equivalent Hometown share amounts are computed by multiplying the
pro forma combined amounts by a factor of 2.735 to reflect the exchange
ratio in the merger.
(2) The pro forma combined book value per share of First Capital common stock
is based upon the pro forma combined common stockholders' equity for First
Capital and Hometown divided by total pro forma common shares of the
combined entities.
(3) Pro forma dividends per share represent First Capital's historical
dividends per share.
14
Selected Historical Financial Information
The following tables show summarized historical financial data for
First Capital and Hometown. You should read this summary financial information
in connection with First Capital's and Hometown's historical financial
information.
The audited financial statements of Hometown and the unaudited
financial statements for Hometown for the nine months ended September 30, 2002
and 2001 are included in Appendix D. The audited financial statements of First
Capital are included in First Capital's annual report to stockholders and the
unaudited financial statements of First Capital for the nine months ended
September 30, 2002 and 2001 are included in First Capital's Quarterly Report on
Form 10-QSB, both of which are included in Appendix E.
Unaudited financial statements for Hometown and First Capital for the
nine months ended September 30, 2002 and 2001 include normal, recurring
adjustments necessary to fairly present the data for those periods. The
unaudited data is not necessarily indicative of expected results of a full
year's operation.
15
Selected Historical Financial Information for First Capital
At or For the
Nine Months Ended At or For the Year Ended
September 30, December 31,
----------------------- --------------------------
2002 2001 2001 2000
-------- -------- ------------ ------------
(In thousands, except per share data)
Financial Condition Data:
Total assets .............................................. $303,699 $275,460 $282,823 $248,582
Loans receivable, net ..................................... 211,096 195,835 201,730 179,304
Securities available-for-sale ............................. 67,714 53,049 54,891 34,779
Securities held-to-maturity ............................... 1,647 2,431 1,836 11,229
Deposits .................................................. 215,925 199,892 204,122 185,368
Total borrowings .......................................... 49,508 39,668 43,109 30,074
Total stockholders' equity ................................ 35,790 33,333 33,481 31,108
Operating Data:
Interest income ........................................... $ 14,165 $ 14,190 $ 18,960 $ 17,363
Interest expense .......................................... 6,686 7,508 9,842 9,267
-------- -------- -------- --------
Net interest income ....................................... 7,479 6,682 9,118 8,096
Provision for loan losses ................................. 155 36 66 48
-------- -------- -------- --------
Net interest income after
provision for loan losses .............................. 7,324 6,646 9,052 8,048
Noninterest income ........................................ 1,263 1,297 1,675 1,219
Noninterest expense ....................................... 4,895 4,419 5,914 5,629
-------- -------- -------- --------
Income before income taxes ................................ 3,692 3,524 4,813 3,638
Income tax provision ...................................... 1,296 1,255 1,714 1,180
-------- -------- -------- --------
Net income ................................................ $ 2,396 $ 2,269 $ 3,099 $ 2,458
======== ======== ======== ========
Per Share Data:
Basic earnings per share .................................. $ 0.97 $ 0.92 $ 1.26 $ 1.00
Diluted earnings per share ................................ 0.96 0.92 1.25 1.00
Dividends per share ....................................... 0.39 0.35 0.48 0.41
Performance Ratios(1):
Return on average assets (2) .............................. 1.09% 1.16% 1.17% 1.05%
Return on average equity (3) .............................. 9.26 9.69 9.49 8.27
Net interest margin (4) ................................... 3.70 3.61 3.71 3.73
Operating (noninterest) expense
to average total assets ................................ 2.23 2.26 2.23 2.39
Asset Quality Ratios:
Non-performing loans as a percent of loans receivable,
net (5) ................................................ 0.66% 0.36% 0.62% 0.32%
Non-performing assets as a percent of total assets (6) .... 0.51 0.30 0.52 0.28
Allowance for loan losses as a percent of gross loans .....
receivable 0.52 0.56 0.54 0.64
------------------------------------------
(1) Ratios have been annualized where applicable.
(2) Net income divided by average assets.
(3) Net income divided by average equity.
(4) Net interest income as a percentage of average interest-earning assets
(taxable equivalent basis).
(5) Non-performing loans consist of nonaccrual loans and loans greater than 90
days delinquent and still accruing.
(6) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans, but exclude restructured loans.
16
Selected Historical Financial Information for Hometown
At or For the At or For the Year
Nine Months Ended Ended
September 30, December 31,
------------------- --------------------
2002 2001 2001 2000
-------- -------- -------- --------
(In thousands, except per share data)
Financial Condition Data:
Total assets ................................... $84,481 $81,478 $87,715 $86,411
Loans receivable, net .......................... 57,982 57,436 54,962 47,656
Securities available-for-sale .................. 1,764 - - -
Securities held-to-maturity .................... 2,110 5,504 3,724 10,735
Deposits ....................................... 76,710 74,709 80,272 80,263
Total borrowings ............................... - - - -
Total stockholders' equity ..................... 7,376 6,334 7,034 5,565
Operating Data:
Interest income ................................ $ 3,800 $ 4,491 $ 5,802 $ 5,476
Interest expense ............................... 1,978 2,921 3,723 3,364
................................................ ------- ------- ------- -------
Net interest income ............................ 1,822 1,570 2,079 2,112
Provision for loan losses ...................... 329 65 106 132
................................................ ------- ------- ------- -------
Net interest income after
provision for loan losses ................ 1,493 1,605 1,973 1,980
Noninterest income ............................. 343 517 647 626
Noninterest expense ............................ 1,280 1,398 1,863 1,790
------- ------- ------- -------
Income before income taxes ..................... 556 624 757 816
Income taxes ................................... 210 229 276 296
------- ------- ------- -------
Net Income ..................................... $ 346 $ 395 $ 481 $ 520
======= ======= ======= =======
Per Share Data:
Basic income per share ......................... $ 1.51 $ 1.94 $ 2.32 $ 2.60
Diluted income per share ....................... N/A N/A N/A N/A
Dividends per share ............................ - - - -
Performance Ratios (1):
Return on average assets (2) ................... 0.55% 0.64% 0.58% 0.75%
Return on average equity (3) ................... 6.42 9.16 7.63 9.80
Net interest margin (4) ........................ 3.02 2.67 2.60 3.22
Operating (noninterest) expense to
average total assets ....................... 2.02 2.26 2.24 2.60
Asset Quality Ratios:
Non-performing loans to net loans (5) .......... 1.99% 0.44% 1.33% 0.24%
Non-performing assets to total assets .......... 1.48 0.31 0.83 0.13
Allowance for loan losses to gross loans ....... 0.93 0.82 0.80 0.85
--------------------------------------
(1) Ratios have been annualized where applicable.
(2) Net income divided by average total assets.
(3) Net income divided by average total equity.
(4) Net interest income as a percentage of average interest-earning assets.
(5) Non-performing loans consist of loans accounted for on a nonaccrual basis,
loans greater than 90 days delinquent and restructured loans.
17
Summary Selected Pro Forma Combined Data
The following table shows selected financial information on a pro forma
combined basis giving effect to the merger as if the merger had become effective
at the end of the periods presented, in the case of balance sheet information,
and at the beginning of each period presented, in the case of income statement
information. The pro forma information reflects the purchase method of
accounting.
We anticipate that the merger will provide the combined company with
financial benefits that include reduced operating expenses and opportunity to
earn more revenue. The pro forma information, while helpful in illustrating the
financial characteristics of the new company under one set of assumptions, does
not reflect these benefits and, accordingly, does not attempt to predict or
suggest future results. It also does not necessarily reflect what the historical
results of the new company would have been had our companies been combined
during these periods.
You should read this summary pro forma information in conjunction with
the information under "Pro Forma Financial Information" and with the historical
information in this document on which it is based.
Nine Months
Ended Year Ended
September 30, 2002 December 31, 2001
-------------------- -------------------
(In thousands, except per share data)
Pro forma combined income statement data:
Interest income ........................................ $17,965 $24,762
Interest expense ....................................... 8,664 13,565
------- -------
Net interest income .................................... 9,301 11,197
Provision for loan losses .............................. 484 172
------- -------
Net interest income after provision for loan losses .... 8,817 11,025
Non-interest income .................................... 1,605 2,322
Non-interest expense ................................... 6,174 7,777
------- -------
Income before income taxes ............................. 4,248 5,570
Income tax provision ................................... 1,506 1,990
------- -------
Net income ............................................. $ 2,742 $ 3,580
======= =======
Pro forma per share data:
Basic net income ....................................... $ 0.98 $ 1.30
Diluted net income ..................................... 0.97 1.29
September 30, 2002
--------------------
(In thousands)
Pro forma combined balance sheet data:
Total assets ................................. $386,596
Loans receivable, net ........................ 275,144
Deposits ..................................... 292,635
Total stockholders' equity ................... 41,074
18
Market Price And Dividend Information
First Capital common stock is listed on The Nasdaq SmallCap Market
under the symbol "FCAP". The market for shares of Hometown common stock is
highly illiquid and the shares are neither traded on an established exchange nor
listed on The Nasdaq Stock Market. The table below sets forth, for the calendar
quarters indicated, the high and low sales prices of First Capital common stock
as reported on The Nasdaq SmallCap Market and the dividends per share declared
on the First Capital common stock in each such quarter. Hometown has never paid
any cash dividends on its common stock.
First Capital Common Stock
-----------------------------
High Low Dividends
---------- ------ -----------
2001
Quarter ended March 31, 2001 ....... $12.99 $ 9.81 $0.11
Quarter ended June 30, 2001 ........ 11.88 10.40 0.12
Quarter ended September 30, 2001 ... 14.61 11.39 0.12
Quarter ended December 31, 2001 .... 14.40 12.92 0.13
2002
Quarter ended March 31, 2002 ....... $15.20 $14.05 $0.13
Quarter ended June 30, 2002 ........ 17.00 15.10 0.13
Quarter ended September 30, 2002 ... 19.06 15.48 0.13
Quarter ended December 31, 2002 .... 20.33 17.25 0.13
2003
Quarter ended March 31, 2003
(through January 27, 2003) $22.19 $20.33 $ -
You should obtain current market quotations for First Capital common
stock as the market price of First Capital common stock will fluctuate between
the date of this document and the date on which the merger is completed, and
thereafter. You can get these quotations from a newspaper, on the Internet or by
calling your broker.
As of January 17, 2003, there were approximately 1,281 holders of
record of First Capital common stock. As of January 17, 2003, there were
approximately 249 holders of record of Hometown common stock. These numbers do
not reflect the number of persons or entities who may hold their stock in
nominee or "street" name through brokerage firms.
Following the merger, the declaration of dividends will be at the
discretion of First Capital's board of directors and will be determined after
consideration of various factors, including earnings, cash requirements, the
financial condition of First Capital, applicable state law and government
regulations and other factors deemed relevant by First Capital's board of
directors. Federal law limits the ability of First Harrison Bank to pay
dividends to First Capital. The merger agreement prohibits Hometown from paying
cash dividends on Hometown common stock pending consummation of the merger. See
"The Merger Agreement--Conduct of Business Before the Merger."
19
Recent Developments
On January 17, 2003, First Capital reported earnings for the fourth quarter
of 2002 and the year ended December 31, 2002:
(In thousands, except per share data)
Three Months Ended Year Ended
December 31, December 31,
2002 2001 2002 2001
-------- -------- -------- --------
(unaudited) (unaudited)
SUMMARY OF RESULTS OF OPERATIONS
Interest income.............................. $4,747 $4,770 $18,912 $18,960
Interest expense............................. 2,116 2,334 8,802 9,482
------ ------ ------- -------
Net interest income.......................... 2,631 3,436 10,110 9,118
Provision for loan losses.................... 150 30 305 66
------ ------ ------- -------
Net interest income after provision for loan
losses.................................... 2,481 2,406 9,805 9,052
Noninterest income........................... 465 404 1,728 1,706
Noninterest expense.......................... 1,627 1,521 6,522 5,945
------ ------ ------- -------
Income before federal income taxes........... 1,319 1,289 5,011 4,813
Federal income taxes......................... 467 459 1,763 1,714
------ ------ ------- -------
Net income................................... $ 852 $ 830 $ 3,248 $ 3,099
====== ====== ======= =======
Net income per share:
Basic..................................... $ 0.34 $ 0.34 $ 1.31 $ 1.26
Diluted................................... $ 0.34 $ 0.33 $ 1.29 $ 1.25
December 31, December 31,
2002 2001
----------- -----------
(unaudited)
SUMMARY OF CONSOLIDATED FINANCIAL POSITION
Total assets...................................... $308,553 $282,823
Loans receivable, net............................. 215,996 201,730
Deposits.......................................... 216,202 204,122
Stockholders' equity.............................. 36,330 33,481
First Capital's complete earnings announcement is included in the Current
Report on Form 8-K filed by First Capital on January 22, 2003 and incorporated
by reference in this proxy statement-prospectus. See "Where You Can Find More
Information," on page 72.
20
Special Meeting of Hometown Stockholders
Place, Date and Time
The meeting will be held at the main office of Hometown National Bank,
3131 Grant Line Road, New Albany, Indiana on March 13, 2003, at 6:00 p.m., local
time.
Purpose of the Meeting
The purpose of the meeting is to consider and vote on a proposal to
approve and adopt the merger agreement and to act on any other matters brought
before the meeting.
Who Can Vote at the Meeting; Record Date
You are entitled to vote your Hometown common stock if the records of
Hometown showed that you held your shares as of the close of business on January
17, 2003. As of the close of business on that date, a total of 229,550 shares of
Hometown common stock were outstanding. Each share of common stock has one vote.
If you are a beneficial owner of Hometown common stock held by a
broker, bank or other nominee (i.e., in "street name") and you want to vote your
shares of Hometown common stock in person at the meeting, you will have to get a
written proxy in your name from the broker, bank or other nominee who holds your
shares.
Quorum and Vote Required
Quorum. The special meeting will be held if a majority of the
outstanding shares of common stock entitled to vote is represented in person or
by proxy at the meeting. If you return valid proxy instructions or attend the
meeting in person, your shares will be counted for purposes of determining
whether there is a quorum, even if you abstain from voting. Broker non-votes
also will be counted for purposes for determining the existence of a quorum. A
broker non-vote occurs when a broker, bank or other nominee holding shares for a
beneficial owner does not vote on a particular proposal because the nominee does
not have discretionary voting power with respect to that item and has not
received voting instructions from the beneficial owner. Under applicable rules,
brokers, banks and other nominees may not exercise their voting discretion on
the proposal to approve and adopt the merger agreement and, for this reason, may
not vote shares held for beneficial owners without specific instructions from
the beneficial owners.
Vote Required. Approval and adoption of the merger agreement requires
the affirmative vote of the holders of at least a majority of the outstanding
shares of Hometown common stock entitled to vote at the meeting. Failure to
return a properly executed proxy card or to vote in person will have the same
effect as a vote against the merger agreement. Abstentions and broker non-votes
will have the same effect as a vote against the merger agreement.
Shares Held by Hometown Officers and Directors and by First Capital
As of January 17, 2003, directors and executive officers of
Hometown beneficially owned 88,433 shares of Hometown common stock. This equals
38.52% of the outstanding shares of Hometown common stock. As of the same date,
First Capital and its directors and executive officers beneficially owned no
shares of Hometown common stock. All 11 Hometown directors entered into voting
agreements with First Capital under which they have agreed to vote an aggregate
of 61,702 shares of Hometown common stock owned by them in favor of the proposal
to approve the merger agreement.
21
Voting by Proxy
The board of directors of Hometown is sending you this document for the
purpose of requesting that you allow your shares of Hometown common stock to be
represented at the special meeting by the persons named in the enclosed proxy
card. All shares of Hometown common stock represented at the meeting by properly
executed proxies will be voted in accordance with the instructions indicated on
the proxy card. If you sign and return a proxy card without giving voting
instructions, your shares will be voted as recommended by Hometown's board of
directors. Hometown's board of directors unanimously recommends a vote "FOR"
approval of the merger agreement.
If any matters not described in this document are properly presented at
the special meeting, the persons named in the proxy card will use their own
judgment to determine how to vote your shares. This includes a motion to adjourn
or postpone the meeting in order to solicit additional proxies. However, no
proxy voted against the proposal to approve the merger agreement will be voted
in favor of an adjournment or postponement to solicit additional votes in favor
of the merger agreement. Hometown does not know of any other matters to be
presented at the meeting.
If your Hometown common stock is held in street name, you will receive
instructions from your broker, bank or other nominee that you must follow in
order to have your shares voted. Please see the instruction form that
accompanies this document.
Revocability of Proxies
You may revoke your proxy at any time before the vote is taken at the
meeting. To revoke your proxy you must either advise the Secretary of Hometown
in writing before your common stock has been voted at the special meeting,
deliver proxy instructions with a later date, or attend the meeting and vote
your shares in person. Attendance at the special meeting will not in itself
constitute revocation of your proxy.
Solicitation of Proxies
Hometown will pay the cost of this proxy solicitation. In addition to
soliciting proxies by mail, directors, officers and employees of Hometown may
solicit proxies personally and by telephone. None of these persons will receive
additional or special compensation for soliciting proxies. Hometown will, upon
request, reimburse brokers, banks and other nominees for their expenses in
sending proxy materials to their customers who are beneficial owners and
obtaining their voting instructions.
22
Ownership of Hometown Common Stock
The following table provides information as of January 17, 2003 with
respect to persons known to Hometown to be the beneficial owners of more than 5%
of Hometown's outstanding common stock. A person may be considered to
beneficially own any shares of common stock over which he or she has, directly
or indirectly, sole or shared voting or investing power.
Percent of
Number of Common Stock
Name and Address Shares Owned Outstanding
----------------------------- -------------- -------------
Lucas Farms 19,000 8.28%
1210 S. Westwood Dr.
Scottsburg, IN 47172
Thomas D. Lumley 12,427 5.41%
3131 Grant Line Road
New Albany, IN 47150
The following table provides information about the shares of Hometown
common stock that may be considered to be owned by each director and by all
directors and executive officers of Hometown as a group as of January 17, 2003.
Unless otherwise indicated, each of the named individuals has sole voting power
and sole investment power with respect to the shares shown.
Number of Percent of Common
Name Shares Owned Stock Outstanding
------------------------------------------------ -------------- -------------------
Stephen L. Banet 9,596 4.18%
Carl F. Booth 10,281(1) 4.48%
C. Ronald Clark 3,883 1.69%
F. Wendell Gooch 10,060(2) 4.38%
Robert E. Kleehamer 9,100(3) 3.97%
Patrick N. Lucas 800(4) *
Thomas D. Lumley 12,427(5) 5.41%
Roland Nobis 11,282(6) 4.92%
Michael J. Pattison 10,250 4.47%
Anne M. Ragains 8,524 3.71%
Craig W. Stanley 2,230 *
All directors and executive officers as a group 88,433 38.52%
(11 persons)
--------------------------------
*Less than 1% of shares outstanding.
(1) Includes 5,141, shares held by his spouse.
(2) Includes 8,000 shares held by his spouse.
(3) Includes 154 shares held by his spouse and 100 shares held by his daughter.
(4) Includes 300 shares held by his children but excludes 19,000 shares held by
Lucas Farms, in which Mr. Lucas is a partner.
(5) Includes 2,000 shares held by WTS, Inc.
(6) Includes 9,082 shares held by RCGC-1, LP.
23
The Merger
The following discussion of the merger is qualified by reference to the
merger agreement, which is attached to this proxy statement-prospectus as
Appendix A. You should read the entire merger agreement carefully. It is the
legal document that governs the merger.
The Parties to the Merger
First Capital, Inc. First Capital is the savings and loan holding
company for First Harrison Bank, a federally chartered savings bank. First
Harrison, which conducts its operations through its nine locations in Southern
Indiana, is a community-oriented financial institution offering traditional
financial services primarily to residents of Harrison County, Indiana, and
contiguous counties. First Harrison's primary business is attracting deposits
from the general public and using those funds to originate one-to-four family
residential mortgage loans. First Harrison also originates multi-family and
commercial real estate loans primarily secured by properties located in Southern
Indiana. To a lesser extent, First Harrison originates commercial and consumer
loans. First Harrison's wholly-owned subsidiary, First Harrison Financial
Services, Inc., sells property and casualty insurance and non-deposit investment
products.
Certain information relating to executive compensation, benefit plans,
voting securities and the principal holders thereof, certain relationships and
related transactions and other matters related to First Capital is incorporated
by reference or set forth in First Capital's annual report on Form 10-KSB for
the year ended December 31, 2001 and quarterly reports for the three months
ended March 31, 2002, June 30, 2002 and September 30, 2002, which are
incorporated herein by reference. Hometown stockholders desiring copies of such
documents may contact First Capital at its address or telephone number indicated
under "Where You Can Find More Information" beginning on page 72.
For financial statements of First Capital and a discussion of First
Capital's recent results of operations, see First Capital's 2001 annual report
to stockholders and Quarterly Report on Form 10-QSB for the quarter ended
September 30, 2002, both of which accompany this document as Appendix E.
Hometown Bancshares, Inc. Hometown is an Indiana corporation and a
one-bank holding company, regulated by the Federal Reserve. Hometown has no
subsidiaries other than Hometown National.
Hometown National is a national bank chartered in 1996. Hometown
conducts its business from its headquarters in New Albany, Indiana and a branch
office located in Floyds Knobs, Indiana. Hometown National is a full service
commercial bank which offers a full range of banking products and services,
including specialized products and services such as loans to small to
moderate-size businesses and developers, farmers, consumers, students and
community and economic development projects. Hometown National operates with
approximately 27 full time employees and has no subsidiaries.
For information on Hometown's business and financial statements and a
discussion of Hometown's recent results of operations, see Appendix D.
Form of the Merger
The boards of directors of Hometown and First Capital each have
unanimously approved a merger agreement that provides for the merger of Hometown
with and into First Capital. First Capital will survive the merger. Upon
completion of the merger, each share of Hometown common stock will
24
be converted into the right to receive, at the election of the holder, either
$46.50 in cash or a number of shares of First Capital common stock established
by a formula in the merger agreement. The common stock of First Capital will
continue to trade on The Nasdaq SmallCap Market under the symbol "FCAP" after
completion of the merger.
Conversion of Hometown Common Stock
When the merger becomes effective, each share of Hometown common stock
issued and outstanding immediately prior to the completion of the merger will
automatically be converted into the right to receive, at the holder's election,
either (a) $46.50 in cash without interest or (b) shares of First Capital
common stock and cash instead of fractional shares. A Hometown stockholder's
receipt of either cash and/or stock, however, is subject to the allocation and
proration procedures as well as other provisions in the merger agreement. See
"-Cash or Stock Election."
The number of shares of First Capital common stock into which each
Hometown share will be exchanged will be based on the price of First Capital
common stock over a measurement period prior to the closing. The measurement
period will consist of the twenty trading days ending on the third business day
prior to the closing date. The number of shares of First Capital common stock to
be exchanged for each share of Hometown common stock will be determined as
follows:
If the average closing price of then the number of shares of First Capital
First Capital common stock during common stock that will be exchanged for each
the measurement period is: share of Hometown common stock will be:
.. $14.45 or less . a number of shares of First Capital common
stock equal to $39.52 divided by the
average closing price.
.. between $14.45 and $19.55 . 2.735 shares of First Capital common
stock.
.. $19.55 or more . a number of shares of First Capital common
stock equal to $53.47 divided by the
average closing price.
25
The following table illustrates the calculation of the exchange ratio and
the value of the shares of First Capital common stock that you may receive in
the merger. On January 27, 2003, the closing price of First Capital common stock
was $22.19. We can give you no assurance as to what the market price of First
Capital common stock will be if and when the merger is completed, and you are
advised to obtain current market quotations for First Capital common stock. In
addition, because the tax consequences of receiving cash will differ from the
tax consequences of receiving First Capital common stock, you should carefully
read the information included below under "--Material Federal Income Tax
Consequences of the Merger."
Average Closing Value of First
Price of First Capital Capital
Common Stock During Resulting Common Stock
Measurement Period Exchange Ratio to be Received (1)
---------------------- -------------- --------------------
$13.00 3.040 $39.52
13.25 2.983 39.52
13.50 2.927 39.52
13.75 2.874 39.52
14.00 2.823 39.52
14.25 2.773 39.52
----------------------------------------------------------
14.45 2.735 39.52 Merger price limitation
----------------------------------------------------------
14.50 2.735 39.66
14.75 2.735 40.34
15.00 2.735 41.03
15.25 2.735 41.71
15.50 2.735 42.39
15.75 2.735 43.08
16.00 2.735 43.76
16.25 2.735 44.44
16.50 2.735 45.13
16.75 2.735 45.81
17.00 2.735 46.50
17.25 2.735 47.18
17.50 2.735 47.86
17.75 2.735 48.55
18.00 2.735 49.23
18.25 2.735 49.91
18.50 2.735 50.60
18.75 2.735 51.28
19.00 2.735 51.97
19.25 2.735 52.65
19.50 2.735 53.33
----------------------------------------------------------
19.55 2.735 53.47 Merger price limitation
----------------------------------------------------------
19.75 2.707 53.47
20.00 2.674 53.47
20.25 2.640 53.47
20.50 2.608 53.47
20.75 2.577 53.47
21.00 2.546 53.47
21.25 2.516 53.47
21.50 2.487 53.47
21.75 2.458 53.47
22.00 2.430 53.47
22.25 2.403 53.47
22.50 2.376 53.47
22.75 2.350 53.47
23.00 2.325 53.47
(1) Calculated by multiplying the average closing price of First Capital
common stock during the measurement period by the resulting exchange
ratio. The actual value of the shares at the time First Capital stock
certificates are delivered or the shares become available may be more
or less than the amounts shown due to fluctuations in the market price
of First Capital common stock.
26
Cash or Stock Election
Under the terms of the merger agreement, Hometown stockholders may elect to
convert their shares into cash, First Capital common stock or a mixture of cash
and First Capital common stock. All elections of Hometown stockholders are
further subject to the allocation and proration procedures described in the
merger agreement. These procedures provide that the number of shares of Hometown
common stock to be converted into First Capital common stock in the merger must
be 50% of the total number of shares of Hometown common stock issued and
outstanding on the date of the merger. We are not making any recommendation as
to whether Hometown stockholders should elect to receive cash or First Capital
common stock in the merger. Each holder of Hometown common stock must make his
or her own decision with respect to such election.
It is unlikely that elections will be made in the exact proportions
provided for in the merger agreement. As a result, the merger agreement
describes procedures to be followed if Hometown stockholders in the aggregate
elect to receive more or less of the First Capital common stock than First
Capital has agreed to issue. These procedures are summarized below:
. If Stock Is Oversubscribed: If Hometown stockholders elect to receive
more First Capital common stock than First Capital has agreed to issue
in the merger, then all Hometown stockholders who have elected to
receive cash or who have made no election will receive cash for their
Hometown shares and all stockholders who elected to receive First
Capital common stock will receive a pro rata portion of the available
First Capital shares plus cash for those shares not converted into
First Capital common stock.
. If Stock Is Undersubscribed: If Hometown stockholders elect to receive
fewer shares of First Capital common stock than First Capital has
agreed to issue in the merger, then all Hometown stockholders who have
elected to receive First Capital common stock will receive First
Capital common stock and those stockholders who elected to receive
cash or who have made no election will be treated in the following
manner:
. If the number of shares held by Hometown stockholders who have
made no election is sufficient to make up the shortfall in the
number of First Capital shares that First Capital is required to
issue, then all Hometown stockholders who elected cash will
receive cash, and those stockholders who made no election will
receive both cash and First Capital common stock in whatever
proportion is necessary to make up the shortfall.
. If the number of shares held by Hometown stockholders who have
made no election is insufficient to make up the shortfall, then
all Hometown stockholders who made no election will receive First
Capital common stock and those Hometown stockholders who elected
to receive cash will receive cash and First Capital common stock
in whatever proportion is necessary to make up the shortfall.
No guarantee can be made that you will receive the amounts of cash and/or
stock you elect. As a result of the allocation procedures and other limitations
outlined in this document and in the merger agreement, you may receive First
Capital common stock or cash in amounts that vary from the amounts you elect to
receive.
27
Election Procedures; Surrender of Stock Certificates
An election form is being mailed separately from this proxy
statement-prospectus to holders of shares of Hometown common stock on or about
the date this proxy statement-prospectus is being mailed. Each election form
entitles the holder of the Hometown common stock to elect to receive cash, First
Capital common stock, or a combination of cash and stock, or make no election
with respect to the merger consideration you wish to receive.
To make an effective election, you must submit a properly completed
election form, along with your Hometown stock certificates representing all
shares of Hometown common stock covered by the election form (or an appropriate
guarantee of delivery) to Registrar and Transfer Company on or before 5:00 p.m.,
New York City time, on March 10, 2003. Registrar and Transfer Company will act
as exchange agent in the merger and in that role will process the exchange of
Hometown stock certificates for cash and/or First Capital common stock. Shortly
after the merger, the exchange agent will allocate cash and stock among Hometown
stockholders, consistent with their elections and the allocation and proration
procedures. If you do not submit an election form, you will receive instructions
from the exchange agent on where to surrender your Hometown stock certificates
after the merger is completed. In any event, do not forward your Hometown stock
certificates with your proxy cards.
You may change your election at any time prior to the election deadline by
written notice accompanied by a properly completed and signed later dated
election form received by the exchange agent prior to the election deadline or
by withdrawal of your stock certificates by written notice prior to the election
deadline. All elections will be revoked automatically if the merger agreement is
terminated. If you have a preference for receiving either First Capital stock
and/or cash for your Hometown stock, you should complete and return the election
form. If you do not make an election, you will be allocated First Capital common
stock and/or cash depending on the elections made by other stockholders.
If the merger is not completed within 15 days following the election
deadline, any Hometown stockholder who made a timely election may change or
revoke his or her election during the period beginning on the 16/th/ day
following the election deadline and ending on the third business day prior to
the closing date.
We make no recommendation as to whether you should elect to receive cash,
stock or a combination of cash and stock in the merger. You must make your own
decision with respect to your election.
If certificates for Hometown common stock are not immediately available or
you are unable to send the election form and other required documents to the
exchange agent prior to the election deadline, Hometown shares may be properly
exchanged, and an election will be effective, if:
. such exchanges are made by or through a member firm of a registered
national securities exchange or of the National Association of
Securities Dealers, Inc., or by a commercial bank or trust company
having an office, branch or agency in the United States;
. the exchange agent receives, prior to the election deadline, a
properly completed and duly executed notice of guaranteed delivery
substantially in the form provided with the election form (delivered
by hand, mail, telegram, telex or facsimile transmission); and
28
. the exchange agent receives, within three business days after the
election deadline, the certificates for all exchanged Hometown shares,
or confirmation of the delivery of all such certificates into the
exchange agent's account with The Depository Trust Company in
accordance with the proper procedures for such transfer, together with
a properly completed and duly executed election form and any other
documents required by the election form.
Hometown stockholders who do not submit a properly completed election form
or revoke their election form prior to the election deadline will have their
shares of Hometown common stock designated as non-election shares. Hometown
stock certificates represented by elections that have been revoked will be
promptly returned without charge to the Hometown stockholder revoking the
election upon written request.
After the completion of the merger, the exchange agent will mail to
Hometown stockholders who do not submit election forms or who have revoked such
forms a letter of transmittal, together with instructions for the exchange of
their Hometown common stock certificates for the merger consideration. Until you
surrender your Hometown stock certificates for exchange after completion of the
merger, you will not be paid dividends or other distributions declared after the
merger with respect to any First Capital common stock into which your Hometown
shares have been converted. When you surrender your Hometown stock certificates,
First Capital will pay any unpaid dividends or other distributions, without
interest. After the completion of the merger, there will be no further transfers
of Hometown common stock. Hometown stock certificates presented for transfer
after the completion of the merger will be canceled and exchanged for the merger
consideration.
If your Hometown stock certificates have been either lost, stolen or
destroyed, you will have to prove your ownership of these certificates and that
they were lost, stolen or destroyed before you receive any consideration for
your shares. Upon request, our transfer agent, Registrar and Transfer Company,
will send you instructions on how to provide evidence of ownership.
Material Federal Income Tax Consequences of the Merger
The following discussion addresses the material United States federal
income tax consequences of the merger to holders of Hometown common stock. This
discussion applies only to Hometown stockholders that hold their Hometown common
stock as a capital asset within the meaning of Section 1221 of the Internal
Revenue Code. Further, this discussion does not address all aspects of United
States federal taxation that may be relevant to a particular stockholder in
light of its personal circumstances or to stockholders subject to special
treatment under the United States federal income tax laws including: banks or
trusts; tax-exempt organizations; insurance companies; dealers in securities or
foreign currency; traders in securities who elect to apply a mark-to-market
method of accounting; pass-through entities and investors in such entities;
foreign persons; and stockholders who hold Hometown common stock as part of a
hedge, straddle, constructive sale, conversion transaction or other integrated
instrument.
This discussion is based on the Internal Revenue Code, Treasury
regulations, administrative rulings and judicial decisions, all as in effect as
of the date of this proxy statement-prospectus and all of which are subject to
change (possibly with retroactive effect) and to differing interpretations. Tax
considerations under state, local and foreign laws are not addressed in this
document. The tax consequences of the merger to you may vary depending upon your
particular circumstances. Therefore, you should consult your tax advisor to
determine the particular tax consequences of the merger to you, including those
relating to state and/or local taxes.
29
It is a condition to the obligations of First Capital and Hometown to
complete the merger that each of First Capital and Hometown receive an opinion
of Muldoon Murphy & Faucette LLP to the effect that (1) the merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code, (2) First Capital and Hometown
will each be a party to that reorganization within the meaning of Section 368(b)
of the Internal Revenue Code, and (3) except to the extent of any cash received
in lieu of a fractional share interest in First Capital common stock, no gain or
loss will be recognized by stockholders of Hometown who exchange their Hometown
common stock for First Capital common stock in the merger.
In rendering its opinions, counsel may require and rely upon
representations contained in letters and certificates to be received from
officers of First Capital, Hometown and others. This tax opinion will not be
binding on the Internal Revenue Service or the courts, and we do not intend to
request any ruling from the Internal Revenue Service with respect to the federal
income tax consequences of the merger.
Although the merger agreement allows both of us to waive the condition that
we receive a tax opinion from Muldoon Murphy & Faucette LLP, we currently do not
anticipate doing so.
The federal income tax consequences of the merger to you will depend
primarily on whether you exchange your Hometown common stock for solely First
Capital common stock (except for cash received instead of a fractional share of
First Capital common stock), solely cash or a combination of stock and cash.
Regardless of whether you elect to receive First Capital common stock, cash or a
combination of stock and cash, the federal income tax consequences will depend
on the actual merger consideration that you receive.
Exchange Solely for First Capital Common Stock. No gain or loss will be
recognized by a Hometown stockholder who receives solely shares of First Capital
common stock (except for cash received in lieu of fractional shares, as
discussed below) in exchange for all of his or her shares of Hometown common
stock. The tax basis of the shares of First Capital common stock received by a
Hometown stockholder in such exchange will be equal (except for the basis
attributable to any fractional shares of First Capital common stock, as
discussed below) to the basis of the Hometown common stock surrendered in
exchange for the First Capital common stock. The holding period of the First
Capital common stock received will include the holding period of shares of
Hometown common stock surrendered in exchange for the First Capital common
stock, provided that such shares were held as capital assets of the Hometown
stockholder at the effective time of the merger.
Exchange Solely for Cash. A Hometown stockholder who receives solely cash
in exchange for all of his or her shares of Hometown common stock (and is not
treated as constructively owning First Capital common stock after the merger
under the circumstances referred to below under "--Possible Dividend Treatment")
will recognize gain or loss for federal income tax purposes equal to the
difference between the cash received and such stockholder's tax basis in the
Hometown common stock surrendered in exchange for the cash. Such gain or loss
will be a capital gain or loss, provided that such shares were held as capital
assets of the Hometown stockholder at the effective time of the merger. Such
gain or loss will be long-term capital gain or loss if the Hometown
stockholder's holding period is more than one year. The Internal Revenue Code
contains limitations on the extent to which a taxpayer may deduct capital losses
from ordinary income.
Exchange for First Capital Common Stock and Cash. A Hometown stockholder
who receives a combination of First Capital common stock and cash in exchange
for his or her Hometown common stock will not be permitted to recognize any loss
for federal income tax purposes. Such a
30
stockholder will recognize gain, if any, equal to the lesser of (1) the amount
of cash received or (2) the amount of gain "realized" in the transaction. The
amount of gain a Hometown stockholder "realizes" will equal the amount by which
(a) the cash plus the fair market value at the effective time of the merger of
the First Capital common stock received exceeds (b) the stockholders' basis in
the Hometown common stock to be surrendered in the exchange for the cash and
First Capital common stock. Any recognized gain could be taxed as a capital gain
or a dividend, as described below. The tax basis of the shares of First Capital
common stock received by such Hometown stockholder will be the same as the basis
of the shares of Hometown common stock surrendered in exchange for the shares of
First Capital common stock, adjusted as provided in Section 358(a) of the
Internal Revenue Code for the cash received in exchange for such shares of
Hometown common stock. The holding period for shares of First Capital common
stock received by such Hometown stockholder will include such stockholder's
holding period for the Hometown common stock surrendered in exchange for the
First Capital common stock, provided that such shares were held as capital
assets of the stockholder at the effective time of the merger.
A Hometown stockholder's federal income tax consequences will also depend
on whether his or her shares of Hometown common stock were purchased at
different times at different prices. If they were, the Hometown stockholder
could realize gain with respect to some of the shares of Hometown common stock
and loss with respect to other shares. Such Hometown stockholder would have to
recognize such gain to the extent such stockholder receives cash with respect to
those shares in which the stockholder's adjusted tax basis is less than the
amount of cash plus the fair market value at the effective time of the merger of
the First Capital common stock received, but could not recognize loss with
respect to those shares in which the Hometown stockholder's adjusted tax basis
is greater than the amount of cash plus the fair market value at the effective
time of the merger of the First Capital common stock received. Any disallowed
loss would be included in the adjusted basis of the First Capital common stock.
Such a Hometown stockholder is urged to consult his or her own tax advisor
respecting the tax consequences of the merger to that stockholder.
Possible Dividend Treatment. In certain circumstances, a Hometown
stockholder who receives solely cash or a combination of cash and First Capital
common stock in the merger may receive ordinary income, rather than capital
gain, treatment on all or a portion of the gain recognized by that stockholder
if the receipt of cash "has the effect of the distribution of a dividend." The
determination of whether a cash payment has such effect is based on a comparison
of the Hometown stockholder's proportionate interest in First Capital after the
merger with the proportionate interest the stockholder would have had if the
stockholder had received solely First Capital common stock in the merger. This
could happen because of your purchase (or the purchase by a family member) of
additional First Capital stock or a repurchase of shares by First Capital. For
purposes of this comparison, the Hometown stockholder may be deemed to
constructively own shares of First Capital common stock held by certain members
of the stockholder's family or certain entities in which the stockholder has an
ownership or beneficial interest and certain stock options may be aggregated
with the stockholder's shares of First Capital common stock. The amount of the
cash payment that may be treated as a dividend is limited to the stockholder's
ratable share of the accumulated earnings and profits of Hometown at the
effective time of the merger. Any gain that is not treated as a dividend will be
taxed as a capital gain, provided that the stockholder's shares were held as
capital assets at the effective time of the merger. Because the determination of
whether a cash payment will be treated as having the effect of a dividend
depends primarily upon the facts and circumstances of each Hometown stockholder,
stockholders are urged to consult their own tax advisors regarding the tax
treatment of any cash received in the merger.
Cash in Lieu of Fractional Shares. A Hometown stockholder who holds
Hometown common stock as a capital asset and who receives in the merger, in
exchange for such stock, solely First
31
Capital common stock and cash in lieu of a fractional share interest in First
Capital common stock will be treated as having received such cash in full
payment for such fractional share of stock and as capital gain or loss,
notwithstanding the dividend rules discussed above.
Background of the Merger
From time to time Hometown's board has considered various strategies and
alternatives to develop and expand its banking business. While Hometown has been
operating profitably since 1998, the board of directors decided the organization
should seek to raise additional capital to support its growth, given applicable
regulatory capital requirements. In 2001, Hometown commenced a community
offering of its common stock, seeking to raise up to $3,500,000 by offering
100,000 shares at a price of $35.00 per share. That offering ended in November
2001, with the sale of only 29,550 shares ($1,034,250 proceeds, before expenses,
in the aggregate).
Unable to raise a significant amount of capital in the stock offering,
the board of directors and management began to investigate other strategic
opportunities available to enhance the resources available to Hometown to expand
its banking operations, and to enhance stockholder value, including a strategic
combination. To that end, by a letter agreement dated May 1, 2002, Hometown
engaged David A. Noyes & Company to act as its financial advisor if a merger or
acquisition were to take place with a designated buyer. Prior to its engagement,
David A. Noyes had surveyed recent financial institution transactions in
Indiana, and, with input from Hometown's senior management, profiled the type of
financial institution likely to make a good "fit" with Hometown. Management and
David A. Noyes identified two bank holding companies (other than First Capital)
as potential strategic partners. David A. Noyes contacted these two bank holding
companies to determine their interest in engaging in a business combination.
With the advice and assistance of John Reed of David A. Noyes, discussions with
them followed. On July 10 and July 16, 2002, respectively, these two bank
holding companies submitted indications of their interest in engaging in a
business combination with Hometown. At a meeting held on July 18, 2002, John
Reed gave a presentation to the Hometown board concerning these bank holding
companies and their indications of interest, and the board of directors
discussed the status of the negotiations and the bank holding companies' due
diligence investigations of Hometown.
On July 18, 2002, Hometown's senior management also contacted First
Capital's senior management about its potential interest in engaging in a
business combination. In the past, senior management of First Capital had
expressed an interest to senior management of Hometown in pursuing discussions
about a possible transaction if Hometown's board ever decided to pursue that
strategy. During the conversation on July 18, First Capital's senior management
immediately expressed a strong interest in pursuing negotiations. On July 22,
2002, First Capital sent Hometown a proposed confidentiality letter so that
confidential negotiations and due diligence investigations could proceed.
The next meeting of the Hometown board was held on July 23, 2002, at
which the board of directors continued its consideration of the proposals
presented by the two bank holding companies. At that meeting the board of
directors authorized management to proceed with negotiations of a definitive
agreement with one of the bank holding companies.
At the July 23 board meeting, the directors also discussed the interest
First Capital had expressed about negotiating a possible transaction with
Hometown. The Hometown board of directors also authorized management to proceed
with these negotiations with First Capital.
Hometown executed First Capital's proposed confidentiality agreement on
August 7, 2002, and then provided First Capital and its advisors access to
Hometown's records to conduct a due diligence investigation. First Capital and
its advisors conducted due diligence on Hometown during the week of
32
August 12, 2002. At a meeting of the Hometown board of directors held on August
15, 2002, management updated directors about the status of the negotiations, and
the Hometown board of directors authorized the engagement of Wyatt, Tarrant &
Combs, LLP as legal counsel to represent Hometown in connection with a possible
transaction.
On August 22, 2002, First Capital presented management of Hometown with a
proposed merger agreement, and on August 27, 2002, Hometown's counsel received a
proposed merger agreement from the bank holding company with which Hometown
management had begun negotiations. Both proposals would have afforded Hometown
stockholders the opportunity to elect to receive cash or shares in the merger
transaction, but the price offered by First Capital was more than that offered
by the bank holding company.
Following negotiations between Hometown's financial advisor and First
Capital's financial advisor, First Capital presented a revised merger agreement
on August 30, 2002. When, on August 30, 2002, Hometown's financial advisor and
C. Ronald Clark, Hometown's Chairman and Chief Executive Officer, contacted the
bank holding company that had presented a merger proposal, it expressed no
interest in modifying its proposal or increasing its offer.
During the first weeks of September, management of Hometown, with the
advice of Hometown's financial and legal advisors, analyzed First Capital's
proposal, and discussed it with individual directors. During this time period,
Hometown's advisors negotiated directly with First Capital's advisors concerning
the detailed terms of the merger proposal, and the manner in which the share
exchange ratio was computed, and First Capital agreed to revisions to the
definitive agreement.
Hometown's board of directors considered the merger agreement with First
Capital at a meeting held on September 19, 2002. At that meeting, Hometown's
financial advisor made a presentation concerning First Capital, the financial
terms and conditions of its proposal, and how it compared with the other
proposals Hometown received, as well as other recent financial institution
transactions in the region. Hometown's counsel led the directors through a
discussion of the terms and conditions contained in the definitive agreements
First Capital had prepared. The directors discussed the mix of consideration
being offered by First Capital, the tax deferral available to Hometown
stockholders who elect to receive shares of First Capital in the merger, the
liquidity and market for First Capital's shares, and the impact that changes in
the trading value of First Capital shares while the transaction was pending
could have on the value received by Hometown stockholders. The directors also
considered the conditions of the proposal and the likelihood that they could be
satisfied, the regulatory approvals required and the impact the merger
transaction would have on Hometown National Bank and its employees and
customers. They compared First Capital's proposal to the other proposal
received, recognizing that they could not seek out any other proposals if the
agreement with First Capital was signed and that, under certain circumstances,
Hometown could be required to pay First Capital a termination fee if another
acquisition proposal was made.
On September 24, 2002, John Reed met with senior management of First
Capital and was provided access to records of First Capital to conduct a due
diligence investigation.
The directors continued their deliberations concerning First Capital's
proposal at a meeting held on September 25, 2002. At that time, John Reed
summarized the results of his due diligence meeting at First Capital. Mr. Reed
delivered the opinion of David A. Noyes that the merger transaction proposed by
First Capital was fair to the stockholders of Hometown from a financial point of
view, and Hometown's counsel highlighted changes that had been made to the
definitive agreements in response to Hometown's comments. Among the matters
discussed were First Capital's strategic plans and prospects for expansion, the
likelihood (or unlikelihood) of finding a more favorable transaction with an
attractive
33
strategic partner, and the prospects available to Hometown's banking business,
and its stockholders, if Hometown were to remain independent, versus those
available if it were to merge with First Capital as proposed. Following
discussion, and questions by the board of directors to Hometown's management and
its financial and legal advisors, Hometown's board of directors approved the
merger transaction with First Capital and its recommendation to stockholders,
and authorized the execution of the merger agreement.
Reasons for the Merger
Hometown's board of directors has approved the merger agreement and
unanimously recommends that Hometown stockholders vote "FOR" the approval of the
merger agreement.
Hometown's board of directors has determined that the merger and the merger
agreement are fair to, and in the best interests of, Hometown and its
stockholders. In approving the merger agreement, Hometown's board of directors
consulted with legal counsel as to its legal duties and the terms of the merger
agreement and with its financial advisor with respect to the financial aspects
and fairness of the transaction from a financial point of view. In arriving at
its determination, Hometown's board of directors also considered a number of
factors, including the following:
.. Information concerning the businesses, earnings, operations, financial
condition and prospects of each of Hometown and First Capital. The Hometown
board of directors took into account the results of Hometown's financial
advisor's due diligence review of First Capital.
.. The opinion rendered by David A. Noyes, as financial advisor to Hometown,
that the merger consideration is fair, from a financial standpoint, to
Hometown stockholders (see "-Opinion of Hometown's Financial Advisor").
.. The terms of the merger agreement and the structure of the merger,
including the fact that Hometown stockholders will have the opportunity to
elect to receive either cash, First Capital common stock, or both, in
exchange for their shares and that the merger is intended to qualify as a
transaction of a type that is generally tax-free for U.S. federal income
tax purposes for stockholders who exchange their Hometown shares for First
Capital shares. Hometown's board also considered the impact of the proposed
transaction on the interest that any other institution might have in a
business combination with Hometown.
.. The fact that the financial terms of the merger agreement provide that the
share exchange ratio will automatically adjust if the price of First
Capital common stock falls below $14.45 per share, so that a Hometown
stockholder who receives shares of First Capital common stock in the merger
will receive shares having an average trading value of at least $39.52 for
each share of Hometown common stock.
.. The review conducted by the Hometown board of directors of the strategic
options available to Hometown and the assessment of the Hometown board of
directors that none of those options presented superior opportunities.
.. The apparent capacity of First Capital to pay the merger consideration
without third party financing.
.. First Capital's statement that it intended to retain substantially all of
Hometown's employees, subject to its staffing needs.
34
.. The fact that, although there has not historically been a high trading
volume, First Capital common stock is quoted on The Nasdaq SmallCap Market,
in comparison to Hometown common stock, for which no established trading
market exists.
.. Hometown stockholders who receive First Capital common stock will begin to
receive dividends, based on First Capital's current dividend rate.
.. The current and prospective regulatory environment facing Hometown, First
Capital and the financial services industry generally.
.. The Hometown board of directors' assessment that Hometown would better
serve the convenience and needs of its customers and the communities that
it serves through affiliation with a financial institution such as First
Capital that had a stronger capital base, larger infrastructure, and wider
branch network to support future growth.
.. The Hometown board of directors' belief that, while no assurances could be
given, the level of execution risk in the merger appeared to be low.
.. The likelihood of the Office of Thrift Supervision approving the merger.
.. The likelihood of Hometown stockholders approving the merger.
The discussion of the information and factors considered by the Hometown
board of directors is not intended to be exhaustive, but includes all material
factors considered by the Hometown board of directors. In reaching its
determination to approve and recommend the merger, the Hometown board of
directors did not assign any specific or relative weights to any of the
foregoing factors, and individual directors may have weighed factors
differently.
Opinion of Hometown's Financial Advisor
At a meeting of the Hometown board of directors on September 25, 2002,
during which the terms of the proposed merger were discussed and considered,
David A. Noyes rendered its opinion to the Hometown board that, as of that date,
the exchange ratio and the cash consideration were fair to the Hometown
stockholders from a financial point of view. David A. Noyes has updated its
opinion as of the date of this proxy statement-prospectus. The full text of
David A. Noyes' updated opinion is included as Appendix B to this proxy
statement-prospectus.
David A. Noyes, as part of its investment banking business, is regularly
engaged in the valuation of commercial bank and thrift securities in connection
with mergers and acquisitions, negotiated underwritings and valuations for
estate, corporate and other purposes. As specialists in the securities of
commercial banking and thrift organizations, David A. Noyes has extensive
experience in, and knowledge of, the commercial banking and thrift industries
and its participants.
In connection with its opinion, David A. Noyes reviewed, among other
things:
. the merger agreement;
. annual reports on Form Y-6 of Hometown;
. annual reports on Form 10-KSB of First Capital covering the three
years ended December 31, 2001;
35
. quarterly reports on Form 10-QSB of First Capital; and
. certain other communications from Hometown and First Capital to their
respective stockholders.
David A. Noyes also held discussions with members of the senior management
of Hometown and First Capital regarding the strategic rationale for, and the
potential benefits of, the transaction contemplated by the merger agreement and
the past and current business operations, financial condition and future
prospects of their respective companies. In addition, David A. Noyes reviewed
the reported price and trading activity for Hometown common stock and First
Capital common stock, compared certain financial and stock market information
for Hometown and First Capital with similar information for certain other
companies in which securities are publicly traded. David A. Noyes reviewed the
financial terms of certain recent business combinations in the banking industry
and performed such other studies and analyses as it considered appropriate.
David A. Noyes relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and assumed such accuracy and
completeness for purposes of rendering this opinion. David A. Noyes is not an
expert in the evaluation of loan and lease portfolios for purposes of assessing
the adequacy of the allowances for losses with respect thereto and assumed, with
the Hometown board's consent, that such allowances for each of Hometown and
First Capital are in the aggregate adequate to cover all such losses. Similarly,
David A. Noyes assumed, with the Hometown board's consent and without
independent analysis, that the obligations of Hometown and First Capital
pursuant to derivatives, swaps, foreign exchange, financial instruments and
off-balance sheet lending-related financial instruments, will not have an
adverse effect which would be relevant to its analysis. In addition, David A.
Noyes did not review individual credit files nor did it make an independent
evaluation or appraisal of the assets and liabilities of Hometown or First
Capital or any of their subsidiaries, and it had not been furnished with any
such evaluation or appraisal. David A. Noyes' opinion as to the fairness of the
exchange ratio and cash consideration addressed the ownership position in First
Capital to be received by the Hometown stockholders pursuant to the exchange
ratio on the terms set forth in the merger agreement and did not address the
future trading or acquisition value for the stock of First Capital. In addition,
David A. Noyes' considered the relative merits of the merger and certain
alternative business strategies. In that regard, David A. Noyes solicited
certain third party indications of interest in acquiring all or part of Hometown
or in engaging in a business combination or other strategic transaction with
Hometown. David A. Noyes also assumed, with the Hometown board's consent, that
obtaining any necessary regulatory approvals and third party consents for the
merger will not have an adverse effect on Hometown or First Capital pursuant to
the merger.
David A. Noyes' advisory services and the opinion expressed by it were
provided for the information and assistance of the Hometown board in connection
with its consideration of the transaction contemplated by the merger agreement
and such opinion did not constitute a recommendation as to how any Hometown
stockholder should vote with respect to such transaction.
The following is a brief summary of the material financial analyses
considered in a presentation to the Hometown board on September 25, 2002 by
David A. Noyes in connection with its oral and written opinions as of such date:
Comparative Financial and Market Performance Analysis. In performing a
comparative market performance analysis, David A. Noyes analyzed certain
operating performance statistics of Hometown relative to a group of community
banks located in southern Indiana and with assets of $50 million to $100 million
as of June 30, 2002 (the "Noyes Community Bank Peer Group"),
36
and of First Capital relative to a group consisting of the public thrifts based
in Indiana whose stock is listed on The Nasdaq Stock Market ("Noyes Thrift Peer
Group"):
Noyes Community Bank Peer Group:
Company Name City State
------------ ---- -----
American State Bank Lawrenceburg IN
Bank of Evansville, N.A. Evansville IN
CSB State Bank Cynthiana IN
Farmers State Bank Lanesville IN
Independence Bank New Albany IN
Lynnville National Bank Lynnville IN
Napoleon State Bank Napoleon IN
Peoples Bank Brownstown IN
Peoples Trust & Savings Bank Boonville IN
Spencer County Bank Santa Claus IN
Stone City Bank of Bedford, IN Bedford IN
United Commerce Bank Bloomington IN
Noyes Thrift Peer Group:
Company Name City State
------------ ---- -----
AMB Financial Corp. Munster IN
Ameriana Bancorp New Castle IN
Blue River Bancshares, Inc. Shelbyville IN
CFS Bancorp, Inc. Munster IN
FFW Corporation Wabash IN
Fidelity Federal Bancorp Evansville IN
First Bancorp of Indiana, Inc. Evansville IN
First Capital, Inc. Corydon IN
Hometown Financial Bancorp Spencer IN
Lincoln Bancorp Plainfield IN
Logansport Financial Corp. Logansport IN
LSB Financial Corp. Lafayette IN
MFB Corp. Mishawaka IN
MutualFirst Financial Inc. Muncie IN
NorthEast Indiana Bancorp, Inc. Huntington IN
Peoples Bancorp Auburn IN
PFS Bancorp, Inc. Aurora IN
River Valley Bancorp Madison IN
Security Financial Bancorp, Inc. St. John IN
Sobieski Bancorp, Inc. South Bend IN
Union Community Bancorp Crawfordsville IN
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David A. Noyes analyzed the relative financial performance of Hometown
by comparing certain financial information of Hometown with the Noyes Community
Bank Peer Group, and the relative financial performance and stock market
valuation of First Capital by comparing certain financial and market trading
information of First Capital with the Noyes Thrift Peer Group. Historical
financial information used in connection with this analysis was as of, and for
the twelve months ended, June 30, 2002.
The following table compares return on average assets and return on
average equity for Hometown, First Capital, the Noyes Community Bank Peer Group
and the Noyes Thrift Peer Group as of and for the twelve months ended June 30,
2002.
Noyes Community Noyes Thrift
Bank Peer Group Peer Group
Hometown First Capital (median) (median)
---------- --------------- ------------------ --------------
Return on average assets 0.58% 1.13% 0.71% 0.73%
Return on average equity 7.50% 9.46% 5.46% 6.49%
Analysis of Other Similar Transactions. David A. Noyes analyzed other
similar transactions in which the seller was a commercial banking company with
assets between $50 million and $100 million located in Indiana, Kentucky or Ohio
and the transaction was announced during the period from January 1, 2000 to
September 30, 2002 that it considered relevant.
38
The following similar transactions ("M&A Comparables") were analyzed:
Buyer Seller
----- ------
CKF Bancorp, Inc. First Lancaster Bancshares
First Mutual of Richmond, Inc. AmTrust Capital Corp.
German American Bancorp Holland Bancorp, Inc.
Lincoln Bancorp Citizens Bancorp
Peoples Community Bancorp, Inc. Market Financial Corp.
Peoples Community Bancorp, Inc. Kenwood Bancorp, Inc.
The following table illustrates the results of the analysis of the
value of the stock to be received at the exchange ratio plus the cash
consideration.
M&A Comparables M&A Comparables
Hometown (median) (mean)
---------- ---------------- ----------------
Price to book value 160.7% 116.2% 139.0%
Price to earnings 25.5X 28.3X 30.0X
Core deposit premium 8.13% 6.56% 7.80%
The foregoing summary does not purport to be a complete description of
the analyses performed by David A. Noyes, but describes the material analyses
performed thereby. In addition, David A. Noyes believes that its analyses must
be considered as a whole and that selecting portions of such analyses and the
factors considered by it, without considering all such analyses and factors,
could create an incomplete view of the process underlying the analyses and the
opinions. The preparation of a financial adviser's opinion is a complex process
involving subjective judgments and is not necessarily susceptible to partial
analyses or summary description. In its analyses, David A. Noyes also took into
account its assessment of general economic, market, and financial conditions and
its experience in similar transactions, as well as its experience in securities
valuation and its knowledge of the banking industry generally. With respect to
the comparative financial and market performance and other similar transactions
analyses summarized above, no public company utilized as a comparison is
identical to Hometown or First Capital and such analyses necessarily involve
complex considerations and judgments concerning the differences in financial and
operating characteristics of the companies and other factors that could affect
the acquisition or public trading values of the companies concerned. Any
estimates contained in David A. Noyes' analyses are not necessarily indicative
of future results or values, which may be significantly more or less favorable
than such estimates. Estimates of values of companies do not purport to be
appraisals or necessarily reflect the prices at which companies or its
securities actually may be sold. None of the analyses performed by David A.
Noyes were assigned a greater significance by David A. Noyes than any other.
David A. Noyes is a recognized investment banking firm that regularly
engages in the valuation of businesses and their securities in connection with
mergers and acquisitions.
Hometown has entered into an agreement with David A. Noyes relating to
the financial advisory services being provided by David A. Noyes in connection
with the merger. Pursuant to such agreement, Hometown has agreed to pay David A.
Noyes a fee equal to $168,343 in the aggregate, payable as follows: (a) an
initial fee of $56,115 payable upon the signing of a definitive written
agreement (which has been paid) and (b) the balance of $112,228 payable upon
consummation of the merger. Hometown also has agreed to reimburse David A. Noyes
for its reasonable out-of-pocket expenses incurred in connection with its
engagement.
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If, in connection with its engagement, David A. Noyes becomes involved in
any capacity in any action or legal proceeding, Hometown has agreed (a) to
reimburse David A. Noyes for its reasonable legal fees, disbursements of counsel
and other expenses, and (b) to indemnify and hold David A. Noyes harmless
against any losses, claims, damages, or liabilities, joint or several, to which
David A. Noyes may become subject in connection its engagement (other than any
loss, claims, damage, or liability that a court having jurisdiction determines
by a final judgment to have resulted from David A. Noyes' failure to exercise
reasonable or ordinary care, malfeasance or recklessness). In the event that
this indemnity is unavailable or insufficient to hold David A. Noyes harmless,
then Hometown will be required to contribute to amounts paid or payable by David
A. Noyes in respect of such losses, claims, damages, and liabilities in such
proportion as appropriately reflects the relative benefits received by, and
fault of, Hometown and David A. Noyes in connection with the matters as to which
such losses, claims, damages, or liabilities relate and other equitable
considerations. The agreements of Hometown extend to and inure to the benefit of
each person, if any, who may be deemed to control David A. Noyes.
Rights of Dissenting Stockholders
Under Indiana law, you will have dissenters' rights with respect to the
merger. If you follow the procedures set forth in Indiana Code Chapter 44,
these rights will entitle you to receive the fair value of your shares of
Hometown common stock rather than having your shares converted into the right to
receive the cash payment and/or shares of First Capital common stock as
described above. Accompanying this prospectus-proxy statement as Appendix C is a
copy of the text of Chapter 44 of the Indiana Business Corporation Law, which
prescribes the procedures for the exercise of dissenters' rights and for
determining the fair value of Hometown common stock. Hometown stockholders
electing to exercise dissenters' rights must comply with the provisions of
Chapter 44 of the Indiana Business Corporation Law in order to perfect their
rights. Hometown and First Capital will require strict compliance with the
statutory procedures.
The following is intended as a brief summary of the material provisions of
the Indiana statutory procedures required to be followed by a stockholder in
order to dissent from the merger and perfect the stockholder's dissenters'
rights. This summary, however, is not a complete statement of all applicable
requirements and is qualified in its entirety by reference to Chapter 44 of the
Indiana Business Corporation Law, the full text of which appears in Appendix C
of this prospectus-proxy statement.
Under Chapter 23-1-44, a Hometown stockholder of record for the special
meeting who desires to assert dissenters' rights must (1) deliver to Hometown
before the stockholder vote is taken written notice of the stockholder's intent
to demand payment in cash for shares owned if the merger is effectuated, and (2)
not vote the stockholder's shares in favor of the merger, either in person or by
proxy. Dissenting stockholders cannot dissent as to only some but not all of the
Hometown common stock registered in their names, except in limited
circumstances. Dissenting stockholders may send their written notice to C.
Ronald Clark, Chairman and Chief Executive Officer, Hometown Bancshares, Inc.,
3131 Grant Line Road, New Albany, Indiana 47150.
If the merger is approved by the Hometown stockholders, Hometown must mail
or deliver a written notice of dissenters' rights to each dissenting stockholder
satisfying the above conditions within ten days after stockholder approval has
occurred. The notice to dissenting stockholders must:
1. State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
2. Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
40
3. Supply a form for demanding payment that includes the date of the first
announcement to news media or to stockholders of the terms of the
proposed merger, which was September 26, 2002, and require that the
dissenting stockholder certify whether or not that stockholder acquired
beneficial ownership of the shares before that date;
4. Set a date by which Hometown must receive the payment demand, which
date may not be fewer than 30 nor more than 60 days after the date the
notice to dissenters is delivered; and
5. Be accompanied by a copy of Indiana Code Chapter 23-1-44.
Any Hometown stockholder who is sent a notice to dissenters must then (a)
demand payment for the stockholder's shares of Hometown common stock, (b)
certify whether the stockholder acquired beneficial ownership of the Hometown
common stock before September 26, 2002 (the date the merger was publicly
announced) and (c) deposit the stockholder's certificates representing shares of
Hometown common stock in accordance with the terms of the notice to dissenters.
A Hometown stockholder who fails to take these steps by the date set forth in
the notice to dissenters will not be entitled to payment for the stockholder's
shares through the dissenters' rights process and will be considered to have
voted his or her shares in favor of the merger.
A Hometown stockholder who desires to exercise dissenters' rights
concerning the merger but who does not comply with the preliminary conditions
described above will be considered not to be entitled to dissenters' rights
under Indiana Code Chapter 23-1-44. Stockholders who execute and return the
enclosed proxy, but do not specify a choice on the merger proposal will be
deemed to have voted in favor of the merger and, accordingly, to have waived
their dissenters' rights, unless the stockholder revokes the proxy before it is
voted and satisfies the other requirements of Indiana Code Chapter 23-1-44.
Upon consummation of the merger, First Capital will pay each dissenting
stockholder who has complied with all statutory requirements and the notice to
dissenters, and who was the beneficial owner of Hometown common stock before
September 26, 2002 (the date the merger was first publicly announced), First
Capital's estimate of the fair value of the shares as of the time immediately
before the merger, excluding any appreciation in value in anticipation of the
merger unless exclusion would be inequitable. For those dissenters who became
beneficial owners of shares on or after September 26, 2002, First Capital will
provide its estimate of fair value upon consummation of the merger, but may
withhold payment of the fair value of the shares until the dissenting
stockholder agrees to accept the estimated fair value amount in full
satisfaction of the dissenting stockholder's demand or until First Capital is
otherwise directed by a court of competent jurisdiction.
If the dissenting stockholder believes the amount paid or estimated by
First Capital is less than the fair value for his or her shares of Hometown
common stock or if First Capital fails to make payment to the dissenting
stockholder within 60 days after the date set for demanding payment, the
dissenting stockholder may notify First Capital in writing of the stockholder's
own estimate of the fair value of his or her shares and demand payment of his or
her estimate (less the amount of any payment made by First Capital for the
shares to the dissenting stockholder). Demand for payment must be made in
writing within 30 days after First Capital has made payment for the dissenting
stockholder's shares or has offered to pay its estimate of fair value for the
dissenting stockholder's shares. First Capital will not give further notice to
the dissenting stockholder of this deadline. A dissenting stockholder who fails
to make the demand within this time waives the right to demand payment for the
stockholder's shares.
First Capital can elect to agree with the dissenting stockholder's fair
value demand or if a demand for payment remains unsettled, First Capital must
commence a proceeding in the circuit or
41
superior court of Harrison County within 60 days after receiving the payment
demand from the dissenting stockholder and petition the court to determine the
fair value of the shares. If First Capital fails to commence the proceeding
within the 60 day period, it must pay each dissenting stockholder whose demand
remains unsettled the amount demanded. First Capital must make all dissenting
stockholders whose demands remain unsettled parties to the proceeding and all
parties must be served a copy of the petition. The court may appoint one or more
persons as appraisers to receive evidence and recommend a decision on the
question of fair value. Each dissenting stockholder made a party to the
proceeding is entitled to judgement for the amount, if any, by which the court
finds the fair value of the dissenting stockholder's shares, plus interest,
exceeds the amount paid by First Capital.
The court will determine all costs of the appraisal proceeding, including
the reasonable compensation and expenses of appraisers appointed by the court,
and will assess these costs against the parties in amounts the court finds
equitable. The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable,
against First Capital if the court finds that First Capital did not comply with
Indiana Code Chapter 23-1-44 or against either First Capital or a dissenting
stockholder if the court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously or not in good faith with respect to
the rights provided by Indiana Code Chapter 23-1-44.
If Hometown and First Capital do not consummate the merger within 60 days
after the date set in the notice to dissenters for demanding payment and
depositing certificates of Hometown common stock, Hometown will return the
deposited certificates. If after returning the deposited certificates Hometown
and First Capital consummate the merger, Hometown will send a new notice to
dissenters and repeat the payment demand process.
Every Hometown stockholder who does not deliver a notice of intent to
demand payment for his or her shares as described above, or who votes in favor
of the merger, is bound by the vote of the assenting stockholders and will have
no right to dissent and to demand payment of the fair value of the stockholder's
shares of Hometown common stock as a result of the merger. Such a stockholder
will only be entitled to the same consideration described in this document to be
offered to every other assenting Hometown stockholder as a result of the merger.
Voting against the merger does not in itself constitute the notice of intent to
demand payment required by Indiana Code Chapter 23-1-44.
Interests of Our Directors and Officers in the Merger that Differ From Your
Interests
Some members of Hometown's management and board of directors may have
interests in the merger that are in addition to or different from the interests
of Hometown stockholders. Hometown's board of directors was aware of these
interests and considered them in approving the merger agreement.
Employment Agreement with Robert E. Kleehamer. Both First Capital and First
Harrison have entered into an employment agreement with Robert E. Kleehamer,
which will become effective upon completion of the merger. Under this employment
agreement, which has a term of three years, subject to renewal, Mr. Kleehamer
will serve as the area president for New Albany and Clark County. Mr.
Kleehamer's initial base salary will be $91,800. Mr. Kleehamer has the option to
terminate his employment agreement during the sixth month period beginning on
the first anniversary of the agreement and receive full payment of his remaining
salary for the term of the agreement. The employment agreement also provides
that Mr. Kleehamer will receive options to acquire 3,000 shares of First Capital
common stock.
Termination and Non-Competition Agreement with C. Ronald Clark. Mr. C.
Ronald Clark has entered into an agreement with Hometown under which he will
terminate employment upon
42
consummation of the merger and receive a severance payment of $240,000. If this
payment, together with other payments that Mr. Clark may receive in connection
with this merger, is deemed to include an "excess parachute payment" under
Section 280G of the Internal Revenue Code, Mr. Clark's total payments will be
reduced to an amount equal to $1.00 less than three times the average of his
annual compensation over the past five years.
Mr. Clark has entered into a non-competition agreement with First Capital.
Pursuant to this agreement, Mr. Clark will be paid $5,000 per month for a period
of six months following consummation of the merger in consideration of being
subject to specified non-competition requirements.
Maintenance of an Advisory Board. For a period of at least two years, First
Capital will maintain an advisory board for the purpose of advising First
Capital on the operations of the former Hometown National offices. Each of the
non-employee directors of Hometown will be invited to serve on the advisory
board and will be paid $150 per meeting attended.
Protection of Hometown Directors and Officers Against Claims. First Capital
has agreed to indemnify and hold harmless each present and former director and
officer of Hometown for a period of six years from liability and expenses
arising out of matters existing or occurring at or before the consummation of
the merger to the fullest extent allowed under Indiana law as in effect at the
time of closing. This indemnification extends to liability arising out of the
transactions contemplated by the merger agreement. First Capital has also agreed
to advance any related costs to each of these persons as they are incurred.
First Capital has also agreed that it will maintain a policy of directors' and
officers' liability insurance coverage for the benefit of Hometown's directors
and officers for six years following consummation of the merger, subject to
certain limitations on the amount of premiums to be paid.
Regulatory Approvals Needed to Complete the Merger
The merger of Hometown with First Capital is subject to the prior approval
of the Board of Governors of the Federal Reserve System under the Bank Holding
Company Act. The Board of Governors of the Federal Reserve System waived this
application requirement by letter dated November 25, 2002.
Completion of the merger of Hometown National with First Harrison is
subject to prior approval of the Office of Thrift Supervision. In reviewing
applications for transactions of this type, the OTS must consider, among other
factors, the financial and managerial resources and future prospects of the
existing and resulting institutions, and the convenience and needs of the
communities to be served. In addition, the OTS may not approve a transaction if
it will result in a monopoly or otherwise be anticompetitive. First Capital
filed an application with the OTS on November 14, 2002 which was deemed complete
on January 4, 2003.
Under the Community Reinvestment Act of 1977, the OTS must take into
account the record of performance of First Harrison and Hometown National in
meeting the credit needs of the entire community, including low- and
moderate-income neighborhoods, served by each institution. As part of the review
process, bank regulatory agencies frequently receive comments and protests from
community groups and others. First Harrison and Hometown National each received
a "Satisfactory" rating during their last federal Community Reinvestment Act
examinations.
In addition, a period of 15 to 30 days must expire following approval by
the OTS before completion of the merger is allowed, within which period the
United States Department of Justice may file objections to the merger under the
federal antitrust laws. While we believe that the likelihood of objection by the
Department of Justice is remote in this case, there can be no assurance that the
Department of Justice will not initiate proceedings to block the merger, or that
the Attorney General of
43
the State of Indiana will not challenge the merger, or if any proceeding is
instituted or challenge is made, as to the result of the challenge.
The merger cannot proceed in the absence of the requisite regulatory
approvals. See "The Merger Agreement--Conditions to Completing the Merger" and
"--Terminating the Merger Agreement." There can be no assurance that the
requisite regulatory approvals will be obtained, and if obtained, there can be
no assurance as to the date of any approval. There can also be no assurance that
any regulatory approvals will not contain a condition or requirement that causes
the approvals to fail to satisfy the condition set forth in the merger agreement
and described under "The Merger Agreement--Conditions to Completing the Merger."
The approval of any application merely implies the satisfaction of
regulatory criteria for approval, which does not include review of the merger
from the standpoint of the adequacy of the cash consideration or the exchange
ratio for converting Hometown common stock to First Capital common stock.
Furthermore, regulatory approvals do not constitute an endorsement or
recommendation of the merger.
Accounting Treatment of the Merger
First Capital will account for the merger as a purchase, as that term is
used under generally accepted accounting principles, for accounting and
financial reporting purposes. Under the purchase method of accounting, the
assets and liabilities of Hometown will be recorded on First Capital's
consolidated balance sheet at their estimated fair value at the effective date
of the merger. The amount by which the purchase price paid by First Capital
exceeds the fair value of the net tangible and identifiable intangible assets
acquired by First Capital through the merger will be recorded as goodwill.
Financial statements of First Capital issued after the effective date of the
merger will reflect these values and will not be restated retroactively to
reflect the historical position or results of operations of Hometown.
Resale of First Capital Common Stock
The shares of First Capital common stock to be issued to stockholders of
Hometown in the merger have been registered under the Securities Act of 1933.
Shares of First Capital common stock issued in the merger may be traded freely
and without restriction by those stockholders not deemed to be "affiliates" of
Hometown, as that term is defined in the rules under the Securities Act. First
Capital common stock received by those stockholders of Hometown who are deemed
to be "affiliates" of Hometown at the time the merger is submitted for vote of
the stockholders of Hometown may be resold without registration under the
Securities Act only to the extent provided for by Rule 145 promulgated under the
Securities Act, which permits limited sales under certain circumstances, or
pursuant to another exemption from registration. An affiliate of Hometown is an
individual or entity that controls, is controlled by or is under common control
with, Hometown, and may include the executive officers and directors of
Hometown, as well as certain principal stockholders of Hometown. The same
restrictions apply to certain relatives or the spouse of those persons and any
trusts, estates, corporations or other entities in which those persons have a
10% or greater beneficial interest.
Hometown has agreed in the merger agreement to use its best efforts to
cause each person who is an affiliate of Hometown for purposes of Rule 145 under
the Securities Act to deliver to First Capital a written agreement intended to
ensure compliance with the Securities Act.
44
The Merger Agreement
The following describes material provisions of the merger agreement.
This description does not purport to be complete and is qualified by reference
to the merger agreement, which is attached as Appendix A and is incorporated by
reference into this proxy statement-prospectus.
Terms of the Merger
The merger agreement provides for a business combination in which
Hometown will merge with and into First Capital. First Capital will be the
surviving corporation in the merger.
As a result of the merger, except as noted below, each outstanding
share of Hometown common stock will be converted into the right to receive, at
the election of the holder, either shares of First Capital common stock or
$46.50 in cash. See "The Merger-Conversion of Hometown Common Stock." First
Capital will not issue fractions of shares of First Capital common stock, but
instead will pay each holder of Hometown common stock who would otherwise be
entitled to a fraction of a share of First Capital common stock an amount in
cash determined by multiplying that fraction by the average closing price of
First Capital common stock over a measurement period prior to the completion of
the merger. If there is a change in the number or classification of shares of
First Capital outstanding as a result of a stock split, stock dividend,
reclassification, recapitalization, or other similar transaction, the exchange
ratio will be equitably adjusted. Shares of Hometown common stock held directly
or indirectly by First Capital will be canceled and retired upon completion of
the merger, and no payment will be made for them. Canceled shares will not
include shares held by either Hometown or First Capital in a fiduciary capacity
or in satisfaction of a debt previously contracted. Holders of shares for which
dissenters' rights have been exercised will be entitled only to the rights
granted by Indiana law.
When Will the Merger be Completed
The closing of the merger will take place on a date designated by First
Capital that is no later than 30 days following the date on which all of the
conditions to the merger contained in the merger agreement are satisfied or
waived, unless we agree to a later date. See "--Conditions to Completing the
Merger." On the closing date, First Capital will file articles of merger with
the Indiana Secretary of State merging Hometown into First Capital. The merger
will become effective at the time stated in the articles of merger.
First Capital and Hometown expect to complete the merger in the first
calendar quarter of 2003. However, we cannot guarantee when or if the required
regulatory approvals will be obtained. See "The Merger--Regulatory Approvals
Needed to Complete the Merger." Furthermore, either company may terminate the
merger agreement if, among other reasons, the merger has not been completed on
or before June 30, 2003, unless failure to complete the merger by that time is
due to a misrepresentation, breach of warranty or failure to fulfill a covenant
by the party seeking to terminate the agreement. See "--Terminating the Merger
Agreement."
Conditions to Completing the Merger
First Capital's and Hometown's obligations to consummate the merger are
conditioned on the following:
. approval of the merger agreement by Hometown stockholders;
45
. receipt of all required regulatory approvals without any conditions
that would materially and adversely impact the benefits of the
merger to First Capital and the expiration of all statutory waiting
periods;
. no party to the merger being subject to any legal order that
prohibits consummating any part of the transaction, no governmental
entity having instituted any proceeding for the purpose of blocking
the transaction, and the absence of any statute, rule or regulation
that prohibits completion of any part of the transaction;
. the registration statement of which this proxy statement-prospectus
forms a part being declared effective by the Securities and
Exchange Commission, the absence of any pending or threatened
proceeding by the Securities and Exchange Commission to suspend the
effectiveness of the registration statement and the receipt of all
required state "blue sky" approvals;
. receipt by each of us of all consents and approvals from third
parties (other than those required from government agencies)
required to complete the merger, unless failure to obtain those
consents or approvals would not have a material adverse effect on
First Capital after completion of the merger;
. receipt by each of us of an opinion from Muldoon Murphy & Faucette
LLP to the effect that the merger will be treated for federal
income tax purposes as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code; and
. the other party having performed in all material respects its
obligations under the merger agreement, the other party's
representations and warranties being true and correct as of the
date of the merger agreement and as of the closing date, and
receipt of a certificate signed by the other party's chief
executive officer and chief financial officer to that effect.
The obligation of Hometown to complete the merger is also conditioned
on First Capital having deposited the cash portion of the merger consideration
with the exchange agent.
The obligation of First Capital to complete the merger is also
conditioned upon the total stockholders' equity of Hometown being at least $6.8
million as of December 31, 2002 according to its audited balance sheet,
exclusive of any payments made or expenses incurred by Hometown in connection
with this merger or any actions taken at the request of First Capital.
We cannot guarantee whether all of the conditions to the merger will be
satisfied or waived by the party permitted to do so.
Conduct of Business Before the Merger
Hometown has agreed that, until completion of the merger and unless
permitted by First Capital, neither it nor its subsidiaries will:
General Business
. conduct its business other than in the regular, ordinary and usual
course consistent with past practice;
46
. fail to maintain and preserve intact its business organization,
properties, leases, employees and advantageous business
relationships and retain the services of its officers and key
employees;
. take any action that would adversely affect or delay its ability to
perform its obligations under the merger agreement or to consummate
the transactions contemplated by the merger agreement;
Indebtedness
. incur any indebtedness or become responsible for the obligations of
any person or entity, other than the creation of deposit
liabilities, purchases of Federal Funds, borrowings from the
Federal Home Loan Bank or the Federal Reserve Bank of St. Louis
that mature within one year, entry into repurchase agreements fully
secured by U.S. government agency securities, bankers acceptances,
treasury tax and loan accounts established the ordinary course of
business, and sales of certificates of deposit that mature within
five years;
. purchase any brokered certificate of deposit;
. prepay any such indebtedness so as to cause itself to incur a
prepayment penalty thereunder;
Capital Stock
. adjust, split, combine or reclassify its capital stock;
. pay any cash or stock dividends or make any other distribution on
its capital stock;
. grant any individual, corporation or other entity any right to
acquire any shares of its capital stock;
. issue any securities convertible or exercisable for any shares of
its capital stock;
Dispositions
. dispose of any of its material assets or cancel or release any
indebtedness, other than in the ordinary course of business or
pursuant to commitments existing as of the date of the merger
agreement;
Investments
. make any equity investment other than pursuant to commitments
existing as of the date of the merger agreement (other then
foreclosures in connection with satisfaction of loans in the
ordinary course of Hometown National's business);
. purchase outside the ordinary course of business any property or
assets of any other individual or corporation;
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Contracts
. enter into, renew, amend or terminate any contract or agreement, or
make any change in any of its leases or contracts, other than with
respect to those involving the payment of less than $20,000 per
year, and those specifically permitted by the merger agreement;
Loans
. make, renew, increase, extend or purchase any loans, advances,
credit enhancements or extensions, other than existing loan
commitments and those in conformity with lending policies in effect
as of the date of the merger agreement in amounts not to exceed an
aggregate of $350,000 with respect to any one borrower, or $500,000
if such loan is approved at a meeting of the board of directors of
Hometown National;
. make or increase any loan or extension of credit or commit to make
or increase any such loan or extension of credit to any director or
executive officer of Hometown or Hometown National, except for
loans or extensions of credit on terms made available to the
general public;
Employees
. increase the compensation or fringe benefits of any of its
employees or directors, except in the ordinary course of business
consistent with past practice;
. pay any bonus, pension, retirement allowance or contribution not
required by any existing plan or agreement to any employees or
directors;
. become a party to, amend or commit to any benefit plan or
employment agreement;
. voluntarily accelerate the vesting or the lapsing of any
restrictions with respect to any stock options or other stock-based
compensation;
. elect any new executive officer or director;
. hire any employee with an annual total compensation in excess of
$50,000;
Settling Claims
. settle any claim against it for more than $25,000 or impose or
agree to material restrictions on its operations;
Governing Documents
. amend its articles of incorporation or bylaws;
Sale of Securities
. restructure or materially change its investment securities
portfolio or its interest rate risk position through purchases,
sales or otherwise, or the manner in which the portfolio is
classified or reported;
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Investment in Debt Securities
. make any investment in any debt security, including mortgage-backed
and mortgage-related securities, other than U.S. government and
U.S. government agency securities with final maturities not greater
than one year;
Capital Expenditures
. make any capital expenditures other than pursuant to binding
commitments and other than expenditures necessary to maintain
existing assets in good repair or to make payment of necessary
taxes or other obligations due and owing;
Branches
. establish or commit to establish any new branch or other office or
file an application to relocate or terminate the operation of an
existing banking office;
Accounting
. change its method of accounting, except as required by changes in
generally accepted accounting principles or regulatory guidelines;
Merger Agreement
. take any action that is intended or expected to result in any of
its representations and warranties under the merger agreement being
or becoming untrue in any material respect or in the conditions to
the merger not being satisfied or in a violation of a provision of
the merger agreement;
. knowingly take any action that would prevent or impede the merger
from qualifying as a reorganization under 368(a) of the Internal
Revenue Code; and
Other Agreements
. agree to take, commit to take any or adopt any resolutions in
support of any of the foregoing actions.
First Capital has agreed that, until the completion of the merger and
unless permitted to by Hometown, it will not:
. take any action that would adversely affect or delay its ability to
perform its obligations under the merger agreement or to consummate
the transactions contemplated by the merger agreement;
. take any action that is intended or expected to result in any of
its representations and warranties under the merger agreement being
or becoming untrue in any material respect or in the conditions to
the merger not being satisfied or in a violation of a provision of
the merger agreement;
. knowingly take any action that would prevent or impede the merger
from qualifying as a reorganization under 368(a) of the Internal
Revenue Code;
49
. amend its articles of incorporation or bylaws in a manner that
would materially and adversely effect the benefits of the merger to
Hometown stockholders;
. enter into any agreement with a third party that could reasonably
be expected to result in the merger with Hometown not being
consummated or that would change the kind of consideration that
Hometown stockholders would receive upon closing; and
. agree to take, commit to take or adopt any resolutions in support
of any of the foregoing actions.
Covenants of Hometown and First Capital in the Merger Agreement
Agreement Not to Solicit Other Proposals. Hometown has agreed not to
initiate, solicit, encourage, facilitate, obtain or endorse any acquisition
proposal with a third party. An acquisition proposal includes the following:
. any merger, consolidation, share exchange, business combination, or
other similar transaction involving Hometown or its subsidiaries;
. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 25% or more of the assets of Hometown outside of the
regular course of business;
. any tender offer or exchange offer for 25% or more of the
outstanding shares of capital stock of Hometown; and
. any public announcement of a proposal, plan or intention to do any
of the foregoing or any agreement to engage in any of the
foregoing.
Despite the agreement of Hometown not to solicit other acquisition
proposals, the board of directors of Hometown may generally negotiate or have
discussions with, or provide information to, a third party who makes an
unsolicited, written, bona fide acquisition proposal, provided that the Hometown
board of directors:
. reasonably expects that the acquisition proposal will result in a
more favorable transaction (a "superior proposal") than the
transaction contemplated by the merger agreement with First
Capital; and
. after consultation with and receipt of advice from outside legal
counsel, in good faith deems such action to be required in order
for the board of directors to comply with its fiduciary duties to
Hometown stockholders under applicable law.
If Hometown receives a proposal or information request from a third
party or enters into negotiations with a third party regarding a superior
proposal, Hometown must notify First Capital and provide First Capital with
information about the third party and its proposal.
Employee Matters. Subject to determination of its staffing needs, each
person who is an employee of Hometown National as of the closing of the merger
(whose employment is not specifically terminated upon the closing) will become
an employee of First Harrison. First Capital will make available employer
provided health and other employee welfare benefit plans to each continuing
employee on the same basis that it provides such coverage to First Capital
employees. Former employees of Hometown National will be eligible to participate
in First Capital's 401(k) plan and employee stock
50
ownership plan with full credit for prior service with Hometown for purposes of
eligibility and vesting. First Capital has also agreed to honor all vested
benefits or other vested amounts earned or accrued under Hometown employee
benefit plans, contracts and arrangements.
Indemnification of Hometown Officers and Directors. First Capital has
agreed to indemnify and hold harmless each present and former director and
officer of Hometown for a period of six years from liability and expenses
arising out of matters existing or occurring at or before the consummation of
the merger to the fullest extent allowed under Indiana law as in effect at the
time of closing. First Capital has also agreed that it will maintain a policy of
directors' and officers' liability insurance coverage, or provide a policy
providing comparable coverage and amounts on terms no less favorable than
Hometown's current policy, for the benefit of Hometown's directors and officers
who are currently covered by insurance for six years following consummation of
the merger, subject to a cap on the amount of annual premiums.
Certain Other Covenants. The merger agreement also contains other
agreements relating to our conduct before consummation of the merger, including
the following:
. After all requisite approvals and third party consents necessary to
consummate the merger are obtained, Hometown National will modify
and change its loan, litigation, real estate valuation and
investment and asset/liability management policies and practices so
as to be consistent with those of First Harrison.
. Hometown will give First Capital and First Capital will give
Hometown reasonable access during normal business hours to each's
property, books, records and personnel and furnish all information
either party may reasonably request. First Capital and Hometown
agree that they will keep confidential all such information and
documents unless the information was already known, becomes
available, is disclosed with prior written consent from the other
party or becomes readily ascertainable from published information.
. Hometown will promptly provide First Capital with a copy of all
documents filed with the Securities and Exchange Commission, each
report filed with its banking regulators, each management report
provided to its board of directors and each public press release.
. Hometown will meet with First Capital on a regular basis to discuss
and plan for the conversion of Hometown's data processing and
related electronic information systems.
. First Capital and Hometown will use their reasonable best efforts
to submit all necessary applications, notices, and other filings
with any governmental entity, the approval of which is required to
complete the merger and related transactions.
. First Capital and Hometown will use their reasonable best efforts
to obtain all third party consents necessary to consummate the
merger.
. First Capital and Hometown will take any necessary action to exempt
First Capital, First Harrison and this transaction from any
anti-takeover provisions contained in either party's articles of
incorporation or bylaws or federal or state law.
. First Capital and Hometown will use all reasonable efforts to take
all actions necessary to consummate the merger and the transactions
contemplated by the merger agreement.
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. Hometown and First Capital will consult with each other regarding
any public statements about the merger and any filings with any
governmental entity or with any national securities exchange or
market.
. First Capital will file a registration statement, of which this
proxy statement-prospectus forms a part, with the Securities and
Exchange Commission registering the shares of First Capital common
stock to be issued in the merger to Hometown stockholders.
. Hometown will take all actions necessary to convene a meeting of
its stockholders to vote on the merger agreement. The Hometown
board of directors will recommend at the stockholder meeting that
the stockholders vote to approve the merger and will use its
reasonable best efforts to solicit stockholder approval, unless it
determines that such actions would not comply with its fiduciary
obligations to Hometown stockholders.
. Prior to completion of the merger, First Capital will notify The
Nasdaq Stock Market of the additional shares of First Capital
common stock that First Capital will issue in exchange for shares
of Hometown common stock.
. Hometown will use its reasonable best efforts to cause each person
who is an affiliate of it under Rule 145 of the Securities Act to
deliver to First Capital a letter to the effect that such person
will comply with Rule 145.
. First Capital and Hometown will notify each other of any material
contract defaults and any events that, so far as can be foreseen at
the time of its occurrence, would reasonably be likely to result in
a material adverse effect on the other. They also will notify each
other of any communication from a third party regarding the need to
obtain that party's consent in connection with the merger.
Representations and Warranties Made by First Capital and Hometown in the Merger
Agreement
First Capital and Hometown have made certain customary representations
and warranties to each other in the merger agreement relating to our businesses.
For information on these representations and warranties, please refer to the
merger agreement attached as Appendix A. The representations and warranties must
be true in all material respects through the completion of the merger unless the
change does not have a material negative impact on our business, financial
condition or results of operations. See "--Conditions to Completing the Merger."
Terminating the Merger Agreement
The merger agreement may be terminated at any time prior to the
completion of the merger, either before or after approval of the merger
agreement by Hometown stockholders, as follows:
. with the mutual written consent of First Capital and Hometown;
. by either party, if the stockholders of Hometown fail to approve
the merger agreement (provided that Hometown will only be entitled
to terminate for this reason if it has complied with its
obligations under the merger agreement with respect to its
stockholder meeting);
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. by either party, if a required regulatory approval, consent or waiver
is denied or any governmental entity prohibits the consummation of the
merger or the transactions contemplated by the merger agreement;
. by either party, if the merger is not consummated by June 30, 2003,
unless failure to complete the merger by that time is due to a
misrepresentation, breach of a warranty or failure to fulfill a
covenant by the party seeking to terminate the agreement;
. by either party, if the other party makes a misrepresentation,
breaches a warranty or fails to fulfill a covenant that cannot be
cured within a specified time and that would have a material adverse
effect on the other party; or
. by First Capital, if the board of directors of Hometown does not
recommend approval of the merger in the proxy statement-prospectus or
withdraws or revises its recommendation or takes any action in a
manner adverse to First Capital.
Termination Fee
The merger agreement requires Hometown to pay First Capital a fee of
$175,000 if First Capital terminates the merger agreement as a result of the
failure of Hometown's board of directors to recommend approval of the merger or
the withdrawal, qualification or revision of its recommendation to approve the
merger. If within 12 months after such termination, Hometown consummates or
enters into an agreement with respect to an acquisition proposal, Hometown must
pay an additional termination fee of $175,000.
The merger agreement also requires Hometown to pay First Capital a fee of
$350,000 if within 12 months after the merger agreement is terminated, Hometown
consummates or enters into any agreement with respect to an acquisition proposal
and if the merger agreement is terminated under either of the following
circumstances:
. if First Capital terminates the merger agreement as a result of a
willful breach of the merger agreement by Hometown, and an acquisition
proposal from a third party with respect to Hometown has been publicly
announced, disclosed or communicated or made known to Hometown at any
time after the date of the merger agreement and prior to the date of
termination; or
. if either party terminates the merger agreement as a result of the
failure of Hometown's stockholders to approve the merger, and an
acquisition proposal from a third party has been publicly announced,
disclosed or communicated or made known to Hometown at any time after
the date of the merger agreement and prior to the date of the Hometown
stockholders' meeting.
Under no circumstances will Hometown be required to pay more than $350,000
in the aggregate under the termination fee provisions.
The merger agreement also requires First Capital to pay Hometown a fee of
$350,000 if Hometown terminates the merger agreement as a result of First
Capital's willful breach of the merger agreement and an acquisition proposed
from a third party to First Capital has been publicly announced, disclosed or
communicated or made known to First Capital at any time after the date of the
merger agreement and prior to the date of termination, and if within 12 months
after such termination, First Capital consummates or enters into any agreement
with respect to an acquisition proposal.
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Expenses
Each of First Capital and Hometown will pay its own costs and expenses
incurred in connection with the merger, except that First Capital and Hometown
will share equally the expense of filing, printing and mailing to Hometown's
stockholders this proxy statement-prospectus.
Changing the Terms of the Merger Agreement
Before the completion of the merger, First Capital and Hometown may agree
to waive, amend or modify any provision of the merger agreement. However, after
the vote by Hometown stockholders, First Capital and Hometown can make no
amendment or modification that would reduce the amount or alter the kind of
consideration to be received by Hometown's stockholders under the terms of the
merger.
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Pro Forma Financial Information
The following unaudited pro forma condensed combined consolidated balance
sheet as of September 30, 2002 and the unaudited pro forma condensed combined
consolidated statements of income for nine months ended September 30, 2002 and
the year ended December 31, 2001 give effect to the pending merger, accounted
for as a purchase.
The unaudited pro forma condensed combined consolidated financial
information is based on the historical consolidated financial statements of
First Capital and Hometown under the assumptions and adjustments set forth in
the accompanying notes. The unaudited pro forma condensed combined consolidated
balance sheet gives effect to the merger as if the merger had been consummated
at the end of the period presented. The unaudited pro forma condensed combined
consolidated statements of income give effect to the merger as if the merger had
been consummated on January 1 of each of the periods presented. The unaudited
pro forma condensed combined consolidated financial statements do not give
effect to the anticipated cost savings in connection with the merger.
You should read the unaudited pro forma condensed combined consolidated
financial statements in conjunction with the consolidated historical financial
statements of First Capital and Hometown, including the respective notes to
those statements. The pro forma information is not necessarily indicative of the
combined financial position or the results of operations in the future or of the
combined financial position or the results of operations which would have been
realized had the merger been consummated during the periods or as of the dates
for which the pro forma information is presented. We anticipate that the merger
will provide the combined company with financial benefits that include reduced
operating expenses and opportunity to earn more revenue. In addition, First
Capital will incur costs in acquiring Hometown. The pro forma information, while
helpful in illustrating the financial characteristics of the new company under
one set of assumptions, does not reflect these benefits and costs and,
accordingly, does not attempt to predict or suggest future results.
Pro forma per share amounts for the combined company are based on a 2.735
exchange ratio.
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FIRST CAPITAL, INC. AND HOMETOWN BANCSHARES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 2002
(In thousands) Pro Forma
Historical Adjustments
--------------------------- -------------------------------
First Pro Forma
Capital Hometown Debit Credit Combined
ASSETS
Cash and due from banks ............................. $ 7,169 $ 1,820 $ 180 (d),(e) $ 5,595 $ 3,574
Interest bearing deposits with banks ................ 3,186 3,269 -- -- 6,455
Securities available for sale, at fair value ........ 67,714 1,764 -- -- 69,478
Securities held to maturity ......................... 1,647 2,110 -- -- 3,757
Federal funds sold .................................. -- 8,120 -- -- 8,120
Loans receivable, net ............................... 211,096 64,048 -- -- 275,144
Federal Reserve Bank stock .......................... -- 180 -- (d) 180 --
Federal Home Loan Bank stock ........................ 2,482 200 -- -- 2,682
Premises and equipment .............................. 6,774 2,284 75 (c) -- 9,133
Goodwill ............................................ -- -- 3,042 (e) -- 3,042
Amortizable core deposit intangible ................. -- -- 894 (e) -- 894
Other assets ........................................ 3,631 686 -- -- 4,317
--------- -------- -------- ------- ---------
Total Assets $ 303,699 $ 84,481 $ 4,191 $ 5,775 $ 386,596
========= ======== ======== ======= =========
LIABILITIES
Deposits ............................................ $ 215,925 $ 76,710 $ -- $ -- $ 292,635
Borrowed funds ...................................... 49,508 -- -- -- 49,508
Accrued interest payable ............................ 1,207 238 -- -- 1,445
Other liabilities ................................... 1,269 157 -- (a-c) 508 1,934
--------- -------- -------- ------- ---------
Total Liabilities 267,909 77,105 -- 508 345,522
--------- -------- -------- ------- ---------
STOCKHOLDERS' EQUITY
Preferred stock ..................................... -- -- -- -- --
Common stock ........................................ 26 5,973 5,973 (e) 3 29
Additional paid-in capital .......................... 12,938 -- -- (e) 5,333 18,271
Retained earnings ................................... 22,551 1,407 1,459 (a-c),(e) -- 22,499
Accumulated other comprehensive income (loss) ....... 1,004 (4) -- (e) 4 1,004
Unearned stock compensation plans ................... (612) -- -- -- (612)
Treasury stock, at cost ............................. (117) -- -- -- (117)
--------- -------- -------- ------- ---------
Total stockholders' equity 35,790 7,376 7,432 5,340 41,074
--------- -------- -------- ------- ---------
Total Liabilities and
Stockholders' Equity $ 303,699 $ 84,481 $ 7,432 $ 5,848 $ 386,596
========= ======== ======== ======= =========
See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
56
FIRST CAPITAL, INC. AND HOMETOWN BANCSHARES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(In thousands) Pro Forma
Historical Adjustments
-------------------------- -----------------
Pro Forma
First Capital Hometown Debit Credit Combined
INTEREST INCOME
Loans, including fees ....................... $11,582 $ 3,311 $ -- $ -- $14,893
Securities .................................. 2,323 302 -- -- 2,625
Dividends ................................... 107 17 -- -- 124
Federal funds sold and interest-
bearing deposits with banks .............. 153 170 -- -- 323
------- ------- ----- ------ -------
Total interest income ................... 14,165 3,800 -- -- 17,965
------- ------- ----- ------ -------
INTEREST EXPENSE
Deposits .................................... 4,688 1,978 -- -- 6,666
Borrowed funds .............................. 1,998 -- -- -- 1,998
------- ------- ----- ------ -------
Total interest expense ................... 6,686 1,978 -- -- 8,664
------- ------- ----- ------ -------
Net interest income ...................... 7,479 1,822 -- -- 9,301
Provision for loan losses ................... 155 329 -- -- 484
------- ------- ----- ------ -------
Net interest income after
provision for loan losses .............. 7,324 1,493 -- -- 8,817
NONINTEREST INCOME
Service charges on deposit accounts ......... 1,013 225 -- -- 1,238
Gain on sale of mortgage loans .............. -- 90 -- -- 90
Other income ................................ 250 27 -- -- 277
------- ------- ----- ------ -------
Total noninterest income ................. 1,263 342 -- -- 1,605
------- ------- ----- ------ -------
NONINTEREST EXPENSES
Compensation and benefits ................... 2,676 795 -- -- 3,471
Occupancy and equipment ..................... 677 136 -- -- 813
Other expenses .............................. 1,542 348 -- -- 1,890
------- ------- ----- ------ -------
Total noninterest expenses ............... 4,895 1,279 -- -- 6,174
------- ------- ----- ------ -------
Income before income taxes ............... 3,692 556 -- -- 4,248
Income tax expense .......................... 1,296 210 -- -- 1,506
------- ------- ----- ------ -------
Net Income ................................ $ 2,396 $ 346 $ -- $ -- $ 2,742
======= ======= ===== ====== =======
Net Income per common share, basic ........ $ 0.97 $ 1.51 $ 0.98
======= ======= =======
Net income per common share, diluted ....... $ 0.96 $ 1.51 $ 0.97
======= ======= =======
See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
57
FIRST CAPITAL, INC. AND HOMETOWN BANCSHARES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001
(In thousands) Pro Forma
Historical Adjustments
------------------------- -----------------------
First Pro Forma
Capital Hometown Debit Credit Combined
INTEREST INCOME
Loans, including fees ..................... $ 15,462 $ 4,699 $ - $ - $ 20,161
Securities ................................ 2,975 358 - - 3,333
Dividends ................................. 130 24 - - 154
Federal funds sold and interest-bearing
deposits with banks ....................... 393 721 - - 1,114
-------- ------- --- --- --------
Total interest income .................. 18,960 5,802 - - 24,762
-------- ------- --- --- --------
INTEREST EXPENSE
Deposits .................................. 7,680 3,723 - - 11,403
Borrowed funds ............................ 2,162 - - - 2,162
-------- ------- --- --- --------
Total interest expense ................. 9,842 3,723 - - 13,565
-------- ------- --- --- --------
Net interest income .................... 9,118 2,079 - - 11,197
Provision for loan losses ................. 66 106 - - 172
-------- ------- --- --- --------
Net interest income after provision
for loan losses ........................ 9,052 1,973 - - 11,025
NONINTEREST INCOME
Service charges on deposit accounts ....... 1,230 207 - - 1,437
Gain on sale of mortgage loans ............ 124 329 - - 453
Gain on sale of securities ................ 15 - - - 15
Other income .............................. 306 111 - - 417
-------- ------- --- --- --------
Total noninterest income ............... 1,675 647 - - 2,322
-------- ------- --- --- --------
NONINTEREST EXPENSES
Compensation and benefits ................. 3,198 1,256 - - 4,454
Occupancy and equipment ................... 741 165 - - 906
Other expenses ............................ 1,975 442 - - 2,417
-------- ------- --- --- --------
Total noninterest expenses ............. 5,914 1,863 - - 7,777
-------- ------- --- --- --------
Income before income taxes ............. 4,813 757 - - 5,570
Income tax expense ........................ 1,714 276 - - 1,990
-------- ------- --- --- --------
Net Income ............................. $ 3,099 $ 481 $ - $ - $ 3,580
======== ======= === === ========
Net income per common share, basic ........ $ 1.26 $ 2.32 $ 1.30
======== ======= ========
Net income per common share, diluted ...... $ 1.25 $ 2.32 $ 1.29
======== ======= ========
See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
58
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial information is based on the
historical consolidated financial statements of First Capital and Hometown and
is presented to give effect to the proposed merger described in Note 1. The
merger will be accounted for as a purchase under the assumptions and adjustments
set forth below. The unaudited pro forma condensed combined financial statements
do not give effect to the anticipated cost savings in connection with the
merger.
The unaudited pro forma condensed combined financial statements should be read
in conjunction with the historical consolidated financial statements of First
Capital and Hometown, including the respective notes to those statements. The
pro forma information is not necessarily indicative of the combined financial
position or the results of operations in the future or of the combined financial
position or the results of operations which would have been realized had the
merger been consummated as of the date or during the periods for which the pro
forma information is presented.
Note 1. Basis of Presentation
On September 25, 2002, First Capital, Inc. ("acquiror"), the thrift holding
company for First Harrison Bank, and Hometown, the bank holding company for
Hometown National Bank, entered into an Agreement and Plan of Merger whereby
each of the issued and outstanding common shares of Hometown will be exchanged
for shares of First Capital or $46.50 in cash per share. The number of shares of
First Capital common stock to be exchanged for each share of Hometown common
stock will be based on the average closing price of First Capital common stock
over a twenty day trading period shortly before the closing of the merger.
Elections to receive stock, cash or a combination of stock and cash by the
shareholders of Hometown will be limited by a requirement that 50% of the total
number of outstanding shares of Hometown common stock be exchanged for First
Capital common stock. It is anticipated that the merger will be consummated in
the first quarter of 2003.
Under generally accepted accounting principles, the merger will be accounted for
using the purchase method of accounting and, as such, the assets and liabilities
acquired will be recorded at fair value. In accordance with Statement of
Financial Account Standards No. 142 (SFAS 142), Goodwill and Other Tangible
Assets, goodwill acquired in a business combination for which the acquisition
date is after June 30, 2001 shall not be amortized. Goodwill must be tested for
impairment in future periods following the business combination. Impairment is
the condition that exists when the carrying amount of goodwill exceeds its
implied fair value. Also, in accordance with this statement, intangible assets
other than goodwill acquired in a business combination for which the acquisition
date is after June 30, 2001, shall be amortized based on the estimated useful
life of the intangible asset unless that life is determined to be indefinite.
The audited pro forma condensed combined balance sheet assumes the merger was
consummated on September 30, 2002 and the fair value of assets acquired and
liabilities assumed approximate the carrying value in the historical financial
statements of Hometown. The unaudited pro forma condensed combined statements
of income give effect to the merger as if the merger occurred at the beginning
of the earliest period presented.
59
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS - CONTINUED
Note 2. Accounting Policies and Financial Statement Classifications
The accounting policies of both companies are in the process of being reviewed
for consistency. As a result of this review, certain conforming accounting
adjustments may be necessary. The nature and extent of these adjustments have
not been determined but are not expected to be significant.
Note 3. Merger- and Restructuring-Related Charges
A liability of $180,000 (pre-tax) has been recorded in the unaudited pro forma
combined balance sheet to reflect First Capital's best estimate of merger- and
restructuring-related charges in connection with the merger. This liability
resulted in a $52,000 after-tax charge to retained earnings in the unaudited pro
forma combined balance sheet.
Merger- and restructuring-related charges include additional office supplies and
signage expenses relating to the name change at the Hometown locations, expenses
related to conversion of Hometown's data processing systems, and capital
expenditures for data processing equipment. The effect of the proposed charge
has been reflected in the unaudited pro forma combined balance sheet as of
September 30, 2002. However, since the proposed charge is nonrecurring, it has
not been reflected in the unaudited pro forma combined statements of income.
Note 4. Pro Forma Earnings Per Share
The pro forma combined earnings per share information for the nine month period
ended September 30, 2002 and the year ended December 31, 2001, has been computed
based on the pro forma combined weighted average common shares outstanding for
each period as if the merger had occurred at the beginning of the earliest
period presented. The basic and fully diluted weighted average common shares
outstanding for First Capital were adjusted to include the converted Hometown
weighted average common shares outstanding. In accordance with the merger
agreement, 50% of the outstanding common shares of Hometown will be converted
into common shares of First Capital at an exchange ratio of 2.735.
60
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS - CONTINUED
Note 5. Pro forma Adjustments
The following is a summary of the pro forma adjustments to reflect the proposed
business combination and the effect of merger and restructuring related expenses
in the pro forma balance sheet:
Debit Credit
(In thousands)
(a). Retained earnings $208
Other liabilities $208
Pro forma adjustment to recognize a liability for estimated
merger transaction costs of Hometown incurred prior to or
coincident with consummation of the merger. (No income tax
benefit has been assumed)
(b). Retained earnings $173
Other liabilities $173
Pro forma adjustment to recognize a liability, net of tax
benefit, for amounts payable by Hometown pursuant to the
severance and non-competition agreement with C. Ronald Clark
coincident with consummation of the merger. (Total severance
and non-competition payments to Mr. Clark of $270,000, net of
income tax benefit of $97,000)
(c). Premises and equipment $ 75
Retained earnings 52
Other liabilities $127
Pro forma adjustment to recognize a liability, net of tax
benefit, for non-recurring merger and restructuring-related
expenses and for capital expenditures for data processing
equipment. See Note 3 for additional information.
(d). Cash and due from banks $180
Federal Reserve Bank stock $180
Pro forma adjustment to record expected redemption of Federal
Reserve Bank stock of Hometown consummation of merger.
61
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS - CONTINUED
Note 5. Pro forma Adjustments - continued
Debit Credit
(In thousands)
(e) Amortizable core deposit intangible $ 894
Goodwill 3,042
Common stock 5,973
Retained earnings 1,026
Accumulated other comprehensive income $ 4
Cash and due from banks 5,595
Common stock 3
Additional paid-in capital 5,333
Pro forma adjustment to recognize estimated core deposit intangible and
goodwill for the acquisition of Hometown using the purchase method of
accounting. For the purpose of the pro forma presentation, management has
assumed that the fair values of assets acquired and liabilities assumed
approximate their carrying amounts. Management has assumed an estimated core
deposit intangible at 5% of core deposits at September 30, 2002, defined as
total demand and savings deposits of Hometown of approximately $17.9
million. Management expects to amortize the core deposit intangible over an
estimated economic life of six years.
Following is a summary of the excess of cost over the fair value of acquired
net assets (goodwill) recognized in the pro forma balance sheet:
(In thousands)
Expected cost of acquired entity:
Common stock of First Capital to be issued in
exchange for 114,750 common shares of
Hometown Bancshares (50%) at an exchange ratio of 2.735,
313,840 shares at an average closing price of $17.00 $ 5,336
Cash consideration for 114,750 common shares of
Hometown Bancshares (50%) at $46.50 per share 5,336
Estimated direct costs of the business combination 259
--------
Total expected cost of Hometown $10,931
Pro forma estimated fair value of acquired assets and
(liabilities) as of September 30, 2002:
Total carrying amount of assets $ 84,481
Estimated value of core deposit intangible 894
Total carrying amount of liabilities (77,105)
Pro forma adjustment to recognize liabilities
of Hometown in connection with the merger (381)
Pro forma net assets acquired -------- 7,889
-------
Estimated goodwill $ 3,042
=======
62
A Warning About Forward-Looking Statements
This proxy statement-prospectus, including information included or
incorporated by reference in this document, contains certain forward-looking
statements with respect to the financial condition, results of operations,
plans, objectives, future performance and business of each of First Capital and
Hometown, as well as certain information relating to the merger. These
statements are preceded by, followed by or include the words "believes,"
"expects," "anticipates," "estimates" or similar expressions.
These forward-looking statements involve certain risks and uncertainties.
Actual results may differ materially from those contemplated by the
forward-looking statements due to, among others, the following factors:
. expected cost savings from the merger may not be fully realized or
realized within the expected time frame;
. revenues following the merger may be lower than expected;
. competitive pressures among financial services companies may increase
significantly;
. costs or difficulties related to the integration of the business of
First Capital and Hometown may be greater than expected;
. changes in the interest rate environment may reduce interest margins;
. general economic conditions, either nationally or in Indiana, may be
less favorable than expected;
. legislative or regulatory changes may adversely affect the business in
which First Capital or Hometown is engaged; and
. changes may occur in the securities markets.
First Capital does not intend to update or otherwise revise any
forward-looking statements to reflect circumstances existing since their
preparation or to reflect the occurrence of unanticipated events, even in the
event that any or all of the underlying assumptions are shown to be in error.
Furthermore, First Capital does not intend to update or revise the
forward-looking statements to reflect changes in general economic or industry
conditions.
See "Where You Can Find More Information."
63
Description of First Capital Common Stock
General
First Capital is authorized to issue 5,000,000 shares of common stock
having a par value of $.01 per share and 1,000,000 shares of preferred stock
having a par value of $.01 per share. Each share of First Capital's common stock
has the same relative rights as, and is identical in all respects with, each
other share of common stock.
Common Stock
Dividends. First Capital can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its board of directors. The
payment of dividends by First Capital is subject to limitations that are imposed
by law and applicable regulation. The holders of common stock of First Capital
are entitled to receive and share equally in any dividends as may be declared by
the board of directors of First Capital out of funds legally available for the
payment of dividends. If First Capital issues preferred stock, the holders of
the preferred stock may have a priority over the holders of the common stock
with respect to dividends.
Voting Rights. The holders of common stock of First Capital possess
exclusive voting rights in First Capital. They elect First Capital's board of
directors and act on any other matters as are required to be presented to them
under applicable law or as are otherwise presented to them by the board of
directors. Each holder of common stock is entitled to one vote per share and
does not have any right to cumulate votes in the election of directors. First
Capital's articles of incorporation, however, provide that a holder of First
Capital common stock who owns, together with certain affiliates or persons
acting in concert, in excess of 10% of the then-outstanding shares of common
stock cannot vote any shares in excess of 10% unless permitted by the board of
directors of First Capital. If First Capital issues preferred stock, holders of
preferred stock may also possess voting rights. Certain matters require the vote
of 80% of the outstanding shares entitled to vote thereon.
Liquidation. In the event of liquidation, dissolution or winding up of
First Capital, the holders of its common stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of First Capital available for distribution. If First Capital issues
preferred stock, the holders of the preferred stock may have a priority over the
holders of the common stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the common stock of First Capital are not
entitled to preemptive rights with respect to any shares that may be issued. The
common stock is not subject to redemption.
Preferred Stock
First Capital may issue preferred stock with such designations, powers,
preferences and rights as First Capital's board of directors may from time to
time determine. The board of directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights that
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. None of the shares of the authorized preferred stock will be issued in
connection with the merger and there are no plans to issue preferred stock.
64
Comparison of Rights of Stockholders
The rights of stockholders of First Capital are currently governed by First
Capital's articles of incorporation, bylaws and applicable provisions of the
Indiana Business Corporation Law. The rights of stockholders of Hometown are
currently governed by Hometown's articles of incorporation, bylaws and
applicable provisions of the Indiana Business Corporation Law. If we complete
the merger, Hometown stockholders who elect to receive stock and who do not
exercise dissenters' rights will receive First Capital common stock and will
become First Capital stockholders and their rights will likewise be governed by
First Capital's articles of incorporation and bylaws.
Because First Capital and Hometown are both organized under the laws of the
state of Indiana, any differences in your rights as a stockholder of Hometown
and First Capital will arise solely from differences in the articles of
incorporation and bylaws of First Capital and Hometown rather than from
differences of law. This summary is not a complete discussion of the First
Capital and Hometown articles and bylaws, and it is qualified in its entirety by
reference to those documents. Copies of First Capital's articles and bylaws are
on file with the SEC. Copies of Hometown's articles and bylaws may be requested
in writing from C. Ronald Clark, Chairman and Chief Executive Officer, Hometown
Bancshares, Inc. 3131 Grant Line Road, New Albany, Indiana 47150.
Authorized Stock
--------------------------------------------------------------------------------
First Capital Hometown
-------------------------------------- --------------------------------------
.. The First Capital articles of . The Hometown articles of
incorporation authorizes 6,000,000 incorporation authorize 925,000
shares of capital stock, consisting shares of capital stock, consisting
of 5,000,000 shares of common of 900,000 shares of common stock,
stock, $.01 par value, and no par value, and 25,000 shares of
1,000,000 shares of serial preferred stock, no par value.
preferred stock, $.01 par value.
.. As of September 30, 2002, there . As of September 30, 2002, there
were 2,551,103 shares of First were 229,550 shares of Hometown
Capital common stock issued and common stock issued and
outstanding. outstanding.
.. As of September 30, 2002, there . Same.
were no shares of preferred stock
issued or outstanding.
Voting Rights
--------------------------------------------------------------------------------
First Capital Hometown
-------------------------------------- --------------------------------------
.. The holders of the common stock . Same.
exclusively possess all voting
power, subject to the authority of
the board of directors to offer
voting rights to the holders of
preferred stock.
.. Each share of common stock is . Each share of common stock is
entitled to one vote. Beneficial entitled to one vote.
owners of 10% or more of the
outstanding stock are subject to
voting limitations.
.. Holders of common stock may not . Same.
cumulate their votes for the
election of directors.
65
Required Vote for Authorization of Certain Actions
--------------------------------------------------------------------------------
First Capital Hometown
-------------------------------------- --------------------------------------
.. At least 80% of the outstanding . Hometown's articles of
shares of voting stock must approve incorporation do not provide for
certain "business combinations" any special vote requirement or
involving a "related person." In vote limitation for authorization
addition, a business combination of certain actions. Accordingly, a
with a related person must be majority vote of the outstanding
approved by at least a majority of shares is sufficient to approve a
outstanding shares of voting stock business combination.
other than shares beneficially
owned by the related person. See
"Selected Provisions In The
Articles of Incorporation And
Bylaws Of First Capital-- Business
Combinations with Related Persons."
However, if a two-thirds majority
of directors not affiliated with
the related person approves the
business combination, a majority
vote of the outstanding shares is
sufficient to approve a business
combination.
Dividends
--------------------------------------------------------------------------------
First Capital Hometown
-------------------------------------- --------------------------------------
.. Holders of common stock are . Holders of common stock are
entitled, when declared by the entitled, when declared by the
First Capital board, to receive Hometown board, to receive
dividends, subject to the rights of dividends.
holders of preferred stock.
Stockholders' Meetings
--------------------------------------------------------------------------------
First Capital Hometown
-------------------------------------- --------------------------------------
.. First Capital must deliver notice . Same.
of the meeting and, in the case of
a special meeting, a description of
its purpose no fewer than ten days
and no more than 60 days before the
meeting to each stockholder
entitled to vote.
.. The chairman of the board or the . Hometown's articles of
highest ranking officer present incorporation and bylaws and the
will chair the meeting. Indiana Business Corporation Law
do not specify who will chair the
meeting.
.. Only the chairman or a majority of . The chairman of the board, a
the board of directors may call a majority of the board of directors
special meeting. or at least one-third of the
shares entitled to vote may call a
special meeting.
.. For purposes of determining . For purposes of determining
stockholders entitled to vote at a stockholders entitled to vote at a
meeting, the board of meeting, the board of
66
directors may fix a record date directors may fix a record date
that is not less than ten days more that is not more than 70 days
than 70 days before the meeting. before the meeting.
.. The board of directors or any . Same.
stockholder of any class of capital
stock entitled to vote for the
election of directors may nominate
directors for election or propose
new business.
.. To nominate a director or propose . There are no prior notice
new business, stockholders must requirements for making nominations
give written notice to the or proposing new business.
Secretary of First Capital not less
than 30 days nor more than 60 days
prior to the meeting. However, if
First Capital gives less than 31
days' notice of the meeting to the
stockholders, written notice of the
stockholder proposal or nomination
must be delivered to the Secretary
within ten days of the date notice
of the meeting was mailed to
stockholders. Each notice given by
a stockholder with respect to a
nomination to the board of
directors or proposal for new
business must include certain
information regarding the nominee
or proposal and the stockholder
making the nomination or proposal.
Action by Stockholders Without a Meeting
--------------------------------------------------------------------------------
First Capital Hometown
-------------------------------------- --------------------------------------
.. Any action that requires the . Same.
approval of the stockholders may be
taken without a meeting by the
unanimous written consent of all
stockholders entitled to vote on
the action.
Board of Directors
--------------------------------------------------------------------------------
First Capital Hometown
-------------------------------------- --------------------------------------
.. The articles of incorporation and . The bylaws provide that the number
bylaws provide that the number of of directors shall consist of not
directors shall be no fewer than less than five nor more than 20
five nor more than 15 and that the members, the exact number to be set
board of directors shall fix the by resolution of the board of
number of directors by resolution. directors
.. There are currently 12 members of . There are currently 11 members of
the First Capital board of the Hometown board of directors.
directors.
.. The board of directors is divided . All directors of Hometown are in
into three classes as equal in the same class; each director holds
number as possible and office for one year and is elected
approximately one-third of the at each annual meeting.
directors are elected at each
annual meeting.
67
.. Vacancies on the board of directors . Vacancies may be filled by majority
will be filled by the remaining vote of the remaining directors
directors or by the stockholders at until the next stockholders'
the next annual meeting. meeting at which directors are
elected.
.. Directors may be removed only for . Directors may be removed with or
cause by the vote of at least without cause at any time by a vote
two-thirds of the outstanding of at least 75% of the board of
shares entitled to vote for directors. Directors may be removed
directors. Cause for removal is with cause by a majority vote of
deemed to exist only if the the stockholders entitled to vote.
director is convicted of a felony
or found by a court to be liable
for gross negligence or misconduct
in the performance of the
director's duties to First Capital.
Amendment of the Bylaws
--------------------------------------------------------------------------------
First Capital Hometown
-------------------------------------- --------------------------------------
.. The bylaws may be amended or . The bylaws may be amended or
repealed only with the approval of repealed with the approval of at
at least two-thirds of the board of least a majority of the board of
directors. directors, subject to the rights of
the stockholders.
Amendment of the Articles of Incorporation
--------------------------------------------------------------------------------
First Capital Hometown
-------------------------------------- --------------------------------------
.. The articles of incorporation may . The articles of incorporation maybe
be amended or repealed upon amended or repealed upon approval
approval of at least two-thirds of of at least a majority of the board
the board of directors and by a of directors and by a majority of
majority of shares entitled to vote shares entitled to vote on the
on the matter, unless otherwise matter unless otherwise provided in
provided in the articles of the articles of incorporation or
incorporation or Indiana Business Indiana law. However, amendments to
Corporation Law. However, the articles of incorporation that
amendments to the articles of would revise the removal procedures
incorporation that would revise the for directors require approval by
provisions relating to the number, at least 80% of the outstanding
terms and classification, election shares.
and removal procedures for
directors, the process for calling
special meetings of stockholders,
voting restrictions applicable to
beneficial owners of 10% or more of
the voting stock, stockholder
approval of business combinations
with related persons, consideration
of social and economic factors when
evaluating a proposed business
combination, indemnification of
directors, officers and employees
of First Capital, the election not
to be governed by the Business
Combinations Chapter of the Indiana
Business Corporation Law, and
amendment of the articles of
incorporation require approval by
at least a two-thirds vote of the
outstanding shares.
68
Selected Provisions in the Articles of Incorporation
and Bylaws of First Capital
First Capital's articles of incorporation and bylaws contain certain
provisions that could make more difficult an acquisition of First Capital by
means of a tender offer, proxy context or otherwise. Certain provisions will
also render the removal of the incumbent board of directors or management of
First Capital more difficult. These provisions may have the effect of deterring
or defeating a future takeover attempt that is not approved by First Capital's
board of directors, but which First Capital stockholders may deem to be in their
best interests or in which stockholders may receive a substantial premium for
their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have the opportunity
to do so. The following description of these provisions is only a summary and
does not provide all of the information contained in First Capital's articles of
incorporation and bylaws. See "Where You Can Find More Information" as to where
to obtain a copy of these documents.
Business Combinations with Related Persons
The articles of incorporation require the approval of the holders of at
least 80% of First Capital's outstanding shares of voting stock to approve
certain "business combinations" involving a "related person" except in cases
where the proposed transaction has been approved in advance by a two-thirds vote
of those members of First Capital's board of directors who are unaffiliated with
the related person and were directors prior to the time when the related person
became a related person.
The term "related person" includes any individual or entity that owns
beneficially or controls, directly or indirectly, 10% or more of the outstanding
shares of voting stock of First Capital or an affiliate of the person or entity.
A "business combination" includes:
. any merger or consolidation of First Capital with or into any related
person;
. any sale, lease, exchange, mortgage, transfer, or other disposition of
25% or more of the assets of First Capital or a subsidiary of First
Capital;
. any merger or consolidation of a related person with or into First
Capital or a subsidiary of First Capital;
. any sale, lease, exchange, transfer, or other disposition of 25% or
more of the assets of a related person to First Capital or a
subsidiary of First Capital;
. the issuance of any securities of First Capital or a subsidiary of
First Capital to a related person;
. the acquisition by First Capital or a subsidiary of First Capital of
any securities of a related person;
. any reclassification of common stock of First Capital or any
recapitalization involving the common stock of First Capital; or
. any agreement or other arrangement providing for any of the foregoing.
Limitation on Voting Rights
69
First Capital's articles of incorporation provide that no record owner of
any outstanding First Capital common stock which is beneficially owned, directly
or indirectly, by a person who beneficially owns in excess of 10% of the then
outstanding shares of First Capital common stock will be entitled or permitted
to any vote in respect of the shares held in excess of the 10% limit, unless
permitted by a resolution adopted by a majority of the board of directors.
Beneficial ownership is determined pursuant to the federal securities laws and
includes shares beneficially owned by such person or any of his or her
affiliates (as defined in the articles of incorporation), shares which such
person or his or her affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his or her
affiliates have or share investment or voting power, but does not include shares
beneficially owned by directors, officers and employees of First Harrison or
First Capital or shares that are subject to a revocable proxy and that are not
otherwise beneficially, or deemed by First Capital to be beneficially, owned by
such person and his or her affiliates.
Board of Directors
Classified Board. The board of directors of First Capital is divided into
three classes, each of which contains approximately one-third of the number of
directors. The stockholders elect one class of directors each year for a term of
three years. The classified board makes it more difficult and time consuming for
a stockholder group to fully use its voting power to gain control of the board
of directors without the consent of the incumbent board of directors of First
Capital.
Filling of Vacancies; Removal. The articles of incorporation provide that
any vacancy occurring in the First Capital Board, including a vacancy created by
an increase in the number of directors, may be filled by a vote of a majority of
the directors then in office. The articles of incorporation of First Capital
provide that a director may be removed from the board of directors prior to the
expiration of his or her term only for cause and only upon the vote of
two-thirds of the outstanding shares of voting stock. These provisions make it
more difficult for stockholders to remove directors and replace them with their
own nominees.
Special Meetings of Stockholders
The articles of incorporation provide that only the Chairman or a majority
of the board of directors of First Capital may call a special meeting of the
stockholders of First Capital. Stockholders are not able to call a special
meeting or require the board to do so. At a special meeting, the stockholders
may consider only the business specified in the notice of meeting given by First
Capital. This provision prevents stockholders from forcing stockholder
consideration of a proposal between annual meetings over the opposition of the
Chairman and the First Capital board by calling a special meeting of the
stockholders.
Advance Notice Provisions for Stockholder Nominations and Proposals
First Capital's bylaws establish an advance notice procedure for
stockholders to nominate directors or bring other business before an annual
meeting of stockholders of First Capital. A person may not be nominated for
election as a director unless that person is nominated by or at the direction of
First Capital's board of directors or by a stockholder who has given appropriate
notice to First Capital before the meeting. Similarly, a stockholder may not
bring business before an annual meeting unless the stockholder has given First
Capital appropriate notice of its intention to bring that business before the
meeting. First Capital's Secretary must receive notice of the nomination or
proposal not less than 30 days and not more than 60 days prior to the annual
meeting. A stockholder who desires to raise new business must provide certain
information to First Capital concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must
provide First Capital with certain information concerning the nominee and the
proposing stockholder.
70
Advance notice of nominations or proposed business by stockholders gives
First Capital's board of directors time to consider the qualifications of the
proposed nominees, the merits of the proposals and, to the extent deemed
necessary or desirable by the board of directors, to inform stockholders and
make recommendations about those matters.
Preferred Stock
The articles of incorporation authorize First Capital's board of directors
to establish one or more series of preferred stock and, for any series of
preferred stock, to determine the terms and rights of the series, including
voting rights, conversion rates, and liquidation preferences. Although First
Capital's board of directors has no intention at the present time of doing so,
it could issue a series of preferred stock that could, depending on its terms,
impede a merger, tender offer or other takeover attempt. First Capital's board
of directors will make any determination to issue shares with those terms based
on its judgment as to the best interests of First Capital and its stockholders.
Amendment of Articles of Incorporation
First Capital's articles of incorporation requires the affirmative vote of
at least two-thirds of the outstanding voting stock entitled to vote to amend or
repeal certain provisions of the articles of incorporation, including the
provision limiting voting rights, the provisions relating to approval of
business combinations with related persons, calling special meetings, the number
and classification of directors, director and officer indemnification by First
Capital and amendment of First Capital's bylaws and articles of incorporation.
These supermajority voting requirements make it more difficult for the
stockholders to amend these provisions of the First Capital articles of
incorporation.
Legal Matters
The validity of the shares of First Capital common stock to be issued in
connection with the merger will be passed upon for First Capital by Muldoon
Murphy & Faucette LLP, Washington, D.C.
In addition, Muldoon Murphy & Faucette LLP, counsel to First Capital, will
deliver an opinion concerning federal income tax consequences of the merger.
Experts
The financial statements of First Capital as of December 31, 2001 and 2000
and for each of the two fiscal years ended December 31, 2001 included in the
Annual Report to Stockholders delivered together with this proxy
statement-prospectus have been audited by Monroe Shine and Co., Inc.,
independent auditors, as stated in their report appearing herein and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements of Hometown as of December 31, 2001 and 2000 and
for the two fiscal years ended December 31, 2001 have been included in this
proxy statement-prospectus in reliance upon the report of Monroe Shine and Co.,
Inc., independent certified public accountants, with respect to those financial
statements, and upon the authority of that firm as experts in accounting and
auditing.
Where You Can Find More Information
First Capital has filed with the Securities and Exchange Commission a
registration statement under the Securities Act that registers the distribution
to Hometown stockholders of the shares of First
71
Capital common stock to be issued in connection with the merger. The
registration statement, including the exhibits, contains additional relevant
information about First Capital and First Capital common stock. The rules and
regulations of the SEC allow First Capital to omit certain information included
in the registration statement from this proxy statement-prospectus.
First Capital files annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information that First Capital files at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. Please call the SEC
at 1-800-SEC-0330 for further information on the SEC's public reference rooms.
First Capital's public filings are also available to the public from commercial
document retrieval services and at the Internet World Wide Website maintained by
the SEC at "http://www.sec.gov."
The SEC allows First Capital to "incorporate by reference" information into
this proxy statement-prospectus. This means that First Capital can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed to
be part of this document, except for any information superseded by information
contained directly in this document. This document incorporates by reference the
other documents that are listed below that First Capital has previously filed
with the SEC. These documents contain important information about First
Capital's financial condition.
First Capital SEC Filings (File No. 0-25023)
1. Annual Report on From 10-KSB for the year ended December 31, 2001
2. Quarterly Reports on Form 10-KSB for the quarters ended March 31, 2002,
June 30, 2002 and September 30, 2002 (the latter accompanying this proxy
statement-prospectus in Appendix E.)
3. Current Reports on Form 8-K filed on September 30, 2002, January 10,
2003 and January 22, 2003
Documents incorporated by reference are available from First Capital
without charge (except for exhibits to the documents unless the exhibits are
specifically incorporated in this document by reference). You may obtain
documents incorporated by reference in this document by requesting them in
writing or by telephone from Hometown at the following address:
First Capital, Inc.
220 Federal Drive, N.W.
Corydon, Indiana 47112
Attention: Joel E. Voyles, Corporate Secretary
Telephone No.: (812) 738-2198
If you would like to request documents from First Capital, please do so by
March 6, 2003 in order to receive them before the special meeting of
stockholders. If you request any incorporated documents, First Capital will mail
them to you by first-class mail, or other equally prompt means, within one
business day of its receipt of your request.
First Capital has supplied all information contained in this proxy
statement-prospectus relating to First Capital, and Hometown has supplied all
information relating to Hometown.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the meeting. We have not
authorized anyone to provide you with information that is different from what is
contained or incorporated by reference in this document. This document is dated
January 30, 2003. You should not assume that the information contained in this
document is accurate as of any date other than that date, and neither the
mailing of this document to stockholders nor the issuance of First Capital's
securities in the merger shall create any implication to the contrary.
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APPENDIX A
================================================================================
AGREEMENT AND PLAN OF MERGER
DATED AS OF SEPTEMBER 25, 2002
BY AND BETWEEN
FIRST CAPITAL, INC.
AND
HOMETOWN BANCSHARES, INC.
================================================================================
Agreement and Plan of Merger
This is an Agreement and Plan of Merger, dated as of the 25th day of
September, 2002 ("Agreement"), by and between First Capital, Inc., an Indiana
corporation ("First Capital"), and Hometown Bancshares, Inc., an Indiana
corporation ("Hometown").
Introductory Statement
The Board of Directors of each of First Capital and Hometown (i) has
determined that this Agreement and the business combination and related
transactions contemplated hereby are advisable and in the best interests of
First Capital or Hometown, as the case may be, and in the best long-term
interests of the stockholders of First Capital or Hometown, as the case may be,
and (ii) has determined that this Agreement and the transactions contemplated
hereby are consistent with, and in furtherance of, its respective business
strategies.
The parties hereto intend that the Merger as defined herein shall qualify
as a reorganization under the provisions of Section 368(a) of the IRC for
federal income tax purposes.
First Capital and Hometown each desire to make certain representations,
warranties and agreements in connection with the business combination and
related transactions provided for herein and to prescribe various conditions to
such transactions.
As a condition and inducement to First Capital's willingness to enter into
this Agreement, each of the members of the Board of Directors of Hometown has
entered into an agreement dated as of the date hereof in the form of Exhibit A
pursuant to which he (or she) will vote his (or her) shares of Hometown Common
Stock in favor of this Agreement and the transactions contemplated hereby.
In consideration of their mutual promises and obligations hereunder, the
parties hereto adopt and make this Agreement and prescribe the terms and
conditions hereof and the manner and basis of carrying it into effect, which
shall be as follows:
ARTICLE I
Definitions
For purposes of this Agreement:
"Acquisition Proposal" means with respect to a party any proposal or offer
with respect to any of the following (other than the transactions contemplated
hereunder): (i) any merger, consolidation, share exchange, business combination,
or other similar transaction involving such party or any of its Subsidiaries;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition
of 25% or more of such party's consolidated assets outside of the regular course
of business in a single transaction or series of related transactions; (iii) any
tender offer or exchange offer for 25% or more of the outstanding shares of such
party's capital stock or the filing of a registration statement under the
Securities Act in connection therewith; or (iv) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in an any of the foregoing.
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"Agreement" means this Agreement, as amended, modified or amended and
restated from time to time in accordance with its terms.
"Articles of Merger" shall have the meaning given to that term in Section
2.3.
"Bank Merger" shall have the meaning given to that term in Section 2.13.
"BHC Act" means the Bank Holding Company Act of 1956, as amended.
"Cash Consideration" shall have the meaning given to that term in Section
2.5(a).
"Cash Election" shall have the meaning given to that term in Section
2.6(b).
"Cash Election Shares" shall have the meaning given to that term in Section
2.6(b).
"Cash Proration Factor" shall have the meaning given to that term in
Section 2.6(e)(ii)(B).
"Certificate" shall have the meaning given to that term in Section 2.6(c).
"Closing" shall have the meaning given to that term in Section 2.2.
"Closing Date" shall have the meaning given to that term in Section 2.2.
"Continuing Employee" shall have the meaning given to that term in Section
5.12(a).
"CRA" means the Community Reinvestment Act.
"Disclosure Letter" shall have the meaning given to that term in Section
3.1.
"Dissenters' Shares" shall have the meaning given to that term in Section
2.12.
"Effective Time" shall have the meaning given to that term in Section 2.3.
"Election Deadline" shall have the meaning given to that term in Section
2.6(c).
"Election Form" shall have the meaning given to that term in Section
2.6(a).
"Election Modification Period" shall have the meaning given to that term in
Section 2.6(c).
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, directive, executive or administrative order, judgment, decree,
injunction, or agreement with any Governmental Entity relating to (i) the
protection, preservation or restoration of the environment (which includes,
without limitation, air, water vapor, surface water, groundwater, drinking water
supply, soil, surface land, subsurface land, plant and animal life or any other
natural resource), or to human health or safety as it relates to Hazardous
Materials, or (ii) the exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production, release
or disposal of, Hazardous Materials, in each case as amended and as now in
effect. The term Environmental Law includes, without limitation, the Federal
Comprehensive
A-2
Environmental Response, Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act of 1986, the Federal Water Pollution Control
Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal
Resource Conservation and Recovery Act of 1976, the Federal Solid Waste Disposal
and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide
and Rodenticide Act, the Federal Occupational Safety and Health Act of 1970 as
it relates to Hazardous Materials, the Federal Hazardous Substances
Transportation Act, the Emergency Planning and Community Right-To-Know Act, the
Safe Drinking Water Act, the Endangered Species Act, the National Environmental
Policy Act, the Rivers and Harbors Appropriation Act or any so-called
"Superfund" or "Superlien" law, each as amended and as now in effect.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" shall have the meaning given to that term in Section
2.6(c).
"Exchange Ratio" shall have the meaning given to that term in Section
2.5(a).
"Excluded Shares" shall consist of (i) Dissenters' Shares and (ii) shares
held directly or indirectly by First Capital (other than shares held in a
fiduciary capacity or in satisfaction of a debt previously contracted).
"FDIA" means the Federal Deposit Insurance Act, as amended.
"FDIC" means the Federal Deposit Insurance Corporation.
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.
"First Capital" shall have the meaning given to that term in the preamble.
"First Capital Common Stock" means the common stock, par value $.01 per
share, of First Capital.
"First Capital Price" means the average of the closing sales prices of
First Capital Common Stock, as reported on The Nasdaq Stock Market, during the
Measurement Period; provided, however, that in the event First Capital Common
Stock does not trade on one or more of the trading days in the Measurement
Period, any such date shall be disregarded in computing the average closing
sales price and the average shall be based upon the closing sales price and
number of days on which First Capital Common Stock actually traded during the
Measurement Period.
"First Capital Regulatory Filings" shall have the meaning given to that
term in Section 3.3(g)(ii).
"First Capital's Reports" shall have the meaning given to that term in
Section 3.3(g)(i).
"First Harrison Bank" shall have the meaning given to that term in Section
2.13.
A-3
"GAAP" means generally accepted accounting principles.
"Government Regulator" means any federal or state governmental authority
charged with the supervision or regulation of depository institutions or
depository institution holding companies or engaged in the insurance of bank
deposits.
"Governmental Entity" means any court, administrative agency or commission
or other governmental authority or instrumentality.
"Hazardous Material" means any substance (whether solid, liquid or gas)
which is or could be detrimental to human health or safety or to the
environment, currently or hereafter listed, defined, designated or classified as
hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any
Environmental Law, whether by type or by quantity, including any substance
containing any such substance as a component. Hazardous Material includes,
without limitation, any toxic waste, pollutant, contaminant, hazardous
substance, toxic substance, hazardous waste, special waste, industrial
substance, oil or petroleum, or any derivative or by-product thereof, radon,
radioactive material, asbestos, asbestos-containing material, urea formaldehyde
foam insulation, lead and polychlorinated biphenyl.
"HOLA" means the Home Owners' Loan Act, as amended.
"Hometown" shall have the meaning given to that term in the preamble.
"Hometown Common Stock" means the common stock, no par value per share, of
Hometown.
"Hometown Employee Plans" shall have the meaning given to that term in
Section 3.2(r)(i).
"Hometown National Bank" shall have the meaning given to that term in
Section 2.13.
"Hometown Qualified Plan" shall have the meaning given to that term in
Section 3.2(r)(iv).
"Hometown Regulatory Filings" shall have the meaning given to that term in
Section 3.2(g).
"IBCL" means the Indiana Business Corporation Law.
"Indemnified Party" shall have the meaning given to that term in Section
5.13(a).
"IRC" means the Internal Revenue Code of 1986, as amended.
"IRS" means the Internal Revenue Service.
"knowledge" means, with respect to a party hereto, actual knowledge of the
members of the Board of Directors of that party or any officer of that party
with the title ranking not less than senior vice president.
"Letter of Transmittal" shall have the meaning given to that term in
Section 2.7(a).
"Lien" means any charge, mortgage, pledge, security interest, claim, lien
or encumbrance.
A-4
"Loan" means a loan, lease, advance, credit enhancement, guarantee or other
extension of credit.
"Loan Property" means any property in which the applicable party (or a
subsidiary of it) holds a security interest and, where required by the context,
includes the owner or operator of such property, but only with respect to such
property.
"Mailing Date" shall have the meaning given to that term in Section 2.6(a).
"Material Adverse Effect" means an effect which is material and adverse to
the business, financial condition or results of operations of Hometown or First
Capital, as the context may dictate, and its Subsidiaries taken as a whole;
provided, however, that any such effect resulting from any (i) changes in laws,
rules or regulations or generally accepted accounting principles or regulatory
accounting requirements or interpretations thereof that apply to both First
Capital and Hometown, or to financial and/or depository institutions generally,
(ii) changes in economic conditions affecting financial institutions generally,
including but not limited to, changes in the general level of market interest
rates, (iii) actions and omissions of First Capital or Hometown taken with the
prior written consent of the other in contemplation of the transactions
contemplated hereby and (iv) direct effects of compliance with this Agreement on
the operating performance of the parties, including expenses incurred by the
parties in consummating the transactions contemplated by this Agreement, shall
not be considered in determining if a Material Adverse Effect has occurred.
"Maximum Insurance Amount" shall have the meaning given to that term in
Section 5.13(c).
"Measurement Period" means the twenty consecutive trading days ending on
the third business day prior to the Closing Date.
"Merger" shall have the meaning given to that term in Section 2.1.
"Merger Consideration" shall have the meaning given to that term in Section
2.5(a).
"Mixed Election" shall have the meaning given to that term in Section
2.6(b).
"NASD" means the National Association of Securities Dealers, Inc.
"Non-Election" shall have the meaning given to that term in Section 2.6(b).
"Non-Election Proration Factor" shall have the meaning given to that term
in Section 2.6(e)(ii)(A).
"Non-Election Shares" shall have the meaning given to that term in Section
2.6(b).
"OTS" means the Office of Thrift Supervision.
"Participation Facility" means any facility in which the applicable party
(or a Subsidiary of it) participates in the management (including all property
held as trustee or in any other fiduciary capacity) and, where required by the
context, includes the owner or operator of such property, but only with respect
to such property.
A-5
"person" means an individual, corporation, limited liability company,
partnership, association, trust, unincorporated organization or other entity.
"Proxy Statement-Prospectus" shall have the meaning given to that term in
Section 5.9(a).
"Registration Statement" shall have the meaning given to that term in
Section 5.9(a).
"Representative" shall have the meaning given to that term in Section
2.6(b).
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Shortfall Number" shall have the meaning given to that term in Section
2.6(e)(ii).
"Stock Consideration" shall have the meaning given to that term in Section
2.5(a).
"Stock Conversion Number" shall have the meaning given to that term in
Section 2.6(d).
"Stock Election" shall have the meaning given to that term in Section
2.6(b).
"Stock Election Number" shall have the meaning given to that term in
Section 2.6(b).
"Stock Election Shares" shall have the meaning given to that term in
Section 2.6(b).
"Stock Proration Factor" shall have the meaning given to that term in
Section 2.6(d).
"Stockholder Meeting" shall have the meaning given to that term in Section
5.8.
"Subsidiary" means a corporation, partnership, joint venture or other
entity in which Hometown or First Capital, as the case may be, has, directly or
indirectly, an equity interest representing 50% or more of any class of the
capital stock thereof or other equity interests therein.
"Superior Proposal" means an unsolicited, bona fide written offer made by a
third party to consummate an Acquisition Proposal that (i) Hometown's Board of
Directors determines in good faith, after consulting with its outside legal
counsel and its financial advisor, would, if consummated, result in a
transaction that is more favorable to the stockholders of Hometown than the
transactions contemplated hereby, including any adjustments to the terms and
conditions of such transactions proposed by First Capital in response to such
Acquisition Proposal, and taking into account all legal, financial, regulatory
and other aspects of the Acquisition Proposal and the entity making the
Acquisition Proposal, (ii) is not conditioned on obtaining financing, and (iii)
is for 100% of the outstanding shares of Hometown Common Stock.
"Surviving Corporation" shall have the meaning given to that term in
Section 2.1.
A-6
"taxes" means all income, franchise, gross receipts, real and personal
property, real property transfer and gains, wage and employment taxes.
ARTICLE II
The Merger
2.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, Hometown will merge with and into First Capital ("Merger") at
the Effective Time. At the Effective Time, the separate corporate existence of
Hometown shall cease. First Capital shall be the surviving corporation
(hereinafter sometimes referred to in such capacity as the "Surviving
Corporation") in the Merger and shall continue to be governed by the IBCL and
its name and separate corporate existence, with all of its rights, privileges,
immunities, powers and franchises, shall continue unaffected by the Merger.
2.2 Closing. The closing of the Merger (the "Closing") will take place in
the offices of Muldoon Murphy & Faucette LLP, 5101 Wisconsin Avenue, Washington,
DC at 10:00 a.m. on the date designated by First Capital within thirty days
following satisfaction or waiver of the conditions to Closing set forth in
Article VI (other than those conditions that by their nature are to be satisfied
at the Closing), or such later date as the parties may otherwise agree (the
"Closing Date").
2.3 Effective Time. In connection with the Closing, First Capital shall
duly execute and deliver articles of merger (the "Articles of Merger") to the
Indiana Secretary of State for filing pursuant to the IBCL. The parties will
make all other filings or recordings required under the IBCL. The Merger shall
become effective at such time as the Articles of Merger are duly filed with the
Indiana Secretary of State or at such later date or time as First Capital and
Hometown agree and specify in the Articles of Merger (the date and time the
Merger becomes effective being the "Effective Time").
2.4 Effects of the Merger. The Merger will have the effects set forth in
the IBCL. Without limiting the generality of the foregoing, and subject thereto,
from and after the Effective Time, First Capital shall possess all of the
properties, rights, privileges, powers and franchises of Hometown and be subject
to all of the debts, liabilities and obligations of Hometown.
2.5 Effect on Outstanding Shares of Hometown Common Stock.
(a) Subject to the provisions of Section 2.6 hereof, by virtue of the
Merger, automatically and without any action on the part of the holder thereof,
each share of Hometown Common Stock issued and outstanding at the Effective
Time, other than Excluded Shares, shall become and be converted into, at the
election of the holder as provided in and subject to the limitations set forth
in this Agreement, either (i) the right to receive $46.50 in cash without
interest (the "Cash Consideration") or (ii) the number of shares of First
Capital Common Stock equal to the Exchange Ratio (as defined below)(the "Stock
Consideration"). The Cash Consideration and the Stock Consideration are
sometimes referred to herein collectively as the "Merger Consideration." The
"Exchange Ratio" shall be equal (rounded to the nearest one-thousandth) to (A)
the result obtained by dividing $39.52 by the First Capital Price if the First
Capital Price is less than $14.45, (B) 2.735 if the First Capital Price is (i)
$14.45 or more and (ii) less than $19.55 or (C) the result obtained by dividing
$53.47 by the First Capital Price if the First Capital Price is $19.55 or more.
A-7
(b) Notwithstanding any other provision of this Agreement, no
fraction of a share of First Capital Common Stock and no certificates or scrip
therefor will be issued in the Merger; instead, First Capital shall pay to each
holder of Hometown Common Stock who would otherwise be entitled to a fraction of
a share of First Capital Common Stock an amount in cash, rounded to the nearest
cent, determined by multiplying such fraction by the First Capital Price.
(c) If, between the date of this Agreement and the Effective Time,
the outstanding shares of First Capital Common Stock shall have been changed
into a different number of shares or into a different class by reason of any
stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares, the Exchange Ratio shall be adjusted
appropriately to provide the holders of Hometown Common Stock the same economic
effect as contemplated by this Agreement prior to such event.
(d) As of the Effective Time, each Excluded Share, other than
Dissenters' Shares, shall be canceled and retired and shall cease to exist, and
no exchange or payment shall be made with respect thereto. All shares of First
Capital Common Stock that are held by Hometown, if any, other than shares held
in a fiduciary capacity or in satisfaction of a debt previously contracted,
shall be canceled and shall constitute authorized but unissued shares. In
addition, no Dissenters' Shares shall be converted into shares of First Capital
Common Stock pursuant to this Section 2.5 but instead shall be treated in
accordance with the provisions set forth in Section 2.12 of this Agreement.
2.6 Election and Proration Procedures.
(a) An election form in such form as Hometown and First Capital shall
mutually agree (an "Election Form") shall be mailed on the Mailing Date (as
defined below) to each holder of record of shares of Hometown Common Stock as of
a record date which shall be the same date as the record date for eligibility to
vote on the Merger. The "Mailing Date" shall be the date on which proxy
materials relating to the Merger are mailed to holders of shares of Hometown
Common Stock. First Capital shall make available Election Forms as may be
reasonably requested by all persons who become holders of Hometown Common Stock
after the record date for eligibility to vote on the Merger and prior to the
Election Deadline (as defined herein), and Hometown shall provide to the
Exchange Agent all information reasonably necessary for it to perform its
obligations as specified herein.
(b) Each Election Form shall entitle the holder of shares of Hometown
Common Stock (or the beneficial owner through appropriate and customary
documentation and instructions) to (i) elect to receive the Cash Consideration
for all of such holder's shares (a "Cash Election"), (ii) elect to receive the
Stock Consideration for all of such holder's shares (a "Stock Election"), (iii)
elect to receive the Stock Consideration with respect to some of such holder's
shares and the Cash Consideration with respect to such holder's remaining shares
(a "Mixed Election") or (iv) make no election or to indicate that such holder
has no preference as to the receipt of the Cash Consideration or the Stock
Consideration (a "Non-Election"). Holders of record of shares of Hometown Common
Stock who hold such shares as nominees, trustees or in other representative
capacities (a "Representative") may submit multiple Election Forms, provided
that such Representative certifies that each such Election Form covers all the
shares of Hometown Common Stock held by that Representative for a particular
beneficial owner. Shares of Hometown Common Stock as to which a Cash Election
has been made (including pursuant to a Mixed Election) are referred to herein as
"Cash Election Shares." Shares of Hometown Common Stock as to which a Stock
Election has been made (including pursuant to a Mixed Election) are referred to
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herein as "Stock Election Shares." Shares of Hometown Common Stock as to which
no election has been made are referred to as "Non-Election Shares." For purposes
of this Section, Excluded Shares shall be deemed Cash Election Shares. The
aggregate number of shares of Hometown Common Stock with respect to which a
Stock Election has been made is referred to herein as the "Stock Election
Number."
(c) To be effective, a properly completed Election Form must be
received by a bank or trust company designated by First Capital and reasonably
satisfactory to Hometown (the "Exchange Agent") on or before 5:00 p.m., New York
City time, on the third business day immediately preceding Hometown's
Stockholder Meeting (or such other time and date as Hometown and First Capital
may mutually agree) (the "Election Deadline"). An election shall have been
properly made only if the Exchange Agent shall have actually received a properly
completed Election Form by the Election Deadline. An Election Form shall be
deemed properly completed only if accompanied by one or more certificates
theretofore representing Hometown Common Stock ("Certificates") (or customary
affidavits and, if required by First Capital pursuant to Section 2.7(i),
indemnification regarding the loss or destruction of such Certificates or the
guaranteed delivery of such Certificates) representing all shares of Hometown
Common Stock covered by such Election Form, together with duly executed
transmittal materials included with the Election Form. Any Hometown stockholder
may at any time prior to the Election Deadline change his or her election by
written notice received by the Exchange Agent prior to the Election Deadline
accompanied by a properly completed and signed revised Election Form. Any
Hometown stockholder may, at any time prior to the Election Deadline, revoke his
or her election by written notice received by the Exchange Agent prior to the
Election Deadline or by withdrawal prior to the Election Deadline of his or her
Certificates, or of the guarantee of delivery of such Certificates, previously
deposited with the Exchange Agent. Notwithstanding the previous two sentences,
if the Effective Time shall not occur within 15 days following the Election
Deadline, then during the period commencing on the 16th day following the
Election Deadline and ending on 5:00 p.m., New York City time, on the third
business day prior to the Closing Date (the "Election Modification Period"), any
Hometown stockholder may change or revoke his or her election in the manner
specified in the previous two sentences. All elections shall be revoked
automatically if the Exchange Agent is notified in writing by First Capital and
Hometown that this Agreement has been terminated. If a stockholder either (i)
does not submit a properly completed Election Form by the Election Deadline,
(ii) revokes (as opposed to changes) his or her Election Form prior to the
Election Deadline and does not submit a new properly executed Election Form
prior to the Election Deadline or (iii) revokes his or her Election Form during
the Election Modification Period, the shares of Hometown Common Stock held by
such stockholder shall be designated Non-Election Shares. First Capital shall
cause the Certificates representing Hometown Common Stock described in (ii) or
(iii) in the immediately preceding sentence to be promptly returned without
charge to the person submitting the Election Form upon written request to that
effect from the person who submitted the Election Form. Subject to the terms of
this Agreement and of the Election Form, the Exchange Agent shall have
reasonable discretion to determine whether any election, revocation or change
has been properly or timely made and to disregard immaterial defects in any
Election Form, and any good faith decisions of the Exchange Agent regarding such
matters shall be binding and conclusive.
(d) Notwithstanding any other provision contained in this Agreement,
50% of the total number of shares of Hometown Common Stock outstanding at the
Effective Time (the "Stock Conversion Number") shall be converted into the Stock
Consideration and the remaining outstanding shares of Hometown Common Stock
(excluding shares of Hometown Common Stock to be canceled as provided in Section
2.5(d) and Dissenters' Shares) shall be converted into the Cash Consideration.
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(e) Within three business days after the later to occur of the
Election Deadline or the Effective Time, First Capital shall cause the Exchange
Agent to effect the allocation among holders of Hometown Common Stock of rights
to receive the Cash Consideration and the Stock Consideration as follows:
(i) If the Stock Election Number exceeds the Stock Conversion
Number, then all Cash Election Shares and all Non-Election Shares shall be
converted into the right to receive the Cash Consideration, and each holder of
Stock Election Shares will be entitled to receive (A) the number of shares of
First Capital Common Stock equal to the product obtained by multiplying (1) the
number of Stock Election Shares held by such holder by (2) the Exchange Ratio by
(3) a fraction the numerator of which is the Stock Conversion Number and the
denominator of which is the Stock Election Number (the "Stock Proration Factor")
and (B) cash in an amount equal to the product obtained by multiplying (1) the
number of Stock Election Shares held by such holder by (2) the Cash
Consideration by (3) one minus the Stock Proration Factor;
(ii) If the Stock Election Number is less than the Stock
Conversion Number (the amount by which the Stock Conversion Number exceeds the
Stock Election Number being referred to herein as the "Shortfall Number"), then
all Stock Election Shares shall be converted into the right to receive the Stock
Consideration and the Non-Election Shares and Cash Election Shares shall be
treated in the following manner:
(A) if the Shortfall Number is less than or equal to the
number of Non-Election Shares, then all Cash Election Shares shall be converted
into the right to receive the Cash Consideration and each holder of Non-Election
Shares shall receive (1) the number of shares of First Capital Common Stock
equal to the product obtained by multiplying (x) the number of Non-Election
Shares held by such holder by (y) the Exchange Ratio by (z) a fraction the
numerator of which is the Shortfall Number and the denominator of which is the
total number of Non-Election Shares (the "Non-Election Proration Factor") and
(B) cash in an amount equal to the product obtained by multiplying (x) the
number of Non-Election Shares held by such holder by (y) the Cash Consideration
by (z) one minus the Non-Election Proration Factor; or
(B) if the Shortfall Number exceeds the number of
Non-Election Shares, then all Non-Election Shares shall be converted into the
right to receive the Stock Consideration, and each holder of Cash Election
Shares shall receive (1) the number of shares of First Capital Common Stock
equal to the product obtained by multiplying (x) the number of Cash Election
Shares held by such holder by (y) the Exchange Ratio by (z) a fraction the
numerator of which is the amount by which the Shortfall Number exceeds the
number of Non-Election Shares and the denominator of which is the total number
of Cash Election Shares (the "Cash Proration Factor") and (B) cash in an amount
equal to the product obtained by multiplying (x) the number of Cash Election
Shares held by such holder by (y) the Cash Consideration by (z) one minus the
Cash Proration Factor.
2.7 Exchange Procedures.
(a) Appropriate transmittal materials ("Letter of Transmittal") in a
form satisfactory to First Capital and Hometown shall be mailed as soon as
practicable after the Effective Time to each holder of record of Hometown Common
Stock as of the Effective Time who did not previously submit a completed
Election Form in accordance with Section 2.6(c). A Letter of Transmittal
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will be deemed properly completed only if accompanied by certificates
representing all shares of Hometown Common Stock to be converted thereby.
Delivery of a properly completed Election Form in accordance with Section 2.6(c)
which is not subsequently revoked shall satisfy the requirement for delivery of
a Letter of Transmittal pursuant to this Section 2.7.
(b) At and after the Effective Time, each Certificate (except as
specifically set forth in Section 2.5) shall represent only the right to receive
the Merger Consideration.
(c) Prior to the Effective Time, First Capital shall (i) reserve for
issuance with its transfer agent and registrar a sufficient number of shares of
First Capital Common Stock to provide for payment of the aggregate Stock
Consideration and (ii) deposit, or cause to be deposited, with the Exchange
Agent, for the benefit of the holders of shares of Hometown Common Stock, for
exchange in accordance with this Section 2.7, an amount of cash sufficient to
pay the aggregate Cash Consideration.
(d) The Letter of Transmittal shall (i) specify that delivery shall
be effected, and risk of loss and title to the Certificates shall pass, only
upon delivery of the Certificates to the Exchange Agent, (ii) be in a form and
contain any other provisions as First Capital may reasonably determine and (iii)
include instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. Upon the proper surrender of the
Certificates to the Exchange Agent, together with a properly completed and duly
executed Letter of Transmittal, the holder of such Certificates shall be
entitled to receive in exchange therefor a certificate representing that number
of whole shares of First Capital Common Stock that such holder has the right to
receive pursuant to Section 2.5, if any, and a check in the amount equal to the
cash that such holder has the right to receive pursuant to Section 2.5, if any
(including any cash in lieu of fractional shares, if any, that such holder has
the right to receive pursuant to Section 2.5, and any dividends or other
distributions to which such holder is entitled pursuant to Section 2.5).
Certificates so surrendered shall forthwith be canceled. As soon as practicable
following the Effective Time and the receipt of the properly completed Letter of
Transmittal and any necessary accompanying documentation, the Exchange Agent
shall distribute First Capital Common Stock and cash as provided herein. The
Exchange Agent shall not be entitled to vote or exercise any rights of ownership
with respect to the shares of First Capital Common Stock held by it from time to
time hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect to such shares for the account of
the persons entitled thereto. If there is a transfer of ownership of any shares
of Hometown Common Stock not registered in the transfer records of Hometown, the
Merger Consideration shall be issued to the transferee thereof if the
Certificates representing such Hometown Common Stock are presented to the
Exchange Agent, accompanied by all documents required, in the reasonable
judgment of First Capital and the Exchange Agent, to evidence and effect such
transfer and to evidence that any applicable stock transfer taxes have been
paid.
(e) No dividends or other distributions declared or made after the
Effective Time with respect to First Capital Common Stock issued pursuant to
this Agreement shall be remitted to any person entitled to receive shares of
First Capital Common Stock hereunder until such person surrenders his or her
Certificates in accordance with this Section 2.7. Upon the surrender of such
person's Certificates, such person shall be entitled to receive any dividends or
other distributions, without interest thereon, which subsequent to the Effective
Time had become payable but not paid with respect to shares of First Capital
Common Stock represented by such person's Certificates.
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(f) The stock transfer books of Hometown shall be closed immediately
upon the Effective Time and from and after the Effective Time there shall be no
transfers on the stock transfer records of Hometown of any shares of Hometown
Common Stock. If, after the Effective Time, Certificates are presented to First
Capital, they shall be canceled and exchanged for the Merger Consideration
deliverable in respect thereof pursuant to this Agreement in accordance with the
procedures set forth in this Section 2.7.
(g) Any portion of the aggregate amount of cash to be paid pursuant
to Section 2.5, any dividends or other distributions to be paid pursuant to this
Section 2.7 or any proceeds from any investments thereof that remains unclaimed
by the stockholders of Hometown for six months after the Effective Time shall be
repaid by the Exchange Agent to First Capital upon the written request of First
Capital. After such request is made, any stockholders of Hometown who have not
theretofore complied with this Section 2.7 shall look only to First Capital for
the Merger Consideration deliverable in respect of each share of Hometown Common
Stock such stockholder holds, as determined pursuant to Section 2.5 of this
Agreement, without any interest thereon. If any Merger Consideration is not
claimed by the person(s) entitled thereto prior to the date on which such
payments would otherwise escheat to or become the property of any governmental
unit or agency, the unclaimed items shall, to the extent permitted by any
abandoned property, escheat or other applicable laws, become the property of
First Capital. Notwithstanding the foregoing, neither the Exchange Agent nor any
party to this Agreement (or any affiliate thereof) shall be liable to any former
holder of Hometown Common Stock for any amount delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(h) First Capital and the Exchange Agent shall be entitled to rely
upon Hometown's stock transfer books to establish the identity of those persons
entitled to receive the Merger Consideration, which books shall be conclusive
with respect thereto. In the event of a dispute with respect to ownership of
stock represented by any Certificate, First Capital and the Exchange Agent shall
be entitled to deposit any Merger Consideration represented thereby in escrow
with an independent third party and thereafter be relieved with respect to any
claims thereto.
(i) If any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by the Exchange
Agent or First Capital, the posting by such person of a bond in such amount as
the Exchange Agent may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Certificate the Merger Consideration
deliverable in respect thereof pursuant to Section 2.5.
2.8 Effect on Outstanding Shares of First Capital Common Stock. At and
after the Effective Time, each share of First Capital Common Stock issued and
outstanding immediately prior to the Effective Time shall remain an issued and
outstanding share of common stock of the Surviving Corporation and shall not be
affected by the Merger.
2.9 Directors of Surviving Corporation after Effective Time. Immediately
after the Effective Time, until their respective successors are duly elected or
appointed and qualified, the directors of the Surviving Corporation shall
consist of the directors of First Capital serving immediately prior to the
Effective Time.
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2.10 Articles of Incorporation and Bylaws. The articles of
incorporation of First Capital, as in effect immediately prior to the Effective
Time, shall be the articles of incorporation of the Surviving Corporation until
thereafter amended in accordance with applicable law. The bylaws of First
Capital, as in effect immediately prior to the Effective Time, shall be the
bylaws of the Surviving Corporation until thereafter amended in accordance with
applicable law.
2.11 [RESERVED]
2.12 Dissenters' Rights. Notwithstanding any other provision of this
Agreement to the contrary, shares of Hometown Common Stock that are outstanding
immediately prior to the Effective Time and which are held by stockholders who
shall have not voted in favor of the Merger or consented thereto in writing and
who properly shall have delivered written notice to Hometown before the vote is
taken of the stockholders' intent to demand payment for such shares in
accordance with the IBCL (collectively, the "Dissenters' Shares") shall not be
converted into or represent the right to receive the Merger Consideration. Such
stockholders instead shall be entitled to receive payment of the fair value of
such shares held by them in accordance with the provisions of the IBCL, except
that all Dissenters' Shares held by stockholders who shall have failed to
perfect or who effectively shall have withdrawn or otherwise lost their rights
to appraisal of such shares under the IBCL shall thereupon be deemed to have
been converted into and to have become exchangeable, as of the Effective Time,
for the right to receive, without any interest thereon, the Merger Consideration
upon surrender in the manner provided in Section 2.7 of the Hometown
Certificate(s) that, immediately prior to the Effective Time, evidenced such
shares. Hometown shall give First Capital (i) prompt notice of any written
demands for payment for any shares of Hometown Common Stock, attempted
withdrawals of such demands and any other instruments served pursuant to the
IBCL and received by Hometown relating to stockholders' dissenters' rights, and
(ii) the opportunity to participate in all negotiations and proceedings with
respect to demands under the IBCL consistent with the obligations of Hometown
thereunder. Hometown shall not, except with the prior written consent of First
Capital, (x) make any payment with respect to such demand, (y) offer to settle
or settle any demand for payment or (z) waive any failure to timely deliver a
written demand for payment or timely take any other action to perfect
dissenters' rights in accordance with the IBCL.
2.13 Bank Merger. Concurrently with or as soon as practicable after the
execution and delivery of this Agreement, First Harrison Bank ("First Harrison
Bank"), a wholly owned subsidiary of First Capital, and Hometown National Bank
("Hometown National Bank"), a wholly owned subsidiary of Hometown, shall enter
into the Plan of Bank Merger, in the form attached hereto as Exhibit B, pursuant
----------
to which Hometown National Bank will merge with and into First Harrison Bank
(the "Bank Merger"). The parties intend that the Bank Merger will become
effective simultaneously with or immediately following the Effective Time.
2.14 Alternative Structure. Notwithstanding anything to the contrary
contained in this Agreement, prior to the Effective Time, First Capital may
specify that the structure of the transactions contemplated by this Agreement be
revised and the parties shall enter into such alternative transactions as First
Capital may reasonably determine to effect the purposes of this Agreement;
provided, however, that such revised structure shall not (i) alter or change the
amount or kind of the Merger Consideration, (ii) change the intended federal
income tax consequences of the transactions contemplated by this Agreement or
(iii) materially impede or delay the receipt of any regulatory approval referred
to in, or the consummation of the transactions contemplated by, this Agreement.
In the event that First Capital elects
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to make such a revision, the parties agree to execute appropriate documents to
reflect the revised structure.
ARTICLE III
Representations and Warranties
3.1 Disclosure Letters. Prior to the execution and delivery of this
Agreement, First Capital and Hometown have each delivered to the other a letter
(each, its "Disclosure Letter") setting forth, among other things, facts,
circumstances and events the disclosure of which is required or appropriate in
relation to any or all of their respective representations and warranties (and
making specific reference to the Section of this Agreement to which they
relate). The mere inclusion of a fact, circumstance or event in a Disclosure
Letter shall not be deemed an admission by a party that such item represents a
material exception or that such item is reasonably likely to result in a
Material Adverse Effect. Any matter disclosed pursuant to one section of a
party's Disclosure Letter shall be deemed disclosed for all purposes of such
party's Disclosure Letter.
3.2 Representations and Warranties of Hometown. Hometown represents
and warrants to First Capital that, except as disclosed in Hometown's Disclosure
Letter:
(a) Organization and Qualification. Hometown is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Indiana and is registered as a bank holding company under the BHC Act. Hometown
has all requisite corporate power and authority to own, lease and operate its
properties and to conduct the business currently being conducted by it. Hometown
is duly qualified or licensed as a foreign corporation to transact business and
is in good standing in each jurisdiction in which the character of the
properties owned or leased by it or the nature of the business conducted by it
makes such qualification or licensing necessary, except where the failure to be
so qualified or licensed and in good standing would not have a Material Adverse
Affect on Hometown.
(b) Subsidiaries.
(i) Hometown's Disclosure Letter sets forth with respect to
each of Hometown's Subsidiaries its name, its jurisdiction of incorporation,
Hometown's percentage ownership, the number of shares of stock owned or
controlled by Hometown and the name and number of shares held by any other
person who owns any stock of the Subsidiary. Hometown owns of record and
beneficially all the capital stock of each of its Subsidiaries free and clear of
any Liens. There are no contracts, commitments, agreements or understandings
relating to Hometown's right to vote or dispose of any equity securities of its
Subsidiaries. Hometown's ownership interest in each of its Subsidiaries is in
compliance with all applicable laws, rules and regulations relating to equity
investments by bank holding companies or national banking associations.
(ii) Each of Hometown's Subsidiaries is a corporation duly
organized and validly existing under the laws of its jurisdiction of
incorporation, has all requisite corporate power and authority to own, lease and
operate its properties and to conduct the business currently being conducted by
it and is duly qualified or licensed as a foreign corporation to transact
business and is in good standing in each jurisdiction in which the character of
the properties owned or leased by it or the nature of the business conducted by
it makes such qualification or licensing necessary, except where the failure to
be
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so qualified or licensed and in good standing would not have a Material
Adverse Affect on such Subsidiary.
(iii) The outstanding shares of capital stock of each
Subsidiary have been validly authorized and are validly issued, fully paid and
nonassessable. No shares of capital stock of any Subsidiary of Hometown are or
may be required to be issued by virtue of any options, warrants or other rights,
no securities exist that are convertible into or exchangeable for shares of such
capital stock or any other debt or equity security of any Subsidiary, and there
are no contracts, commitments, agreements or understandings of any kind for the
issuance of additional shares of capital stock or other debt or equity security
of any Subsidiary or options, warrants or other rights with respect to such
securities.
(iv) No Subsidiary of Hometown other than Hometown National
Bank is an "insured depository institution" as defined in the FDIA and the
applicable regulations thereunder. The deposits of Hometown National Bank are
insured by the FDIC through the Bank Insurance Fund to the fullest extent
permitted by law. Hometown National Bank is a member in good standing of the
Federal Home Loan Bank of Indianapolis.
(c) Capital Structure.
(i) The authorized capital stock of Hometown consists of:
(A) 900,000 shares of Hometown Common Stock; and
(B) 25,000 shares of preferred stock, no par value per
share.
(ii) As of the date of this Agreement:
(A) 229,550 shares of Hometown Common Stock are issued
and outstanding, all of which are validly issued, fully paid and nonassessable
and were issued in full compliance with all applicable laws and not in violation
of any preemptive rights;
(B) no shares of Hometown preferred stock are issued and
outstanding;
(iii) No bonds, debentures, notes or other indebtedness having
the right to vote on any matters on which stockholders of Hometown may vote are
issued or outstanding.
(iv) Except as set forth in this Section 3.2(c), as of the
date of this Agreement, (A) no shares of capital stock or other voting
securities of Hometown are issued, reserved for issuance or outstanding and (B)
neither Hometown nor any of its Subsidiaries has or is bound by any outstanding
subscriptions, options, warrants, calls, rights, convertible securities,
commitments or agreements of any character obligating Hometown or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, any additional shares of capital stock of Hometown or obligating Hometown
or any of its Subsidiaries to grant, extend or enter into any such option,
warrant, call, right, convertible security, commitment or agreement. As of the
date hereof, there are no outstanding contractual obligations of Hometown or any
of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of Hometown or any of its Subsidiaries.
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(d) Authority. Hometown has all requisite corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement have been duly authorized by all necessary corporate actions
on the part of Hometown's Board of Directors, and no other corporate proceedings
on the part of Hometown are necessary to authorize this Agreement or to
consummate the transactions contemplated by this Agreement other than the
approval and adoption of this Agreement by the affirmative vote of the holders
of a majority of the outstanding shares of Hometown Common Stock. This Agreement
has been duly and validly executed and delivered by Hometown and constitutes a
valid and binding obligation of Hometown, enforceable against Hometown in
accordance with its terms, subject to applicable bankruptcy, insolvency and
similar laws affecting creditors' rights and remedies generally and to general
principles of equity, whether applied in a court of law or a court of equity.
(e) No Violations. The execution, delivery and performance of this
Agreement by Hometown do not, and the consummation of the transactions
contemplated by this Agreement (including the Bank Merger) by Hometown and
Hometown National Bank will not, (i) assuming all required governmental
approvals have been obtained and the applicable waiting periods have expired,
violate any law, rule or regulation or any judgment, decree, order, governmental
permit or license to which Hometown or any of its Subsidiaries (or any of their
respective properties) is subject, (ii) violate the articles of incorporation or
bylaws of Hometown or the similar organizational documents of any of its
Subsidiaries or (iii) constitute a breach or violation of, or a default under
(or an event which, with due notice or lapse of time or both, would constitute a
default under), or result in the termination of, accelerate the performance
required by, or result in the creation of any Lien upon any of the properties or
assets of Hometown or any of its Subsidiaries under, any of the terms,
conditions or provisions of any note, bond, indenture, deed of trust, loan
agreement or other agreement, instrument or obligation to which Hometown or any
of its Subsidiaries is a party, or to which any of their respective properties
or assets may be subject except, in the case of (iii), for any such breaches,
violations or defaults that would not, individually or in the aggregate, have a
Material Adverse Effect on Hometown.
(f) Consents and Approvals. No consents or approvals of, or
filings or registrations with, any Governmental Entity or any third party are
required to be made or obtained in connection with the execution and delivery by
Hometown of this Agreement or the consummation by Hometown of the Merger and the
other transactions contemplated by this Agreement, including the Bank Merger,
except for (i) filings of applications and notices with, receipt of approvals or
nonobjections from, and expiration of the related waiting period required by,
federal and state banking authorities, (ii) filing of the Registration Statement
with the SEC and declaration by the SEC of the Registration Statement's
effectiveness under the Securities Act, (iii) the registration or qualification
of the shares of First Capital Common Stock to be issued in exchange for shares
of Hometown Common Stock under state securities or "blue sky" laws and (iv) the
listing of the shares of First Capital Common Stock to be issued in exchange for
shares of Hometown Common Stock on the Nasdaq Stock Market. As of the date
hereof, Hometown knows of no reason pertaining to Hometown why any of the
approvals referred to in this Section 3.2(f) should not be obtained without the
imposition of any material condition or restriction described in Section 6.1(b).
(g) Regulatory Filings. Hometown and each Subsidiary of Hometown
has filed with the SEC and any Government Regulator all reports, schedules,
registrations, and statements that it has been required to file since December
31, 1998 (collectively, "Hometown Regulatory Filings"). As of
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their respective dates, each of the Hometown Regulatory Filings complied in all
material respects with all of the laws, rules and regulations of the SEC or the
Government Regulator with which they were filed. None of the Hometown Regulatory
Filings contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they were made, not
misleading.
(h) Financial Statements. Hometown has previously made available
to First Capital copies of the consolidated balance sheets of Hometown and its
Subsidiaries as of December 31, 2001 and 2000 and related consolidated
statements of income, cash flows and changes in stockholders' equity for each of
the years in the two-year period ended December 31, 2001, together with the
notes thereto, accompanied by the audit report of Hometown's independent public
auditors. Such financial statements were prepared from the books and records of
Hometown and its Subsidiaries, fairly present the consolidated financial
position of Hometown and its Subsidiaries in each case at and as of the dates
indicated and the consolidated results of operations, retained earnings and cash
flows of Hometown and its Subsidiaries for the periods indicated, and, except as
otherwise set forth in the notes thereto, were prepared in accordance with GAAP
consistently applied throughout the periods covered thereby. The books and
records of Hometown and its Subsidiaries have been, and are being, maintained in
all respects in accordance with GAAP and any other legal and accounting
requirements and reflect only actual transactions.
(i) Undisclosed Liabilities. Neither Hometown nor any of its
Subsidiaries has incurred any debt, liability or obligation of any nature
whatsoever (whether accrued, contingent, absolute or otherwise and whether due
or to become due) other than liabilities reflected on or reserved against in the
consolidated balance sheet of Hometown as of December 31, 2001, except for (i)
liabilities incurred since December 31, 2001 in the ordinary course of business
consistent with past practice that, either alone or when combined with all
similar liabilities, have not had, and would not reasonably be expected to have,
a Material Adverse Effect on Hometown and (ii) liabilities incurred for legal,
accounting, financial advising fees and out-of-pocket expenses in connection
with the transactions contemplated by this Agreement.
(j) Absence of Certain Changes or Events. Except as disclosed in
Hometown's Disclosure Letter, since December 31, 2001, (i) Hometown and its
Subsidiaries have conducted their respective businesses only in the ordinary and
usual course of such businesses consistent with their past practices, (ii) there
has not been any event or occurrence that has had, or is reasonably expected to
have, a Material Adverse Effect on Hometown, (iii) there has been no increase in
the salary, compensation, pension or other benefits payable or to become payable
by Hometown or any of its Subsidiaries to any of their respective directors,
officers or employees, other than in conformity with the policies and practices
of such entity in the usual and ordinary course of its business, (iv) neither
Hometown nor any of its Subsidiaries has paid or made any accrual or arrangement
for payment of bonuses or special compensation of any kind or any severance or
termination pay to any of their directors, officers or employees and (v) there
has been no change in any accounting principles, practices or methods of
Hometown or any of its Subsidiaries other than as required by GAAP.
(k) Litigation. There are no suits, actions or legal,
administrative or arbitration proceedings pending or, to the knowledge of
Hometown, threatened against or affecting Hometown or any of its Subsidiaries or
any property or asset of Hometown or any of its Subsidiaries that (i)
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect on
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Hometown or (ii) challenge the validity or propriety of the transactions
contemplated by this Agreement. To the knowledge of Hometown, there are no
investigations, reviews or inquiries by any court or Governmental Entity pending
or threatened against Hometown or any of its Subsidiaries. There are no
judgments, decrees, injunctions, orders or rulings of any Governmental Entity or
arbitrator outstanding against Hometown or any of its Subsidiaries that,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect on Hometown.
(l) Absence of Regulatory Actions. Since December 31, 1997,
neither Hometown nor any of its Subsidiaries has been a party to any cease and
desist order, written agreement or memorandum of understanding with, or any
commitment letter or similar undertaking to, or has been subject to any action,
proceeding, order or directive by any Government Regulator, or has adopted any
board resolutions at the request of any Government Regulator, or has been
advised by any Government Regulator that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such action, proceeding, order, directive, written agreement, memorandum of
understanding, commitment letter, board resolutions or similar undertaking.
There are no unresolved violations, criticisms or exceptions by any Government
Regulator with respect to any report or statement relating to any examinations
of Hometown or its Subsidiaries.
(m) Compliance with Laws. Hometown and each of its Subsidiaries
conducts its business in compliance with all statutes, laws, regulations,
ordinances, rules, judgements, orders or decrees applicable to it or the
employees conducting such business. Hometown and each of its Subsidiaries has
all permits, licenses, certificates of authority, orders and approvals of, and
has made all filings, applications and registrations with, all Governmental
Entities that are required in order to permit it to carry on its business as it
is presently conducted; all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect, and no suspension or
cancellation of any of them is threatened. Neither Hometown nor any of its
Subsidiaries has been given notice or been charged with any violation of, any
law, ordinance, regulation, order, writ, rule, decree or condition to approval
of any Governmental Entity which, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect on Hometown.
(n) Taxes. All federal, state, local and foreign tax returns
required to be filed by or on behalf of Hometown or any of its Subsidiaries have
been timely filed or requests for extensions have been timely filed and any such
extension shall have been granted and not have expired, and all such filed
returns are complete and accurate in all material respects. All taxes shown on
such returns, all taxes required to be shown on returns for which extensions
have been granted and all other taxes required to be paid by Hometown or any of
its Subsidiaries have been paid in full or adequate provision has been made for
any such taxes on Hometown's balance sheet (in accordance with GAAP). There is
no audit examination, deficiency assessment, tax investigation or refund
litigation with respect to any taxes of Hometown or any of its Subsidiaries, and
no claim has been made in writing by any authority in a jurisdiction where
Hometown or any of its Subsidiaries do not file tax returns that Hometown or any
such Subsidiary is subject to taxation in that jurisdiction. All taxes,
interest, additions and penalties due with respect to completed and settled
examinations or concluded litigation relating to Hometown or any of its
Subsidiaries have been paid in full or adequate provision has been made for any
such taxes on Hometown's balance sheet (in accordance with GAAP). Hometown and
its Subsidiaries have not executed an extension or waiver of any statute of
limitations on the assessment or collection of any tax due that is currently in
effect. Hometown and each of its Subsidiaries has withheld and paid all taxes
required to have been withheld and paid in connection with amounts paid or owing
to any employee,
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independent contractor, creditor, stockholder or other third party, and Hometown
and each of its Subsidiaries has timely complied with all applicable information
reporting requirements under Part III, Subchapter A of Chapter 61 of the IRC and
similar applicable state and local information reporting requirements. Neither
Hometown nor any of its Subsidiaries is a party to any agreement, contract,
arrangement or plan that has resulted or would result, individually or in the
aggregate, in connection with this Agreement in the payment of any "excess
parachute payments" within the meaning of Section 280G of the IRC and neither
Hometown nor any of its Subsidiaries has made any payments and is not a party to
any agreement, and does not maintain any plan, program or arrangement, that
could require it to make any payments (including any deemed payment of
compensation upon the issuance of any Hometown Common Stock), that would not be
fully deductible by reason of Section 162(m) of the IRC.
(o) Agreements.
(i) Hometown's Disclosure Letter lists any contract,
arrangement, commitment or understanding (whether written or oral) to which
Hometown or any of its Subsidiaries is a party or is bound:
(A) with any executive officer or other key employee of
Hometown or any of its Subsidiaries the benefits of which are contingent, or the
terms of which are materially altered, upon the occurrence of a transaction
involving Hometown or any of its Subsidiaries of the nature contemplated by this
Agreement;
(B) with respect to the employment of any directors,
officers, employees or consultants;
(C) any of the benefits of which will be increased, or
the vesting or payment of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement, or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement (including any stock option
plan, phantom stock or stock appreciation rights plan, restricted stock plan or
stock purchase plan);
(D) containing covenants that limit the ability of
Hometown or any of its Subsidiaries to compete in any line of business or with
any person, or that involve any restriction on the geographic area in which, or
method by which, Hometown (including any successor thereof) or any of its
Subsidiaries may carry on its business (other than as may be required by law or
any regulatory agency);
(E) pursuant to which Hometown or any of its
Subsidiaries may become obligated to invest in or contribute capital to any
entity;
(F) not fully disclosed in Hometown Regulatory Filings
that relates to borrowings of money (or guarantees thereof) by Hometown or any
of its Subsidiaries in excess of $50,000, other than purchases of Federal Funds
or repurchase agreements fully secured by U.S. government agency securities;
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(G) which is a lease or license with respect to any
property, real or personal, whether as landlord, tenant, licensor or licensee,
involving a liability or obligation as obligor in excess of $25,000 on an annual
basis;
(H) the termination of which would require payment by
Hometown or any of its Subsidiaries in excess of $25,000; or
(I) which would constitute a material contract (as
defined in Item 601(b)(10) of Regulation S-K promulgated by the SEC);
(ii) Neither Hometown nor any of its Subsidiaries is in
default under (and no event has occurred which, with due notice or lapse of time
or both, would constitute a default under) or is in violation of any provision
of any note, bond, indenture, mortgage, deed of trust, loan agreement, lease or
other agreement to which it is a party or by which it is bound or to which any
of its respective properties or assets is subject and, to the knowledge of
Hometown, no other party to any such agreement (excluding any loan or extension
of credit or security agreements relating thereto made by Hometown or any of its
Subsidiaries) is in default in any respect thereunder, except for such defaults
or violations that would not, individually or in the aggregate, have a Material
Adverse Effect on Hometown.
(p) Intellectual Property. Hometown and each of its Subsidiaries
owns or possesses valid and binding licenses and other rights to use without
payment all patents, copyrights, trade secrets, trade names, service marks and
trademarks material to its businesses, and neither Hometown nor any of its
Subsidiaries has received any notice of conflict with respect thereto that
asserts the right of others. Each of Hometown and its Subsidiaries has performed
all the obligations required to be performed by it and are not in default under
any contact, agreement, arrangement or commitment relating to any of the
foregoing, except for such non-performance or defaults that would not,
individually or in the aggregate, have a Material Adverse Effect on Hometown.
(q) Labor Matters. Hometown and its Subsidiaries are in material
compliance with all applicable laws respecting employment, retention of
independent contractors, employment practices, terms and conditions of
employment, and wages and hours. Neither Hometown nor any of its Subsidiaries is
or has ever been a party to, or is or has ever been bound by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or labor organization with respect to its employees, nor is Hometown or
any of its Subsidiaries the subject of any proceeding asserting that it has
committed an unfair labor practice or seeking to compel it or any such
Subsidiary to bargain with any labor organization as to wages and conditions of
employment nor has any such proceeding been threatened, nor is there any strike,
other labor dispute or organizational effort involving Hometown or any of its
Subsidiaries pending or, to the knowledge of Hometown, threatened.
(r) Employee Benefit Plans.
(i) Hometown's Disclosure Letter contains a complete and
accurate list of all pension, retirement, stock option, stock purchase, stock
ownership, savings, stock appreciation right, profit sharing, deferred
compensation, consulting, bonus, group insurance, severance and other benefit
plans, contracts, agreements and arrangements, including, but not limited to,
"employee benefit plans," as defined in Section 3(3) of ERISA, incentive and
welfare policies, contracts, plans and arrangements and all trust agreements
related thereto with respect to any present or former directors, officers or
other
A-20
employees of Hometown or any of its Subsidiaries (hereinafter referred to
collectively as the "Hometown Employee Plans"). Hometown has previously
delivered or made available to First Capital true and complete copies of each
agreement, plan and other documents referenced in Hometown's Disclosure Letter
or has provided a written description of any Hometown Employee Plan for which no
document is available. There has been no announcement or commitment by Hometown
or any of its Subsidiaries to create an additional Hometown Employee Plan, or to
amend any Hometown Employee Plan, except for amendments required by applicable
law which do not materially increase the cost of such Hometown Employee Plan.
(ii) There is no pending or, to the knowledge of Hometown,
threatened litigation, administrative action or proceeding relating to any
Hometown Employee Plan. All of the Hometown Employee Plans comply in all
material respects with all applicable requirements of ERISA, the IRC and other
applicable laws. There has occurred no "prohibited transaction" (as defined in
Section 406 of ERISA or Section 4975 of the IRC) with respect to the Hometown
Employee Plans which is likely to result in the imposition of any penalties or
taxes upon Hometown or any of its Subsidiaries under Section 502(i) of ERISA or
Section 4975 of the IRC.
(iii) No Hometown Employee Plan currently or formerly
maintained by Hometown is or was subject to Title IV of ERISA. Neither Hometown
nor any of its Subsidiaries has contributed to any "multiemployer plan," as
defined in Section 3(37) of ERISA, on or after September 26, 1980.
(iv) Each Hometown Employee Plan that is an "employee pension
benefit plan" (as defined in Section 3(2) of ERISA) and which is intended to be
qualified under Section 401(a) of the IRC (a "Hometown Qualified Plan") has
received a favorable determination letter from the IRS, and Hometown and its
Subsidiaries are not aware of any circumstances likely to result in revocation
of any such favorable determination letter. No Hometown Qualified Plan is an
"employee stock ownership plan" (as defined in Section 4975(e)(7) of the IRC).
(v) Neither Hometown nor any of its Subsidiaries has any
obligations for post-retirement or post-employment benefits under any Hometown
Employee Plan that cannot be amended or terminated upon 60 days' notice or less
without incurring any liability thereunder, except for coverage required by Part
6 of Title I of ERISA or Section 4980B of the IRC, or similar state laws, the
cost of which is borne by the insured individuals.
(s) Properties.
(i) A description of each parcel of real property owned by
Hometown or a Subsidiary of Hometown is set forth in Hometown's Disclosure
Letter. Hometown and each of its Subsidiaries has good and marketable title to
all real property owned by it (including any property acquired in a judicial
foreclosure proceeding or by way of a deed in lieu of foreclosure or similar
transfer), in each case free and clear of any Liens except (i) liens for taxes
not yet due and payable and (ii) such easements, restrictions and encumbrances,
if any, as are not material in character, amount or extent, and do not
materially detract from the value, or materially interfere with the present use
of the properties subject thereto or affected thereby. All real property and
fixtures of Hometown and each of its Subsidiaries are in a good state of
maintenance and repair (normal wear and tear excepted), conform with all
applicable ordinances, regulations and zoning laws and are considered by
Hometown to be
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adequate for the current business of Hometown and its Subsidiaries. To the
knowledge of Hometown, none of the buildings, structures or other improvements
located on its real property encroaches upon or over any adjoining parcel or
real estate or any easement or right-of-way.
(ii) Hometown and each of its Subsidiaries has good and
marketable title to all tangible personal property owned by it, free and clear
of all Liens except such encumbrances, if any, as are not material in character,
amount or extent, and do not materially detract from the value, or materially
interfere with the present use of the properties subject thereto or affected
thereby. With respect to personal property used in the business of Hometown and
its Subsidiaries that is leased rather than owned, neither Hometown nor any of
its Subsidiaries is in default in any material respect under the terms of any
such lease.
(iii) A description of all real property leased by Hometown or
a Subsidiary of Hometown is set forth in Hometown's Disclosure Letter. Each
lease pursuant to which Hometown or any of its Subsidiaries as lessee, leases
real or personal property, is valid and in full force and effect and neither
Hometown nor any of its Subsidiaries, nor, to Hometown's knowledge, any other
party to any such lease, is in default or in violation of any material
provisions of any such lease.
(t) Fairness Opinion. Hometown has received the opinion of David
A. Noyes & Company to the effect that, as of the date hereof, the Merger
Consideration is fair, from a financial point of view, to Hometown's
stockholders.
(u) Fees. Other than financial advisory services performed for
Hometown by David A. Noyes & Company pursuant to an agreement dated June 30,
2002, a true and complete copy of which has been previously delivered to First
Capital, neither Hometown nor any of its Subsidiaries, nor any of their
respective officers, directors, employees or agents, has employed any broker or
finder or incurred any liability for any financial advisory fees, brokerage
fees, commissions or finder's fees, and no broker or finder has acted directly
or indirectly for Hometown or any of its Subsidiaries in connection with this
Agreement or the transactions contemplated hereby.
(v) Environmental Matters.
(i) Each of Hometown and its Subsidiaries and, to the
knowledge of Hometown, the Participation Facilities and the Loan Properties are,
and have been, in substantial compliance with all Environmental Laws.
(ii) There is no suit, claim, action, demand, executive or
administrative order, directive, investigation or proceeding pending or, to the
knowledge of Hometown, threatened, before any court, governmental agency or
board or other forum against Hometown or any of its Subsidiaries or any
Participation Facility (A) for alleged noncompliance (including by any
predecessor) with, or liability under, any Environmental Law or (B) relating to
the presence of or release into the environment of any Hazardous Material,
whether or not occurring at or on a site owned, leased or operated by Hometown
or any of its Subsidiaries or any Participation Facility.
(iii) To the knowledge of Hometown, there is no suit, claim,
action, demand, executive or administrative order, directive, investigation or
proceeding pending or threatened before any court, governmental agency or board
or other forum relating to or against any Loan Property (or
A-22
Hometown or any of its Subsidiaries in respect of such Loan Property) (A)
relating to alleged noncompliance (including by any predecessor) with, or
liability under, any Environmental Law or (B) relating to the presence of or
release into the environment of any Hazardous Material, whether or not occurring
at a Loan Property.
(iv) Neither Hometown nor any of its Subsidiaries has
received any notice, demand letter, executive or administrative order, directive
or request for information from any Governmental Entity or any third party
indicating that it may be in violation of, or liable under, any Environmental
Law.
(v) There are no underground storage tanks at any properties
owned or operated by Hometown or any of its Subsidiaries or, to the knowledge of
Hometown, at any Participation Facility and no underground storage tanks have
been closed or removed from any properties owned or operated by Hometown or any
of its Subsidiaries or, to the knowledge of Hometown, any Participation
Facility.
(vi) During the period of (A) Hometown's or its Subsidiary's
ownership or operation of any of their respective current properties or (B)
Hometown's or its Subsidiary's participation in the management of any
Participation Facility, there has been no release of Hazardous Materials in, on,
under or affecting such properties. To the knowledge of Hometown, prior to the
period of (A) Hometown's or its Subsidiary's ownership or operation of any of
their respective current properties or (B) Hometown's or its Subsidiary's
participation in the management of any Participation Facility, there was no
contamination by or release of Hazardous Material in, on, under or affecting
such properties.
(w) Loan Portfolio; Allowance for Loan Losses.
(i) With respect to each Loan owned by Hometown or its
Subsidiaries in whole or in part:
(A) The note and the related security documents are each
legal, valid and binding obligations of the maker or obligor thereof,
enforceable against such maker or obligor in accordance with their terms subject
to bankruptcy, insolvency, fraudulent convenyance and other laws of general
applicability relating to or affecting creditors' rights and to general equity
principles;
(B) neither Hometown nor any of its Subsidiaries, nor
any prior holder of a Loan, has modified the note or any of the related security
documents in any material respect or satisfied, canceled or subordinated the
note or any of the related security documents except as otherwise disclosed by
documents in the applicable Loan file;
(C) Hometown or a Subsidiary of Hometown is the sole
holder of legal and beneficial title to each Loan (or Hometown's or its
Subsidiary's applicable participation interest, as applicable), except as
otherwise referenced on the books and records of Hometown or a Subsidiary of
Hometown;
(D) the original note and the related security documents
are included in the Loan files, and copies of any documents in the Loan files
are true and correct copies of the
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documents they purport to be and have not been suspended, amended, modified,
canceled or otherwise changed except as otherwise disclosed by documents in the
applicable Loan file; and
(E) with respect to a Loan held in the form of a
participation, the participation documentation is legal, valid, binding and
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
(ii) Neither the terms of any Loan, any of the documentation
for any Loan, the manner in which any Loans have been administered and serviced,
nor Hometown's practices of approving or rejecting Loan applications, violate in
any material respect any federal, state, or local law, rule or regulation
applicable thereto, including, without limitation, the Truth In Lending Act,
Regulations O and Z of the Federal Reserve Board, the CRA, the Equal Credit
Opportunity Act, and any state laws, rules and regulations relating to consumer
protection, installment sales and usury.
(iii) The allowance for loan losses reflected in Hometown's
audited balance sheet at December 31, 2001 was, and the allowance for loan
losses shown on the balance sheets in the Hometown Regulatory Filings for
periods ending after December 31, 2001, in the opinion of management, was or
will be adequate, as of the dates thereof, under GAAP. Hometown has no knowledge
of any fact which is likely to require a future material increase in the
provision for loan losses or a material decrease in the allowance for loan
losses under GAAP.
(x) Deposits. The deposit accounts of Hometown National Bank are
insured by the FDIC to the maximum extent permitted by law. None of the deposits
of Hometown or any of its Subsidiaries is a "brokered" deposit.
(y) Anti-takeover Provisions Inapplicable. Hometown and its
Subsidiaries have taken all actions required to exempt First Capital, the
Agreement, the Plan of Bank Merger, the Merger and the Bank Merger from any
provisions of an antitakeover nature contained in their organizational
documents, and the provisions of any "anti-takeover," "fair price,"
"moratorium," "control share acquisition" or similar laws or regulations
contained in the IBCL.
(z) Material Interests of Certain Persons. No officer or director
of Hometown, or any "associate" (as such term is defined in Rule 12b-2 under the
Exchange Act) of any such officer or director, has any material interest in any
material contract or property (real or personal), tangible or intangible, used
in or pertaining to the business of Hometown or any of its Subsidiaries other
than banking relationships in the ordinary course of business.
(aa) Insurance. In the opinion of management, Hometown and its
Subsidiaries are presently insured for amounts deemed reasonable by management
against such risks as companies of a similar size engaged in a similar business
would, in accordance with good business practice, customarily be insured. All of
the insurance policies and bonds maintained by Hometown and its Subsidiaries are
in full force and effect, Hometown and its Subsidiaries are not in default
thereunder and all material claims thereunder have been filed in due and timely
fashion.
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(bb) Investment Securities; Derivatives.
(i) Except for restrictions that exist for securities that
are classified as "held to maturity," none of the investment securities held by
Hometown or any of its Subsidiaries is subject to any restriction (contractual
or statutory) that would materially impair the ability of the entity holding
such investment freely to dispose of such investment at any time.
(ii) Neither Hometown nor any of its Subsidiaries is a party
to or has agreed to enter into an exchange-traded or over-the-counter equity,
interest rate, foreign exchange or other swap, forward, future, option, cap,
floor or collar or any other contract that is a derivative contract (including
various combinations thereof) or owns securities that (A) are referred to
generically as "structured notes," "high risk mortgage derivatives," "capped
floating rate notes" or "capped floating rate mortgage derivatives" or (B) are
likely to have changes in value as a result of interest or exchange rate changes
that significantly exceed normal changes in value attributable to interest or
exchange rate changes.
(cc) Indemnification. Except as provided in the articles of
incorporation or bylaws of Hometown and the similar organizational documents of
its Subsidiaries, neither Hometown nor any of its Subsidiaries is a party to any
agreement that provides for the indemnification of any of its present or former
directors, officers or employees, or other persons who serve or served as a
director, officer or employee of another corporation, partnership or other
enterprise at the request of Hometown and, to the knowledge of Hometown, there
are no claims for which any such person would be entitled to indemnification
under the articles of incorporation or bylaws of Hometown or the similar
organizational documents of any of its Subsidiaries, under any applicable law or
regulation or under any indemnification agreement.
(dd) Corporate Documents. Hometown's Disclosure Letter contains a
complete and correct copy of the articles of incorporation, bylaws and similar
organizational documents of Hometown and each of Hometown's Subsidiaries, as in
effect as of the date of this Agreement. Neither Hometown nor any of Hometown's
Subsidiaries is in violation of its articles of incorporation, bylaws or similar
organizational documents. The minute books of Hometown and each of Hometown's
Subsidiaries constitute a complete and correct record of all actions taken by
their respective boards of directors (and each committee thereof) and their
stockholders.
(ee) Hometown Information. The information regarding Hometown and
its Subsidiaries to be supplied by Hometown for inclusion in the Registration
Statement, any filings or approvals under applicable state securities laws, or
any filing pursuant to Rule 165 or Rule 425 under the Securities Act will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
(ff) Community Reinvestment Act Compliance. Hometown National Bank
is in material compliance with the applicable provisions of the CRA and the
regulations promulgated thereunder, and Hometown National Bank currently has a
CRA rating of satisfactory or better. To the knowledge of Hometown, there is no
fact or circumstance or set of facts or circumstances that would cause Hometown
National Bank to fail to comply with such provisions or cause the CRA rating of
Hometown National Bank to fall below satisfactory.
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(gg) Tax Treatment of the Merger. Hometown has no knowledge of any
fact or circumstance relating to it that would prevent the transactions
contemplated by this Agreement from qualifying as a reorganization under Section
368 of the IRC.
3.3 Representations and Warranties of First Capital. First Capital
represents and warrants to Hometown that, except as set forth in First Capital's
Disclosure Letter:
(a) Organization and Qualification. First Capital is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Indiana and is registered with the OTS as a savings and loan
holding company. First Capital has all requisite corporate power and authority
to own, lease and operate its properties and to conduct the business currently
being conducted by it. First Capital is duly qualified or licensed as a foreign
corporation to transact business and is in good standing in each jurisdiction in
which the character of the properties owned or leased by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
where the failure to be so qualified or licensed and in good standing would not
have a Material Adverse Affect on First Capital.
(b) Subsidiaries.
(i) First Capital owns of record and beneficially all
the capital stock of each of its Subsidiaries free and clear of any Liens. There
are no contracts, commitments, agreements or understandings relating to First
Capital's right to vote or dispose of any equity securities of its Subsidiaries.
First Capital's ownership interest in each of its Subsidiaries is in compliance
with all applicable laws, rules and regulations relating to equity investments
by savings and loan holding companies or federally chartered savings
associations.
(ii) Each of First Capital's Subsidiaries is a
corporation duly organized and validly existing under the laws of its
jurisdiction of incorporation, has all requisite corporate power and authority
to own, lease and operate its properties and to conduct the business currently
being conducted by it and is duly qualified or licensed as a foreign corporation
to transact business and is in good standing in each jurisdiction in which the
character of the properties owned or leased by it or the nature of the business
conducted by it makes such qualification or licensing necessary, except where
the failure to be so qualified or licensed and in good standing would not have a
Material Adverse Affect on First Capital.
(iii) The outstanding shares of capital stock of each
Subsidiary have been validly authorized and are validly issued, fully paid and
nonassessable. No shares of capital stock of any Subsidiary of First Capital are
or may be required to be issued by virtue of any options, warrants or other
rights, no securities exist that are convertible into or exchangeable for shares
of such capital stock or any other debt or equity security of any Subsidiary,
and there are no contracts, commitments, agreements or understandings of any
kind for the issuance of additional shares of capital stock or other debt or
equity security of any Subsidiary or options, warrants or other rights with
respect to such securities.
(iv) No Subsidiary of First Capital other than First
Harrison Bank is an "insured depository institution" as defined in the FDIA and
the applicable regulations thereunder. First Harrison Bank is a qualified thrift
lender pursuant to Section 10(m) of the HOLA and its deposits are insured by the
FDIC through the Savings Association Insurance Fund to the fullest extent
permitted by law. First Harrison Bank is a member in good standing of the
Federal Home Loan Bank of Indianapolis.
A-26
(c) Capital Structure.
(i) The authorized capital stock of First Capital
consists of:
(A) 5,000,000 shares of First Capital Common
Stock; and
(B) 1,000,000 shares of preferred stock, par value
$.01 per share.
(ii) As of the date of this Agreement:
(A) 2,542,128 shares of First Capital Common Stock
are issued and outstanding, all of which are validly issued, fully paid and
nonassessable and were issued in full compliance with all applicable laws and
not in violation of any preemptive rights;
(B) no shares of First Capital preferred stock are
issued and outstanding; and
(C) 74,828 shares of First Capital Common Stock
are reserved for issuance pursuant to outstanding grants or awards under First
Capital's stock-based benefit plans.
(iii) No bonds, debentures, notes or other indebtedness
having the right to vote on any matters on which stockholders of First Capital
may vote are issued or outstanding.
(iv) Except as set forth in this Section 3.3(c), as of
the date of this Agreement, (A) no shares of capital stock or other voting
securities of First Capital are issued, reserved for issuance or outstanding and
(B) neither First Capital nor any of its Subsidiaries has or is bound by any
outstanding subscriptions, options, warrants, calls, rights, convertible
securities, commitments or agreements of any character obligating First Capital
or any of its Subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, any additional shares of capital stock of First Capital or
obligating First Capital or any of its Subsidiaries to grant, extend or enter
into any such option, warrant, call, right, convertible security, commitment or
agreement. As of the date hereof, there are no outstanding contractual
obligations of First Capital or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of First Capital or any of its
Subsidiaries.
(v) The shares of First Capital Common Stock to be
issued in exchange for shares of Hometown Common Stock upon consummation of the
Merger in accordance with this Agreement have been duly authorized and when
issued in accordance with the terms of this Agreement, will be validly issued,
fully paid and nonassessable and subject to no preemptive rights.
(d) Authority. First Capital has all requisite corporate
power and authority to enter into this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated by this Agreement. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement have been duly authorized by all
necessary corporate actions on the part of First Capital's Board of Directors,
and no other corporate proceedings on the part of First Capital are necessary to
authorize this Agreement or to consummate the transactions contemplated by this
Agreement. This Agreement has been duly and validly executed and delivered by
First Capital and constitutes a valid and binding obligation of First Capital,
enforceable against First
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Capital in accordance with its terms, subject to applicable bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally
and to general principles of equity, whether applied in a court of law or a
court of equity.
(e) No Violations. The execution, delivery and performance of
this Agreement by First Capital do not, and the consummation of the transactions
contemplated by this Agreement (including the Bank Merger) by First Capital and
First Harrison Bank will not, (i) assuming all required governmental approvals
have been obtained and the applicable waiting periods have expired, violate any
law, rule or regulation or any judgment, decree, order, governmental permit or
license to which First Capital or any of its Subsidiaries (or any of their
respective properties) is subject, (ii) violate the articles of incorporation or
bylaws of First Capital or the similar organizational documents of any of its
Subsidiaries or (iii) constitute a breach or violation of, or a default under
(or an event which, with due notice or lapse of time or both, would constitute a
default under), or result in the termination of, accelerate the performance
required by, or result in the creation of any Lien upon any of the properties or
assets of First Capital or any of its Subsidiaries under, any of the terms,
conditions or provisions of any note, bond, indenture, deed of trust, loan
agreement or other agreement, instrument or obligation to which First Capital or
any of its Subsidiaries is a party, or to which any of their respective
properties or assets may be subject except, in the case of (iii), for any such
breaches, violations or defaults that would not, individually or in the
aggregate, have a Material Adverse Effect on First Capital.
(f) Consents and Approvals. No consents or approvals of, or
filings or registrations with, any Governmental Entity or any third party are
required to be made or obtained in connection with the execution and delivery by
First Capital of this Agreement or the consummation by First Capital of the
Merger and the other transactions contemplated by this Agreement, including the
Bank Merger, except for (i) filings of applications and notices with, receipt of
approvals or nonobjections from, and expiration of the related waiting period
required by, federal and state banking authorities, (ii) filing of the
Registration Statement with the SEC and declaration by the SEC of the
Registration Statement's effectiveness under the Securities Act, (iii) the
registration or qualification of the shares of First Capital Common Stock to be
issued in exchange for shares of First Capital Common Stock under state
securities or "blue sky" laws and (iv) the listing of the shares of First
Capital Common Stock to be issued in exchange for shares of First Capital Common
Stock on the Nasdaq Stock Market. As of the date hereof, First Capital knows of
no reason pertaining to First Capital why any of the approvals referred to in
this Section 3.3(f) should not be obtained without the imposition of any
material condition or restriction described in Section 6.1(b).
(g) Securities and Regulatory Filings.
(i) First Capital has filed with the SEC all reports,
schedules, registration statements, definitive proxy statements and other
documents that it has been required to file under the Securities Act or the
Exchange Act since December 31, 1998 (collectively, "First Capital's Reports").
None of First Capital's Reports contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading. As of their respective dates, all of
First Capital's Reports complied in all material respects with the applicable
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations of the SEC promulgated thereunder. Each of the
financial statements (including, in each case, any notes thereto) of First
Capital included in First Capital's Reports complied as to form, as of their
respective dates of filing with the
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SEC, in all material respects with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto.
(ii) First Capital and each Subsidiary of First Capital
has filed with any Government Regulator all reports, schedules, registrations,
and statements that it has been required to file since December 31, 1998
(collectively, "First Capital Regulatory Filings"). As of their respective
dates, each of the First Capital Regulatory Filings complied in all material
respects with all of the laws, rules and regulations of the Government Regulator
with which they were filed. None of the First Capital Regulatory Filings
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(h) Financial Statements. First Capital has previously made
available to Hometown copies of (i) the consolidated balance sheets of First
Capital and its Subsidiaries as of December 31, 2001 and 2000 and related
consolidated statements of income, cash flows and changes in stockholders'
equity for each of the years in the two-year period ended December 31, 2001,
together with the notes thereto, accompanied by the audit report of First
Capital's independent public auditors, as reported in First Capital's Annual
Report on Form 10-KSB for the year ended December 31, 2001 filed with the SEC
and (ii) the unaudited consolidated balance sheet of First Capital and its
Subsidiaries as of June 30, 2002 and the related consolidated statements of
income and cash flows for the six months ended June 30, 2002 and 2001, as
reported in First Capital's Quarterly Report on Form 10-QSB for the period ended
June 30, 2002 filed with the SEC. Such financial statements were prepared from
the books and records of First Capital and its Subsidiaries, fairly present the
consolidated financial position of First Capital and its Subsidiaries in each
case at and as of the dates indicated and the consolidated results of operations
and cash flows of First Capital and its Subsidiaries for the periods indicated,
and, except as otherwise set forth in the notes thereto, were prepared in
accordance with GAAP consistently applied throughout the periods covered
thereby; provided, however, that the unaudited financial statements for interim
periods are subject to normal year-end adjustments (which will not be material
individually or in the aggregate) and lack a statement of changes in
stockholders' equity and footnotes to the extent permitted under applicable
regulations. The books and records of First Capital and its Subsidiaries have
been, and are being, maintained in all respects in accordance with GAAP and any
other legal and accounting requirements and reflect only actual transactions.
(i) Undisclosed Liabilities. Neither First Capital nor any of
its Subsidiaries has incurred any debt, liability or obligation of any nature
whatsoever (whether accrued, contingent, absolute or otherwise and whether due
or to become due) other than liabilities reflected on or reserved against in the
consolidated balance sheet of First Capital as of June 30, 2002 as included in
First Capital's Quarterly Report on Form 10-QSB for the period ended June 30,
2002, except for (i) liabilities incurred since June 30, 2002 in the ordinary
course of business consistent with past practice that, either alone or when
combined with all similar liabilities, have not had, and would not reasonably be
expected to have, a Material Adverse Effect on First Capital and (ii)
liabilities incurred for legal, accounting, financial advising fees and
out-of-pocket expenses in connection with the transactions contemplated by this
Agreement.
(j) Absence of Certain Changes or Events. Except as disclosed
in First Capital's Reports filed with the SEC prior to the date of this
Agreement, since June 30, 2002, (i) First Capital and its Subsidiaries have
conducted their respective businesses only in the ordinary and usual course of
such
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businesses consistent with their past practices and (ii) there has not been
any event or occurrence that has had, or is reasonably expected to have, a
Material Adverse Effect on First Capital.
(k) Litigation. There are no suits, actions or legal,
administrative or arbitration proceedings pending or, to the knowledge of First
Capital, threatened against or affecting First Capital or any of its
Subsidiaries or any property or asset of First Capital or any of its
Subsidiaries that (i) individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect on First Capital or (ii) challenge
the validity or propriety of the transactions contemplated by this Agreement.
There are no judgments, decrees, injunctions, orders or rulings of any
Governmental Entity or arbitrator outstanding against First Capital or any of
its Subsidiaries that, individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect on First Capital.
(l) Absence of Regulatory Actions. Since December 31, 1997,
neither First Capital nor any of its Subsidiaries has been a party to any cease
and desist order, written agreement or memorandum of understanding with, or any
commitment letter or similar undertaking to, or has been subject to any action,
proceeding, order or directive by any Government Regulator, or has adopted any
board resolutions at the request of any Government Regulator, or has been
advised by any Government Regulator that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such action, proceeding, order, directive, written agreement, memorandum of
understanding, commitment letter, board resolutions or similar undertaking.
There are no unresolved violations, criticisms or exceptions by any Government
Regulator with respect to any report or statement relating to any examinations
of First Capital or its Subsidiaries.
(m) Compliance with Laws. First Capital and each of its
Subsidiaries conducts its business in compliance with all statutes, laws,
regulations, ordinances, rules, judgements, orders or decrees applicable to it
or the employees conducting such business. First Capital and each of its
Subsidiaries has all permits, licenses, certificates of authority, orders and
approvals of, and has made all filings, applications and registrations with, all
Governmental Entities that are required in order to permit it to carry on its
business as it is presently conducted; all such permits, licenses, certificates
of authority, orders and approvals are in full force and effect, and no
suspension or cancellation of any of them is threatened. Neither First Capital
nor any of its Subsidiaries has been given notice or been charged with any
violation of, any law, ordinance, regulation, order, writ, rule, decree or
condition to approval of any Governmental Entity which, individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect on
First Capital.
(n) Taxes. All federal, state, local and foreign tax returns
required to be filed by or on behalf of First Capital or any of its Subsidiaries
have been timely filed or requests for extensions have been timely filed and any
such extension shall have been granted and not have expired, and all such filed
returns are complete and accurate in all material respects. All taxes shown on
such returns, all taxes required to be shown on returns for which extensions
have been granted and all other taxes required to be paid by First Capital or
any of its Subsidiaries have been paid in full or adequate provision has been
made for any such taxes on First Capital's balance sheet (in accordance with
GAAP). There is no audit examination, deficiency assessment, tax investigation
or refund litigation with respect to any taxes of First Capital or any of its
Subsidiaries, and no claim has been made in writing by any authority in a
jurisdiction where First Capital or any of its Subsidiaries do not file tax
returns that First Capital or any such Subsidiary is subject to taxation in that
jurisdiction. All taxes, interest, additions and penalties due with respect to
completed and settled examinations or concluded litigation relating to First
Capital or any
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of its Subsidiaries have been paid in full or adequate provision has been made
for any such taxes on First Capital's balance sheet (in accordance with GAAP).
First Capital and its Subsidiaries have not executed an extension or waiver of
any statute of limitations on the assessment or collection of any tax due that
is currently in effect. First Capital and each of its Subsidiaries has withheld
and paid all taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder or other third party, and First Capital and each of its Subsidiaries
has timely complied with all applicable information reporting requirements under
Part III, Subchapter A of Chapter 61 of the IRC and similar applicable state and
local information reporting requirements.
(o) Agreements.
(i) First Capital and its Subsidiaries are not bound by
any material contract (as defined in Item 601(b)(10) of Regulation S-K
promulgated by the SEC), to be performed after the date hereof that has not been
filed with First Capital's Reports.
(ii) Neither First Capital nor any of its Subsidiaries
is in default under (and no event has occurred which, with due notice or lapse
of time or both, would constitute a default under) or is in violation of any
provision of any note, bond, indenture, mortgage, deed of trust, loan agreement,
lease or other agreement to which it is a party or by which it is bound or to
which any of its respective properties or assets is subject and, to the
knowledge of First Capital, no other party to any such agreement (excluding any
loan or extension of credit made by First Capital or any of its Subsidiaries) is
in default in any respect thereunder, except for such defaults or violations
that would not, individually or in the aggregate, have a Material Adverse Effect
on First Capital.
(p) First Capital Information. The information regarding
First Capital and its Subsidiaries to be supplied by First Capital for inclusion
in the Registration Statement, any filings or approvals under applicable state
securities laws, or any filing pursuant to Rule 165 or Rule 425 under the
Securities Act or Rule 14a-12 under the Exchange Act will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Proxy
Statement-Prospectus (except for such portions thereof that relate only to
Hometown or any of its Subsidiaries) will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder. The Registration Statement will comply as to form in all material
respects with the provisions of the Securities Act and the rules and regulations
thereunder.
(q) Environmental Matters.
(i) Each of First Capital and its Subsidiaries and, to
the knowledge of First Capital, the Participation Facilities and the Loan
Properties are, and have been, in substantial compliance with all Environmental
Laws.
(ii) There is no suit, claim, action, demand, executive
or administrative order, directive, investigation or proceeding pending or, to
the knowledge of First Capital, threatened, before any court, governmental
agency or board or other forum against First Capital or any of its Subsidiaries
or any Participation Facility (A) for alleged noncompliance (including by any
predecessor) with, or liability under, any Environmental Law or (B) relating to
the presence of or release into the
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environment of any Hazardous Material, whether or not occurring at or on a site
owned, leased or operated by First Capital or any of its Subsidiaries or any
Participation Facility.
(iii) To the knowledge of First Capital, there is no
suit, claim, action, demand, executive or administrative order, directive,
investigation or proceeding pending or threatened before any court, governmental
agency or board or other forum relating to or against any Loan Property (or
First Capital or any of its Subsidiaries in respect of such Loan Property) (A)
relating to alleged noncompliance (including by any predecessor) with, or
liability under, any Environmental Law or (B) relating to the presence of or
release into the environment of any Hazardous Material, whether or not occurring
at a Loan Property.
(iv) Neither First Capital nor any of its Subsidiaries
has received any notice, demand letter, executive or administrative order,
directive or request for information from any Governmental Entity or any third
party indicating that it may be in violation of, or liable under, any
Environmental Law.
(v) There are no underground storage tanks at any
properties owned or operated by First Capital or any of its Subsidiaries or, to
the knowledge of First Capital, at any Participation Facility and no underground
storage tanks have been closed or removed from any properties owned or operated
by First Capital or any of its Subsidiaries or, to the knowledge of First
Capital, any Participation Facility.
(vi) During the period of (A) First Capital's or its
Subsidiary's ownership or operation of any of their respective current
properties or (B) First Capital's or its Subsidiary's participation in the
management of any Participation Facility, there has been no release of Hazardous
Materials in, on, under or affecting such properties. To the knowledge of First
Capital, prior to the period of (A) First Capital's or its Subsidiary's
ownership or operation of any of their respective current properties or (B)
First Capital's or its Subsidiary's participation in the management of any
Participation Facility, there was no contamination by or release of Hazardous
Material in, on, under or affecting such properties.
(r) Community Reinvestment Act Compliance. First Harrison
Bank is in material compliance with the applicable provisions of the CRA and the
regulations promulgated thereunder, and First Harrison Bank currently has a CRA
rating of satisfactory or better. To the knowledge of First Capital, there is no
fact or circumstance or set of facts or circumstances that would cause First
Harrison Bank to fail to comply with such provisions or cause the CRA rating of
First Harrison Bank to fall below satisfactory.
(s) Tax Treatment of the Merger. First Capital has no
knowledge of any fact or circumstance relating to it that would prevent the
transactions contemplated by this Agreement from qualifying as a reorganization
under Section 368 of the IRC.
(t) Availability of Funds. First Capital has and will have
available to it at the Effective Time, sources of capital sufficient to pay the
aggregate Cash Consideration and to pay any other amounts payable pursuant to
this Agreement and to effect the transactions contemplated hereby.
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ARTICLE IV
Conduct Pending the Merger
4.1 Forbearances by Hometown. Except as expressly contemplated or
permitted by this Agreement, and except to the extent required by law or
regulation or any Governmental Entity, during the period from the date of this
Agreement to the Effective Time, Hometown shall not, nor shall Hometown permit
any of its Subsidiaries to, without the prior written consent of First Capital,
which consent shall not be unreasonably withheld:
(a) conduct its business other than in the regular, ordinary
and usual course consistent with past practice; fail to maintain and preserve
intact its business organization, properties, leases, employees and advantageous
business relationships and retain the services of its officers and key
employees; or take any action that would adversely affect or delay its ability
to perform its obligations under this Agreement or to consummate the
transactions contemplated hereby;
(b) (i) incur, modify, extend or renegotiate any
indebtedness for borrowed money, or assume, guarantee, endorse or otherwise as
an accommodation become responsible for the obligations of any other individual,
corporation or other entity, other than the creation of deposit liabilities,
purchases of Federal Funds, borrowings from the Federal Home Loan Bank or the
Federal Reserve Bank of St. Louis that mature within one year, entry into
repurchase agreements fully secured by U.S. government agency securities,
bankers acceptances, treasury tax and loan accounts established in the ordinary
course of business, and sales of certificates of deposit that mature within five
years;
(ii) purchase any brokered certificates of deposit; or
(iii) prepay any indebtedness or other similar
arrangements so as to cause Hometown to incur any prepayment penalty thereunder;
(c) (i) adjust, split, combine or reclassify any capital
stock;
(ii) make, declare or pay any dividend, or make any
other distribution on its capital stock;
(iii) grant any individual, corporation or other entity
any right to acquire any shares of its capital stock; or
(iv) issue any additional shares of capital stock or any
securities or obligations convertible or exercisable for any shares of its
capital stock;
(d) sell, transfer, mortgage, encumber or otherwise dispose
of any of its material properties or assets to any individual, corporation or
other entity other than a Subsidiary, or cancel, release or assign any
indebtedness to any such person or any claims held by any such person, except in
the ordinary course of business consistent with past practice or pursuant to
contracts or agreements in force at the date of this Agreement;
(e) except pursuant to contracts or agreements in force at
the date of or permitted by this Agreement, make any equity investment, either
by purchase of stock or securities, contributions to
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capital, property transfers (other than foreclosures in connection with
satisfaction of loans in the ordinary course of Hometown National Bank's
business), or purchase outside the ordinary course of business of any property
or assets of any other individual, corporation or other entity;
(f) enter into, renew, amend or terminate any contract or
agreement, or make any change in any of its leases or contracts, other than with
respect to those involving aggregate payments of less than, or the provision of
goods or services with a market value of less than, $20,000 per annum and other
than contracts or agreements covered by Section 4.1(g);
(g) make, renegotiate, renew, increase, extend, modify or
purchase any loan, lease (credit equivalent), advance, credit enhancement or
other extension of credit, or make any commitment in respect of any of the
foregoing, except (i) in conformity with existing lending practices in amounts
not to exceed an aggregate of $350,000, or $500,000 if such loan is approved at
a meeting of the Board of Directors of Hometown National Bank, with respect to
any individual borrower or (ii) loans or advances as to which Hometown has a
binding obligation to make such loans or advances as of the date hereof;
(h) except for loans or extensions of credit made on terms
generally available to the public, make or increase any loan or other extension
of credit, or commit to make or increase any such loan or extension of credit,
to any director or executive officer of Hometown or Hometown National Bank, or
any entity controlled, directly or indirectly, by any of the foregoing;
(i) (i) increase in any manner the compensation or fringe
benefits of any of its employees or directors other than in the ordinary course
of business consistent with past practice and pursuant to policies currently in
effect, or pay any bonus, pension, retirement allowance or contribution not
required by any existing plan or agreement to any such employees or directors;
(ii) become a party to, amend or commit itself to any
pension, retirement, profit-sharing or welfare benefit plan or agreement or
employment agreement with or for the benefit of any employee or director;
(iii) voluntarily accelerate the vesting of, or the
lapsing of restrictions with respect to, any stock options or other stock-based
compensation; or
(iv) elect to any senior executive office any person who
is not a member of its senior executive officer team as of the date of this
Agreement or elect to its Board of Directors any person who is not a member of
its Board of Directors as of the date of this Agreement, or hire any employee
with annual compensation in excess of $50,000;
(j) settle any claim, action or proceeding involving payment
by it of money damages in excess of $25,000 or impose any material restriction
on its operations or the operations of any of its Subsidiaries;
(k) amend its articles of incorporation or bylaws, or similar
governing documents;
(l) restructure or materially change its investment
securities portfolio or its interest rate risk position, through purchases,
sales or otherwise, or the manner in which the portfolio is classified or
reported;
(m) make any investment in any debt security, including
mortgage-backed and mortgage-related securities, other than U.S. government and
U.S. government agency securities with final maturities not greater than one
year;
(n) make any capital expenditures other than pursuant to
binding commitments existing on the date hereof and other than expenditures
necessary to maintain existing assets in good repair or to make payment of
necessary taxes or other obligations due and owing;
(o) establish or commit to the establishment of any new
branch or other office facilities or file any application to relocate or
terminate the operation of any banking office;
(p) take any action that is intended or expected to result in
any of its representations and warranties set forth in this Agreement being or
becoming untrue in any material respect at any time prior to the Effective Time
such that the conditions specified in Section 6.2(a) cannot be satisfied, or in
any of the conditions to the Merger set forth in Article VI not being satisfied
or in a violation of any provision of this Agreement;
(q) implement or adopt any change in its accounting
principles, practices or methods, other than as may be required by GAAP or
regulatory guidelines;
(r) knowingly take any action that would prevent or impede
the Merger from qualifying as a reorganization within the meaning of Section 368
of the IRC; or
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(s) agree to take, make any commitment to take, or adopt any
resolutions of its board of directors in support of, any of the actions
prohibited by this Section 4.1.
Any request by Hometown or response thereto by First Capital
shall be made in accordance with the notice provisions of Section 8.7 and shall
note that it is a request pursuant to this Section 4.1. First Capital shall be
deemed to consent and agree to any request hereunder to the extent it does not
respond thereto within five business days.
4.2 Forbearances by First Capital. Except as expressly
contemplated or permitted by this Agreement, and except to the extent required
by law or regulation or any Governmental Entity, during the period from the date
of this Agreement to the Effective Time, First Capital shall not, nor shall
First Capital permit any of its Subsidiaries to, without the prior written
consent of Hometown, which shall not unreasonably be withheld:
(a) take any action that would adversely affect or delay its
ability to perform its obligations under this Agreement or to consummate the
transactions contemplated hereby;
(b) take any action that is intended to or expected to result
in any of its representations and warranties set forth in this Agreement being
or becoming untrue in any material respect at any time prior to the Effective
Time such that the conditions specified in Section 6.3(a) cannot be satisfied,
or in any of the conditions to the Merger set forth in Article VI not being
satisfied or in a violation of any provision of this Agreement;
A-35
(c) knowingly take any action that would prevent or impede
the Merger from qualifying as a reorganization withing the meaning of Section
368 of the IRC;
(d) amend its articles of incorporation or bylaws in a manner
that would materially and adversely effect the benefits of the Merger to the
stockholders of Hometown;
(e) enter into any agreement with respect to an Acquisition
Proposal with a third party that (i) reasonably could be expected to result in
the Merger not being consummated or (ii) that would be consummated prior to the
Closing Date and would effect a change in the kind of Merger Consideration to be
received by stockholders of Hometown; or
(f) agree to take, make any commitment to take, or adopt any
resolutions of its Board of Directors in support of, any of the actions
prohibited by this Section 4.2.
ARTICLE V
Covenants
5.1 Acquisition Proposals.
(a) Except as permitted by this Agreement, neither Hometown,
its Subsidiaries nor the officers and directors of Hometown or any of its
Subsidiaries shall, and Hometown shall use all reasonable efforts to cause its
employees and agents, including any investment banker, financial advisor,
attorney, accountant or other representative retained by Hometown or any of its
Subsidiaries, not to, directly or indirectly, (i) solicit, initiate or encourage
(including by way of furnishing non-public information), or take any other
action to facilitate, any inquiries, discussions or the making of any proposal
that constitutes or could reasonably be expected to lead to an Acquisition
Proposal, (ii) participate in any discussions or negotiations, or otherwise
communicate in any way with any person (other than First Capital), regarding an
Acquisition Proposal or (iii) enter into or consummate any agreement requiring
it to abandon, terminate or fail to consummate the transactions contemplated
hereby. Notwithstanding the foregoing, Hometown may, in response to an
Acquisition Proposal that reasonably is expected to result in a Superior
Proposal that has not been withdrawn and that did not otherwise result from a
breach of this Section 5.1, (x) furnish non-public information with respect to
Hometown to the person who made such Acquisition Proposal pursuant to a
confidentiality agreement on terms no more favorable to such person than the
confidentiality agreement between First Capital and Hometown dated August 7,
2002 and (y) participate in discussions or negotiations with such person
regarding such Acquisition Proposal, if and so long as Hometown's Board of
Directors determines in good faith, after consultation with and based upon the
advice of its outside legal counsel, that such action is required in order for
the Board of Directors to comply with its fiduciary duties under applicable law.
(b) Hometown will notify First Capital immediately orally
(within one day) and in writing (within three days) of any Acquisition Proposal,
any request for non-public information that could reasonably be expected to lead
to an Acquisition Proposal, or any inquiry with respect to or that could
reasonably be expected to lead to an Acquisition Proposal, including, in each
case, the identity of the person making such Acquisition Proposal, request or
inquiry and the terms and conditions thereof. Hometown will keep First Capital
informed of any developments with respect to any such Acquisition Proposal,
request or inquiry immediately upon the occurrence thereof.
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(c) Hometown will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any
parties conducted heretofore that relate to any Acquisition Proposal. Hometown
will take the necessary steps to inform the appropriate individuals or entities
referred to in the first sentence of Section 5.1(a) of the obligations
undertaken in this Section 5.1. Hometown will promptly request each person
(other than First Capital) that has executed a confidentiality agreement prior
to the date hereof in connection with its consideration of a business
combination with Hometown or any of its Subsidiaries to return or destroy all
confidential information previously furnished to such person by or on behalf of
Hometown or any of its Subsidiaries. Hometown shall not release any third party
from, or waive any provisions of, any confidentiality agreements or standstill
agreement to which it or any of its Subsidiaries is a party.
5.2 Certain Policies and Actions of Hometown. At the request of
First Capital, Hometown shall cause Hometown National Bank to modify and change
its loan, litigation and real estate valuation policies and practices (including
loan classifications and levels of reserves) and investment and asset/liability
management policies and practices so as to be consistent with those of First
Harrison Bank; provided, however, that Hometown shall not be required to take
such action prior to the date on which the conditions set forth in Sections
6.1(a), 6.1(b) and 6.1(e) have been satisfied, and until after receipt of
written confirmation from First Capital that it is not aware of any fact or
circumstance that would prevent completion of the Merger, and provided further,
that such policies and procedures are not prohibited by GAAP or any applicable
laws and regulations. Hometown's representations, warranties and covenants
contained in this Agreement shall not be deemed to be untrue or breached in any
respect for any purpose as a consequence of any modifications or changes
undertaken solely on account of this Section 5.2.
5.3 Access and Information.
(a) Upon reasonable notice, Hometown shall (and shall cause Hometown's
Subsidiaries to) afford First Capital and its representatives (including,
without limitation, directors, officers and employees of First Capital and its
affiliates and counsel, accountants and other professionals retained by First
Capital) such reasonable access during normal business hours throughout the
period prior to the Effective Time to the books, records (including, without
limitation, tax returns and work papers of independent auditors), contracts,
properties, personnel and to such other information relating to Hometown and
Hometown's Subsidiaries as First Capital may reasonably request. Upon reasonable
notice, First Capital shall (and shall cause First Capital's Subsidiaries to)
afford Hometown and its representatives (including, without limitation,
directors, officers and employees of Hometown and its affiliates and counsel,
accountants and other professionals retained by Hometown) such reasonable access
during normal business hours throughout the period prior to the Effective Time
to the executive officers of First Capital and to such information regarding
First Capital and its Subsidiaries as Hometown may reasonably request. No
investigation by any party pursuant to this Section 5.3 shall affect or be
deemed to modify any representation or warranty made by the other party in this
Agreement.
(b) From the date hereof until the Effective Time, Hometown shall, and
shall cause Hometown's Subsidiaries to, promptly provide First Capital with (i)
a copy of each report, schedule, registration statement and other document filed
or received by it pursuant to the requirements of the Securities Act or the
Exchange Act, (ii) a copy of each report filed with federal or state banking
regulators, (iii) a copy of each periodic report to its senior management and
all materials relating to its business or operations furnished to its Board of
Directors, (iv) a copy of each press release made available to the public and
(v) all other information concerning its business, properties and personnel as
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First Capital may reasonably request. Notwithstanding the foregoing, neither
Hometown nor its Subsidiaries shall be required to provide access to or to
disclose information where such access or disclosure would violate the rights of
such entity's customers, jeopardize the attorney-client privilege of the entity
in possession or control of such information, or contravene any law, rule,
regulation, order, judgment, decree or binding agreement entered into prior to
the date of this Agreement. The parties hereto will make appropriate substitute
disclosure arrangements under circumstances in which the restrictions of the
previous sentence apply.
(c) Each of First Capital and Hometown agrees that it will not, and
will cause its representatives not to, use any information obtained pursuant to
this Section 5.3 for any purpose unrelated to the consummation of the
transactions contemplated by this Agreement. Subject to the requirements of
applicable law, each of First Capital and Hometown agrees that it will keep
confidential, and will cause its representatives to keep confidential, all
information and documents obtained pursuant to this Section 5.3 unless such
information (i) was already known to it or an affiliate of it, other than
pursuant to a confidentiality agreement or other confidential relationship, (ii)
becomes available to it or an affiliate of it from other sources not known by
such party to be bound by a confidentiality agreement or other obligation of
secrecy, (iii) is disclosed with the prior written approval of the other party
or (iv) is or becomes readily ascertainable from published information or trade
sources.
(d) From and after the date hereof, representatives First Capital and
Hometown shall meet on a regular basis to discuss and plan for the conversion of
Hometown's and its Subsidiaries' data processing and related electronic
informational systems to those used by First Capital and its Subsidiaries with
the goal of conducting such conversion simultaneously with the consummation of
the Bank Merger.
5.4 Applications; Consents.
(a) The parties hereto shall cooperate with each other and shall use
their reasonable best efforts to prepare and file as soon as practicable after
the date hereof all necessary applications, notices and filings to obtain all
permits, consents, approvals and authorizations of all Governmental Entities
that are necessary or advisable to consummate the transactions contemplated by
this Agreement. Hometown and First Capital shall furnish each other with all
information concerning themselves, their respective subsidiaries, and their and
their respective subsidiaries' directors, officers and stockholders and such
other matters as may be reasonably necessary or advisable in connection with any
application, notice or filing made by or on behalf of First Capital, Hometown or
any of their respective subsidiaries to any Governmental Entity in connection
with the transactions contemplated by this Agreement and the Plan of Bank
Merger. First Capital and Hometown shall have the right to review in advance,
and to the extent practicable each will consult with the other on, all the
information relating to First Capital and Hometown, as the case may be, and any
of their respective subsidiaries, that appears in any filing made with, or
written materials submitted to, any Governmental Entity pursuant to this Section
5.4(a).
(b) As soon as practicable after the date hereof, each of the parties
hereto shall, and they shall cause their respective subsidiaries to, use its
best efforts to obtain any consent, authorization or approval of any third party
that is required to be obtained in connection with the transactions contemplated
by this Agreement and the Plan of Bank Merger.
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5.5 Antitakeover Provisions. Each party and its Subsidiaries shall take
all steps required by any relevant federal or state law or regulation or under
any relevant agreement or other document to exempt or continue to exempt First
Capital, First Harrison Bank, the Agreement, the Plan of Bank Merger and the
Merger from any provisions of an antitakeover nature in their respective
articles of incorporation and bylaws, or similar organizational documents, and
the provisions of any federal or state antitakeover laws.
5.6 Additional Agreements. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
take promptly, or cause to be taken promptly, all actions and to do promptly, or
cause to be done promptly, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement as expeditiously as possible,
including using efforts to obtain all necessary actions or non-actions,
extensions, waivers, consents and approvals from all applicable Governmental
Entities, effecting all necessary registrations, applications and filings
(including, without limitation, filings under any applicable state securities
laws) and obtaining any required contractual consents and regulatory approvals.
5.7 Publicity. The initial press release announcing this Agreement shall
be a joint press release and thereafter Hometown and First Capital shall consult
with each other prior to issuing any press releases or otherwise making public
statements with respect to the Merger and any other transaction contemplated
hereby and in making any filings with any Governmental Entity or with any
national securities exchange or market with respect thereto; provided, however,
that nothing in this Section 5.7 shall be deemed to prohibit any party from
making any disclosure which its counsel deems necessary in order to satisfy such
party's disclosure obligations imposed by law.
5.8 Stockholder Meeting. Hometown will submit to its stockholders this
Agreement and any other matters required to be approved or adopted by
stockholders in order to carry out the intentions of this Agreement. In
furtherance of that obligation, Hometown will take, in accordance with
applicable law and its articles of incorporation and bylaws, all action
necessary to call, give notice of, convene and hold a meeting of its
stockholders (the "Stockholder Meeting") as promptly as practicable for the
purpose of considering and voting on approval and adoption of this Agreement and
the transactions provided for in this Agreement. Unless Hometown's Board of
Directors submits this Agreement to the Hometown stockholders without a
recommendation of approval, Hometown's Board of Directors will use all
reasonable best efforts to obtain from Hometown's stockholders a vote approving
this Agreement. Except as provided in this Agreement or required by law, (i)
Hometown's Board of Directors shall recommend to Hometown's stockholders
approval of this Agreement, (ii) the Proxy Statement-Prospectus shall include a
statement to the effect that Hometown's Board of Directors has recommended that
Hometown's stockholders vote in favor of the approval of this Agreement and
(iii) neither Hometown's Board of Directors nor any committee thereof shall
withdraw, amend or modify, or propose or resolve to withdraw, amend or modify in
a manner adverse to First Capital, the recommendation of Hometown's Board of
Directors that Hometown's stockholders vote in favor of approval of this
Agreement or make any statement in connection with the Stockholder Meeting
inconsistent with such recommendation. Notwithstanding the foregoing, if
Hometown's Board of Directors, after consultation with and based on the advice
of counsel, determines in good faith that it would result in a violation of its
fiduciary duties under applicable law to recommend this Agreement, then in
submitting the Agreement to stockholders at the Stockholder Meeting it may
submit the Agreement without recommendation of approval, in which case the Board
of Directors may communicate the basis for its lack of a
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recommendation of approval to the stockholders in the Proxy Statement-Prospectus
or an appropriate amendment or supplement thereto to the extent required by law.
5.9 Registration of First Capital Common Stock.
(a) As promptly as reasonably practicable following the date hereof,
First Capital shall prepare and file with the SEC a registration statement on
Form S-4 with respect to the issuance of First Capital Common Stock in the
Merger (such Form S-4, and any amendments or supplements thereto, the
"Registration Statement"). The Registration Statement shall contain proxy
materials relating to the matters to be submitted to the Hometown stockholders
at the Stockholders Meeting, which shall also constitute the prospectus relating
to the shares of First Capital Common Stock to be issued in the Merger (such
proxy statement/prospectus, and any amendments or supplements thereto, the
"Proxy Statement-Prospectus"). Hometown will furnish to First Capital the
information required to be included in the Registration Statement with respect
to its business and affairs and shall have the right to review and consult with
First Capital and approve the form of, and any characterizations of such
information included in, the Registration Statement prior to its being filed
with the SEC. First Capital shall use reasonable best efforts to have the
Registration Statement declared effective by the SEC and to keep the
Registration Statement effective as long as is necessary to consummate the
Merger and the transactions contemplated hereby. Hometown will use reasonable
best efforts to cause the Proxy Statement-Prospectus to be mailed to Hometown's
stockholders as promptly as practicable after the Registration Statement is
declared effective under the Securities Act. First Capital will advise Hometown,
promptly after it receives notice thereof, of the time when the Registration
Statement has become effective, the issuance of any stop order, the suspension
of the qualification of the First Capital Common Stock issuable in connection
with the Merger for offering or sale in any jurisdiction, or any request by the
SEC for amendment of the Proxy Statement-Prospectus or the Registration
Statement. If at any time prior to the Effective Time any information relating
to First Capital or Hometown, or any of their respective affiliates, officers or
directors, should be discovered by First Capital or Hometown which should be set
forth in an amendment or supplement to any of the Registration Statement or the
Proxy Statement-Prospectus so that any of such documents would not include any
misstatement of a material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, the party which discovers such information shall promptly
notify the other party hereto and, to the extent required by law, rules or
regulations, an appropriate amendment or supplement describing such information
shall be promptly filed by First Capital with the SEC and disseminated by
Hometown to the stockholders of Hometown.
(b) First Capital shall also take any action required to be taken
under any applicable state securities laws in connection with the Merger and
each of Hometown and First Capital shall furnish all information concerning it
and the holders of Hometown Common Stock as may be reasonably requested in
connection with any such action.
(c) Prior to the Effective Time, First Capital shall notify The
Nasdaq Stock Market of the additional shares of First Capital Common Stock to be
issued by First Capital in exchange for the shares of Hometown Common Stock.
5.10 Affiliate Letters. Hometown shall use its best efforts to cause each
director, executive officer and other person who is an "affiliate" of Hometown
under Rule 145 of the Securities Act to deliver to First Capital as soon as
practicable and prior to the mailing of the Proxy Statement-Prospectus
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executed letter agreements, each substantially in the form attached hereto as
Exhibit C, providing that such person will comply with Rule 145.
---------
5.11 Notification of Certain Matters. Each party shall give prompt notice
to the other of: (i) any event or notice of, or other communication relating to,
a default or event that, with notice or lapse of time or both, would become a
default, received by it or any of its Subsidiaries subsequent to the date of
this Agreement and prior to the Effective Time, under any contract material to
the financial condition, properties, businesses or results of operations of each
party and its Subsidiaries taken as a whole to which each party or any
Subsidiary is a party or is subject; and (ii) any event, condition, change or
occurrence which individually or in the aggregate has, or which, so far as
reasonably can be foreseen at the time of its occurrence, is reasonably likely
to result in a Material Adverse Effect. Each of Hometown and First Capital shall
give prompt notice to the other party of any notice or other communication from
any third party alleging that the consent of such third party is or may be
required in connection with any of the transactions contemplated by this
Agreement.
5.12 Employee Benefits Matters.
(a) Subject to determination of its staffing needs, First Capital
desires to retain substantially all of the employees of Hometown National Bank
following the Effective Time. All persons who are employees of Hometown National
Bank immediately prior to the Effective Time and whose employment is not
specifically terminated at or prior to the Effective Time (a "Continuing
Employee") shall, at the Effective Time, become employees of First Harrison
Bank; provided, however, that in no event shall any of Hometown National Bank's
employees be officers of First Harrison Bank, or have or exercise any power or
duty conferred upon such an officer, unless and until duly elected or appointed
to such position in accordance with the bylaws of First Harrison Bank. All of
the Continuing Employees shall be employed at the will of First Harrison Bank
and no contractual right to employment shall inure to such employees because of
this Agreement.
(b) As of the Effective Time, First Capital shall make available
employer-provided health and other employee welfare benefit plans to each
Continuing Employee on the same basis as it provides such coverage to First
Capital employees except that any pre-existing condition, eligibility waiting
period or other limitations or exclusions otherwise applicable under such plans
to new employees shall not apply to a Continuing Employee or their covered
dependents who were covered under a similar Hometown plan at the Effective Time
of the Merger.
(c) As of the Effective Time, each Continuing Employee shall be
eligible to participate in First Capital's 401(k) plan and employee stock
ownership plan with full credit for prior service with Hometown for purposes of
eligibility and vesting. As soon as administratively practicable following the
Effective Time, First Capital shall cause Hometown's 401(k) plan to be merged
into First Capital's 401(k) plan.
(d) First Capital agrees to honor in accordance with their terms all
benefits vested as of the Effective Time under the Hometown Employee Plans and
all vested benefits or other vested amounts earned or accrued through such time
under contracts, arrangement commitments or understandings described in
Hometown's Disclosure Letter, including benefits which vest or are otherwise
accrued as a result of the consummation of the transactions contemplated by this
Agreement.
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(e) Except as otherwise provided in Hometown's Disclosure Letter,
each Hometown employee who is terminated at the Effective Time and each
Continuing Employee who is terminated within 12 months of the Effective Time
(other than for cause) shall receive a severance payment equal to the greater of
(i) two weeks salary for every year of employment with Hometown or (ii) one
month's salary.
5.13 Indemnification.
(a) From and after the Effective Time through the sixth anniversary
of the Effective Time, First Capital agrees to indemnify and hold harmless each
present and former director and officer of Hometown and its Subsidiaries and
each officer or employee of Hometown and its Subsidiaries that is serving or has
served as a director or trustee of another entity expressly at Hometown's
request or direction (each, an "Indemnified Party"), against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, amounts paid
in settlement, losses, claims, damages or liabilities incurred in connection
with any claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of matters existing or
occurring at or prior to the Effective Time (including the transactions
contemplated by this Agreement), whether asserted or claimed prior to, at or
after the Effective Time, as they are from time to time incurred, in each case
to the fullest extent such person would have been indemnified or have the right
to advancement of expenses pursuant to the articles of incorporation and bylaws
of Hometown and its Subsidiaries, as applicable, as in effect on the date of
this Agreement and to the fullest extent permitted by law.
(b) Any Indemnified Party wishing to claim indemnification under
Section 5.13(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify First Capital thereof, but the failure to
so notify shall not relieve First Capital of any liability it may have hereunder
to such Indemnified Party if such failure does not materially and substantially
prejudice First Capital.
(c) First Capital shall maintain Hometown's existing directors' and
officers' liability insurance policy (or provide a policy providing comparable
coverage and amounts on terms no less favorable to the persons currently covered
by Hometown's existing policy, including First Capital's existing policy if it
meets the foregoing standard) covering persons who are currently covered by such
insurance for a period of six years after the Effective Time; provided, however,
that in no event shall First Capital be obligated to expend, in order to
maintain or provide insurance coverage pursuant to this Section 5.13(c), an
amount per annum in excess of 150% of the amount of the annual premiums paid by
Hometown as of the date hereof for such insurance ("Maximum Insurance Amount");
provided further, that if the amount of the annual premiums necessary to
maintain or procure such insurance coverage exceeds the Maximum Insurance
Amount, First Capital shall obtain the most advantageous coverage obtainable for
an annual premium equal to the Maximum Insurance Amount.
(d) In the event First Capital or any of its successors or assigns
(i) consolidates with or merges into any other person or entity and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers or conveys all or substantially all of its properties
and assets to any person or entity, then, and in each such case, to the extent
necessary, proper provision shall be made so that the successors and assigns of
First Capital assume the obligations set forth in this Section 5.13.
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(e) The provisions of this Section 5.13 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
representatives.
5.14 Advisory Board. For a period of two years from the Effective Time or
such longer time as First Capital in its sole discretion shall determine, First
Capital shall maintain an advisory board for the purpose of advising First
Capital on the operations of Hometown National Bank. Each of the non-employee
directors of Hometown as of the Effective Time shall be invited to serve on the
advisory board. Each advisory director shall be paid $150 per meeting attended.
ARTICLE VI
Conditions to Consummation
6.1 Conditions to Each Party's Obligations. The respective obligations
of each party to effect the Merger shall be subject to the satisfaction of the
following conditions:
(a) Stockholder Approval. This Agreement shall have been approved by
the requisite vote of Hometown's stockholders in accordance with applicable laws
and regulations.
(b) Regulatory Approvals. All approvals, consents or waivers of any
Governmental Entity required to permit consummation of the transactions
contemplated by this Agreement shall have been obtained and shall remain in full
force and effect, and all statutory waiting periods shall have expired;
provided, however, that none of such approvals, consents or waivers shall
contain any condition or requirement that would so materially and adversely
impact the economic or business benefits to First Capital of the transactions
contemplated hereby that, had such condition or requirement been known, First
Capital would not, in its reasonable judgment, have entered into this Agreement.
(c) No Injunctions or Restraints; Illegality. No party hereto shall
be subject to any order, decree or injunction of a court or agency of competent
jurisdiction that enjoins or prohibits the consummation of the Merger or the
Bank Merger and no Governmental Entity shall have instituted any proceeding for
the purpose of enjoining or prohibiting the consummation of the Merger or the
Bank Merger or any transactions contemplated by this Agreement. No statute, rule
or regulation shall have been enacted, entered, promulgated or enforced by any
Governmental Entity which prohibits or makes illegal consummation of the Merger.
(d) Registration Statement; Blue Sky Laws. The Registration Statement
shall have been declared effective by the SEC and no proceedings shall be
pending or threatened by the SEC to suspend the effectiveness of the
Registration Statement, and First Capital shall have received all required
approvals by state securities or "blue sky" authorities with respect to the
transactions contemplated by this Agreement.
(e) Third Party Consents. First Capital and Hometown shall have
obtained the consent or approval of each person (other than the governmental
approvals or consents referred to in Section 6.1(b)) whose consent or approval
shall be required to consummate the transactions contemplated by this Agreement,
except those for which failure to obtain such consents and approvals would not,
individually or in the aggregate, have a Material Adverse Effect on First
Capital (after giving effect to the consummation of the transactions
contemplated hereby).
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(f) Tax Opinions. First Capital and Hometown shall have received
opinions of Muldoon Murphy & Faucette LLP, dated as of the Closing Date, in form
and substance customary in transactions of the type contemplated hereby, and
reasonably satisfactory to Hometown and First Capital, as the case may be,
substantially to the effect that on the basis of the facts, representations and
assumptions set forth in such opinions which are consistent with the state of
facts existing at the Effective Time, (i) the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the IRC, (ii) First Capital and Hometown will each be a party to that
reorganization within the meaning of Section 368(b) of the IRC and (iii) except
to the extent of any cash received in lieu of a fractional share interest in
First Capital Common Stock, no gain or loss will be recognized by the
stockholders of Hometown who exchange their Hometown Common Stock for First
Capital Common Stock pursuant to the Merger. Such opinions may be based on, in
addition to the review of such matters of fact and law as counsel considers
appropriate, representations contained in certificates of officers of First
Capital, Hometown and others.
6.2 Conditions to the Obligations of First Capital. The obligations of
First Capital to effect the Merger shall be further subject to the satisfaction
of the following additional conditions, any one or more of which may be waived
by First Capital:
(a) Hometown's Representations and Warranties. Each of the
representations and warranties of Hometown contained in Sections 3.2(a) (except
as relates to qualification), (b) (except as relates to qualification), (c),
(d), (e)(i) and (ii), (y) and (gg) of this Agreement shall be true and correct
(except for inaccuracies that are de minimis) as of the date of this Agreement
and as of the Closing Date as though made at and as of the Closing Date, and
there shall not exist any inaccuracies in the representations and warranties of
Hometown contained in this Agreement (including the representations and
warranties set forth in the Sections designated above) such that the effect of
such inaccuracies individually or in the aggregate has, or is reasonably likely
to have, a Material Adverse Effect on Hometown.
(b) Performance of Hometown's Obligations. Hometown shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Effective Time.
(c) Officers' Certificate. First Capital shall have received a
certificate signed by the chief executive officer and the chief financial or
principal accounting officer of Hometown to the effect that the conditions set
forth in Sections 6.2(a) and (b) have been satisfied.
(d) Minimum Book Value. The total stockholder's equity of Hometown as
of December 31, 2002 as shown on its audited consolidated balance sheet as of
such date shall not be less than $6,800,000, exclusive of the effect of (i) any
payments made or expenses incurred by Hometown after June 30, 2002 in connection
with the execution, performance and consummation of this Agreement and (ii) any
actions taken by Hometown at the request of First Capital pursuant to Section
5.2.
6.3 Conditions to the Obligations of Hometown. The obligations of
Hometown to effect the Merger shall be further subject to the satisfaction of
the following additional conditions, any one or more of which may be waived by
Hometown:
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(a) First Capital's Representations and Warranties. Each of the
representations and warranties of First Capital contained in Sections 3.3(a)
(except as relates to qualification), (b) (except as relates to qualification),
(c), (d), (e)(i) and (ii), and (r) of this Agreement shall be true and correct
(except for inaccuracies that are de minimis) as of the date of this Agreement
and as of the Closing Date as though made at and as of the Closing Date, and
there shall not exist any inaccuracies in the representations and warranties of
First Capital contained in this Agreement (including the representations and
warranties set forth in the Sections designated above) such that the effect of
such inaccuracies individually or in the aggregate has, or is reasonably likely
to have, a Material Adverse Effect on First Capital.
(b) Performance of First Capital's Obligations. First Capital shall
have performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Effective Time.
(c) Officers' Certificate. Hometown shall have received a certificate
signed by the chief executive officer and the chief financial or principal
accounting officer of First Capital to the effect that the conditions set forth
in Sections 6.3(a) and (b) have been satisfied.
(d) Deposit of Merger Consideration. First Capital shall have
deposited with the Exchange Agent sufficient cash to pay the aggregate Cash
Consideration.
ARTICLE VII
Termination
7.1 Termination. This Agreement may be terminated, and the Merger
abandoned, at any time prior to the Effective Time, by action taken or
authorized by the Board of Directors of the terminating party, either before or
after any requisite stockholder approval:
(a) by the mutual written consent of First Capital and Hometown; or
(b) by either First Capital or Hometown, in the event of the failure
of Hometown's stockholders to approve the Agreement at the Stockholder Meeting;
provided, however, that Hometown shall only be entitled to terminate the
Agreement pursuant to this clause if it has complied in all material respects
with its obligations under Section 5.8; or
(c) by either First Capital or Hometown, if either (i) any approval,
consent or waiver of a Governmental Entity required to permit consummation of
the transactions contemplated by this Agreement shall have been denied or (ii)
any Governmental Entity of competent jurisdiction shall have issued a final,
unappealable order enjoining or otherwise prohibiting consummation of the
transactions contemplated by this Agreement; or
(d) by either First Capital or Hometown, in the event that the Merger
is not consummated by June 30, 2003 unless the failure to so consummate by such
time is due to the failure of the party seeking to terminate this Agreement to
perform or observe the covenants and agreements of such party set forth herein;
or
(e) by either First Capital or Hometown (provided that the party
seeking termination is not then in material breach of any representation,
warranty, covenant or other agreement contained
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herein), in the event of a breach of any covenant or agreement on the part of
the other party set forth in this Agreement, or if any representation or
warranty of the other party shall have become untrue, in either case such that
the conditions set forth in Sections 6.2(a) and (b) or Sections 6.3(a) and (b),
as the case may, be would not be satisfied and such breach or untrue
representation or warranty has not been or cannot be cured within thirty (30)
days following written notice to the party committing such breach or making such
untrue representation or warranty; or
(f) by First Capital, if the Board of Directors of Hometown does not
publicly recommend in the Proxy Statement-Prospectus that stockholders approve
and adopt this Agreement or if, after recommending in the Proxy
Statement-Prospectus that stockholders approve and adopt this Agreement, the
Board of Directors of Hometown withdraws, qualifies or revises such
recommendation or takes any action in any respect materially adverse to First
Capital.
7.2 Termination Fee.
(a) If First Capital terminates this Agreement pursuant to Section
7.1(f), then Hometown shall make payment to First Capital of a termination fee
in the amount of $175,000. Such amount shall be paid by wire transfer of
immediately available funds within two business days following such termination.
If within 12 months after such termination, Hometown shall consummate or enter
into an agreement with respect to an Acquisition Proposal, then Hometown shall
make payment to First Capital of an additional termination fee in the amount of
$175,000. Such amount shall be paid by wire transfer of immediately available
funds on the date of such consummation or execution.
(b) If this Agreement is terminated by (i) First Capital pursuant to
Section 7.1(e) where the breach giving rise to such termination was willful and
in such case an Acquisition Proposal by a third party with respect to Hometown
has been publicly announced, disclosed or communicated or made known to the
senior management or Board of Directors of Hometown by such third party at any
time after the date of this Agreement and prior to the date of the date of
termination or (ii) either party pursuant to Section 7.1(b) and in such case an
Acquisition Proposal by a third party with respect to Hometown has been publicly
announced, disclosed or communicated or made known to the senior management or
Board of Directors of Hometown by such third party at any time after the date of
this Agreement and prior to the date of the Stockholders Meeting, then Hometown
shall make payment to First Capital of a termination fee in the amount of
$350,000 if within 12 months after such termination, Hometown shall consummate
or enter into any agreement with respect to an Acquisition Proposal. Such amount
shall be paid by wire transfer of immediately available funds on the date of
such execution or consummation.
(c) Notwithstanding anything herein to the contrary, in no event
shall the aggregate amount that Hometown must pay to First Capital pursuant to
Sections 7.2(a) and (b) exceed $350,000.
(d) If this Agreement is terminated by Hometown pursuant to Section
7.1(e) where the breach giving rise to such termination was willful and in such
case an Acquisition Proposal by a third party with respect to First Capital has
been publicly announced, disclosed or communicated or made known to the senior
management or Board of Directors of First Capital by such third party at any
time after the date of this Agreement and prior to the date of the date of
termination, then First Capital shall make payment to Hometown of a termination
fee in the amount of $350,000 if within 12 months after such termination, First
Capital shall consummate or enter into any agreement with respect to an
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Acquisition Proposal. Such amount shall be paid by wire transfer of immediately
available funds on the date of such execution or consummation.
7.3 Effect of Termination. In the event of termination of this Agreement
by either First Capital or Hometown as provided in Section 7.1, this Agreement
shall forthwith become void and, subject to Section 7.2, have no effect, and
there shall be no liability on the part of any party hereto or their respective
officers and directors, except that (i) Sections 5.3(c), 7.2, and 8.6, shall
survive any termination of this Agreement, and (ii) notwithstanding anything to
the contrary contained in this Agreement, no party shall be relieved or released
from any liabilities or damages arising out of its willful breach of any
provision of this Agreement.
ARTICLE VIII
Certain Other Matters
8.1 Interpretation. When a reference is made in this Agreement to
Sections or Exhibits such reference shall be to a Section of, or Exhibit to,
this Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for ease of reference only and shall not affect
the meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation." Any singular term in this Agreement
shall be deemed to include the plural, and any plural term the singular. Any
reference to gender in this Agreement shall be deemed to include any other
gender.
8.2 Survival. None of the representations and warranties in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time. This Section 8.2 shall not limit any covenant or
agreement of the parties which by its terms contemplates performance after the
Effective Time.
8.3 Waiver; Amendment. Prior to the Effective Time, any provision of this
Agreement may be: (i) waived in writing by the party benefitted by the provision
or (ii) amended or modified at any time (including the structure of the
transaction) by an agreement in writing between the parties hereto except that,
after the vote by the stockholders of Hometown, no amendment or modification may
be made that would reduce the amount or alter or change the kind of
consideration to be received by holders of Hometown Common Stock or contravene
any provision of the IBCL or the federal banking laws, rules and regulations.
8.4 Counterparts. This Agreement may be executed in counterparts each of
which shall be deemed to constitute an original, but all of which together shall
constitute one and the same instrument.
8.5 Governing Law. This Agreement shall be governed by, and interpreted
in accordance with, the laws of the State of Indiana, without regard to
conflicts of laws principles.
8.6 Expenses. Each party hereto will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby;
provided that the cost of printing and mailing to Hometown's stockholders the
Proxy Statement-Prospectus shall be borne equally by First Capital and Hometown.
8.7 Notices. All notices, requests, acknowledgments and other
communications hereunder to a party shall be in writing and shall be deemed to
have been duly given when delivered by hand,
A-47
overnight courier or facsimile transmission to such party at its address or
facsimile number set forth below or such other address or facsimile transmission
as such party may specify by notice (in accordance with this provision) to the
other party hereto.
If to First Capital, to:
220 Federal Drive, NW
Corydon, Indiana 47112
Facsimile: (812) 738-2202
Attention: William W. Harrod and Samuel Uhl
With copies to:
Muldoon Murphy & Faucette LLP
5101 Wisconsin Avenue, NW
Washington, DC 20016
Facsimile: (202) 966-9409
Attention: Aaron M. Kaslow, Esq.
If to Hometown, to:
3131 Grant Line Road
New Albany, Indiana 47150
Facsimile: (812) 981-0199
Attention: C. Ronald Clark
With copies to:
Wyatt Tarrant & Combs LLP
PNC Plaza
500 West Jefferson Street
Louisville, Kentucky 40202
Facsimile: (502) 589-0309
Attention: Cynthia W. Young, Esq.
8.8 Entire Agreement; etc. This Agreement, together with the Disclosure
Letters, represents the entire understanding of the parties hereto with
reference to the transactions contemplated hereby and supersedes any and all
other oral or written agreements heretofore made. All terms and provisions of
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns. Except for Section
5.13, which confers rights on the parties described therein, nothing in this
Agreement is intended to confer upon any other person any rights or remedies of
any nature whatsoever under or by reason of this Agreement.
8.9 Successors and Assigns; Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that this Agreement may not be
assigned by either party hereto without the written consent of the other party.
A-48
In Witness Whereof, the parties hereto have caused this Agreement to
be executed by their duly authorized officers as of the date first above
written.
First Capital, Inc.
By: /s/ William W. Harrod
-------------------------------------
William W. Harrod
President and Chief Executive Officer
Hometown Bancshares, Inc.
By: /s/ C. Ronald Clark
-------------------------------------
C. Ronald Clark
Chief Executive Officer
A-49
APPENDIX B
[LETTERHEAD OF DAVID A. NOYES & COMPANY]
CONFIDENTIAL
------------
January 30, 2003
Board of Directors
Hometown Bancshares, Inc.
3131 Grant Line Road
P.O. Box 1145
New Albany, IN 47150
Members of the Board:
You have requested our opinion as to the fairness from a financial point of
view to the holders of outstanding shares of common stock, no par value
("HOME Common Stock") of Hometown Bancshares, Inc. ("HOME"), of the
Exchange Ratios (as defined below) contemplated by the Agreement and Plan
of Merger ("Agreement"), dated as of September 25, 2002, by and between
First Capital, Inc. ("FCAP") and HOME. The Agreement provides for the
merger of HOME with and into FCAP (the "Merger"), pursuant to which, among
other things, each share of HOME common stock will be exchanged for cash
and/or shares of First Capital, Inc. ("FCAP") Common Stock ("FCAP Common
Stock") as follows:
Generally, each share of Hometown Common Stock issued and outstanding at
the Effective Time, shall become and be converted into, at the election of
the holder as provided in and subject to limitations set forth in the
Agreement, either (i) the right to receive $46.50 in cash without interest
(the "Cash Consideration") or (ii) the number of shares of First Capital
Common Stock equal to the Exchange Ratio (as defined below)(the "Stock
Consideration"). The Cash Consideration and the Stock Consideration are
sometimes referred to in the Agreement collectively as the "Merger
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Hometown Bancshares, Inc.
January 30, 2003
Page Two
Consideration." Merger Consideration is to consist of 50% Cash
Consideration and 50% Stock Consideration.
The "Exchange Ratio" shall be equal (rounded to the nearest one-thousandth)
to (A) the result obtained by dividing $39.52 by the First Capital Price if
the First Capital Price is less than $14.45, (B) 2.735 if the First Capital
Price is (i) $14.45 or more and (ii) less than $19.55 or (C) the result
obtained by dividing $53.47 by the First Capital Price if the First Capital
Price is $19.55 or more.
David A. Noyes and Company, as part of its investment banking business,
is regularly engaged in the valuation of commercial bank and thrift
securities in connection with mergers and acquisitions and other purposes.
As specialists in the securities of commercial banking and thrift
organizations, Noyes has extensive experience in, and knowledge of,
the commercial banking and thrift industries and their participants.
In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Stockholders and Annual Reports on Form 10-K
of FCAP for the two years ended December 31, 2001; Annual Reports to
Stockholders of HOME for the three years ended December 31, 2001; certain
interim financial reports to stockholders of HOME and FCAP; and certain
other communications from HOME and FCAP to their respective shareholders.
We also have held discussions with members of the senior management of HOME
and FCAP regarding the strategic rationale for, and potential benefits of,
the transaction contemplated by the Agreement and the past and current
business operations, financial condition and future prospects of their
respective companies. In addition, we have reviewed the price and trading
activity for FCAP Common Stock, and compared certain financial and stock
market information for FCAP with similar information for certain other
companies the securities of which are publicly traded. We also reviewed the
financial terms of certain recent business combinations in the banking
industry and performed such other studies and analyses as
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Hometown Bancshares, Inc.
January 30, 2003
Page Three
we deemed appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. We are not experts in
the evaluation of loan and lease portfolios for purposes of assessing the
adequacy of the allowances for losses with respect thereto and have
assumed, with your consent, that such allowances for each of HOME and FCAP
are in the aggregate adequate to cover all such losses. Similarly, we have
assumed, without independent analysis, that the obligations of HOME and
FCAP pursuant to derivatives, swaps, foreign exchange, financial
instruments and off-balance sheet lending-related financial instruments
will not have an adverse effect which would be relevant to our analysis. In
addition, we have not reviewed individual credit files nor have we made an
independent evaluation or appraisal of the assets and liabilities of HOME
or FCAP or any of their subsidiaries, and we have not been furnished with
any such evaluation or appraisal. Our opinion as to the fairness of the
Exchange Ratios addresses the ownership position in FCAP to be received by
the holders of HOME Common Stock pursuant to the Exchange Ratios on the
terms set forth in the Agreement and does not address the future trading or
acquisition value for the stock of FCAP. In addition, our opinion does not
address the relative merits of the Merger and alternative business
strategies. In that regard, we were requested to, and did, solicit third
party indications of interest in acquiring all or part of HOME. We also
have assumed, with your consent, that the Merger will be accounted for as a
"purchase" under generally accepted accounting principles and that
obtaining any necessary regulatory approvals and third party consents for
the Merger or otherwise will not have an adverse effect on HOME or FCAP
pursuant to the Merger.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of HOME in connection
with its consideration of the transaction contemplated by the Agreement and
such opinion does not constitute a recommendation as to how any holder of
HOME Common Stock should vote with respect to such transaction.
B-3
Hometown Bancshares, Inc.
January 30, 2003
Page Four
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that as of the date hereof the
Merger Consideration pursuant to the Agreement is fair from a financial
point of view to the holders of HOME Common Stock.
Very truly yours,
DAVID A. NOYES & COMPANY
By /s/ John C. Reed
-------------------------
John C. Reed
Executive Vice President
B-4
APPENDIX C
INDIANA CODE 23-1-44
DISSENTERS RIGHTS
23-1-44-1. "Corporation" defined. - As used in this chapter, "corporation"
means the issuer of the shares held by a dissenter before the corporate action,
or the surviving or acquiring corporation by merger or share exchange of that
issuer.
23-1-44-2. "Dissenter" defined. - As used in this chapter, "dissenter" means
a shareholder who is entitled to dissent from corporate action under section 8
of this chapter and who exercises that right when and in the manner required by
sections 10 through 18 of this chapter.
23-1-44-3. "Fair Value" defined. - As used in this chapter, "fair value",
with respect to a dissenter's shares, means the value of the shares immediately
before the effectuation of the corporate action to which the dissenter objects,
excluding any appreciation or depreciation in anticipation of the corporate
action unless exclusion would be inequitable.
23-1-44-4. "Interest" defined. - As used in this chapter, "interest" means
interest from the effective date of the corporate action until the date of
payment, at the average rate currently paid by the corporation on its principal
bank loans or, if none, at a rate that is fair and equitable under all the
circumstances.
23-1-44-5. "Record Shareholder" defined. - As used in this chapter, "record
shareholder" means the person in whose name shares are registered in the records
of a corporation or the beneficial owner of shares to the extent that treatment
as a record shareholder is provided under a recognition procedure or a
disclosure procedure established under IC-23-1-30-4.
23-1-44-6. "Beneficial Shareholder" defined. - As used in this chapter,
"beneficial shareholder" means the person who is a beneficial owner of shares
held by a nominee as the record shareholder.
23-1-44-7. "Shareholder" defined. - As used in this chapter, "shareholder"
means the record shareholder or the beneficial shareholder.
23-1-44-8. Shareholder dissent. - (a) A shareholder is entitled to dissent
from, and obtain payment of the fair value of the shareholder's shares in the
event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party if:
(A) Shareholder approval is required for the merger by
IC23-1-40-3 or the articles of incorporation; and
(B) The shareholder is entitled to vote on the merger.
C-1
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan.
(3) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
(1) year after the date of sale.
(4) The approval of a control share acquisition under IC 23-1-42.
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.
(b) This section does not apply to the holders of shares of any class or
series if, on the date fixed to determine the shareholders entitled to receive
notice of and vote at the meeting of shareholders at which the merger, plan of
share exchange, or sale or exchange of property is to be acted on, the shares of
that class or series were:
(1) Registered on a United States securities exchange registered
under the Exchange Act (as defined in IC 23-1-43-9); or
(2) Traded on the National Association of Securities Dealers, Inc.
Automated Quotations System Over-the-Counter Markets -- National Market Issues
or a similar market.
(c) A shareholder:
(1) Who is entitled to dissent and obtain payment for the
shareholder's shares under this chapter; or
(2) Who would be so entitled to dissent and obtain payment but for
the provisions of subsection (b);
may not challenge the corporate action creating (or that, but for the provisions
of subsection (b), would have created) the shareholder's entitlement.
23-1-44-9. Dissenters' rights of beneficial shareholder. - (a) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in the shareholder's name only if the shareholder dissents with
respect to all shares beneficially owned by any one (1) person and notifies the
corporation in writing of the name and address of each person on whose behalf
the shareholder asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as
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to which the shareholder dissents and the shareholder's other shares were
registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares held
on the shareholder's behalf only if:
(1) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(2) The beneficial shareholder does so with respect to all the
beneficial shareholder's shares or those shares over which the beneficial
shareholder has power to direct the vote.
23-1-44-10. Proposed action creating dissenters' rights; notice. - (a) If
proposed corporate action creating dissenters' rights under section 8 of this
chapter is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter.
(b) If corporate action creating dissenters' rights under section 8 of this
chapter is taken without a vote of shareholders, the corporation shall notify in
writing all shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in section 12 of this
chapter.
23-1-44-11. Proposed action creating dissenters' rights; assertion of
dissenters' rights. - (a) If proposed corporate action creating dissenters'
rights under section 8 of this chapter is submitted to a vote at a shareholders'
meeting, a shareholder who wishes to assert dissenters' rights:
(1) Must deliver to the corporation before the vote is taken written
notice of the shareholder's intent to demand payment for the shareholder's
shares if the proposed action is effectuated; and
(2) Must not vote the shareholder's shares in favor of the proposed
action.
(b) A shareholder who does not satisfy the requirements of subsection (a) is
not entitled to payment for the shareholder's shares under this chapter.
23-1-44-12. Dissenters' notice; contents. - (a) If proposed corporate action
creating dissenters' rights under section 8 of this chapter is authorized at a
shareholders' meeting, the corporation shall deliver a written dissenters'
notice to all shareholders who satisfied the requirements of section 11 of this
chapter.
(b) The dissenters' notice must be sent no later than ten (10) days after
approval by the shareholders, or if corporate action is taken without approval
by the shareholders, then ten (10) days after the corporate action was taken.
The dissenters' notice must:
(1) State where the payment demand must be sent and where and when
certificates for
C-3
certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not the person acquired beneficial ownership of the shares
before that date;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty (30) nor more than sixty (60)
days after the date the subsection (a) notice is delivered; and
(5) Be accompanied by a copy of this chapter.
23-1-44- 13. Demand for payment and deposit of shares by shareholder. - (a) A
shareholder sent a dissenters' notice described in IC 23-1-42-11 or in section
12 of this chapter must demand payment, certify whether the shareholder acquired
beneficial ownership of the shares before the date required to be set forth in
the dissenter's notice under section 12(b)(3) of this chapter, and deposit the
shareholder's certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits the shareholder's
shares under subsection (a) retains all other rights of a shareholder until
these rights are cancelled or modified by the taking of the proposed corporate
action.
(c) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter and is considered, for purposes of this article, to have voted the
shareholder's shares in favor of the proposed corporate action.
23-1-44-14. Uncertificated shares; restriction on transfer; dissenters'
rights. - (a) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under section 16 of this
chapter.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are
cancelled or modified by the taking of the proposed corporate action.
23-1-44-15. Payment to dissenter. - (a) Except as provided in section 17 of
this chapter, as soon as the proposed corporate action is taken, or, if the
transaction did not need shareholder approval and has been completed, upon
receipt of a payment demand, the corporation shall pay each dissenter who
complied with section 13 of this chapter the amount the corporation estimates to
be the fair value of the dissenter's shares.
(b) The payment must be accompanied by:
C-4
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of
the shares; and
(3) A statement of the dissenter's right to demand payment under
section 18 of this chapter.
23-1-44-16. Failure to take action; return of certificates; new action by
corporation. - (a) If the corporation does not take the proposed action within
sixty (60) days after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates and
release the transfer restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 12 of this chapter and repeat the payment
demand procedure.
23-1-44-17. Withholding payment by corporation; corporation's estimate of
fair value; after-acquired shares. - (a) A corporation may elect to withhold
payment required by section 15 of this chapter from a dissenter unless the
dissenter was the beneficial owner of the shares before the date set forth in
the dissenters' notice as the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after taking the proposed corporate action, it shall estimate
the fair value of the shares and shall pay this amount to each dissenter who
agrees to accept it in full satisfaction of the dissenter's demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares and a statement of the dissenter's right to demand payment
under section 18 of this chapter.
23-1-44-18. Dissenters' estimate of fair value; demand for payment; waiver. -
(a) A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and demand payment of the
dissenter's estimate (less any payment under section 15 of this chapter), or
reject the corporation's offer under section 17 of this chapter and demand
payment of the fair value of the dissenter's shares, if:
(1) The dissenter believes that the amount paid under section 15 of
this chapter or offered under section 17 of this chapter is less than the fair
value of the dissenter's shares;
(2) The corporation fails to make payment under section 15 of this
chapter within sixty (60) days after the date set for demanding payment; or
(3) The corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty (60) days after the date set for
demanding payment.
C-5
(b) A dissenter waives the right to demand payment under this section unless
the dissenter notifies the corporation of the dissenter's demand in writing
under subsection (a) within thirty (30) days after the corporation made or
offered payment for the dissenter's shares.
23-1-44-19. Court proceeding to determine fair value; judicial appraisal. -
(a) If a demand for payment under IC 23-1-42-11 or under section 18 of this
chapter remains unsettled, the corporation shall commence a proceeding within
sixty (60) days after receiving the payment demand and petition the court to
determine the fair value of the shares. If the corporation does not commence the
proceeding within the sixty (60) day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in the circuit or superior
court of the county where a corporation's principal office (or, if none in
Indiana, its registered office) is located. If the corporation is a foreign
corporation without a registered office in Indiana, it shall commence the
proceeding in the county in Indiana where the registered office of the domestic
corporation merged with or whose shares were acquired by the foreign corporation
was located.
(c) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced under
subsection (b) is plenary and exclusive. The court may appoint one (1) or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them or in any amendment to it. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment:
(1) For the amount, if any, by which the court finds the fair value
of the dissenter's shares, plus interest, exceeds the amount paid by the
corporation; or
(2) For the fair value, plus accrued interest, of the dissenter's
after- acquired shares for which the corporation elected to withhold payment
under section 17 of this chapter.
23-1-44-20. Costs; fees; attorney fees. - (a) The court in an appraisal
proceeding commenced under section 19 of this chapter shall determine all costs
of the proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court. The court shall assess the costs against such
parties and in such amounts as the court finds equitable.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of sections 10 through 18 of this chapter; or
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(2) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
C-7
APPENDIX D
FINANCIAL INFORMATION
REGARDING
HOMETOWN BANCSHARES, INC.
Table of Contents
Page
Management's Discussion and Analysis of Financial Condition
and Results of Operations for Hometown Bancshares, Inc. .............................................. D-2
Independent Auditors' Report ......................................................................... D-17
Consolidated Balance Sheets as of December 31, 2001 and 2000 ......................................... D-18
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2001 and 2000 ....................................................... D-19
Consolidated Statements of Income for the years ended December 31, 2001 and 2000 ..................... D-20
Consolidated Statements of Cash Flows for the years ended December 31, 2001 and 2000 ................. D-21
Notes to Consolidated Financial Statements ........................................................... D-22
Condensed Consolidated Balance Sheet as of September 30, 2002 (unaudited) ............................ D-32
Condensed Consolidated Statement of Changes in Stockholders' Equity for
the nine months ended September 30, 2002 (unaudited) ................................................. D-33
Condensed Consolidated Statements of Income for the nine months ended
September 30, 2002 and 2001 (unaudited) .............................................................. D-34
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 (unaudited) .............................................................. D-35
Notes to Condensed Consolidated Financial Statements ................................................. D-36
--------------------------------------------------------------------------------
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; risks inherent in originating loans, including prepayment risks,
fluctuations in collateral values and changes in customer profiles; the rate of
loan charge offs and the level of the provision for loan losses; and changes in
accounting principles.
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. The Company assumes no obligation to update any
forward-looking statements.
General
Hometown Bancshares, Inc. (the Company) is the parent to its wholly owned
subsidiary, Hometown National Bank (the Bank), a commercial bank offering a
variety of banking services to individuals and business customers through its
two offices in southern Indiana. The Company has no income other than that
generated by the Bank. The Bank's primary business is attracting deposits from
the general public and using those funds to originate loans. The Bank's lending
activity includes one-to-four family and multi-family residential, commercial
real estate, commercial business and consumer loans. The Bank invests excess
liquidity primarily in interest bearing deposits with other banks and federal
funds sold.
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 Appendix D.
Operating Strategy
The Bank's results of operations depend primarily on net interest income, which
is the difference between the income earned on its interest-earning assets, such
as loans and investments, and the cost of its interest-bearing liabilities,
consisting of deposits. 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.
The Bank's business strategy is to operate as a community-oriented full service
commercial bank. This strategy has been implemented in recent years by
attracting retail deposits, emphasizing the origination of commercial real
estate and business loans in the Bank's primary market area, originating fixed
rate residential real estate mortgage loans for sale in the secondary market,
controlling operating expenses, and expanding customer services.
Comparison of Financial Condition at September 30, 2002 and December 31, 2001
Total assets decreased 3.7% from $87.7 million at December 31, 2001 to $84.5
million at September 30, 2002, primarily as a result of decreases in cash and
due from banks, interest-bearing deposits with banks and federal funds sold
offset by an increase in loans receivable. Excess liquidity in the form of
interest-bearing deposits with banks and federal funds sold was reduced due to a
decrease in deposits and to meet loan growth.
Loans receivable, net, were $55.0 million at December 31, 2001, compared to
$58.0 million at September 30, 2002, a 5.5% increase. The growth in the loan
portfolio was concentrated in commercial real estate and business loans which
increased $3.4 million during the period. Also, home equity and consumer loans
increased $602,000 while residential mortgage loans decreased by $707,000 due to
customers refinancing at lower market interest rates during the period.
D-2
Mortgage loans held for sale increased $4.7 million from $1.4 million at
December 31, 2001 to $6.1 million at September 30, 2002. At December 31, 2001,
mortgage loans held for sale included one-to-four family residential mortgage
loans originated by the bank and held pending sale in the secondary market. At
September 30, 2002, mortgage loans held for sale included one-to-four family
residential mortgage loans repurchased from a private secondary market investor
due to certain underwriting exceptions identified subsequent to the sale of
these loans by the Bank in 2001. The Bank holds these loans for sale to another
investor or may later transfer the loans to the Bank's portfolio.
Securities available for sale are carried at fair value and consist of federal
agency notes and bonds. In 2002, the Bank began to designate debt securities
purchases as held available for sale in order to maintain the investment
portfolio component of earning assets without sacrificing liquidity. At
September 30, 2002, the Bank held securities available for sale with a fair
value of $1.8 million.
The investment in securities held-to-maturity, consisting of federal agency
mortgage-backed certificates, notes and bonds, and municipal obligations,
decreased from $3.7 million at December 31, 2001 to $2.1 million at September
30, 2002 as a result of maturities of $5.4 million and principal payments on
mortgage-backed securities of $176,000 offset by purchases of $4.0 million.
Short-term investments, including federal funds sold and interest-bearing
deposits with other financial institutions decreased from $20.2 million at
December 31, 2001 to $11.4 million at September 30, 2002 as the result of the
investment of the excess liquidity in higher yielding loans and the decrease in
total deposits.
Cash and due from banks decreased from $4.2 million at December 31, 2001 to $1.8
million at September 30, 2002 due to management's efforts to reduce
noninterest-bearing assets while funding loan growth and incurring a decrease in
total deposits.
Total deposits decreased $3.6 million, or 4.4%, from $80.3 million at December
31, 2001 to $76.7 million at September 30, 2002. The decrease in deposits
included a decrease in the lower cost savings and interest-bearing demand
deposit accounts of $9.9 million offset by an increase in noninterest-bearing
demand deposit accounts of $925,000 and an increase in certificates of deposit
of $5.4 million as customers responded to the lower market interest rates paid
on transaction accounts. Interest-bearing demand deposit accounts also decreased
as a result of the loss of certain rate sensitive local public deposits.
Total stockholders' equity increased from $7.0 million at December 31, 2001 to
$7.4 million at September 30, 2002 as a result of retained net income of
$346,000.
Comparison of Financial Condition at December 31, 2001 and 2000
Total assets increased $1.3 million or 1.5% from $86.4 million at December 31,
2000 to $87.7 million at December 31, 2001, primarily as a result of the growth
in loans, which was funded primarily by maturities of investment securities and
the proceeds of a rights offering to stockholders, offset by an increase in
short-term investments.
Loans receivable, net, were $47.7 million at December 31, 2000, compared to
$55.0 million at December 31, 2001, a 15.3% increase. Commercial real estate
mortgage loans, including commercial real estate construction loans, increased
$7.5 million from 2000 to 2001 and commercial business loans increased $1.8
million during the same period. At December 31, 2001, commercial business loans
were $28.3 million or 49.4% of the total loan portfolio compared to 54.4% at
December 31, 2000. Total mortgage loans were $25.0 million or 43.7% of the total
portfolio compared to $18.0 million or 36.9% at December 31, 2000. Consumer
loans decreased from $4.2 million at December 31, 2000 to $4.0 million at
December 31, 2001. During 2001, the Bank continued to emphasize loan growth to
provide higher yields as compared to investment securities and short-term
investments.
The investment in securities held-to-maturity decreased from $10.7 million at
December 31, 2000 to $3.7 million at December 31, 2001 as a result of maturities
of $16.7 million and principal payments on mortgage-backed securities of
$186,000 offset by purchases of $9.9 million. Maturing held to maturity
securities were not replaced as management provided for liquidity through
interest-bearing deposits with banks and emphasized loan portfolio growth.
Short-term investments, including federal funds sold and interest-bearing
deposits with other financial institutions increased $3.4 million from $16.8
million at December 31, 2000 to $20.2 million at December 31, 2001. Management
opted to not replace investment securities maturing during the year in order to
increase earning asset liquidity as market interest rates continued to decrease.
Management's decision also considered the potential for the loss of certain
public deposits as a funding source.
D-3
Cash and due from banks decreased from $5.9 million at December 31, 2000 to $4.2
million at December 31, 2001 due to management's efforts to reduce
noninterest-bearing cash.
Deposit accounts totaled $80.3 million at December 31, 2001 and 2000.
Noninterest-bearing demand deposit accounts increased by $86,000 from December
31, 2000 to December 31, 2001. Savings and interest-bearing demand deposits
decreased $9.6 million during the same period but this decrease was offset by a
corresponding increase in time deposit accounts of $9.6 million as customers
responded to the decline in market interest rates during the year.
Total stockholders' equity increased from $5.6 million at December 31, 2000 to
$7.0 million at December 31, 2001 as a result of retained net income of $481,000
and net proceeds from an issuance of common stock of $989,000.
Comparison of Operating Results for the Nine Months Ended September 30, 2002 and
2001
Net Income. Net income was $346,000 ($1.51 per share, basic) for the nine months
ended September 30, 2002 compared to $395,000 ($1.94 per share, basic) for the
nine months ended September 30, 2001. The decrease for 2002 compared to 2001
resulted primarily from the provision for loan losses and a decrease in
noninterest income offset by an increase in net interest income and a decrease
in noninterest expenses.
Net Interest Income. Net interest income increased 16.1% from $1.6 million for
the nine months ended September 30, 2001 to $1.8 million for the nine months
ended September 30, 2002. The increase was primarily due to a decrease in the
average cost of funds in 2002 compared to 2001 partially offset by a decrease in
the average yield on interest-earning assets. The Bank's net interest rate
spread increased from 2.29% for the nine months ended September 30, 2001 to
2.68% for the same period in 2002. This improvement is attributable to a
decrease in the average cost of interest-bearing deposits that occurred as
higher cost money market deposit and certificates of deposit accounts repriced
in the later half of 2001.
Total interest income decreased $691,000, or 15.4%, to $3.8 million for the nine
months ended September 30, 2002 compared to $4.5 million in the prior year as a
result of a lower yield on interest-earning assets. Interest on loans receivable
decreased $229,000 as a result of lower market interest rates in 2002 despite an
increase in the average balance of loans outstanding during the period. The
average balance of interest-earning assets increased from $78.8 million in 2001
to $80.6 million in 2002. The average yield on interest-earning assets decreased
from 7.62 % in 2001 to 6.30 % in 2002 due to the repricing of interest earning
assets following the decline in market rates during 2001. During 2001, the
Federal Reserve Bank lowered the discount rate by 4.75%. At December 31, 2001,
$44.7 million or 78% of the total loan portfolio was subject to repricing at
lower rates within one year due to maturity or floating or adjustable rate terms
of the loans. Also, loan refinancings triggered by lower market interest rates
have reduced the loan portfolio average yield.
Total interest expense decreased $943,000, or 32.3%, to $2.0 million for 2002
compared to $2.9 million for 2001 due to a decrease in the average cost of funds
and a decrease in the average balance of interest-bearing deposits. The average
balance of interest-bearing deposits was $72.8 million for 2002 compared to
$73.1 for 2000. The average cost of funds decreased from 5.33 % in 2001 to 3.62
% in 2002 as a result of the lower market interest rates.
Provision for loan losses. The provision for loan losses was $329,000 for the
nine-month period ended September 30, 2002 compared to $65,000 for the same
period in 2001. During 2002, net loans receivable increased by $3.0 million
primarily due to increases in commercial real estate, commercial business and
consumer loans. Commercial and consumer loans have an inherently higher degree
of credit risk than residential mortgage loans. The Bank's high percentage of
commercial business loans indicates its loan portfolio has a higher degree of
inherent risk. The application of management's allowance methodology resulted in
an increase in the provision for loan losses due to the increase in commercial
and consumer loans, net charge-offs during the nine months ended September 30,
2002 of $247,000 compared to $6,000 for the same period in 2001 and an increase
in nonperforming loans from $250,000 at September 30, 2001 to $1.2 million at
September 30, 2002.
Provisions for loan losses are charges to earnings to maintain the total
allowance for loan losses at a level considered reasonable by management to
provide for probable known and inherent loan losses based on management's
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical loss experience,
specified impaired loans, and economic conditions. Although management uses the
best information available, future adjustments to the allowance may be necessary
due to changes in economic, operating, regulatory and other conditions that may
be beyond the Bank's control. While the Bank maintains the allowance for loan
losses at a level which it considers adequate to provide for estimated losses,
there can be no assurance that further additions will not be made to the
allowance for loan losses and that actual losses will not exceed the estimated
amounts.
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
D-4
expected future cash flows or the fair value of collateral, and determining and
measuring impairment for groups of loans with similar characteristics by
applying loss factors that consider the qualitative factors which may affect the
loss rates.
The allowance for loan losses was $543,000 at September 30, 2002. Management
considers the allowance adequate based on its risk analysis. At September 30,
2002 nonperforming loans totaled $1.2 million, compared to $250,000 at September
30, 2001. The increase in nonperforming loans experienced since the third
quarter of 2001 is primarily due to prevailing market conditions. Included in
nonperforming loans at September 30, 2002 are loans over 90 days past due
secured by one-to-four family residential real estate in the amount of $295,000,
commercial business loans amounting to $674,000 and consumer loans of $20,000.
These loans are accruing interest as the estimated value of the collateral and
collection efforts are deemed sufficient to ensure full recovery.
Non-interest income. Non-interest income decreased $174,000 or 33.7% to $343,000
for the nine months ended September 30, 2002 compared to $517,000 for the nine
months ended September 30, 2001. The decrease is primarily the result of a
decrease in gains on sale of mortgage loans offset by an increase in service
charges on deposit accounts. Service charges on deposit accounts increased
$84,000 for 2002 compared to 2001 due to an increase in the fees charged on
overdrawn accounts and management's efforts to collect these fees. Gains on sale
of mortgage loans decreased 221,000 as the Bank originated and sold fewer loans
in the secondary market due to employee turnover in the mortgage banking
department.
Non-interest expenses. Non-interest expenses decreased by $117,000 for the nine
months ended September 30, 2002 compared to the same period in 2001 primarily
due to a decrease in compensation and benefits during 2002. Compensation and
benefits expense decreased $145,000 primarily due to a decrease in commission
compensation paid to employees in the mortgage banking department resulting from
a decrease in origination volume. Occupancy and equipment costs have increased
$16,000 in 2002 compared to 2001 as a result of an increase in property tax
assessments for the branch office which opened in 2000 and the land purchased in
2001 for an additional branch location. Other noninterest expenses also
increased by $11,000 from 2002 to 2001 due to increases in data processing
expenses, regulatory assessments, professional fees and loan department
expenses.
Income tax expense. Income tax expense for the nine months ended September 30,
2002 was $210,000, compared to $229,000 for the same period in 2001. The
effective tax rate for 2002 was 37.7% compared to 36.7% for 2001.
Comparison of Operating Results for the Years Ended December 31, 2001 and 2000
Net Income. Net income was $481,000 ($2.32 per share, basic) for the year ended
December 31, 2001 compared to $520,000 ($2.60 per share, basic) for the year
ended December 31, 2000. The decrease was primarily due to a decrease in net
interest income and an increase in noninterest expenses for 2001.
Net Interest Income. Net interest income for 2001 was $2.1 million for both of
the years ended December 31, 2001 and 2000. Net interest income remained
consistent over both years due to decreases in the average yield on
interest-earning assets and average cost of funds despite an increase in the
average balance of interest-earning assets and interest-bearing liabilities.
Total interest income increased $326,000 for 2001 compared to the prior year as
a result of an increase in average interest- earning assets offset by a lower
yield on interest-earning assets. Total interest income on loans increased
$453,000 as a result of a higher average balance in 2001 and interest on
investment securities decreased $331,000 primarily as a result of a lower
average balance in 2001. Interest income on federal funds sold and
interest-bearing deposits with banks increased $203,000 from 2001 to 2002 due to
a higher average balance as maturing securities were invested in overnight
deposits.
Total interest expense increased $359,000 to $3.7 million for 2001 compared to
$3.4 million for 2000 due to an increase in the in the average balance of
deposits offset by a decrease in the average cost of funds.
The average yield on total interest-earnings assets decreased from 8.33% in 2000
to 7.24 % in 2001 while the average cost of interest-bearing liabilities
decreased from 5.59 % in 2000 to 5.06 % in 2001 due to the decline in market
interest rates. The average balance of total interest-earning assets increased
from $65.8 million for the year ended December 31, 2000 to $80.2 million for
2001. The average balance of total interest-bearing liabilities was $60.2
million for 2000 compared to $73.6 million for 2001. For further information see
"Average Balance Sheets" below. The changes in interest income and interest
expense resulting from changes in volume and changes in rates for 2002 and 2001
are shown in the schedule captioned "Rate/Volume Analysis" included herein.
Provision for loan losses. The provision for loan losses was $106,000 for the
year ended December 31, 2001 compared to $132,000 for 2000. Loans outstanding
increased $7.3 million and $8.3 million during 2001 and 2000, respectively.
Management made provisions for loan losses in 2001 and 2000 given this loan
portfolio growth and net charge-offs of $61,000 during the year ended December
31, 2001 and $37,000 for the year ended December 31, 2000.
D-5
The allowance for loan losses was $461,000 million at December 31, 2001 compared
to $416,000 at December 31, 2000. Management has deemed these amounts as
adequate on those dates based on its risk analysis. At December 31, 2001,
nonperforming loans totaled $731,000, compared to $113,000 at December 31, 2000.
Included in nonperforming loans at December 31, 2001 are loans over 90 days past
due secured commercial real estate in the amount of $350,000 and consumer loans
of $35,000. These loans are accruing interest as the estimated value of the
collateral and collection efforts are deemed sufficient to ensure full recovery.
Non-interest income. Non-interest income increased 3.3% to $647,000 for the year
ended December 31, 2001 compared to $626,000 for the year ended December 31,
2000. The increase is primarily the result of increases in service charges on
deposit accounts and gains on the sale of mortgage loans offset by a decrease in
mortgage brokerage commission income for 2001. Service charges on deposit
accounts increased $47,000 for 2001 compared to 2000 due to the growth in
transaction accounts during 2001. The gains on sale of mortgage loans increased
$134,000 as compared to the prior year due to an increase in the volume of
mortgage loans originated for sale in the secondary market.
Non-interest expense. Non-interest expense increased by $74,000 for 2001
compared to 2000. The increase results primarily from increases in occupancy and
equipment expenses and other operating expenses. Occupancy and equipment costs
increased $38,000 in 2001 compared to 2000 primarily as a result of the opening
of a new full-service branch office in late 2000. Other operating expenses
increased $34,000 for 2001 compared to 2000 due to increases in bank regulatory
assessments, data processing and automated teller machine processing costs and
correspondent banking fees.
Income tax expense. Income tax expense for the year ended December 31, 2001 was
$276,000, compared to $296,000 for the same period in 2000. The effective tax
rate for 2001 was 36.5% compared to 36.3% for 2000.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits and proceeds from loan
repayments and prepayments, and from the sale and maturity of securities. The
Bank may also borrow from correspondent banks or the Federal Home Loan Bank of
Indianapolis. While loan repayments and maturities and sales of securities are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by market interest rates, general economic conditions and
competition. At September 30, 2002, the Bank had cash and interest-bearing
deposits with banks of $5.1 million, federal funds sold of $8.1 million and
securities available for sale with a fair value of $1.8 million. Also, the
Bank's deposits provide a relatively stable funding base as the deposits are
derived from the Bank's service area.
The Bank's primary investing activity is the origination of commercial real
estate and business loans and, to a lesser extent, one-to-four family mortgage
loans, consumer, multi-family, and residential construction loans. The Bank also
invests in U.S. government and agency securities and Indiana municipal
obligations.
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, 2001, the Bank had total commitments to extend credit of $10.2
million. See Note 9 of Notes to Consolidated Financial Statements. At December
31, 2001, the Bank had certificates of deposit scheduled to mature within one
year of $46.1 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
regulatory requirements. As of September 30, 2002, the Bank was in compliance
with all effective regulatory capital requirements. The Bank's regulatory
capital ratios at September 30, 2002 and December 31, 2001 are presented in the
following table.
September 30, 2002 December 31, 2001
------------------ -----------------
(Dollars in thousands) Amount Ratio Amount Ratio
------ ----- ------ -----
Total Capital (to Risk Weighted Assets) $7,809 12.1% $7,480 12.2%
Tier I Capital (to Risk Weighted Assets) $7,266 11.2% $7,019 11.4%
Tier I Capital (to Average Assets) $7,266 8.6% $7,020 8.2%
D-6
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.
D-7
AVERAGE BALANCE SHEETS
The following table sets forth certain information for the periods indicated
regarding average balance of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earnings assets and interest
expense on average interest-bearing liabilities and average yields and costs.
Such yields and costs for the periods indicated are derived by dividing income
or expense by the average historical cost balances of assets or liabilities,
respectively, for the periods presented and do not give effect to changes in
fair value that are included as a separate component of stockholders' equity.
Average balances are derived from daily balances.
Year ended December 31,
-------------------------------------------------------------------------
2001 2000
------------------------------------ ----------------------------------
Average Average
------- -------
(Dollars in thousands) Average Yield/ Average Yield/
------- ------ ------- ------
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Interest-earnings assets:
Loans receivable (1) $ 55,360 $ 4,699 8.49% $ 46,182 $ 4,246 9.19%
Investment securities:
Taxable (2) 5,871 364 6.20% 10,741 693 6.45%
Tax-exempt (3) 287 27 9.41% 299 29 9.70%
----------------------- ----------------------
Total investment securities 6,158 391 6.35% 11,040 722 6.54%
----------------------- ----------------------
Federal funds sold 12,659 507 4.01% 7,569 463 6.12%
Interest-bearing deposits with banks 6,049 214 3.54% 1,050 55 5.24%
----------------------- ----------------------
Total interest-bearing assets 80,226 5,811 7.24% 65,841 5,486 8.33%
----------------------- ----------------------
Noninterest-earning assets 3,119 3,058
---------- ----------
Total assets $ 83,345 $ 68,899
========== ==========
Interest-bearing liabilities:
Savings and interest-bearing demand deposits $ 22,935 $ 675 2.94% $ 24,192 $ 1,168 4.83%
Time deposits 50,712 3,048 6.01% 35,871 2,190 6.11%
----------------------- ----------------------
Total deposits 73,647 3,723 5.06% 60,063 3,358 5.59%
----------------------- ----------------------
Federal funds purchased - - 73 5 6.85%
FHLB advances - - 22 1 4.55%
----------------------- ----------------------
Total interest-bearing liabilities 73,647 3,723 5.06% 60,158 3,364 5.59%
----------------------- ----------------------
Noninterest-bearing liabilities:
Noninterest-bearing deposits 3,355 3,055
Other liabilities 43 381
---------- ----------
Total liabilities 77,045 63,594
Stockholders' equity 6,300 5,305
---------- ----------
Total liabilities and stockholders' equity $ 83,345 $ 68,899
========== ==========
Net interest income $ 2,088 $ 2,122
========= =========
Interest rate spread 2.18% 2.74%
======== ========
Net interest margin 2.60% 3.22%
======== ========
Ratio of average interest-earnings assets
to average interest-bearing liabilities 108.93% 109.45%
======== ========
(1) Average loans receivable includes nonperforming loans.
(2) Includes taxable debt and equity securities and Federal Home Loan Bank and
Federal Reserve Bank stock.
(3) Tax-exempt income has been adjusted to a tax-equivalent basis using the
federal marginal tax rate of 34%.
D-8
--------------------------------------------------------------------------------
RATE/VOLUME ANALYSIS
--------------------------------------------------------------------------------
The following table sets forth the effects of changing rates and volumes on
net interest income and interest expense. Information is provided with respect
to (i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects attributable to changes in rate
(changes in rate multiplied by prior volume); and (iii) effects attributable to
changes in rate and volume (change in rate multiplied by changes in volume). Tax
exempt income has been adjusted to a tax-equivalent basis using the federal
marginal tax rate of 34%.
2001 Compared to 2000
Increase (Decrease) Due to
------------------------------------------------------
Rate/
Rate Volume Volume Net
------- --------- --------- ---------
(In thousands)
Interest-earning assets:
Loans receivable $ (323) $ 840 $ (64) $ 453
Investment securities:
Taxable (27) (314) 12 (329)
Tax-exempt (1) (1) - (2)
------------------------------------------------------
Total investment securities (28) (315) 12 (331)
------------------------------------------------------
Federal funds sold (160) 311 (107) 44
Interest-bearing deposits with banks (18) 262 (85) 159
------------------------------------------------------
Total net change in income
on interest-earning assets (529) 1,098 (244) 325
------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits (318) 755 (72) 365
Retail repurchase agreements (5) (5) 5 (5)
FHLB advances (1) (1) 1 (1)
------------------------------------------------------
Total net change in expense
on interest-bearing liabilities (324) 749 (66) 359
------------------------------------------------------
Net change in net interest income $ (205) $ 349 $ (178) $ (34)
======================================================
D-9
Loan Portfolio Analysis
The following table sets forth the composition of the Bank's loan portfolio as
of the dates indicated.
At December 31,
--------------------------------------------------------------
2001 2000
---------------------------- --------------------------
Amount Percent Amount Percent
------------ ----------- ----------- ----------
(Dollars in thousands)
Mortgage Loans:
Residential (1) $ 11,008 19.20% $ 11,107 22.78%
Land 28 0.05% 50 0.10%
Residential construction 1,192 2.08% 1,479 3.04%
Commercial real estate 7,172 12.52% 5,326 10.93%
Commercial real estate construction 5,622 9.81% - -
------------ ----------- ----------- ----------
Total mortgage loans 25,022 43.66% 17,962 36.85%
------------ ----------- ----------- ----------
Consumer Loans:
Automobile and boat loans 1,967 3.43% 1,819 3.73%
Other (2) 1,986 3.47% 2,425 4.98%
------------ ----------- ------------ ----------
Total consumer loans 3,953 6.90% 4,244 8.71%
------------ ----------- ------------ ----------
Commercial business loans 28,331 49.44% 26,524 54.44%
------------ ----------- ----------- ----------
Total loans 57,306 100.00% 48,730 100.00%
------------ =========== ----------- ==========
Due to borrowers on loans in process (1,943) (707)
Deferred loan fees net of direct costs 60 49
Allowance for loan losses (461) (416)
------------ -----------
Total loans receivable, net $ 54,962 $ 47,656
============ ===========
(1) Includes conventional one- to four- family and multi-family residential
loans.
(2) Includes secured and unsecured personal loans.
A certain degree of risk taking is inherent in the extension of credit.
Management has established loan and credit policies designed to control both the
types and amounts of risks assumed and to ultimately minimize losses. Such
policies include limitations on loan-to-collateral values for various types of
collateral, requirements for appraisals of real estate collateral, problem loan
management practices and collection procedures, and nonaccrual and charge-off
guidelines.
Commercial business loans primarily represent loans made to businesses, and may
be made on either a secured or an unsecured basis. When taken, collateral
consists of liens on receivables, equipment, inventories, furniture and
fixtures. Unsecured business loans are generally short-term with emphasis on
repayment ability and low debt to worth ratios. Commercial lending involves
significant risk because repayment usually depends on the cash flows generated
by a borrower's business, and the debt service capacity of a business can
deteriorate because of downturns in national and local economic conditions. To
control risk, sophisticated initial and continuing financial analysis of a
borrower's financial information is required. Commercial business loans
comprised 49.4% and 54.4% of the Bank's loan portfolio at December 31, 2001 and
2000, respectively.
D-10
Residential construction loans consist of financing the construction of 1-4
family dwellings. Usually, loan to cost ratios are limited to 80% and permanent
financing commitments are required prior to the advancement of loan proceeds. At
December 31, 2001, residential construction loans totaled $1.2 million or 2.1%
of total loans. Commercial real estate construction loans consist of financing
the construction and development of land for commercial use. At December 31,
2001, commercial real estate construction loans totaled $5.6 million or 9.8% or
total loans.
Loans secured by real estate mortgages comprised 43.7% and 36.9% of the Bank's
loan portfolio at December 31, 2001 and 2000, respectively. Residential real
estate loans consist primarily of first mortgages on single-family homes, with
some multi-family loans. Loan-to-value ratios for these instruments are
generally limited to 80%. Nonfarm, nonresidential loans are secured by business
and commercial properties with loan-to-value ratios generally limited to 75%.
The repayment of both residential and commercial real estate loans is dependent
primarily on the income and cash flows of the borrowers, with the real estate
serving as a secondary or liquidation source of repayment.
Loan Maturity and Repricing
The following table sets forth certain information at December 31, 2001
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
represent gross loans outstanding and do not reflect undisbursed loan proceeds,
deferred loan fees and costs and the allowance for loan losses.
After After After After
One Year 3 Years 5 Years 10 Years
Within Through Through Through Through After
One Year 3 Years 5 Years 10 Years 15 Years 15 Years Total
(In thousands)
Mortgage Loans:
Residential $ 2,176 $ 1,692 $ 1,032 $ 1,554 $ 1,532 $ 3,022 $ 11,008
Commercial real estate and land loans 3,056 1,461 825 1,137 447 274 7,200
Residential construction 1,192 - - - - - 1,192
Commercial real estate construction 5,622 - - - - - 5,622
Consumer Loans 1,915 1,553 478 7 - - 3,953
Commercial business 12,988 5,807 3,514 2,710 1,897 1,415 28,331
-----------------------------------------------------------------------------
Total gross loans $ 26,949 $ 10,513 $ 5,849 $ 5,408 $ 3,876 $ 4,711 $ 57,306
=============================================================================
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In thousands)
Mortgage Loans:
Residential $ 1,739 $ 7,093
Commercial real estate and land loans 1,289 2,855
Residential construction - -
Commercial real estate construction - -
Consumer Loans 1,986 52
Commercial business 7,583 7,760
-----------------------------
Total gross loans $ 12,597 $ 17,760
=============================
D-11
Nonperforming assets
The following table sets forth information with respect to the Bank's
nonperforming assets for the periods indicated.
At September 30, At December 31,
----------------------
2002 2001 2000
---- ---- ----
(In thousands)
Loans accounted for on a nonaccrual basis:
Residential real estate $ 29 $ 62 $ -
Commercial real estate - - -
Commercial business - 157 -
Consumer 38 127 106
--------------- ----------------------
Total 67 346 106
--------------- ----------------------
Restructured loans 99 - -
Loans past due 90 days still on accrual:
Residential real estate 295 - -
Commercial real estate - 350 -
Commercial business 674 - -
Consumer 20 35 7
--------------- ----------------------
Total 989 385 7
--------------- ----------------------
Foreclosed real estate, net 95 - -
--------------- ----------------------
Total nonperforming assets $ 1,250 $ 731 $ 113
=============== ======================
Total nonperforming loans to net loans 1.99% 1.33% 0.24%
Total nonperforming loans to total assets 1.37% 0.83% 0.13%
Total nonperforming assets to total assets 1.48% 0.83% 0.13%
The increase in nonperforming loans is primarily due to prevailing economic
conditions. When a loan is 90 days past due as to interest or principal or there
is serious doubt as to collectibility, the accrual of interest income is
generally discontinued unless the estimated value of collateral is sufficient to
assure collection of the principal balance and accrued interest. Previously
accrued interest on loans placed in a nonaccrual status is reversed against
current income, and subsequent interest income is recognized when received. When
the collectibility of a significant amount of principal is in doubt, the
principal balance is reduced to the estimated fair value of collateral by
charge-off to the allowance for loan losses and any subsequent collections are
credited first to the remaining principal balance and then to the allowance for
loan losses as a recovery of the amount charged-off. A nonaccrual loan is not
returned to accrual status unless principal and interest are current and the
borrower has demonstrated the ability to continue making payments as agreed.
Classified Assets
The Bank as a federally-insured financial institution is subject to various
regulatory policies regarding problem assets. The policies require the Bank to
review and classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal regulators 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.
D-12
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
a regulatory capital. Assets that do not currently expose the insured
institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are designated "special
mention" and monitored by the Bank on a quarterly basis.
Statement on Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan," requires 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. See Note 4 to "Notes to Consolidated Financial Statements" for
additional information regarding impaired loans.
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 Bank reviews quarterly the loan portfolio
to determine whether any loans require classification in accordance with
applicable regulations.
The following is a summary of classified assets and the allocation of the
allowance for loan losses at the dates indicated.
At September 30, At December 31,
---------------- -------------------
2002 2001 2000
---- ---- ----
(In thousands)
Classified assets:
Loss $ 14 $ - $ -
Doubtful (impaired) 593 252 106
Substandard 36 94 -
General loss allowances:
Impaired loans 163 60 41
Other 380 401 375
D-13
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 noninterest 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
noninterest income. At September 30, 2002 the Bank had foreclosed real estate
totaling $95,000.
Allowance for Loan Losses
Management evaluates the adequacy of the allowance for losses on loans each year
based on estimated losses on specific loans and other procedures, including a
review of all loans for which full collectibility may not be reasonably assured
and considers, among other matters, the estimated market value of the underlying
collateral of problem loans, prior loss experience, economic conditions and
overall portfolio quality. These provisions for losses are charged against
earnings in the year they are established. The allowance for loan losses at
September 30, 2002 was $543,000 or 0.93% of total loans outstanding, compared
with $461,000 or 0.80% of total loans outstanding, at December 31, 2001.
Management's estimate of specific and inherent credit losses in the loan
portfolio as described above is intended to provide a reasonable allowance for
loan losses applicable to all loan categories. The allowance for loan losses as
a percentage of total loans outstanding as of the end of a given period
represents an estimated loss percentage for the total loan portfolio and a
general measure of adequacy. However, in accordance with generally accepted
accounting principles (GAAP), management assigns an estimated loss percentage or
a range of loss to each loan category in estimating the total allowance for loan
losses. Management's estimate also includes specifically identified loans having
potential losses. It is management's assessment that the allowance for loan
losses at September 30, 2002 and December 31, 2001 and 2000 was adequate and
represents a reasonable estimate of the specific and inherent credit losses
consistent with the composition of the loan portfolio and credit quality trends.
Although management believes that it uses the best information available to make
such determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while the Bank believes it has
established its existing allowance for loan losses in accordance with GAAP,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to increase significantly its allowance for
loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result of
that factors discussed above. Any material increase in the allowance for loan
losses may adversely affect the Bank's financial condition and results of
operations.
D-14
Allowance for Loan Losses Analysis
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated
Year Ended December 31,
---------------------
2001 2000
---- ----
(Dollars in thousands)
Allowance at beginning of period $ 416 $ 322
Provision for loan losses 106 132
---------------------
522 454
---------------------
Recoveries:
Residential real estate - -
Commercial business - -
Consumer 3 17
---------------------
Total recoveries 3 17
---------------------
Charge-offs:
Residential real estate - -
Commercial business - -
Consumer 64 55
---------------------
Total charge-offs 64 55
---------------------
Net (charge-offs) recoveries (61) (38)
---------------------
Balance at end of period $ 461 $ 416
=====================
Ratio of allowance to total loans outstanding at
the end of the period 0.80% 0.85%
Ratio of net charge-offs (recoveries) to average
loans outstanding during the period 0.11% 0.08%
The following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated.
December 31,
------------------------------------------------
2001 2000
---- ----
-------------------------- ---------------------
Percent of Percent of
Loans in Loans in
Category Category
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
(Dollars in thousands)
Residential real estate (1) $ 18 21.28% $ 14 25.82%
Commercial real estate and land loans (2) 9 22.38% 3 11.03%
Commercial business 288 49.44% 250 54.44%
Consumer 146 6.90% 149 8.71%
Unallocated - -- - --
---------------- ---------------------
Total allowance for loan losses $ 461 100.00% $ 416 100.00%
================ =====================
--------------------------------------------------------------------------------
(1) Includes residential construction loans.
(2) Includes commercial real estate construction loans.
D-15
Securities Analysis
The following table sets forth the securities portfolio at the dates
indicated.
At December 31,
----------------------------------------------------------------------------------------
2001 2000
------------------------------------------- -------------------------------------------
Weighted Weighted
Fair Amortized Percent of Average Fair Amortized Percent of Average
---- --------- ---------- ------- ---- --------- ---------- -------
Value Cost Portfolio Yield (2) Value Cost Portfolio Yield (2)
------ ---- --------- --------- ------ ---- --------- ---------
(Dollars in thousands)
SECURITIES HELD TO MATURITY (1)
-------------------------------
Debt securities:
U.S. Agency:
Due in one year or less $ - $ - 0.00% 0.00% $ 990 $ 990 9.22% 6.12%
Due after one year through five years 544 500 13.42% 7.10% 8,973 9,000 83.84% 6.41%
Due after five years through ten years 1,007 1,000 26.85% 6.22% - - - -
Due after ten years 1,407 1,396 37.49% 6.67% - - - -
Municipal
Due in one year or less 18 17 0.46% 9.83% 11 11 0.10% 9.85%
Due after one year through five years 88 87 2.34% 9.05% 83 79 0.74% 9.82%
Due after five years through ten years 152 150 4.03% 9.00% 150 142 1.32% 9.82%
Due after ten years 31 31 0.83% 6.67% 68 65 0.61% 9.79%
Mortgage-backed securities (3) 544 543 14.58% 7.10% 442 448 4.17% 6.43%
-------------------------------- --------------------------------
$ 3,791 $ 3,724 100.00% $ 10,717 $ 10,735 100.00%
================================ ================================
--------------------------------------------------------------------------------
(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%.
(3) The expected maturities of mortgage-backed securities may differ from
contractual maturities because the mortgages underlying the obligations may
be prepaid without penalty.
Maturities of Time Deposits
The following table presents the maturity distributions of time deposits of
$100,000 or more as of December 31, 2001.
Maturity Period Balance
--------------- -------
(In thousands)
Three months or less $ 4,258
Three through six months 3,897
Six through twelve months 8,570
Over twelve months 2,085
------------
Total $ 18,810
============
D-16
[LETTERHEAD OF MONROE SHINE]
Independent Auditors' Report
Board of Directors and Stockholders
Hometown Bancshares, Inc.
New Albany, Indiana
We have audited the accompanying consolidated balance sheets of Hometown
Bancshares, Inc. and Subsidiary as of December 31, 2001 and 2000, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hometown Bancshares,
Inc. and Subsidiary as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Monroe Shine
New Albany, Indiana
January 30, 2002
D-17
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
---- ----
ASSETS
Cash and due from banks $ 4,189,377 $ 5,876,723
Interest-bearing deposits with banks 7,648,817 599,506
Securities held to maturity (fair value of $3,791,045 in 2001;
$10,717,450 in 2000) 3,723,896 10,734,678
Federal funds sold 12,583,000 16,202,000
Loans held for sale 1,411,427 2,173,187
Loans 55,423,082 48,071,693
Less allowance for loan losses 460,603 416,062
---------------------------------
Net loans 54,962,479 47,655,631
---------------------------------
Federal Reserve Bank stock, at cost 150,000 150,000
Federal Home Loan Bank stock, at cost 200,000 200,000
Premises and equipment 2,346,574 2,155,248
Accrued interest receivable 365,782 548,238
Other assets 133,211 115,444
---------------------------------
Total Assets $ 87,714,563 $ 86,410,655
=================================
LIABILITIES
Deposits:
Noninterest-bearing $ 3,421,473 $ 3,335,806
Interest-bearing 76,850,828 76,926,932
---------------------------------
Total deposits 80,272,301 80,262,738
Accrued interest payable 326,569 353,387
Other liabilities 81,497 229,502
----------------------------------
Total Liabilities 80,680,367 80,845,627
---------------------------------
STOCKHOLDERS' EQUITY
Preferred stock without par value,
Authorized 25,000 shares; none issued - -
Common stock without par value,
Authorized 900,000 shares; issued 229,550 shares
(200,000 shares issued in 2000) 5,972,715 4,984,197
Retained earnings 1,061,481 580,831
---------------------------------
Total Stockholders' Equity 7,034,196 5,565,028
---------------------------------
Total Liabilities and Stockholders' Equity $ 87,714,563 $ 86,410,655
=================================
see notes to consolidated financial statements.
D-18
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Common Retained
Stock Earnings Total
Balance at January 1, 2000 $ 4,984,197 $ 60,853 $ 5,045,050
Net income - 519,978 519,978
--------------------------------------------
Balance at December 31, 2000 4,984,197 580,831 5,565,028
Net income - 480,650 480,650
Issuance of 29,550 shares of common stock 988,518 - 988,518
--------------------------------------------
Balance at December 31, 2001 $ 5,972,715 $ 1,061,481 $ 7,034,196
============================================
See notes to consolidated financial statements.
D-19
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
---- ----
INTEREST INCOME
Loans, including fees $ 4,699,008 $ 4,245,500
Securities:
Taxable 340,390 670,959
Tax-exempt 17,631 19,022
Dividends 23,867 22,438
Federal funds sold 507,396 463,194
Interest-bearing deposits in banks 214,152 54,948
---------------------------------
Total interest income 5,802,444 5,476,061
---------------------------------
INTEREST EXPENSE
Deposits 3,722,781 3,358,019
Federal funds purchased 164 6,060
---------------------------------
Total interest expense 3,722,945 3,364,079
---------------------------------
Net interest income 2,079,499 2,111,982
Provision for loan losses 106,000 131,500
---------------------------------
Net interest income after provision for loan losses 1,973,499 1,980,482
---------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 207,449 160,029
Commission income 73,860 242,443
Net gain on sale of mortgage loans 328,979 194,980
Other income 36,360 28,333
---------------------------------
Total noninterest income 646,648 625,785
---------------------------------
NONINTEREST EXPENSE
Compensation and benefits 1,255,898 1,254,303
Occupancy expense 84,708 65,121
Equipment expense 80,533 62,453
Other expenses 442,253 407,962
---------------------------------
Total noninterest expense 1,863,392 1,789,839
---------------------------------
Income before income taxes 756,755 816,428
Income tax expense 276,105 296,450
---------------------------------
Net Income $ 480,650 $ 519,978
=================================
Net Income Per Common Share $ 2.32 $ 2.60
=================================
See notes to consolidated financial statements.
D-20
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 480,650 $ 519,978
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income taxes 18,814 (3,825)
Depreciation and amortization of premises and equipment 89,311 63,225
Amortization of premium and accretion of discount on
securities, net 2,740 (5,814)
Mortgage loans originated for sale (18,665,253) (8,291,259)
Proceeds from mortgage loan sales 19,755,992 6,313,052
Net gain on sale of mortgage loans (328,979) (194,980)
Provision for loan losses 106,000 131,500
(Increase) decrease in accrued interest receivable 182,456 (157,785)
Increase (decrease) in accrued interest payable (26,818) 134,010
Increase in other assets (36,581) (10,319)
Increase in other liabilities (148,005) 131,691
------------------------------------
Net Cash Provided (Used) By Operating Activities 1,430,327 (1,370,526)
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits with banks (7,049,311) 1,766,861
Net (increase) decrease in federal funds sold 3,619,000 (7,210,000)
Purchase of securities held to maturity (9,879,807) (500,000)
Proceeds from maturities of securities held to maturity 16,702,000 803,000
Principal payments on mortgage-backed securities 185,849 28,256
Net increase in loans (7,412,848) (8,396,853)
Purchase of Federal Home Loan Bank stock - (77,900)
Purchase of premises and equipment (280,637) (946,547)
-----------------------------------
Net Cash Used By Investing Activities (4,115,754) (14,533,183)
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits 85,667 (197,642)
Net increase (decrease) in interest-bearing deposits (76,104) 20,752,937
Issuance of common stock 988,518 -
------------------------------------
Net Cash Provided By Financing Activities 998,081 20,555,295
------------------------------------
Net Increase (Decrease) in Cash and Due From Banks (1,687,346) 4,651,586
Cash and due from banks at beginning of year 5,876,723 1,225,137
------------------------------------
Cash and Due From Banks at End of Year $ 4,189,377 $ 5,876,723
====================================
Supplemental Disclosure of Cash Flow Information:
Cash payments for:
Interest $ 3,749,763 $ 3,230,069
Taxes 468,850 192,300
See notes to consolidated financial statements.
D-21
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Hometown Bancshares, Inc. (the Company) is a one bank holding company
of Hometown National Bank (the Bank), a wholly-owned subsidiary. The
Company has no operating activities. The Bank provides a variety of
commercial banking services to individual and business customers
through its two offices in southern Indiana.
Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and the Bank and have been prepared in accordance with
generally accepted accounting principles and conform with general
practices in the banking industry. Intercompany balances and
transactions have been eliminated.
Statements of Cash Flows
The Company has defined cash and cash equivalents as those amounts
included in the balance sheet caption "Cash and due from banks."
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting years. 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 and foreclosed real estate, further reductions in the carrying
amounts of loans and foreclosed assets may be necessary based on
changes in local economic conditions. In addition, as an integral part
of their examination process, regulatory agencies periodically review
the estimated losses on loans and foreclosed real estate. Such agencies
may require the Bank to recognize additional losses based on their
judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible the
estimated losses on loans and foreclosed real estate may change
materially in the near term. However, the amount of the change that is
reasonably possible cannot be estimated.
Securities Held to Maturity
Debt securities for which the Bank has the positive intent and ability
to hold to maturity are carried at cost, adjusted for amortization of
premium and accretion of discount using the interest method over the
remaining years to maturity, adjusted for anticipated prepayments.
Mortgage Loans Held For Sale
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of aggregate cost or estimated fair value. Net
unrealized losses are recognized through a valuation allowance by
charges to income. The Bank does not retain servicing on loans
originated and sold.
D-22
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(1 - continued)
Loans
Loans receivable are stated at unpaid principal balances, less net
deferred loan fees and the allowance for loan losses. The Bank's real
estate loan portfolio consists of long-term loans, collateralized by
first mortgages on single-family and multi-family residential property
located in the southern Indiana area, commercial real estate loans,
commercial business and consumer loans.
The Bank engages in mortgage banking activities including the
origination of loans for sale in the secondary market and mortgage loan
brokerage. Commission income from brokerage activities is included in
noninterest income.
Loan origination fees and certain direct costs of underwriting and
closing loans are deferred and the net deferred loan fee or cost is
recognized as an adjustment to interest income over the contractual
life of the loans using the interest method.
The accrual of interest is discontinued on a loan when, in the judgment
of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. The Bank does not accrue
interest on loans past due 90 days or more except when the estimated
value of collateral and collection efforts are deemed sufficient to
ensure full recovery. When a loan is placed on non-accrual status,
previously accrued but unpaid interest is reversed against interest
income. Interest income on non-accrual loans is accounted for on the
cash basis until the loan is charged off or qualifies for return to
accrual status.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and economic
conditions. The allowance is increased by a provision for loan losses,
which is charged to expense, and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans are
charged or credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process, management's estimate
of credit losses inherent in the loan portfolio and the related
allowance may change in the near term.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan
basis by either the present value of expected future cash flows at the
loan's effective interest rate or the fair value of the collateral if
the loan is collateral dependent.
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.
D-23
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(1 - continued)
Income Taxes
Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently due
plus deferred taxes related primarily to differences between the basis
of available for sale securities, allowance for loan losses,
accumulated depreciation, and accrued income and expenses for financial
and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
Advertising Costs
Advertising costs are charged to operations when incurred.
Recent Accounting Pronouncements
In September 2000, FASB issued SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. The
statement replaces SFAS 125, Accounting for Transfers and Servicing
Financial Assets and Extinguishments of Liabilities. It revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but
it carries over most of SFAS 125's provisions without reconsideration.
The statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that
approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. The
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings.
The statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31,
2001. The implementation of this standard had no impact on the
Company's financial condition or results of operations.
In June 2001, FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. This statement applies to all entities and the legal
obligations associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development
and/or normal operation of a long-lived asset, except for certain
obligations of lessees. This statement requires that the fair value of
a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value
can be made. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The
implementation of this standard is not expected to have an impact on
the Company's financial condition and results of operations.
In August 2001, FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supersedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and establishes a single financial accounting
model for long-lived assets to be disposed of by sale. The statement
retains the requirements of SFAS 121 to recognize an impairment loss if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and measure an impairment loss as the
difference between the carrying amount and the fair value of the asset.
The implementation of this standard is not expected to have an impact
on the Company's financial condition or results of operations.
D-24
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(2) RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances on hand or 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, 2001 and 2000, were approximately $460,000 and
$295,000, respectively.
(3) DEBT SECURITIES
Debt securities have been classified in the consolidated balance sheets
according to management's intent. The amortized cost and fair value of
held to maturity debt securities and the related unrealized holding
gains and losses were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2001:
Federal agency:
Notes and debentures $ 2,895,496 $ 62,569 $ - $ 2,958,065
Mortgage-backed securities 543,400 780 - 544,180
----------------------------------------------------------
3,438,896 63,349 - 3,502,245
Municipal bonds 285,000 3,800 - 288,800
----------------------------------------------------------
$ 3,723,896 $ 67,149 $ - $ 3,791,045
==========================================================
December 31, 2000:
Federal agency:
Notes and debentures $ 9,990,000 $ 5,231 $ 31,943 $ 9,963,288
Mortgage-backed securities 447,678 - 5,241 442,437
----------------------------------------------------------
10,437,678 5,231 37,184 10,405,725
Municipal bonds 297,000 14,725 - 311,725
----------------------------------------------------------
$ 10,734,678 $ 19,956 $ 37,184 $ 10,717,450
==========================================================
At December 31, 2001, federal agency securities with an amortized cost
of $152,654 and a fair value of $152,811 were pledged to secure public
deposits and certain borrowings.
The amortized cost and fair value of debt securities as of December 31,
2001, by contractual maturity, are shown below.
Amortized Fair
Cost Value
Due in one year or less $ 17,241 $ 17,541
Due after one year through five years 586,724 632,555
Due after five years through ten years 1,150,607 1,159,121
Due after ten years 1,425,924 1,437,648
-----------------------------
3,180,496 3,246,865
Mortgage-backed securities 543,400 544,180
-----------------------------
$ 3,723,896 $ 3,791,045
=============================
D-25
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(4) LOANS RECEIVABLE
Loans receivable at December 31, 2001 and 2000 consisted of the
following:
2001 2000
---- ----
Real estate mortgages:
Residential $ 11,007,995 $ 11,107,039
Commercial real estate and land loans 7,199,894 5,375,958
Residential construction 1,192,400 1,479,000
Commercial real estate construction 5,622,147 -
Commercial loans 28,330,444 26,523,960
Consumer loans 3,953,027 4,243,084
--------------------------------
57,305,907 48,729,041
Less: Undisbursed portion of construction loans (1,942,917) (706,790)
Add: Net deferred loan fees and costs 60,092 49,442
--------------------------------
Total loans $ 55,423,082 $ 48,071,693
================================
An analysis of the allowance for loan losses is as follows:
2001 2000
---- ----
Beginning balances $ 416,062 $ 321,732
Provision for loan losses 106,000 131,500
Recoveries 2,816 17,860
Loans charged-off (64,275) (55,030)
-----------------------------
Ending balances $ 460,603 $ 416,062
=============================
The Bank had loans amounting to approximately $252,000 and $106,000
specifically classified as impaired at December 31, 2001 and 2000,
respectively. The average recorded investment in impaired loans
amounted to approximately $111,000 and $26,000 for the years ended
December 31, 2001 and 2000, respectively. The allowance for loan losses
related to impaired loans amounted to approximately $60,000 and $41,000
at December 31, 2001 and 2000, respectively. No interest income was
recognized on impaired loans in 2001.
The Bank has entered into loan transactions with certain directors,
officers and their affiliates (related parties). In the opinion of
management, such indebtedness was incurred in the ordinary course of
business on substantially the same terms as those prevailing at the
time for comparable transactions with other persons and does not
involve more than normal risk of collectibility or present other
unfavorable features.
The following table represents the aggregate activity for related party
loans which during the year ended December 31, 2001:
Beginning balance $ 2,803,479
New loans and advances 2,822,080
Payments (2,395,071)
-----------
Ending balance $ 3,230,488
===========
D-26
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
2001 2000
---- ----
Land and land improvements $ 937,373 $ 857,933
Building and improvements 1,122,050 975,483
Furniture and equipment 548,995 494,365
-------------------------------
2,608,418 2,327,781
Less accumulated depreciation 261,844 172,533
-------------------------------
Net book value $ 2,346,574 $ 2,155,248
===============================
(6) INCOME TAXES
The components of income tax expense (credit) were as follows:
2001 2000
---- ----
Current $ 257,291 $ 300,275
Deferred 18,814 (3,825)
------------------------------
Totals $ 276,105 $ 296,450
==============================
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 2000 and 1999 were as follows:
2001 2000
---- ----
Deferred tax assets (liabilities):
Allowance for loan losses $ 160,246 $ 146,364
Amortizable start-up costs 2,570 12,808
Deferred insurance commissions 2,301 3,013
Deferred loan origination fees and costs, net (22,652) (18,613)
Depreciation (77,707) (59,999)
-------------------------------
Net deferred tax asset $ 64,758 $ 83,573
===============================
In 2000, the Indiana financial institution tax law was amended to treat
resident financial institutions the same as nonresident financial
institutions by providing for apportionment of Indiana income based on
receipts in Indiana. Receipts for Indiana were defined to exclude receipts
from out of state sources and federal government and agency obligations.
This change was effective retroactively to January 1, 1999. The provision
of income taxes for 2000 includes a credit of $6,069 in recognition of this
change.
D-27
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(6 - continued)
The reconciliation of the income tax credit with the amount which would
have been provided at the federal statutory rate of 34 percent:
2001 2000
---- ----
Provision at statutory rate $ 257,297 $ 277,586
State income tax-net of federal tax benefit 28,077 28,078
Change in state tax law-net of federal tax benefit - (6,069)
Tax exempt interest income (5,122) (5,101)
Other (4,147) 1,956
-----------------------------
Total income tax expense $ 276,105 $ 296,450
=============================
(7) DEPOSITS
The aggregate amount of time deposit accounts of $100,000 or more amounted
to approximately $18,810,000 and $10,612,000 at December 31, 2001 and 2000,
respectively.
At December 31, 2001, scheduled maturities of time deposits were as
follows:
Year ending December 31:
2001 $ 46,069,909
2002 6,105,749
2003 569,667
2004 259,411
2005 and thereafter 102,643
------------
Total $ 53,107,379
============
The Bank held deposits of approximately $2,179,000 and 2,505,000 for
related parties at December 31, 2001 and 2000, respectively.
(8) EMPLOYEE BENEFIT PLAN
The Bank has a qualified defined contribution plan that allows
participating employees to make tax-deferred contributions under Internal
Revenue Code Section 401(k).
The Bank made matching contributions to the plan of $5,434 and $4,487
during 2001 and 2000, respectively.
(9) COMMITMENTS AND CONTINGENT LIABILITIES
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 balance sheet.
Commitments under outstanding standby letters of credit totaled $562,204 at
December 31, 2001.
D-28
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(9 - continued)
The following is a summary of the commitments to extend credit at December
31, 2001 and 2000:
2001 2000
---- ----
Loan commitments:
Fixed rate $ 606,212 $ 31,261
Adjustable rate 117,000 174,033
Undisbursed portion of commercial and consumer
lines of credit 7,543,655 7,146,167
Undisbursed portion of residential construction loans 526,224 706,790
Undisbursed portion of commercial construction loans 1,416,693 -
---------------------------------
Total commitments to extend credit $ 10,209,784 $ 8,058,251
=================================
(10) CONCENTRATIONS OF CREDIT RISK
At December 31, 2001, the Bank had concentrations of credit risk with
correspondent banks as follows:
Due from bank balance in excess of federal deposit
insurance limit - Bankers Bank of Kentucky $ 3,428,886
Federal funds sold:
Bankers Bank of Kentucky 7,033,000
National City Bank 550,000
Bank One 5,000,000
------------
$ 16,011,886
============
(11) 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 9). 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.
D-29
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(11 - continued)
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 commitments during the past two
years.
(12) STOCKHOLDERS' EQUITY AND DIVIDENDS
On March 16, 2000, a two-for-one stock split was ratified by the
stockholders. The effect of the stock split was to increase the number
of issued and outstanding shares to 200,000. All references in the
accompanying financial statements to the number of common shares have
been restated to reflect the stock split.
During 2001, the Company issued 29,550 shares of common stock at an
issue price of $35 per share for gross offering proceeds of $1,034,250.
Offering expenses of $45,732 were charged against the gross offering
proceeds.
The dividends which the Bank may pay to the Company are restricted by
federal banking regulations. Generally, subject to certain
restrictions, dividends may only be paid out of retained earnings.
(13) REGULATORY MATTERS
The Company and the Bank are 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 Company and the
Bank must meet specific capital guidelines that involve 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 Company and 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 of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2000, that the Company and the
Bank meet all capital adequacy requirements to which it is subject.
As of December 31, 2000, the most recent notification from the Federal
Reserve Bank categorized the Company and the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, each entity 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 either entity's
categories.
D-30
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(13 - continued)
The actual capital amounts and ratios are also presented in the table.
No amounts were deducted from capital for interest-rate risk in either
year.
Minimum
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
As of December 31, 2001:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 7,495 12.2% $ 4,920 8.0% N/A
Bank $ 7,480 12.2% $ 4,920 8.0% $ 6,151 10.0%
Tier I Capital (to Risk
Weighted Assets):
Consolidated $ 7,034 11.4% $ 2,460 4.0% N/A
Bank $ 7,019 11.4% $ 2,460 4.0% $ 3,691 6.0%
Tier I Capital (to Average
Assets):
Consolidated $ 7,034 8.2% $ 3,435 4.0% N/A
Bank $ 7,020 8.2% $ 3,435 4.0% $ 4,294 5.0%
As of December 31, 2000:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 5,981 11.2% $ 4,277 8.0% N/A
Bank $ 5,967 11.2% $ 4,277 8.0% $ 5,347 10.0%
Tier I Capital (to Risk
Weighted Assets):
Consolidated $ 5,565 10.4% $ 2,139 4.0% N/A
Bank $ 5,551 10.4% $ 2,139 4.0% $ 3,208 6.0%
Tier I Capital (to Average
Assets):
Consolidated $ 5,565 7.2% $ 3,081 4.0% N/A
Bank $ 5,551 7.2% $ 3,081 4.0% $ 3,852 5.0%
(14) NET INCOME PER COMMON SHARE
Basic earnings per share is calculated by dividing net income by the
207,162 and 200,000 weighted average common shares outstanding during
2001 and 2000, respectively. The Company has no potential dilutive
common shares.
D-31
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
(Unaudited)
ASSETS
Cash and due from banks $ 1,820,483
Interest-bearing deposits with banks 3,268,803
Federal funds sold 8,120,000
Securities available for sale 1,764,087
Securities held to maturity 2,109,925
Loans held for sale 6,066,312
Loans, net 57,981,610
Federal Reserve Bank stock, at cost 179,650
Federal Home Loan Bank stock, at cost 200,000
Foreclosed real estate 95,105
Premises and equipment 2,284,387
Accrued interest receivable 361,165
Other assets 229,495
--------------
Total Assets $ 84,481,022
==============
LIABILITIES
Deposits:
Noninterest-bearing $ 4,331,988
Interest-bearing 72,377,877
--------------
Total deposits 76,709,865
Accrued interest payable 238,177
Other liabilities 156,977
--------------
Total Liabilities 77,105,019
--------------
STOCKHOLDERS' EQUITY
Preferred stock without par value,
Authorized 25,000 shares; none issued -
Common stock without par value,
Authorized 900,000 shares; issued 229,550 shares 5,972,715
Retained earnings 1,407,563
Accumulated other comprehensive loss (4,275)
--------------
Total Stockholders' Equity 7,376,003
--------------
Total Liabilities and Stockholders' Equity $ 84,481,022
==============
See notes to condensed consolidated financial statement.
D-32
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Loss Total
Balances as January 1, 2002 $ 5,972,715 $ 1,061,481 $ - $ 7,034,196
COMPREHENSIVE INCOME
Net income - 346,082 - 346,082
Other comprehensive incom
Change in unrealized loss
on securities available for sale,
net of deferred income
benefit of $2,850 - - (4,275) (4,275)
Less: Reclassification adjustment - - - -
------------
Total comprehensive income 341,807
------------
----------------------------------------------------------------
Balances as September 30, 2002 $ 5,972,715 $ 1,407,563 $ (4,275) $ 7,376,003
================================================================
See notes to condensed consolidated financial statements.
D-33
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)
2002 2001
---- ----
INTEREST INCOME
Loans, including fees $ 3,310,800 $ 3,539,585
Securities 301,934 313,719
Dividends 16,821 18,214
Federal funds sold 121,114 453,621
Interest-bearing deposits in banks 49,231 165,582
------------------------------
Total interest income 3,799,900 4,490,721
------------------------------
INTEREST EXPENSE
Deposits 1,977,755 2,920,698
------------------------------
Net interest income 1,822,145 1,570,023
Provision for loan losses 329,000 65,000
------------------------------
Net interest income after provision for loan losses 1,493,145 1,505,023
------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 225,164 140,712
Net gain on sale of mortgage loans 90,308 311,086
Other income 27,232 65,329
------------------------------
Total noninterest income 342,704 517,127
------------------------------
NONINTEREST EXPENSE
Compensation and benefits 795,390 939,944
Occupancy expense 72,051 59,312
Equipment expense 64,261 60,640
Other expenses 348,498 337,630
------------------------------
Total noninterest expense 1,280,200 1,397,526
------------------------------
Income before income taxes 555,649 624,624
Income tax expense 209,567 229,321
------------------------------
Net Income $ 346,082 $ 395,303
==============================
Net income per common share, basic $ 1.51 $ 1.94
==============================
See notes to condensed consolidated financial statements.
D-34
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 346,082 $ 395,303
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment 70,650 68,850
Amortization of premium and accretion of discount on securities, net 15,700 1,926
Mortgage loans originated for sale (11,024,981) (16,372,647)
Proceeds from mortgage loan sales 6,460,404 17,253,162
Net gain on sale of mortgage loans (90,308) (311,086)
329,000 65,000
Decrease in accrued interest receivable 4,617 81,401
Increase (decrease) in accrued interest payable (88,392) 8,314
Net change in other assets/liabilities (17,954) (168,896)
-------------------------------
Net Cash Provided (Used) By Operating Activities (3,995,182) 1,021,327
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits with banks 4,380,014 (6,794,726)
Net decrease in federal funds sold 4,463,000 10,385,000
Purchase of securities available for sale (4,275,525) -
Proceeds from maturities of securities available for sale 2,500,000 -
Purchase of securities held to maturity (3,985,233) (7,879,182)
Proceeds from maturities of securities held to maturity 5,412,000 13,002,000
Principal payments on mortgage-backed securities 175,817 105,929
Net increase in loans (3,443,236) (9,844,953)
Purchase of Federal Reserve Bank stock (29,650) -
Purchase of premises and equipment (8,463) (182,863)
-------------------------------
Net Cash Provided (Used) By Investing Activities 5,188,724 (1,208,795)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits 910,515 (260,135)
Net decrease in interest-bearing deposits (4,472,951) (5,293,391)
Issuance of common stock - 374,058
-------------------------------
Net Cash Used By Financing Activities (3,562,436) (5,179,468)
-------------------------------
Net Decrease in Cash and Due From Banks (2,368,894) (5,366,936)
Cash and due from banks at beginning of period 4,189,377 5,876,723
-------------------------------
Cash and Due From Banks at End of Period $ 1,820,483 $ 509,787
===============================
See notes to condensed consolidated financial statements.
D-35
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements reflect
the accounts of Hometown Bancshares, Inc. (the "Company") and its
subsidiary, Hometown National Bank (the "Bank"), as of September 30,
2002 and for the nine-month periods ended September 30, 2002 and 2001.
These consolidated financial statements are unaudited and condensed and
accordingly, omit disclosures which would substantially duplicate those
contained in the most recent audited consolidated financial statements.
However, these interim period consolidated financial statements
include, in the opinion of management, all adjustments, consisting of
normal recurring accruals, considered necessary for a fair
presentation. Interim results are not necessarily indicative of results
for a full year. For further information, refer to the consolidated
financial statements and the notes included elsewhere in this
registration statement.
The consolidated financial statements include the accounts of the
Company and the Bank. All intercompany balances and transactions have
been eliminated in consolidation.
2. Business Combination
On September 25, 2002, the Company and First Capital, Inc. (First
Capital), the bank holding company for First Harrison Bank in Corydon,
Indiana, entered into an Agreement and Plan of Merger whereby each of
the Company's issued and outstanding common shares will be exchanged
for shares of First Capital or $46.50 in cash per share. The number of
shares of First Capital common stock to be exchanged for each share of
the Company's common stock will be based on the average closing price
of First Capital common stock over a twenty day trading period shortly
before the closing of the merger. Elections to receive stock, cash or a
combination of stock and cash by the Company's shareholders will be
limited by a requirement that 50% of the total number of outstanding
shares of the Company's common stock be exchanged for First Capital
common stock. The merger is subject to regulatory and stockholder
approvals. It is anticipated that the merger will be consummated in the
first quarter of 2003.
3. Supplemental Disclosures of Cash Flow Information
Nine Months Ended
September 30,
-------------
2002 2001
---- ----
(In thousands)
Cash payments for:
Interest $ 2,066 $ 2,912
Taxes 168 392
Noncash investing activity:
Transfer of loans to real estate acquired
through foreclosure 95 -
D-36
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Comprehensive Income
Comprehensive income is defined as the change in equity (net assets) of
a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. It includes all
changes in equity during a period except those resulting from
investments by owners and distributions to owners. Comprehensive income
for the Company includes net income and other comprehensive income
representing the net unrealized gains and losses on securities
available for sale. The following table sets forth the components of
other comprehensive income and the allocated tax amounts for the nine
months ended September 30, 2002 and 2001:
Nine Months Ended
September 30,
------------
2002 2001
---- ----
Unrealized losses on securities: (In thousands)
Unrealized holding losses
arising during the period $ (7) $ -
Income tax benefit 4 -
-----------------------
Net of tax amount (3) -
-----------------------
Less: reclassification
adjustment for (gains)
losses included in net - -
income tax expense (benefit) - -
-----------------------
Other comprehensive loss $ (3) $ -
=======================
5. Supplemental Disclosure for Earnings Per Share
Basic earnings per share is calculated by dividing net income by the
229,550 and 203,515 weighted average common shares outstanding during
the nine month periods ended September 30, 2002 and 2001, respectively.
The Company has no dilutive potential common shares.
D-37
APPENDIX E
[LOGO OF FIRST CAPITAL, INC.]
Dear Shareholders:
First Capital, Inc. had a record year; we would like to thank our shareholders,
customers, and staff for helping achieve our goals.
Your continued confidence in the company is appreciated and reflected in an
increased stock price, ending the year at $14.40 per share. Management focused
on four major goals in 2001.
Our first goal was to continue to grow First Capital, Inc., while tightly
managing our expenses. Our efficiency ratio of 54.79% ranks us among the top
performers for Indiana Thrift Institutions. The efficiency ratio is the amount
of non-interest expense it takes to make one dollar of gross income. We are
confident we can continue to improve our efficiency ratio as we manage our
planned loan growth and expansion.
Our second goal was to continue to look for ways to efficiently use our capital.
We had very good loan growth in 2001. We expect continued positive growth;
however we realize that economic conditions could impact the level of loan
growth, as we strive to maintain strong asset quality. Our deposits grew 10.12%
over last year. Credit should go to our branch staffs and our Pricing Committee
for this excellent growth. Many banks have struggled with deposit growth. Our
branch staffs and marketing efforts have helped us grow, while maintaining our
net interest margin and our profitability objectives.
Our third goal was and is to deliver the best customer service in all the
markets we serve. To this end, we will be making a major investment in
technology in 2002. This will speed up delivery of information to customers,
allow us to better sell services to customers and non-customers, and support
further growth without adding people. We will complete this project by late
2002.
Our last goal will always be our continued long-standing tradition of supporting
our communities with our time and our money. In 2001, we funded a scholarship at
Ivy Tech, we were a major contributor to our new YMCA, we sponsored the Economic
Forum and Forecast at Indiana University Southeast, and our staff led the
community in major donations to United Way, Relay for Life, American Heart Walk,
and many others. Our staff also gave of their time working at the Harrison
County Fair, reading books to youth at our adopted school, New Middletown
School, worked with the County on a reading program to improve literacy and many
other programs.
As you can see, your company stands for many things and you should be proud to
be a shareholder of First Capital, Inc. We are proud to have you as a
shareholder and appreciate your continued support.
Sincerely,
/s/ WILLIAM W. HARROD /s/ J. GORDON PENDLETON
----------------------- -----------------------
William W. Harrod J. Gordon Pendleton
President and CEO Chairman of the Board
E-1
--------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA
--------------------------------------------------------------------------------
The financial data presented below is qualified in its entirety by the more
detailed financial data appearing elsewhere in this report, including the
Company's audited financial statements. The following tables set forth certain
information concerning the financial position and results of operations of the
Company at the dates indicated.
FINANCIAL CONDITION DATA:
At December 31,
------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Total assets $282,823 $248,582 $222,797
Cash and interest-bearing deposits (1) 12,382 11,469 9,522
Federal funds sold -- -- 4,000
Securities available for sale 54,891 34,779 30,097
Securities held to maturity 1,836 11,229 12,325
Loans receivable, net 201,730 179,304 154,982
Deposits 204,122 185,368 175,342
Advances from Federal Home Loan Bank 42,825 30,074 16,750
Stockholders' equity, substantially restricted 33,481 31,108 28,877
OPERATING DATA:
For the Year Ended December 31,
-------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Interest income $ 18,960 $ 17,363 $ 15,101
Interest expense 9,842 9,267 7,566
-------- -------- --------
Net interest income 9,118 8,096 7,535
Provision for loan losses 66 48 142
-------- -------- --------
Net interest income after provision for loan losses 9,052 8,048 7,393
-------- -------- --------
Noninterest income 1,675 1,219 1,031
Noninterest expense (2) 5,914 5,629 5,574
-------- -------- --------
Income before income taxes 4,813 3,638 2,850
Income tax expense 1,714 1,180 1,080
-------- -------- --------
Net Income $ 3,099 $ 2,458 $ 1,770
======== ======== ========
PER SHARE DATA:
Net income - basic $ 1.26 $ 1.00 $ 0.72
Net income - diluted 1.25 1.00 0.71
Dividends 0.48 0.41 0.35
Dividends of pooled affiliate N/A N/A 0.39
--------------------------------------------------------------------------------
(1) Includes interest-bearing deposits in other depository institutions.
(2) Includes merger related expenses of $439,000 in 1999.
E-2
--------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA - CONTINUED
--------------------------------------------------------------------------------
At or For the
Year Ended December 31,
-----------------------------
2001 2000 1999
------- ------- -------
SELECTED FINANCIAL RATIOS:
Performance Ratios:
Return on assets (1) 1.17% 1.05% 0.84%
Return on average equity (2) 9.49% 8.27% 6.05%
Dividend payout ratio 38.52% 41.40% 51.38%
Average equity to average assets 12.31% 12.64% 13.95%
Interest rate spread (3) 2.99% 2.97% 3.27%
Net interest margin (4) 3.71% 3.73% 3.97%
Non-interest expense to average assets 2.23% 2.39% 2.66%
Average interest earning assets to
average interest bearing liabilities 118.41% 118.30% 118.01%
Regulatory Capital Ratios:
Tier I - adjusted total assets 11.25% 11.92% 12.13%
Tier I - risk based 19.67% 19.97% 19.64%
Total risk-based 20.36% 20.63% 19.64%
Asset Quality Ratios:
Nonperforming loans as a percent of
loans receivable, net (5) 0.62% 0.32% 0.13%
Nonperforming assets as a
percent of total assets (6) 0.52% 0.28% 0.21%
Allowance for loan losses as a percent
of gross loans receivable 0.54% 0.64% 0.75%
--------------------------------------------------------------------------------
(1) Net income divided by average assets.
(2) Net income divided by average equity.
(3) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities (taxable equivalent
basis).
(4) Net interest income as a percentage of average interest-earning assets
(taxable equivalent basis).
(5) Nonperforming loans consist of loans accounted for on a nonaccrual basis
and accruing loans 90 days or more past due.
(6) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans, but exclude restructured loans.
E-3
--------------------------------------------------------------------------------
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. The Company assumes no obligation to update any
forward-looking statements.
General
The Bank's results of operations depend primarily on net interest income, which
is the difference between the income earned on its interest-earning assets, such
as loans and investments, and the cost of its interest-bearing liabilities,
consisting of deposits and borrowings from the Federal Home Loan Bank of
Indianapolis. The Bank's net income is also affected by, among other things, fee
income, provisions for loan losses, operating expenses and income tax
provisions. The Bank's results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government legislation and policies concerning monetary and
fiscal affairs, housing and financial institutions and the intended actions of
the regulatory authorities.
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company and the Bank. The information contained in
this section should be read in conjunction with the consolidated financial
statements and the accompanying notes to consolidated financial statements
included elsewhere in this report.
Operating Strategy
The Company is the parent company to an independent community-oriented financial
institution that delivers quality customer service and offers a wide range of
deposit, loan and investment products to its customers. The Company has no other
material income other than that generated by the Bank and the Bank's
wholly-owned subsidiary, First Harrison Financial Services, Inc., which sells
property and casualty insurance and non-deposit investment products.
The Bank's primary business strategy is attracting deposits from the general
public and using those funds to originate one-to-four family residential
mortgage loans. The Bank's lending activity also includes multi-family
residential loans, commercial real estate and business loans and consumer loans.
The Bank invests excess liquidity primarily in interest-bearing deposits with
the Federal Home Loan Bank of Indianapolis and other financial institutions,
U.S. government and agency securities, local municipal obligations and, to a
lesser extent, mortgage-backed securities.
E-4
In recent years, the Company's operating strategy has also included enhancing
profitability by increasing sources of non-interest income and improving
operating efficiency while managing its capital and limiting its credit risk and
interest rate risk exposures. To accomplish these objectives, the Company has
focused on the following:
.. Control credit risk by focusing on the origination of one-to-four family
residential mortgage loans and consumer loans, consisting primarily of home
equity loans and lines of credit while increasing the market share of
commercial real estate and small business loans.
.. Provide quality customer service by expanding and upgrading the branch
offices, introducing internet banking and broadening its commercial deposit
and loan products.
.. Increase fee income from non-deposit investment products and providing
property and casualty insurance.
.. Continue to invest in technology to increase productivity and efficiency.
.. Engage in a capital management strategy to repurchase Company stock and pay
dividends to enhance shareholder value.
Merger with HCB Bancorp
On January 12, 2000, the Company completed the plan of merger with HCB Bancorp
(HCB), a bank holding company located in Palmyra, Indiana. HCB was the parent
company of Harrison County Bank, a state-chartered commercial bank, which was
merged with and into the Bank. The merger provided for an exchange of 15.5
shares of the Company's common stock for each outstanding share of HCB common
stock. The merger was accounted for as a pooling of interests and the
consolidated financial statements give effect to the merger as if the merger had
been consummated as of the earliest date presented. See the accompanying notes
to consolidated financial statements for additional information.
Comparison of Financial Condition at December 31, 2001 and 2000
Total assets increased 13.8% from $248.6 million at December 31, 2000 to $282.8
million at December 31, 2001, primarily as a result of increases in investment
securities and loans receivable, net, which were funded by growth in deposits
and advances from the Federal Home Loan Bank of Indianapolis.
Loans receivable, net, were $179.3 million at December 31, 2000 compared to
$201.7 million at December 31, 2001, a 12.5% increase. The loan growth is
attributable primarily to a 19.5% growth in residential mortgage and
construction loans and a 15.5% growth in commercial business loans offset by a
22.4% decrease in commercial real estate loans. Residential mortgage and
construction loans were $119.5 million at December 31, 2000, compared to $142.8
million at December 31, 2001 and commercial business loans increased from $9.8
million at December 31, 2000 to $11.3 million at December 31, 2001. Commercial
real estate loans decreased from $20.4 million at December 31, 2000 to $15.8
million at December 31, 2001. Consumer loans grew slightly during the year from
$30.6 million at December 31, 2000 to $31.3 million at December 31, 2001.
Securities available for sale, at fair value, consisting primarily of federal
agency mortgage-backed certificates, notes and bonds, and municipal obligations,
increased $20.1 million or 57.8% from $34.8 million at December 31, 2000 to
$54.9 million at December 31, 2001 as a result of purchases of $42.7 million net
of maturities and repayments of $23.4 million.
The investment in securities held to maturity, consisting of federal agency
mortgage-backed certificates and municipal obligations, decreased from $11.2
million at December 31, 2000 to $1.8 million at December 31, 2001 as a result of
maturities and repayments of $9.4 million and sales and transfers of $523,000
offset by purchases of $500,000.
Cash and interest-bearing deposits with banks increased from $11.5 million at
December 31, 2000 to $12.4 million at December 31, 2001 as a result of excess
liquidity funded by growth in deposits.
E-5
Total deposits increased from $185.4 million at December 31, 2000 to $204.1
million at December 31, 2001, a 10.1% increase. The increase in deposits
resulted from growth in all categories of deposit accounts. Interest-bearing
demand deposits increased $3.9 million in 2001, while noninterest-bearing demand
deposits increased $1.5 million in 2001. Savings and money market accounts
increased $4.4 million from $46.3 million at December 31, 2000 to $50.7 million
at December 31, 2001. Time deposits increased $9.0 million from $95.1 million at
December 31, 2000 to $104.1 million at December 31, 2001. Management attributes
the growth in deposits to the Company's marketing efforts and the weakened stock
market as customers look to safer investments with a guaranteed rate of return.
Total stockholders' equity increased from $31.1 million at December 31, 2000 to
$33.5 million at December 31, 2001 primarily as a result of retained net income
of $1.9 million and a net unrealized gain on securities available for sale of
$377,000.
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 it current
judgments about the credit quality of the loan portfolio. In addition, the
Office of Thrift Supervision (OTS), as an integral part of their examination
process, periodically review the Bank's allowance for loan losses and may
require the Bank to make additional provisions for estimated losses based on
their judgments about information available to them at the time of their
examination.
The methodology used in determining the allowance for loan losses includes
segmenting the loan portfolio by identifying risk characteristics common to
groups of loans, determining and measuring impairment of individual loans based
on the present value of expected future cash flows or the fair value of
collateral, and determining and measuring impairment for groups of loans with
similar characteristics by applying loss factors that consider the qualitative
factors which may effect the loss rates.
Specific allowances related to impaired loans and other classified loans are
established where management has identified significant conditions or
circumstances related to a loan that management believes indicate that a loss
has been incurred. The identification of these loans results from the loan
review process that identifies and monitors credits with weaknesses or
conditions which call into question the full collection of the contractual
payments due under the terms of the loan agreement. Factors considered by
management include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due.
For loans evaluated on a group basis, management applies loss factors to groups
of loans with common risk characteristics (i.e. residential mortgage loans, home
equity loans, credit card loans). The loss factors are derived from the Bank's
historical loss experience or, where the Bank does not have loss experience, the
peer group loss experience. Peer group loss experience is used after evaluating
the attributes of the Bank's loan portfolio as compared to the peer group. Loss
factors are adjusted for significant environmental factors that, in management's
judgment, affect the collectibility of the loan portfolio segment. The
significant environmental factors include the levels and trends in charge-offs
and recoveries, trends in volume and terms of loans, levels and trends in
delinquencies, the effects of changes in underwriting standards and other
lending practices or procedures, the experience and depth of the lending
management and staff, effects of changes in credit concentration, changes in
industry and market conditions and national and local economic trends and
conditions. Management evaluates these conditions on a quarterly basis and
evaluates and modifies the assumptions used in establishing the loss factors.
E-6
The allowance for loan losses was $1.1 million at December 31, 2001 and $1.2
million at December 31, 2000. Management has deemed these amounts as adequate on
those dates based on its evaluation methodology. At December 31, 2001,
nonperforming loans totaled $1.3 million or 0.45% 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 $375,000 and consumer loans in
the amount of $97,000. These loans are accruing interest as the estimated value
of the collateral and collection efforts are deemed sufficient to ensure full
recovery.
Comparison of Operating Results for the Years Ended December 31, 2001 and 2000
Net Income. Net income was $3.1 million ($1.25 per share diluted) for the year
ended December 31, 2001 compared to $2.5 million ($1.00 per share diluted) for
the year ended December 31, 2000. The increase was attributable to increases in
net interest income of $1.0 million and noninterest income of $456,000 offset by
increases in noninterest expenses of $285,000 and income taxes of $534,000.
Net Interest Income. Net interest income increased $1.0 million or 12.6% to $9.1
million in 2001 compared to $8.1 million in 2000 primarily due to an increase in
average interest-earning assets during 2001 and an increase in the interest rate
spread offset by an increase in average interest-bearing liabilities.
Total interest income increased $1.6 million, or 9.2%, to $19.0 million for 2001
compared to $17.4 million in 2000 primarily due to a higher average balance of
interest-earning assets. Interest on loans receivable increased $1.5 million and
interest on investment securities increased $121,000 as a result of higher
average balances in 2001. The average balance of interest-earning assets
increased from $222.2 million in 2000 to $251.2 million in 2001. The average
yield on interest-earnings assets decreased from 7.90% in 2000 to 7.63% in 2001
due to decreases in market rates. During 2001, the Federal Reserve Bank lowered
the discount rate by 4.75%. While a majority of the loan and securities
portfolios are fixed rate in nature, the Bank does hold variable rate
investments and loans which have repriced during the year leading to a lower
overall effective yield. Also, loan refinancings triggered by lower market
interest rates have reduced the loan portfolio average yield.
Total interest expense increased $575,000, or 6.2%, to $9.8 million for 2001
compared to $9.3 million for 2000 primarily due to the growth in deposits and an
increase in average borrowings from the Federal Home Loan Bank. The average
balances of interest-bearing deposits and advances from the Federal Home Loan
Bank were $177.1 million and $34.9 million, respectively, for 2001 compared to
$168.7 million and $19.2 million for 2000. The average cost of funds decreased
from 4.93% in 2000 to 4.64% in 2001 due to lower market interest rates. For
further information see "Average Balance Sheets" below. The changes in interest
income and interest expense resulting from changes in volume and changes in
rates for 2001 and 2000 are shown in the schedule captioned "Rate/Volume
Analysis" included herein.
Provision for Loan Losses. The provision for loan losses was $66,000 for 2001
compared to $48,000 for 2000. During 2001, the net loan portfolio growth was
$22.4 million. Commercial and residential real estate loans, consumer
installment loans, and commercial business loans increased $19.8 million,
$730,000, and $1.5 million, respectively, during this period. The consistent
application of management's allowance methodology did not result in an increase
in the level of the allowance for loan losses due to lower levels of estimated
inherent credit losses in residential and commercial real estate loans. The
provisions were recorded to bring the allowance to the level determined in
applying the allowance methodology after reduction for net charge-offs during
the quarters. See "Allowance for Loan Losses".
Provisions for loan losses are charges to earnings to maintain the total
allowance for loan losses at a level considered reasonable by management to
provide for probable known and inherent loan losses based on management's
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical loss experience,
specified impaired loans, and economic conditions. Although management uses the
best information available, future adjustments to the allowance may be necessary
due to changes in economic, operating, regulatory and other conditions that may
be beyond the Bank's control. While the Bank maintains the allowance for loan
losses at a level which it considers adequate to provide for estimated losses,
there can be no assurance that further additions will not be made to the
allowance for loan losses and that actual losses will not exceed the estimated
amounts.
E-7
Noninterest income. Noninterest income increased $456,000 or 37.4% to $1.7
million for 2001 compared to $1.2 million for 2000. The increase is primarily
attributable to an increase in service charges on deposit accounts of $361,000
due to growth in transaction accounts and changes in the fee schedule during
2001, an increase in commission income of $44,000 relating primarily to credit
life insurance commissions, and an increase in the gain on sale of mortgage
loans of $36,000 resulting from the sale of $5.4 million of residential
mortgages into the secondary market during 2001.
Noninterest expense. Noninterest expense increased $285,000 or 5.1% to $5.9
million for 2001 compared to $5.6 million in 2000. The increase results
primarily from increases in compensation and benefits, data processing expenses,
and other operating expenses. Compensation and benefits expense increased
$166,000 due to normal salary increases and the increased cost of providing
employee health insurance. Data processing expenses increased $43,000 primarily
due to increased automated teller machine processing fees and expenses related
to internet banking. Other operating expenses increased $102,000 primarily due
to increases in loan administration expenses and charitable contributions. Loan
administration expenses increased in 2001 as loan originations increased and
management offered promotional incentives designed to attract new loans. The
charitable contributions include endowing a scholarship at Ivy Tech Vocational
School and making a significant contribution towards the establishment of a YMCA
in Harrison County, Indiana
Income tax expense. Income tax expense for the year ended December 31, 2001 was
$1.7 million, compared to $1.2 million for the same period in 2000. The
effective tax rate for 2001 was 35.6% compared to 32.4 % for 2000. The higher
effective tax rate for 2001 compared to 2000 resulted from a decrease in tax
exempt income in 2001 and a retroactive change in state tax law in 2000. See
Note 10 in the accompanying Notes to Consolidated Financial Statements.
E-8
--------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS
--------------------------------------------------------------------------------
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earnings assets
and interest expense on average interest-bearing liabilities and average yields
and costs. Such yields and costs for the periods indicated are derived by
dividing income or expense by the average historical cost balances of assets or
liabilities, respectively, for the periods presented and do not give effect to
changes in fair value that are included as a separate component of stockholders'
equity. Average balances are derived from daily balances.
Year ended At December 31,
-----------------------------------------------------------------
2001 2000
------------------------------ -------------------------------
Average Average
(Dollars in thousands) Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------- -------- ------- -------- -------- -------
Interest-earning assets:
Loans receivable (1) $189,916 $ 15,462 8.14% $167,981 $ 13,994 8.33%
Investment securities:
Taxable (2) 45,321 2,730 6.02% 40,580 2,608 6.43%
Tax-exempt (3) 7,609 568 7.46% 7,325 570 7.78%
-------- ------ -------- ------
Total investment securities 52,930 3,298 6.23% 47,905 3,178 6.63%
-------- ------ -------- ------
Federal funds sold -- -- -- 533 33 6.19%
Interest-bearing deposits with banks 8,310 393 4.73% 5,794 352 6.08%
-------- ------ -------- ------
Total interest-earning assets 251,156 19,153 7.63% 222,213 17,557 7.90%
-------- ------ -------- ------
Noninterest-earning assets 14,101 12,964
-------- --------
Total assets $265,257 $235,177
======== ========
Interest-bearing liabilities:
Savings and interest-bearing demand
deposits $ 76,445 $ 1,966 2.57% $ 75,231 $ 2,735 3.64%
Time deposits 100,681 5,714 5.68% 93,450 5,300 5.67%
-------- ------ -------- ------
Total deposits 177,126 7,680 4.34% 168,681 8,035 4.76%
-------- ------ -------- ------
Retail repurchase agreements 92 3 3.26% -- -- --
FHLB advances 34,885 2,159 6.19% 19,159 1,232 6.43%
-------- ------ -------- ------
Total interest-bearing liabilities 212,103 9,842 4.64% 187,840 9,267 4.93%
-------- ------ -------- ------
Noninterest-bearing liabilities:
Noninterest-bearing deposits 18,205 15,243
Other liabilities 2,295 2,376
-------- --------
Total liabilities 232,603 205,459
Stockholders' equity 32,654 29,718
-------- --------
Total liabilities and stockholders' equity $265,257 $235,177
======== ========
Net interest income $ 9,311 $ 8,290
======== ========
Interest rate spread 2.99% 2.97%
====== ======
Net interest margin 3.71% 3.73%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 118.41% 118.30%
====== ======
--------------------------------------------------------------------------------
(1) Average loans receivable includes nonperforming loans.
(2) Includes taxable debt and equity securities and Federal Home Loan Bank
Stock.
(3) Tax-exempt income has been adjusted to a tax-equivalent basis using the
federal marginal tax rate of 34%.
E-9
--------------------------------------------------------------------------------
RATE/VOLUME ANALYSIS
--------------------------------------------------------------------------------
The following table sets forth the effects of changing rates and volumes on
net interest income and interest expense. Information is provided with respect
to (i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects attributable to changes in rate
(changes in rate multiplied by prior volume); and (iii) effects attributable to
changes in rate and volume (changes in rate multplied by changes in volume). Tax
exempt income has been adjusted to a tax-equivalent basis using the federal
marginal tax rate of 34%.
2001 Compared to 2000
Increase (Decrease) Due to
--------------------------------
Rate/
Rate Volume Volume Net
----- ------ ------ ------
(In thousands)
Interest-earning assets:
Loans receivable $(319) $1,829 $(42) $1,468
Investment securities:
Taxable (166) 307 (19) 122
Tax-exempt (22) 21 (1) (2)
----- ------ ---- ------
Total investment securities (188) 328 (20) 120
----- ------ ---- ------
Federal funds sold (33) (33) 33 (33)
Interest-bearing deposits with banks (78) 153 (34) 41
----- ------ ---- ------
Total net change in income
on interest-earning assets (618) 2,277 (63) 1,596
----- ------ ---- ------
Interest-bearing liabilities:
Interest-bearing deposits (708) 388 (35) (355)
Retail repurchase agreements -- -- 3 3
FHLB advances (46) 1,011 (38) 927
----- ------ ---- ------
Total net change in expense
on interest-bearing liabilities (754) 1,399 (70) 575
----- ------ ---- ------
Net change in net interest income $ 136 $ 878 $ 7 $1,021
===== ====== ==== ======
E-10
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits and proceeds from loan
repayments and prepayments, and from the sale and maturity of securities. The
Bank may also borrow from the Federal Home Loan Bank of Indianapolis. While loan
repayments and maturities and sales of securities are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by market
interest rates, general economic conditions and competition. At December 31,
2001, the Bank had cash and interest-bearing deposits with banks of $12.4
million and securities available for sale with a fair value of $54.9 million. If
the Bank requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the Federal Home Loan Bank of Indianapolis
and collateral eligible for repurchase agreements.
The Bank's primary investing activity is the origination of one-to-four family
mortgage loans and, to a lesser extent, consumer, multi-family, commercial real
estate, commercial business and residential construction loans. The Bank also
invests in U.S. government and agency securities and mortgage-backed securities
issued by U.S. government agencies.
The Bank must maintain an adequate level of liquidity to ensure the availability
of sufficient funds to support loan growth and deposit withdrawals, to satisfy
financial commitments and to take advantage of investment opportunities. At
December 31, 2001, the Bank had total commitments to extend credit of $28.2
million. See Note 14 of Notes to Consolidated Financial Statements. At December
31, 2001, the Bank had certificates of deposit scheduled to mature within one
year of $60.0 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, 2001, the Bank was in compliance with all
regulatory capital requirements which were effective as of such date with
tangible, core and risk-based capital ratios of 11.3%, 11.3% and 20.4%,
respectively.
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.
E-11
The Bank uses interest rate sensitivity analysis to measure its interest rate
risk by computing changes in NPV(net portfolio value) of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained 100 to 300 basis point increase or decrease in
market interest rates with no effect given to any steps that management might
take to counter the effect of that interest rate movement. Using data compiled
by the OTS, the Bank receives a report which measures interest rate risk by
modeling the change in NPV (net portfolio value) over a variety of interest rate
scenarios. This procedure for measuring interest rate risk was developed by the
OTS to replace the "gap" analysis (the difference between interest-earning
assets and interest-bearing liabilities that mature or reprice within a specific
time period).
The following table is provided by the OTS and sets forth the change in the
Bank's NPV at December 31, 2001, based on OTS assumptions, that would occur in
the event of an immediate change in interest rates, with no effect given to any
steps that management might take to counteract that change. Due to the level of
market interest rates at December 31, 2001, the table provides information for
only a sustained 100 basis point decrease in market interest rates.
At December 31, 2001
------------------------------------------------------------------------
Net Portfolio Value Net Portfolio Value as a
--------------------------------- ----------------------------------
Change Dollar Dollar Percent Percent of Present Value of Assets
------ ------ ------ ------- ----------------------------------
In Rates Amount Change Change NPV Ratio Change
-------- ------ ------ ------ --------- ------
(Dollars in thousands)
300 bp $ 28,433 $(13,234) (32)% 10.25% (378)bp
200 bp 32,971 (8,696) (21) 11.62 (241)bp
100 bp 37,563 (4,104) (10) 12.93 (110)bp
-- bp 41,667 -- -- 14.03 -- bp
(100)bp 43,495 1,828 4 14.43 40 bp
The above table indicates that in the event of a sudden and sustained increase
in prevailing market interest rates, the Bank's NPV would be expected to
decrease, and that in the event of a sudden and sustained decrease in prevailing
market interest rates, the Bank's NPV would be expected to increase. The
differing scenarios are primarily attributable to the relatively high percentage
of fixed-rate loans in the Company's loan portfolio. At December 31, 2001,
approximately 78.3% of the loan portfolio consisted of fixed-rate loans.
Certain assumptions utilized by the OTS in assessing the interest rate risk of
savings associations within its region were utilized in preparing the preceding
table. These assumptions relate to interest rates, loan prepayment rates,
deposit decay rates, and the market values of certain assets under differing
interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates
could deviate significantly from those assumed in calculating the table.
E-12
[LOGO OF MONROE SHINE]
Independent Auditor's Report
The Board of Directors
First Capital, Inc.
Corydon, Indiana
We have audited the accompanying consolidated balance sheets of First Capital,
Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 2001 and 2000. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Capital, Inc.
and Subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years ended December 31, 2001 and 2000
in conformity with accounting principles generally accepted in the United States
of America.
/s/ MONROE SHINE
New Albany, Indiana
January 11, 2002
E-13
FIRST CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
---- ----
ASSETS
Cash and due from banks $ 7,183,882 $ 6,010,281
Interest-bearing deposits with banks 5,198,423 5,458,413
Securities available for sale, at fair value 54,891,268 34,778,541
Securities held to maturity (fair value of $1,850,258 in 2001;
$11,161,645 in 2000) 1,835,651 11,229,045
Loans receivable, net of allowance for loan losses of
$1,102,653 in 2001 and $1,183,638 in 2000 201,730,217 179,304,270
Federal Home Loan Bank stock, at cost 2,178,800 1,503,800
Foreclosed real estate 212,293 118,640
Premises and equipment 5,940,291 6,227,746
Accrued interest receivable:
Loans 1,043,391 1,154,869
Securities 797,854 790,552
Cash value of life insurance 1,214,260 1,160,985
Other assets 597,015 844,990
------------- --------------
Total Assets $ 282,823,345 $ 248,582,132
============= =============
LIABILITIES
Deposits:
Noninterest-bearing $ 18,629,242 $ 17,123,415
Interest-bearing 185,492,942 168,244,737
------------- --------------
Total deposits 204,122,184 185,368,152
Retail repurchase agreements 284,221 -
Advances from Federal Home Loan Bank 42,824,645 30,074,207
Accrued interest payable 1,252,736 1,306,006
Other liabilities 858,894 726,070
------------- -------------
Total Liabilities 249,342,680 217,474,435
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock of $.01 par value per share
Authorized 1,000,000 shares; none issued - -
Common stock of $.01 par value per share
Authorized 5,000,000 shares; issued 2,545,961 shares
(2,537,324 shares in 2000) 25,460 25,373
Additional paid-in capital 12,878,050 12,811,494
Retained earnings-substantially restricted 21,127,319 19,221,842
Accumulated other comprehensive income 231,153 (145,398)
Unearned stock compensation (212,083) (282,854)
Unearned ESOP shares (481,760) (522,760)
Less treasury stock, at cost - 7,146 shares (87,474) -
------------- --------------
Total Stockholders' Equity 33,480,665 31,107,697
------------- --------------
Total Liabilities and Stockholders' Equity $ 282,823,345 $ 248,582,132
============= ==============
See notes to consolidated financial statements.
E-14
FIRST CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001 AND 2000
Accumulated
Additional Other Unearned Unearned
Common Paid-in Retained Comprehensive Stock ESOP
Stock Capital Earnings Income Compensation Shares
---------- ------------ ----------- ------------- ------------ ----------
Balances at January 1, 2000 $ 25,066 $ 12,445,776 $17,781,325 $ (811,737) $ -- $ (563,760)
COMPREHENSIVE INCOME
Net income -- -- 2,458,157 -- -- --
Other comprehensive income:
Change in unrealized loss
on securities available
for sale,
net of deferred income
tax expense of $437,055 -- -- -- 666,339 -- --
Less: reclassification
adjustment -- -- -- -- -- --
Total comprehensive
income
Cash dividends ($0.41 per share) -- -- (1,017,640) -- -- --
Restricted stock
grants 307 353,318 -- -- (353,625) --
Shares released by ESOP trust -- 12,400 -- -- -- 41,000
Stock compensation expense -- -- -- -- 70,771 --
---------- ------------ ----------- ----------- ----------- ----------
Balances at December 31, 2000 25,373 12,811,494 19,221,842 (145,398) (282,854) (522,760)
COMPREHENSIVE INCOME
Net income -- -- 3,099,243 -- -- --
Other comprehensive income:
Change in unrealized loss
on securities available for
sale, net of deferred income
tax expense of $246,981 -- -- -- 376,551 -- --
Less: reclassification
adjustment -- -- -- -- -- --
Total comprehensive
income
Cash dividends ($0.48 per share) -- -- (1,193,766) -- -- --
Exercise of stock
options 87 50,283 -- -- -- --
Shares released by ESOP trust -- 16,273 -- -- -- 41,000
Stock compensation expense -- -- -- -- 70,771 --
Purchase of treasury stock
(7,146 shares) -- -- -- -- -- --
---------- ------------ ----------- ----------- ----------- ----------
Balances at December 31, 2001 $ 25,460 $12,878,050 $21,127,319 $ 231,153 $ (212,083) $ (481,760)
========== =========== =========== =========== =========== ==========
Treasury
Stock Total
-------- -----------
Balances at January 1, 2000 $ -- $28,876,670
COMPREHENSIVE INCOME
Net income -- 2,458,157
Other comprehensive income:
Change in unrealized loss
on securities available
for sale,
net of deferred income
tax expense of $437,055 -- 666,339
Less: reclassification
adjustment -- --
-----------
Total comprehensive
income 3,124,496
-----------
Cash dividends ($0.41 per share) -- (1,017,640)
Restricted stock
grants -- --
Shares released by ESOP trust -- 53,400
Stock compensation expense -- 70,771
-------- -----------
Balances at December 31, 2000 -- 31,107,697
COMPREHENSIVE INCOME
Net income -- 3,099,243
Other comprehensive income:
Change in unrealized loss
on securities available for
sale, net of deferred income
tax expense of $246,981 -- 376,551
Less: reclassification
adjustment -- --
-----------
Total comprehensive
income 3,475,794
-----------
Cash dividends ($0.48 per share) -- (1,193,766)
Exercise of stock
options -- 50,370
Shares released by ESOP trust -- 57,273
Stock compensation expense -- 70,771
Purchase of treasury stock
(7,146 shares) (87,474) (87,474)
-------- -----------
Balances at December 31, 2001 $(87,474) $33,480,665
======== ===========
See notes to consolidated financial statements.
E-15
FIRST CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
---- ----
INTEREST INCOME
Loans, including fees $15,462,139 $13,993,666
Securities:
Taxable 2,600,194 2,500,061
Tax-exempt 374,889 375,888
Federal funds sold - 32,555
Federal Home Loan Bank dividends 130,078 108,522
Interest-bearing deposits in banks 392,708 352,076
----------- -----------
Total interest income 18,960,008 17,362,768
----------- -----------
INTEREST EXPENSE
Deposits 7,679,827 8,035,010
Retail repurchase agreements 2,831 -
Advances from Federal Home Loan Bank 2,159,527 1,231,762
----------- -----------
Total interest expense 9,842,185 9,266,772
----------- -----------
Net interest income 9,117,823 8,095,996
Provision for loan losses 66,000 48,000
----------- -----------
Net interest income after provision for loan losses 9,051,823 8,047,996
----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 1,230,002 868,591
Commission income 244,644 201,002
Gain on sale of securities 15,555 -
Gain on sale of mortgage loans 123,591 87,266
Other income 61,495 62,437
----------- -----------
Total noninterest income 1,675,287 1,219,296
----------- -----------
NONINTEREST EXPENSE
Compensation and benefits 3,197,793 3,032,101
Occupancy and equipment 741,007 745,879
Data processing 455,566 412,933
Merger related expenses - 20,453
Other expenses 1,519,079 1,417,558
----------- -----------
Total noninterest expense 5,913,445 5,628,924
----------- -----------
Income before income taxes 4,813,665 3,638,368
Income tax expense 1,714,422 1,180,211
----------- -----------
Net Income $ 3,099,243 $ 2,458,157
=========== ===========
Net income per common share, basic $ 1.26 $ 1.00
=========== ===========
Net income per common share, diluted $ 1.25 $ 1.00
=========== ===========
See notes to consolidated financial statements.
E-16
FIRST CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,099,243 $ 2,458,157
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of premium and accretion of discount on securities, net 30,847 (7,651)
Depreciation expense 463,264 488,948
Deferred income taxes 18,971 (134,075)
ESOP and stock compensation expense 128,044 124,171
Increase in cash value of life insurance (53,275) (50,398)
Provision for loan losses 66,000 48,000
Gain on sale of securities (15,555) -
Proceeds from the sale of mortgage loans 5,488,218 3,671,898
Mortgage loans originated for sale (5,364,627) (3,584,632)
Gain on sale of mortgage loans (123,591) (87,266)
(Increase) decrease in accrued interest receivable 104,176 (366,953)
Increase (decrease) in accrued interest payable (53,270) 287,105
Net change in other assets/liabilities 114,848 (16,645)
------------ ------------
Net Cash Provided By Operating Activities 3,903,293 2,830,659
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits with banks 259,990 (1,756,760)
Decrease in federal funds sold - 4,000,000
Purchase of securities available for sale (42,716,013) (6,957,369)
Purchase of securities held to maturity (500,000) -
Proceeds from maturities of securities available for sale 21,938,000 2,800,000
Proceeds from maturities of securities held to maturity 9,270,100 981,600
Proceeds from sale of securities held to maturity 356,432 -
Principal collected on mortgage-backed securities 1,540,387 700,700
Net increase in loans receivable (22,618,022) (24,308,654)
Purchase of Federal Home Loan Bank stock (675,000) (251,400)
Proceeds from sale of foreclosed real estate 32,422 75,488
Purchase of premises and equipment (175,809) (257,530)
------------ ------------
Net Cash Used By Investing Activities (33,287,513) (24,973,925)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 18,754,032 10,026,643
Net increase in retail repurchase agreements 284,221 -
Advances from Federal Home Loan Bank 16,000,000 42,000,000
Repayment of advances from Federal Home Loan Bank (3,249,562) (28,675,793)
Exercise of stock options 50,370 -
Purchase of treasury stock (87,474) -
Dividends paid (1,193,766) (1,017,640)
------------ ------------
Net Cash Provided By Financing Activities 30,557,821 22,333,210
------------ ------------
Net Increase in Cash and Due From Banks 1,173,601 189,944
Cash and due from banks at beginning of year 6,010,281 5,820,337
------------ ------------
Cash and Due From Banks at End of Year $ 7,183,882 $ 6,010,281
============ ============
See notes to consolidated financial statements.
E-17
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
First Capital, Inc. (the Company) is the thrift holding company of
First Harrison Bank (the Bank), a wholly-owned subsidiary. The Bank is
a federally-chartered savings bank which provides a variety of banking
services to individuals and business customers through nine locations
in Southern Indiana. The Bank's primary source of revenue is
single-family residential loans. The Bank's wholly-owned subsidiary,
First Harrison Financial Services, Inc., sells property and casualty
insurance and non-deposit investment products.
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
Statements of Cash Flows
For purposes of the statements of cash flows, the Bank has defined cash
and cash equivalents as those amounts included in the balance sheet
caption "Cash and due from banks."
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses and
the valuation of foreclosed real estate. In connection with the
determination of estimated losses on loan and foreclosed real estate,
management obtains appraisals for significant properties.
While management uses available information to recognize losses on
loans and foreclosed real estate, further reductions in the carrying
amounts of loans and foreclosed assets may be necessary based on
changes in local economic conditions. In addition, as an integral part
of their examination process, regulatory agencies periodically review
the estimated losses on loans and foreclosed real estate. Such agencies
may require the Bank to recognize additional losses based on their
judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible the
estimated losses on loans and foreclosed real estate may change
materially in the near term. However, the amount of the change that is
reasonably possible cannot be estimated.
E-18
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(1 - continued)
Securities Available for Sale
Securities available for sale consist of debt and equity securities and
are stated at fair value. Amortization of premium and accretion of
discount are recognized in interest income using the interest method
over the remaining period to maturity, adjusted for anticipated
prepayments. Mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and
serviced by issuers of the securities. Unrealized gains and losses, net
of tax, on securities available for sale are reported as a separate
component of stockholders' equity until realized. Realized gains and
losses on the sale of securities available for sale are determined
using the specific identification method.
Securities Held to Maturity
Debt securities for which the Bank has the positive intent and ability
to hold to maturity are carried at cost, adjusted for amortization of
premium and accretion of discount using the interest method over the
remaining period to maturity, adjusted for anticipated prepayments.
Mortgage-backed securities represent participating interests in pools
of long-term first mortgage loans originated and serviced by issuers of
the securities.
Loans
Loans receivable are stated at unpaid principal balances, less net
deferred loan fees and the allowance for loan losses. The Bank's real
estate loan portfolio consists primarily of long-term loans,
collateralized by first mortgages on single-family residences and
multi-family residential properties located in the southern Indiana
area and commercial real estate loans. In addition to real estate
loans, the Bank makes commercial loans and consumer loans.
Loan origination fees and certain direct costs of underwriting and
closing loans are deferred and the net fee or cost is recognized as an
adjustment to interest income over the contractual life of the loans
using the interest method.
The accrual of interest is discontinued on a loan when, in the judgment
of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. The Bank does not accrue
interest on loans past due 90 days or more except when the estimated
value of collateral and collection efforts are deemed sufficient to
ensure full recovery. When a loan is placed on non accrual status,
previously accrued but unpaid interest is deducted from interest
income.
Subsequent receipts on nonaccrual loans, including specific impaired
loans are recorded as a reduction of principal, and interest income is
only recorded once principal recovery is reasonably assured.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specified impaired loans, and economic
conditions. The allowance is increased by a provision for loan losses,
which is charged to expense, and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans are
charged or credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process, management's estimate
of credit losses inherent in the loan portfolio and the related
allowance may change in the near term.
E-19
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(1 - continued)
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan
basis by either the present value of expected future cash flows at the
loan's effective interest rate or the fair value of the collateral if
the loan is collateral dependent.
Foreclosed Real Estate
Foreclosed real estate is carried at the lower of fair value minus
estimated costs to sell or cost. Costs of holding foreclosed real
estate are charged to expense in the current period, except for
significant property improvements, which are capitalized. Valuations
are periodically performed by management and an allowance is
established by a charge to non-interest expense if the carrying value
exceeds the fair value minus estimated costs to sell. The net expense
from operations of foreclosed real estate held for sale is reported in
non-interest expense.
Premises and Equipment
The Bank uses the straight line and accelerated methods of computing
depreciation at rates adequate to amortize the cost of the applicable
assets over their useful lives. Items capitalized as part of premises
and equipment are valued at cost. Maintenance and repairs are expensed
as incurred. The cost and related accumulated depreciation of assets
sold, or otherwise disposed of, are removed from the related accounts
and any gain or loss is included in earnings.
Mortgage Servicing Rights and Loan Servicing
Mortgage servicing rights are recognized as separate assets when
servicing rights are acquired through purchase or loan originations
when there is a definitive plan to sell the underlying loan.
Capitalized mortgage servicing rights are periodically evaluated for
impairment based on the fair value of those rights. Capitalized
mortgage servicing rights are amortized in proportion to, and over the
period of, estimated future net servicing income of the underlying
mortgage loans.
Loan servicing fees are recognized in income as monthly principal and
interest payments are collected on mortgages. Costs of loan servicing
are charged to expense as incurred.
Amortization of Intangibles
Intangibles relating to the acquisition of a branch banking facility
are amortized over 15 years using the straight-line method.
Income Taxes
Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently due
plus deferred taxes related primarily to differences between the basis
of available for sale securities, allowance for loan losses,
accumulated depreciation and accrued income and expenses for financial
and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
E-20
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(1 - continued)
Stock-Based Compensation
Under the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company measures and recognizes compensation cost
related to stock-based compensation plans using the intrinsic value
method and discloses the pro forma effect of applying the fair value
method contained in SFAS No. 123. Accordingly, no compensation cost is
charged against earnings for stock options granted under the Company's
stock-based compensation plans.
Advertising
Advertising costs are charged to operations when incurred
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS 133),
Accounting for Derivative Instruments and Hedging Activities. SFAS 133,
as amended by SFAS 138 in June 2000, establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. It required that an entity recognize all derivatives as
either assets or liabilities in the statement of condition and measure
those instruments at fair value. The FASB issued SFAS 137, Accounting
for Derivative Investments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133, which extended the effective date of
implementation of SFAS 133 to fiscal quarters of fiscal years beginning
after June 15, 2000. The implementation of this standard had no impact
on the Company's financial condition and results of operations.
In September 2000, FASB issued SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. The
statement replaces SFAS 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. It revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but
it carries over most of SFAS 125's provisions without reconsideration.
The statement was effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31,
2001. The statement was effective for recognition and reclassification
of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15,
2000. The implementation of this standard had no impact on the
Company's financial condition or results of operations.
In June 2001, FASB issued SFAS 141, Business Combinations, which amends
or supersedes interpretations in APB Opinion No. 16, Business
Combinations and supersedes SFAS 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. The provisions of SFAS 141
apply to all business combinations initiated after June 30, 2001 and
requires the use of the purchase method of accounting and addresses
financial accounting and report for goodwill and other intangibles
acquired in a business combination at acquisition. The purchase method
accounts for a business combination as the acquisition of one company
by another. The acquiring company records at its cost the acquired
assets less liabilities assumed. A difference between the cost of the
acquired company and the sum of the fair values of tangible and
identifiable intangible assets less liabilities is recorded as
goodwill. Also, in June 2001, FASB issued SFAS 142, Goodwill and Other
Intangible Assets, which supersedes APB Opinion No. 17, Intangible
Assets. SFAS 142 addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets
(but not those acquired in a business combination) and also addresses
financial accounting and reporting for goodwill and other intangible
assets subsequent to their acquisition. Under this statement, goodwill
shall not be amortized but will be evaluated for impairment. The
provisions of SFAS 142 are required to be applied starting with fiscal
years beginning after December 15, 2001. The implementation of this
statement did not have a material impact on the Company's financial
condition and results of operations.
E-21
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(1 - continued)
In June 2001, FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. This statement applies to all entities and the legal
obligations associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development
and/or normal operation of a long-lived asset, except for certain
obligations of lessees. This statement requires that the fair value of
a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value
can be made. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The
implementation of this standard is not expected to have an impact on
the Company's financial condition and results of operations.
In August 2001, FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supersedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and establishes a single financial accounting
model for long-lived assets to be disposed of by sale. The statement
retains the requirements of SFAS 121 to recognize an impairment loss if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and measure an impairment loss as the
difference between the carrying amount and the fair value of the asset.
The implementation of this standard is not expected to have an impact
on the Company's financial condition or results of operations.
(2) RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances on hand and with the
Federal Reserve Bank which are noninterest bearing and unavailable for
investment. The average amount of those reserve balances for the year
ended December 31, 2001 and 2000 were approximately $1,104,000 and
$757,000 respectively.
(3) DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the balance sheets
according to management's intent. Investment securities at December 31,
2001 and 2000 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2001:
Securities available for sale:
Mortgage-backed securities:
FNMA certificates $ 457,668 $ -- $ 10,716 $ 446,952
GNMA certificates 1,785,617 6,480 -- 1,792,097
FHLMC certificates 310,174 4,523 -- 314,697
FNMA REMICS 2,022,167 4,639 19,487 2,007,319
FHLMC REMICS 2,033,426 16,353 19,394 2,030,385
-----------------------------------------------------
6,609,052 31,995 49,597 6,591,450
-----------------------------------------------------
Other debt securities:
Federal agency 39,662,021 528,972 117,898 40,073,095
Municipal 7,061,710 71,290 72,106 7,060,894
-----------------------------------------------------
46,723,731 600,262 190,004 47,133,989
-----------------------------------------------------
Mutual funds 1,175,717 10,218 20,106 1,165,829
-----------------------------------------------------
Total securities available for sale $54,508,500 $ 642,475 $ 259,707 $54,891,268
=====================================================
E-22
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(3 - continued)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 2001:
Securities held to maturity:
Mortgage-backed securities:
FNMA certificates $ 240,634 $ 1,554 $ 4,644 $ 237,544
GNMA certificates 152,014 1,610 736 152,888
-----------------------------------------------------
392,648 3,164 5,380 390,432
-----------------------------------------------------
Other debt securities:
Municipal 1,443,003 16,823 -- 1,459,826
-----------------------------------------------------
Total securities held to maturity $ 1,835,651 $ 19,987 $ 5,380 $ 1,850,258
=====================================================
December 31, 2000:
Securities available for sale:
Mortgage-backed securities:
FHLMC certificates $ 581,685 $ -- $ 3,072 $ 578,613
GNMA certificates 2,928,927 -- 37,328 2,891,599
-----------------------------------------------------
3,510,612 -- 40,400 3,470,212
-----------------------------------------------------
Other debt securities:
Federal agency 25,448,400 124,526 297,549 25,275,377
Municipal 4,954,187 39,417 51,092 4,942,512
-----------------------------------------------------
30,402,587 163,943 348,641 30,217,889
-----------------------------------------------------
Mutual funds 1,106,106 -- 15,666 1,090,440
-----------------------------------------------------
Total securities available for sale $35,019,305 $ 163,943 $ 404,707 $34,778,541
=====================================================
Securities held to maturity:
Mortgage-backed securities:
FHLMC certificates $ 22,142 $ 15 $ -- $ 22,157
GNMA certificates 207,993 -- 5,039 202,954
FNMA certificates 280,244 933 14,780 266,397
-----------------------------------------------------
510,379 948 19,819 491,508
-----------------------------------------------------
Other debt securities:
Federal agency 8,485,359 -- 97,442 8,387,917
Municipal 2,233,307 48,913 -- 2,282,220
-----------------------------------------------------
10,718,666 48,913 97,442 10,670,137
-----------------------------------------------------
Total securities held to maturity $11,229,045 $ 49,861 $ 117,261 $11,161,645
=====================================================
During 2001, the Bank sold non-rated municipal securities classified as
held to maturity with an amortized cost of $356,432 and recognized a
gain of $15,555. These securities were sold following a recent
examination by the Office of Thrift Supervision (OTS) which has
required divestiture of these holdings within three years. The OTS
limits the holdings of non-rated municipal securities to those issued
by a municipality in which the institution has an office. Through the
merger with HCB Bancorp, the Bank acquired certain non-rated municipal
securities issued by municipalities in which the Bank does not have an
office. At March 31, 2001, the Bank transferred from the held to
maturity category to the available for sale category non-rated
municipal securities with an amortized cost of $182,376. At December
31, 2001, the Bank holds non-rated municipal securities in the
available for sale category with a carrying value of $1,070,703 which
must be divested before December 31, 2004.
E-23
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(3 - continued)
The amortized cost and fair value of debt securities as of December 31,
2001, by contractual maturity, are shown below. Expected maturities of
mortgage-backed securities may differ from contractual maturities
because the mortgages underlying the obligations may be prepaid without
penalty.
Securities Available for Sale Securities Held to Maturity
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $ 3,916,586 $ 3,996,789 $ 826,993 $ 830,228
Due after one year through five
years 32,212,395 32,542,995 525,010 538,598
Due after five years through
ten years 9,053,636 9,087,928 91,000 91,000
Due after ten years 1,541,114 1,506,277 -- --
-----------------------------------------------------------
46,723,731 47,133,989 1,443,003 1,459,826
Mortgage-backed securities 6,609,052 6,591,450 392,648 390,432
-----------------------------------------------------------
$53,332,783 $53,725,439 $ 1,835,651 $ 1,850,258
===========================================================
Certain securities were pledged to secure advances from the Federal
Home Loan Bank at December 31, 2001. (See Note 8)
(4) LOANS
Loans receivable at December 31, 2001 and 2000 consisted of the
following:
2001 2000
---- ----
Real estate mortgage loans:
Residential $132,348,492 $109,812,449
Land 4,381,011 3,356,389
Residential construction 10,476,939 9,665,497
Commercial real estate 15,810,867 20,371,994
Commercial business loans 11,339,361 9,815,614
Consumer loans:
Home equity and second mortgage loans 12,962,816 11,348,657
Automobile loans 10,376,402 10,156,005
Loans secured by savings accounts 1,309,396 1,554,237
Unsecured loans 1,721,400 1,609,396
Other consumer loans 4,949,299 5,919,878
---------------------------
Gross loans receivable 205,675,983 183,610,116
---------------------------
Less:
Deferred loan origination fees, net 116,189 228,992
Undisbursed portion of loans in process 2,726,924 2,893,217
Allowance for loan losses 1,102,653 1,183,637
---------------------------
3,945,766 4,305,846
---------------------------
Loans receivable, net $201,730,217 $179,304,270
===========================
E-24
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(4 - continued)
Mortgage loans serviced for the benefit of others amounted to
$10,061,396 and $10,265,945 at December 31, 2001 and 2000,
respectively. The balance of capitalized mortgage servicing rights,
carried at estimated fair value, included in other assets at December
31, 2001 and 2000, was $124,231 and $115,861, respectively. The
estimated fair value of mortgage servicing rights was determined using
a discount rate of 10 percent and prepayment speeds ranging from 2.22
percent to 13.44 percent, depending upon the stratification of the
specific rights. During the years ended December 31, 2001 and 2000 ,
the Bank capitalized mortgage servicing rights amounting to $77,206 and
$42,357, respectively. The Bank recognized amortization of $68,836 and
$18,915, for the years ended December 31, 2001 and 2000, respectively.
An analysis of the allowance for loan losses is as follows:
2001 2000
---- ----
Beginning balances $ 1,183,638 $ 1,193,606
Provision 66,000 48,000
Recoveries 74,940 17,778
Loans charged-off (221,925) (75,746)
---------------------------
Ending balances $ 1,102,653 $ 1,183,638
===========================
The Bank had loans amounting to approximately $806,000 and $251,000
specifically classified as impaired at December 31, 2001 and 2000,
respectively. The average recorded investment in impaired loans
amounted to approximately $356,000 and $132,000 for the years ended
December 31, 2001 and 2000, respectively. The Bank had a specific
allowance for loan losses related to impaired loans of $165,729 at
December 31, 2001. The Bank had no specific allowance for loan losses
related to impaired loans at December 31, 2000. Interest income on
impaired loans of $18,374 was recognized in 2001 for cash payments
received. No interest income on impaired loans was recognized in 2000.
The Bank has entered into loan transactions with certain directors,
officers and their affiliates (related parties). In the opinion of
management, such indebtedness was incurred in the ordinary course of
business on substantially the same terms as those prevailing at the
time for comparable transactions with other persons.
The following table represents the aggregate activity for related party
loans during the year ended December 31, 2001:
Beginning balance $ 2,045,566
New loans 1,014,826
Payments (1,268,548)
-----------
Ending balance $ 1,791,844
===========
The Bank has purchased commercial paper from a corporation where a
director is considered a related party. In the opinion of management,
these transactions were made in the ordinary course of business on
substantially the same terms, including interest rate and collateral,
as those prevailing at the time for comparable transactions with
unrelated parties. During the year ended December 31, 2001, the Bank
granted approximately $2,424,000, to customers of the corporation and
such loans had an aggregate outstanding balance of approximately
$1,957,000 at December 31, 2001.
E-25
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(5) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
2001 2000
---- ----
Land and land improvements $1,146,490 $1,146,490
Leasehold improvements 153,077 148,283
Office building 4,870,478 4,819,652
Furniture, fixtures and equipment 2,308,390 2,241,964
-----------------------
8,478,435 8,356,389
Less accumulated depreciation 2,538,144 2,128,643
-----------------------
Totals $5,940,291 $6,227,746
=======================
(6) DEPOSITS
The aggregate amount of time deposit accounts with balances of $100,000
or more was approximately $24,592,000 and $19,454,000 at December 31,
2001 and 2000, respectively. Deposit account balances in excess of
$100,000 are not federally insured.
At December 31, 2001, scheduled maturities of time deposits were as
follows:
Year ending December 31:
2002 $ 60,017,496
2003 19,180,850
2004 9,958,086
2005 11,183,443
2006 and thereafter 3,720,428
------------
Total $104,060,303
============
The Bank held deposits of approximately $6,670,000 and $4,387,000 for
related parties at December 31, 2001 and 2000, respectively.
(7) RETAIL REPURCHASE AGREEMENTS
Retail repurchase agreements represent overnight borrowings from
deposit customers and the debt securities sold under the repurchase
agreements were under the control of the Bank at December 31, 2001.
Information concerning borrowings under repurchase agreements at
December 31, 2001 and for the year then ended is summarized as follows:
Weighted average interest rate during the year 3.12%
Average daily balance $ 90,752
Maximum month-end balance during the year $ 578,534
Amortized cost of debt securities underlying the agreements $1,019,710
Fair value of debt securities underlying the agreements $1,056,644
(8) ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 2001 and 2000, advances from the Federal Home Loan Bank
were as follows:
2001 2000
----------------------- -----------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
Fixed rate advances 5.87% $42,824,645 6.30% $30,074,207
===============================================
E-26
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(8 - continued)
The following is a schedule of maturities for advances outstanding as
of December 31, 2001:
Due in:
2002 $ 3,505,094
2003 3,528,004
2004 2,442,497
2005 7,101,821
2006 2,361,097
Thereafter 23,886,132
------------
Total $ 42,824,645
============
The advances are secured under a blanket collateral agreement. At
December 31, 2001, eligible collateral pledged as security for the
advances included the following:
Carrying
Value
Residential mortgage loans $119,127,136
Available for sale securities 46,289,247
Held to maturity securities 392,648
------------
Total pledged assets $165,809,031
============
(9) LEASE COMMITMENTS
On April 1, 1997, the Bank entered into a noncancellable sub-lease
agreement for a branch office for an initial lease term of eight years.
The sub-lessor has a fixed term lease with the owner with an initial
term expiring November 30, 2003. The Bank also has a noncancellable
lease agreement for a branch office dated December 1, 1995 that expires
in the year 2005.
The following is a schedule by years of future minimum rental payments
required under these operating leases:
Year ending December 31:
2002 $ 31,890
2003 30,833
2004 19,200
2005 17,600
--------
Total minimum payments required $ 99,523
========
Total minimum rental expense for all operating leases for each of the
periods ended December 31, 2001 and 2000 amounted to $31,890.
(10) INCOME TAXES
The components of income tax expense were as follows:
2001 2000
---- ----
Current $ 1,695,451 $ 1,314,286
Deferred 18,971 (134,075)
----------------------------
Totals $ 1,714,422 $ 1,180,211
============================
E-27
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(10 - continued)
Significant components of the Bank's deferred tax assets and
liabilities as of December 31, 2001 and 2000 were as follows:
2001 2000
---- ----
Deferred tax assets (liabilities):
Depreciation $(197,962) $(199,869)
Deferred loan fees (49,080) (33,299)
Deferred compensation plans 153,176 141,524
Stock compensation expense 27,400 --
Allowance for loan losses 426,765 458,254
Post-1987 bad debt deduction (57,266) (85,898)
Unrealized loss on securities available for sale (151,614) 95,367
Other (42,641) (28,748)
----------------------
Net deferred tax asset $ 108,778 $ 347,331
======================
The reconciliation of income tax expense with the amount which would
have been provided at the federal statutory rate of 34 percent follows:
2001 2000
---- ----
Provision at federal statutory tax rate $ 1,636,646 $ 1,237,045
State income tax-net of federal tax benefit 227,740 107,817
Change in state tax law - net of federal benefit -- (18,730)
Tax-exempt interest income (135,758) (127,660)
Increase in cash value of life insurance (18,114) (17,135)
Nondeductible merger expenses -- 6,954
Other 3,908 (8,080)
---------------------------
Totals $ 1,714,422 $ 1,180,211
===========================
Effective tax rate 35.6% 32.4%
===========================
In 2000, the Indiana financial institution tax law was amended to treat
resident financial institutions the same as nonresident financial
institutions by providing for apportionment of Indiana income based on
receipts in Indiana. Receipts for Indiana were defined to exclude
receipts from out of state sources and federal government and agency
obligations. This change was effective retroactively to January 1,
1999. The provision of income taxes for 2000 includes a credit of
$18,730 in recognition of this change.
Prior to July 1, 1996, the Bank was permitted by the Internal Revenue
Code to deduct from taxable income an annual addition to a statutory
bad debt reserve subject to certain limitations. Retained earnings at
December 31, 2001 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, 2001.
E-28
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(10 - continued)
Federal legislation in 1996 repealed the use of the qualified thrift
reserve method of accounting for bad debts for tax years beginning
after December 31, 1995. As a result, the Bank discontinued the
calculation of the annual addition to the statutory bad debt reserve
using the percentage-of-taxable-income method and adopted the
experience reserve method for banks. Under this method, the Bank
computes its federal tax bad debt deduction based on actual loss
experience over a period of years. The legislation required the Bank to
recapture into taxable income over a six-year period its post-1987
additions to the qualified thrift statutory bad debt reserve, thereby
generating additional tax liability. At December 31, 2001, the
remaining unamortized balance of the post-1987 reserves totaled
$168,428 for which a deferred tax liability of $57,266 has been
recorded.
The legislation also provided that the Bank will not be required to
recapture its pre-1988 statutory bad debt reserves if it ceases to meet
the qualifying thrift definitional tests as provided under prior law
and if the Bank continues to qualify as a "bank" under existing
provisions of the Internal Revenue Code.
(11) EMPLOYEE BENEFIT PLANS
Defined Contribution Plan:
The Bank has a qualified contributory defined contribution plan
available to all eligible employees. The plan allows participating
employees to make tax-deferred contributions under Internal Revenue
Code Section 401(k). The Bank contributed $109,773 and $86,856 to the
plan for the years ended December 31, 2001 and 2000, respectively.
Employee Stock Ownership Plan:
On December 31, 1998, the Company established a leveraged employee
stock ownership plan (ESOP) covering substantially all employees. The
ESOP trust acquired 61,501 shares of Company common stock financed by a
term loan with the Company. The employer loan and the related interest
income are not recognized in the consolidated financial statements as
the debt is serviced from Company contributions. Dividends payable on
allocated shares are charged to retained earnings and are satisfied by
the allocation of cash dividends to participant accounts. Dividends
payable on unallocated shares are not considered dividends for
financial reporting purposes. Shares held by the ESOP trust are
allocated to participant accounts based on the ratio of the current
year principal and interest payments to the total of the current year
and future years principal and interest to be paid on the employer
loan.
Compensation expense is recognized based on the average fair value of
shares released for allocation to participant accounts during the year
with a corresponding credit to stockholders' equity. Compensation
expense recognized for the years ended December 31, 2001 and 2000
amounted to $50,251 and $44,320, respectively.
Company common stock held by the ESOP trust was as follows:
2001 2000
---- ----
Allocated shares 13,325 9,225
Shares committed to be released -- --
Unearned shares 48,176 52,276
-------------------
Total ESOP shares 61,501 61,501
===================
Fair value of unearned shares $693,734 $575,036
===================
E-29
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(12) DEFERRED COMPENSATION PLANS
The Bank has a deferred compensation plan whereby certain officers will
be provided specific amounts of income for a period of fifteen years
following normal retirement. The benefits under the agreements become
fully vested after four years of service beginning with the effective
date of the agreements. The Bank accrues the present value of the
benefits so the amounts required will be provided at the normal
retirement dates and thereafter.
Assuming normal retirement, the benefits under the plan will be paid in
varying amounts between 1999 and 2022. The Bank is the owner and
beneficiary of insurance policies on the lives of these officers which
may provide funds for a portion of the required payments. The
agreements also provide for payment of benefits in the event of
disability, early retirement, termination of employment or death.
Deferred compensation expense for this plan was $28,051 and $20,909 for
the years ended December 31, 2001 and 2000, 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 $12,208 and $9,691 for the years ended December 31, 2001 and
2000, respectively.
(13) 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 $70,771 was recognized for each of the years
ended December 31, 2001 and 2000.
Stock Option Plan
The Company's stock option plan provides for issuance of up to 138,876
shares of the Company's authorized but unissued common stock to all
employees, including any officer or employee-director. Under the plan,
the Company may grant both non-qualified and qualified (i.e. incentive)
stock options. In the case of incentive stock options, the aggregate
fair value of the stock (determined at the time the incentive stock
option is granted) for which any optionee may be granted incentive
options which are first exercisable during any calendar year shall not
exceed $100,000. Option prices may not be less than the fair market
value of the underlying stock at the date of the grant.
E-30
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(13 - continued)
Options granted vest ratably over five to ten years and are exercisable
in whole or in part for a period up to ten years from the date of the
grant.
The following is a summary of the Company's stock options as of
December 31, 2001 and 2000, and the changes for the years then ended:
2001 2000
-------------------- --------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
Outstanding at beginning
of year 93,629 $ 7.88 30,005 $ 7.88
Granted -- -- 66,500 11.00
Exercised 8,638 5.83 -- --
Forfeited 256 7.81 2,876 10.05
------ ------
Outstanding at end of year 84,736 $10.46 93,629 $10.03
====== ======
Exercisable at end of year 25,533 $ 9.52 16,392 $ 6.73
====== ======
For options outstanding at December 31, 2001, the option price per
share ranged from $6.24 to $12.65 and the weighted average remaining
contractual life of the options was 3.8 years.
For purposes of providing the pro forma disclosures required under SFAS
No. 123, the fair market value of stock options granted for the years
ended December 31, 2001 and 2000, was estimated at the date of grant
using the Black-Scholes option pricing model. The Black-Scholes option
pricing model was originally developed for use in estimating the fair
value of traded options which have different characteristics from the
Company's employee stock options and require the use of highly
subjective assumptions which can materially affect the fair value
estimate. As a result, management believes that the Black-Scholes model
may not necessarily provide a reliable measure of the fair value of
employee stock options.
The following assumptions were used for grants for the year ended
December 31, 2000:
2000
----
Expected dividend yields 3.88%
Risk-free interest rates 6.65%
Expected volatility 11.69%
Expected life of options 5 years
Weighted average fair value at grant date $ 1.59
Had compensation cost for the Company's stock-based compensation plans
been determined in accordance with the fair value based accounting
method provided by SFAS No. 123, the net income and net income per
common share for the years ended December 31, 2001 and 2000 would have
been as follows:
(In thousands, except per share amounts) 2001 2000
---- ----
Pro forma net income $ 3,085 $ 2,446
Pro forma net income per share:
Basic $ 1.25 $ 1.00
Diluted $ 1.24 $ 0.99
E-31
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(14) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding various
commitments and contingent liabilities, such as commitments to extend
credit and legal claims, which are not reflected in the financial
statements.
Commitments under outstanding standby letters of credit totaled
$640,400 at December 31, 2001.
The following is a summary of the commitments to extend credit at
December 31, 2001 and 2000:
2001 2000
---- ----
Loan commitments:
Fixed rate $ 7,599,459 $ 1,774,680
Adjustable rate 617,550 865,500
Undisbursed commercial and personal
lines of credit 8,857,316 8,210,294
Undisbursed portion of construction
loans in process 2,726,924 2,893,217
Other loans in process 8,416,594 5,884,984
-------------------------
Total commitments to extend credit $28,217,843 $19,628,675
=========================
(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve,
to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend
credit and standby letters of credit is represented by the contractual
notional amount of those instruments (see Note 14). The Bank uses the
same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount and type of collateral obtained, if
deemed necessary by the Bank upon extension of credit, varies and is
based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
Standby letters of credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Bank's
policy for obtaining collateral, and the nature of such collateral, is
essentially the same as that involved in making commitments to extend
credit.
The Bank has not been required to perform on any financial guarantees
and has not incurred any losses on its commitments during the years
ended December 31, 2001 and 2000.
E-32
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(16) STOCKHOLDERS' EQUITY
Conversion and Offering
On December 31, 1998, the Bank's former mutual holding company, First
Capital, Inc., M.H.C. (MHC), completed a conversion and stock offering
whereby the MHC was merged with and into the Bank with the Bank
becoming a wholly-owned subsidiary of the Company which offered common
stock to certain current and former depositor and borrower customers of
the Bank in a subscription offering. Prior to the conversion, the MHC
owned 59.5% of the outstanding common stock of the Bank. Upon
consummation of the conversion, the Company issued 768,551 shares of
common stock (including 61,501 shares issued to the ESOP trust) for
gross offering proceeds of $7,685,510. Total expenses in connection
with the conversion and offering amounted to $449,382 and were charged
against the gross offering proceeds. The conversion was accounted for
as a pooling of interests.
The Company also issued 532,057 common shares in exchange for the
204,015 common shares held by the public stockholders of the Bank
pursuant to an exchange ratio resulting in the public stockholders of
the Bank owning in the aggregate approximately 40.5% of the Company
after the conversion and offering.
Dividends
The payment of dividends by the Bank is subject to regulation by the
Office of Thrift Supervision (OTS). The Bank may not declare or pay a
cash dividend or repurchase any of its capital stock if the effect
thereof would cause the regulatory capital of the Bank to be reduced
below regulatory capital requirements imposed by the OTS or below the
amount of the liquidation account.
Liquidation Account
Upon completion of the conversion and offering, the Bank established a
liquidation account in an amount equal to the amount of the cumulative
dividends with respect to the Bank's common stock waived by First
Capital, Inc. MHC plus 59.5% of the Bank's stockholders' equity as of
September 30, 1999, which together totaled $7.5 million. The
liquidation account is maintained for the benefit of depositors as of
the March 31, 1997 eligibility record date (or the September 30, 1999
supplemental eligibility record date) who maintain their deposits in
the Bank after the conversion and offering.
In the event of complete liquidation, and only in such an event, each
eligible depositor will be entitled to receive a liquidation
distribution from the liquidation account in the proportionate amount
of the then current adjusted balance for deposits held, before any
liquidation distribution may be made with respect to the stockholders.
Except for the repurchase of stock and payment of dividends by the
Bank, the existence of the liquidation account does not restrict the
use or application of retained earnings of the Bank.
(17) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involved quantitative measures of the assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification
are also subject to quantitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 2001, that the Bank meets all capital
adequacy requirements to which it is subject.
E-33
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(17 - continued)
As of December 31, 2001, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes
have changed the institutions' categories.
The actual capital amounts and ratios are also presented in the table.
No amounts were deducted from capital for interest-rate risk in either
year.
Minimum
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2001:
Total capital (to risk
weighted assets) $32,921 20.36% $12,938 8.00% $16,172 10.00%
Tier I capital (to risk
weighted assets) $31,818 19.67% $ 6,469 4.00% $ 9,703 6.00%
Tier I capital (to adjusted
total assets) $31,818 11.25% $11,311 4.00% $14,138 5.00%
Tangible capital (to
adjusted total assets) $31,818 11.25% $ 4,241 1.50% N/A
As of December 31, 2000:
Total capital (to risk
weighted assets) $30,783 20.63% $11,935 8.00% $14,919 10.00%
Tier I capital (to risk
weighted assets) $29,599 19.97% $ 5,967 4.00% $ 8,951 6.00%
Tier I capital (to adjusted
total assets) $29,599 11.92% $ 9,934 4.00% $12,417 5.00%
Tangible capital (to
adjusted total assets) $29,599 11.92% $ 3,725 1.50% N/A
E-34
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(18) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of financial instruments
are as follows:
2001 2000
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands)
Financial assets:
Cash and due from banks $ 7,184 $ 7,184 $ 6,010 $ 6,010
Interest bearing deposits in banks 5,198 5,198 5,458 5,458
Securities available for sale 54,891 54,891 34,779 34,779
Securities held to maturity 1,836 1,850 11,229 11,162
Loans receivable 202,833 201,663 180,488 180,794
Less: allowance for loan losses 1,103 1,103 1,184 1,184
-----------------------------------------
Loans receivable, net 201,730 200,560 179,304 179,610
-----------------------------------------
Federal Home Loan Bank stock 2,179 2,179 1,504 1,504
Financial liabilities:
Deposits 204,122 206,690 185,368 187,398
Retail repurchase agreements 284 285 -- --
Advances from Federal Home Loan Bank 42,825 45,017 30,074 30,239
Off-balance-sheet financial instruments:
Asset related to commitments to extend credit -- 90 -- --
Liability related to commitments to extend credit -- -- -- 46
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable
to estimate that value:
Cash and Short-Term Investments
For short-term investments, including cash and due from banks, interest
bearing deposits with banks, and federal funds sold, the carrying
amount is a reasonable estimate of fair value.
Debt and Equity Securities
For debt securities, including mortgage-backed securities, the fair
values are based on quoted market prices. For restricted equity
securities held for investment, the carrying amount is a reasonable
estimate of fair value.
Loans Receivable
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
Deposits
The fair value of demand deposits, savings accounts, money market
deposit accounts and other transaction accounts is the amount payable
on demand at the balance sheet date. The fair value of fixed-maturity
certificates of deposit is estimated by discounting the future cash
flows using the rates currently offered for deposits of similar
remaining maturities.
E-35
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(18 - continued)
Borrowed Funds
The fair value of advances from Federal Home Loan Bank is estimated by
discounting the future cash flows using the current rates at which
similar loans with the same remaining maturities could be obtained.
Commitments to Extend Credit
The majority of commitments to extend credit would result in loans with
a market rate of interest if funded. The fair value of these
commitments are the fees that would be charged to customers to enter
into similar agreements. For fixed rate loan commitments, the fair
value also considers the difference between current levels of interest
rates and the committed rates.
(19) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information for First Capital, Inc. (parent company
only) follows:
Balance Sheets
(In thousands)
2001 2000
---- ----
Assets:
Cash and interest bearing deposits $ 1,037 $ 1,284
Other assets 155 126
Investment in subsidiaries 32,289 29,697
------------------
$33,481 $31,107
==================
Liabilities and Stockholders' Equity:
Other liabilities $ -- $ --
Stockholders' equity 33,481 31,107
------------------
$33,481 $31,107
==================
Statements of Income
(In thousands)
2001 2000
---- ----
Interest income $ 28 $ 72
Dividend income 1,030 --
Other operating expenses (253) (284)
------------------
Income (loss) before income taxes and equity in
undistributed net income of subsidiaries 805 (212)
Income tax credit 79 74
------------------
Income (loss) before equity in undistributed net
income of subsidiaries 884 (138)
Equity in undistributed net income of subsidiaries 2,215 2,596
------------------
Net income $ 3,099 $ 2,458
==================
E-36
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(19 - continued)
Statements of Cash Flows
(In thousands)
2001 2000
---- ----
Operating Activities:
Net income $ 3,099 $ 2,458
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (2,215) (2,596)
ESOP and stock compensation expense 128 124
Net change in other assets/liabilities 2 (103)
------------------
Net cash provided (used) by operating activities 1,084 (117)
------------------
Financing Activities:
Exercise of stock options (50) --
Repurchase of common stock (87) --
Cash dividends paid (1,194) (1,017)
------------------
Net cash provided by financing activities (1,331) (1,017)
------------------
Net decrease in cash (247) (1,134)
Cash at beginning of year 1,284 2,418
------------------
Cash at end of year $ 1,037 $ 1,284
==================
(20) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
2001 2000
---- ----
Basic:
Earnings:
Net income $3,099,243 $2,458,157
=======================
Shares:
Weighted average common shares outstanding 2,463,343 2,452,248
=======================
Net income per common share, basic $ 1.26 $ 1.00
=======================
Diluted:
Earnings:
Net income $3,099,243 $2,458,157
=======================
Shares:
Weighted average common shares outstanding 2,463,433 2,452,248
Add: Dilutive effect of outstanding options 15,717 8,503
Dilutive effect of restricted stock 3,009 1,657
-----------------------
Weighted average common shares
outstanding, as adjusted 2,482,069 2,462,408
=======================
Net income per common share, diluted $ 1.25 $ 1.00
=======================
Unearned ESOP shares are not considered as outstanding for purposes of
computing weighted average common shares outstanding.
E-37
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2001 AND 2000
(21) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2001 2000
---- ----
Cash payments for:
Interest $9,895,455 $8,979,668
Income taxes 1,581,824 1,229,710
Noncash investing activities:
Transfers from loans to real estate
acquired through foreclosure $ 126,398 $ 118,640
Proceeds from sales of foreclosed
real estate financed through loans 34,222 213,220
(22) MERGER WITH HCB BANCORP
On January 12, 2000, the Company completed a merger with HCB Bancorp
(HCB), a bank holding company located in Palmyra, Indiana. HCB was the
parent company of Harrison County Bank, a state-chartered commercial
bank which was merged with and into First Harrison Bank. The merger
provided for an exchange of 15.5 shares of the Company's common stock
for each outstanding share of HCB common stock. The merger was
accounted for as a pooling of interests.
E-38
--------------------------------------------------------------------------------
BOARD OF DIRECTORS/OFFICERS
--------------------------------------------------------------------------------
Directors and Directors Emeritus
James G. Pendleton Mark D. Shireman
Chairman of the Board and retired Chief Executive President of James L. Shireman, Inc.
Officer of First Harrison Bank
Dennis L. Huber Michael L. Shireman
President and Publisher of O'Bannon Publishing President of Uhl Truck Sales, Inc.
Company, Inc.
Kenneth R. Saulman John W. Buschemeyer
Supervisor for Clark County REMC President and Majority Owner of Hurst Lumber
Company
Gerald L. Uhl Loren E. Voyles
Business Manager for Jacobi Sales, Inc. Retired President of Harrison County Bank
Earl H. Book James S. Burden
President of Carriage Ford, Inc. Owner of Tracy's Mobile Home Park
James E. Nett Marvin E. Kiesler, Director Emeritus
Accountant for Koetter Woodworking, Inc. Retired Senior Vice President of Harrison
County Bank
Executive Officers
William W. Harrod M. Chris Frederick
President and Chief Executive Officer of First Senior Vice President, Chief Financial Officer and
Capital, Inc. and Chief Operating Officer of First Treasurer
Harrison Bank
Samuel E. Uhl Joel E. Voyles
President and Chief Executive Officer of First Senior Vice President, Retail Banking Operations
Harrison Bank and Chief Operating Officer of and Corporate Secretary
First Capital, Inc.
Dennis L. Thomas
Senior Vice President, Consumer Lending
Processing and Servicing
E-39
--------------------------------------------------------------------------------
CORPORATE INFORMATION
--------------------------------------------------------------------------------
General Counsel Independent Auditors
Thompson & Byrd Monroe Shine & Co., Inc.
303 N. Capitol Avenue 222 East Market Street
Corydon, Indiana 47112 New Albany, Indiana 47150
Special Counsel Transfer Agent
Muldoon Murphy & Faucette LLP Registrar and Transfer Company
5101 Wisconsin Ave., N.W. 10 Commerce Drive
Washington, D.C. 20016 Crawford, New Jersey 07016
1-800-368-5948
Common Shares and Dividend Information
The common shares of the Company are traded on the Nasdaq SmallCap Market under
the symbol "FCAP." As of December 31, 2001, the Company has 1,291 stockholders
of record and 2,538,815 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, 2001 and 2000.
Market price
High Low Dividends end of period
2001:
First Quarter $ 12.99 $ 9.81 $ 0.11 $ 11.88
Second Quarter 11.88 10.40 0.12 10.80
Third Quarter 14.61 11.39 0.12 13.37
Fourth Quarter 14.40 12.92 0.13 14.40
2000:
First Quarter $ 11.06 $ 10.31 $ 0.10 $ 10.92
Second Quarter 11.16 9.71 0.10 10.53
Third Quarter 11.39 10.04 0.10 10.63
Fourth Quarter 11.00 10.14 0.11 11.00
Dividend payments by the Company depend primarily on dividends received by the
Company from the Bank. See Note 16 to Consolidated Financial Statements for
information regarding the dividend restrictions applicable to the Bank.
Annual Meeting
The Annual Meeting of Stockholders will be held at 12:00 p.m., Wednesday, April
24, 2002, at the office of the Bank, 220 Federal Drive, N.W., Corydon, Indiana
47112.
E-40
General Inquiries and Reports
The Company is required to file an Annual Report on Form 10-KSB for its fiscal
year ended December 31, 2001 with the Securities and Exchange Commission. Copies
of this Annual Report and the Company's annual reports on Form 10-KSB and
quarterly reports on Form 10-QSB may be obtained without charge by writing:
William W. Harrod
President and CEO
First Capital, Inc.
220 Federal Drive, N.W.
Corydon, Indiana 47112
(812) 738-2198
The Company's Annual Reports and Quarterly Reports are also available through
the Securities and Exchange Commission's internet website (www.sec.gov).
E-41
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
----------
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2002
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________to _____________
Commission File No. 0-25023
-------
First Capital, Inc.
-------------------
(Exact name of registrant as specified in its charter)
Indiana 35-2056949
-----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
220 Federal Drive NW, Corydon, Indiana 47112
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 1-812-738-2198
--------------
Not applicable
--------------------------------------------------------------
Former name, former address and former fiscal year, if changed
since last report
APPLICABLE ONLY TO CORPORATE ISSUERS; Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date: 2,542,688 shares of common stock were outstanding as of
October 31, 2002.
Transitional Small Business Issuer Format: Yes _____ No X
-----
E-42
FIRST CAPITAL, INC
INDEX
Part I Financial Information Page
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 (unaudited) 85
Consolidated Statements of Income for the three months and
nine months ended September 30, 2002 and 2001 (unaudited) 86
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001 (unaudited) 87
Notes to consolidated financial statements (unaudited) 88-89
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 90-94
Item 3. Controls and Procedures 95
Part II Other Information 96
Signatures 97
Certifications 98-101
E-43
PART I - FINANCIAL INFORMATION
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
------------- ------------
2002 2001
---- ----
(In thousands)
ASSETS
Cash and due from banks $ 7,169 $ 7,184
Interest bearing deposits with banks 3,186 5,199
Securities available for sale, at fair value 67,714 54,891
Securities-held to maturity 1,647 1,836
Loans receivable, net 211,096 201,730
Federal Home Loan Bank stock, at cost 2,482 2,179
Foreclosed real estate 147 212
Premises and equipment 6,774 5,940
Accrued interest receivable:
Loans 1,026 1,043
Securities 702 798
Cash value of life insurance 1,254 1,214
Other assets 502 597
-------------------------
Total Assets $ 303,699 $ 282,823
=========================
LIABILITIES
Deposits:
Noninterest-bearing $ 20,090 $ 18,629
Interest-bearing 195,835 185,493
-------------------------
Total Deposits 215,925 204,122
Retail repurchase agreements 188 284
Advances from Federal Home Loan Bank 49,320 42,825
Accrued interest payable 1,207 1,253
Accrued expenses and other liabilities 1,269 859
-------------------------
Total Liabilities 267,909 249,343
-------------------------
STOCKHOLDERS' EQUITY
Preferred stock of $.01 par value per share
Authorized 1,000,000 shares; none issued - -
Common stock of $.01 par value per share
Authorized 5,000,000 shares; issued 2,551,103 shares
(2,545,961 shares in 2001) 26 25
Additional paid-in capital 12,938 12,878
Retained earnings-substantially restricted 22,551 21,127
Unearned ESOP shares (451) (482)
Unearned stock compensation (161) (212)
Accumulated other comprehensive income 1,004 231
Less treasury stock, at cost - 8,975 shares (7,146 shares in 2001) (117) (87)
-------------------------
Total Stockholders' Equity 35,790 33,480
-------------------------
Total Liabilities and Stockholders' Equity $ 303,699 $ 282,823
=========================
See accompanying notes to consolidated financial statements.
E-44
PART I - FINANCIAL INFORMATION
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
INTEREST INCOME (In thousands, except per share data)
Loans receivable, including fees $ 3,899 $ 3,926 $ 11,582 $ 11,526
Securities
Taxable 667 660 2,020 1,969
Tax-exempt 113 94 303 273
Federal Home Loan Bank dividends 38 33 107 95
Interest bearing deposits with banks 51 98 153 327
------------------- -------------------
Total interest income 4,768 4,811 14,165 14,190
INTEREST EXPENSE
Deposits 1,536 1,952 4,688 5,974
Retail repurchase agreements 1 1 2 3
Advances from Federal Home Loan Bank 697 563 1,996 1,531
------------------- -------------------
Total interest expense 2,234 2,516 6,686 7,508
Net interest income 2,534 2,295 7,479 6,682
Provision for loan losses 65 - 155 36
------------------- -------------------
Net interest income after provision for
loan losses 2,469 2,295 7,324 6,646
NON-INTEREST INCOME
Service charges on deposit accounts 355 309 1,013 888
Commission income 79 49 201 191
Gain on sale of securities - - - 15
Gain on sale of mortgage loans - 8 - 134
Other income 13 20 49 69
------------------- -------------------
Total non-interest income 447 386 1,263 1,297
------------------- -------------------
NON-INTEREST EXPENSE
Compensation and benefits 893 798 2,676 2,395
Occupancy and equipment 238 228 677 667
Other operating expenses 500 457 1,542 1,357
------------------- -------------------
Total non-interest expense 1,631 1,483 4,895 4,419
------------------- -------------------
Income before income taxes 1,285 1,198 3,692 3,524
Income tax expense 456 423 1,296 1,255
------------------- -------------------
Net Income $ 829 $ 775 $ 2,396 $ 2,269
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain on securities:
Unrealized holding gains arising during the period 345 484 773 784
Less: reclassification adjustment - - - -
------------------- -------------------
Other comprehensive income 345 484 773 784
------------------- -------------------
Comprehensive Income $ 1,174 $ 1,259 $ 3,169 $ 3,053
=================== ===================
Net income per common share, basic $ 0.33 $ 0.31 $ 0.97 $ 0.92
=================== ===================
Net income per common share, diluted $ 0.33 $ 0.31 $ 0.96 $ 0.92
=================== ===================
See accompanying notes to consolidated financial statements.
E-45
PART I - FINANCIAL INFORMATION
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES (In thousands)
Net income $ 2,396 $ 2,269
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of premiums and accretion of discounts 143 16
Depreciation expense 346 342
Deferred income taxes (107) (25)
ESOP compensation expense 49 42
Stock compensation expense 52 53
Increase in cash value of life insurance (40) (39)
Provision for loan losses 155 36
Net gain on sale of securities held to maturity - (15)
Proceeds from sales of mortgage loans - 6,033
Mortgage loans originated for sale - (5,899)
Net gain on sale of mortgage loans - (134)
Decrease in accrued interest receivable 113 101
Increase (decrease) in accrued interest payable (46) 83
Net change in other assets/liabilities 107 317
-------------------
Net Cash Provided By Operating Activities 3,168 3,180
-------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits with banks 2,013 (1,029)
Purchase of securities available for sale (23,462) (33,482)
Proceeds from maturities of securities available for sale 10,577 15,588
Proceeds from sale of securities available for sale 235 -
Purchase of securities held to maturity (300) -
Proceeds from maturities of securities held to maturity 419 8,189
Proceeds from sale of maturities held to maturity - 356
Principal collected on mortgage-backed securities 1,034 1,173
Net increase in loans receivable (9,698) (16,568)
Purchase of Federal Home Loan Bank stock (303) (475)
Proceeds from sale of foreclosed real estate 242 -
Purchase of premises and equipment (1,179) (142)
-------------------
Net Cash Used By Investing Activities (20,422) (26,390)
-------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 11,803 14,524
Net increase in advances from Federal Home Loan Bank 6,495 9,501
Net increase (decrease) in retail repurchase agreements (96) 93
Exercise of stock options 39 29
Purchase of treasury stock (30) (81)
Dividends paid (972) (870)
-------------------
Net Cash Provided By Financing Activities 17,239 23,196
-------------------
Net Decrease in Cash and Due From Banks (15) (14)
Cash and due from banks at beginning of period 7,184 6,010
-------------------
Cash and Due From Banks at End of Period $ 7,169 $ 5,996
===================
See accompanying notes to consolidated financial statements.
E-46
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Presentation of Interim Information
First Capital, Inc. ("Company") is the holding company for First Harrison
Bank ("Bank"). The information presented in this report relates primarily
to the Bank's operations.
In the opinion of management, the unaudited consolidated financial
statements include all normal adjustments considered necessary to present
fairly the financial position as of September 30, 2002, and the results of
operations for the three months and nine months ended September 30, 2002
and 2001 and cash flows for the nine months ended September 30, 2002 and
2001. All of these adjustments are of a normal, recurring nature. Interim
results are not necessarily indicative of results for a full year.
The accompanying unaudited consolidated financial statements and notes have
been prepared in accordance with generally accepted accounting principles
for interim financial statements and are presented as permitted by the
instructions to Form 10-QSB. Accordingly, they do not contain certain
information included in the Company's annual audited consolidated financial
statements and related footnotes for the year ended December 31, 2001
included in the Form 10-KSB.
The consolidated financial statements include the accounts of the Company,
the Bank and the Bank's wholly owned subsidiary, First Harrison Financial
Services, Inc. All material intercompany balances and transactions have
been eliminated in consolidation.
2. Supplemental Disclosures of Cash Flow Information
Nine Months Ended
September 30,
------------
2002 2001
---- ----
(In thousands)
Cash payments for:
Interest $6,732 $7,424
Taxes 1,543 1,206
Noncash investing activity:
Amortized cost of securities transferred from held to
maturity to available for sale - 182
3. Pending Merger
On September 25, 2002, the Company and Hometown Bancshares, Inc.
(Hometown), the bank holding company for Hometown National Bank in New
Albany, Indiana, entered into an Agreement and Plan of Merger whereby each
of the issued and outstanding common shares of Hometown will be exchanged
for shares of the Company or $46.50 in cash per share. The number of shares
of the Company's common stock to be exchanged for each share of Hometown
common stock will be based on the average closing price of the Company's
common stock over a twenty day trading period shortly before the closing of
the merger. Elections to receive stock, cash or a combination of stock and
cash by the shareholders of Hometown will be limited by a requirement that
50% of the total number of outstanding shares of Hometown common stock be
exchanged for the Company's common stock. The merger is subject to
regulatory and stockholder approvals. It is anticipated that the merger
will be consummated in March 2003.
E-47
FIRST CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Comprehensive Income
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. Comprehensive income for the Company includes net
income and other comprehensive income representing the net unrealized gains
and losses on securities available for sale. The following tables set forth
the components of other comprehensive income and the allocated tax amounts
for the three and nine months ended September 30, 2002 and 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Unrealized gains on securities: (In thousands)
Unrealized holding gains
arising during the period $ 571 $ 802 $ 1,208 $ 1,298
Income tax expense (226) (318) (507) (514)
----------------------------------------
Net of tax amount 345 484 773 784
----------------------------------------
Less: reclassification
adjustment for (gains)
losses included in net income -- -- -- --
Income tax expense (benefit) -- -- -- --
----------------------------------------
Other comprehensive income $ 345 $ 484 $ 773 $ 784
========================================
5. Supplemental Disclosure for Earnings Per Share
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands, except per share data)
Basic:
Net income $ 829 $ 775 $ 2,396 $ 2,269
=======================================================
Shares:
Weighted average common shares outstanding 2,477,636 2,462,891 2,474,692 2,463,318
=======================================================
Net income per common share, basic $ 0.33 $ 0.31 $ 0.97 $ 0.92
=======================================================
Diluted:
Net income $ 829 $ 775 $ 2,396 $ 2,269
=======================================================
Shares:
Weighted average common shares outstanding 2,477,636 2,462,891 2,474,692 2,463,318
Add: Dilutive effect of outstanding options 30,894 19,162 27,794 12,447
Add: Dilutive effect of restricted share awards 5,268 3,921 4,192 1,979
-------------------------------------------------------
Weighted average common shares
outstanding, as adjusted 2,513,798 2,485,974 2,506,678 2,477,744
=======================================================
Net income per common share, diluted $ 0.33 $ 0.31 $ 0.96 $ 0.92
=======================================================
E-48
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC. AND SUBSIDIARIES
Safe Harbor Statement for Forward Looking Statements
This report may contain forward-looking statements within the meaning of the
federal securities laws. These statements are not historical facts, rather
statements based on the Company's current expectations regarding its business
strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends" and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous
risks and uncertainties could cause or contribute to the Company's actual
results, performance and achievements to be materially different from those
expressed or implied by the forward-looking statements. Factors that may cause
or contribute to these differences include, without limitation, general economic
conditions, including changes in market interest rates and changes in monetary
and fiscal policies of the federal government; legislative and regulatory
changes; and other factors disclosed periodically in the Company's filings with
the Securities and Exchange Commission.
Because of the risks and uncertainties inherent in forward-looking statements,
readers are cautioned not to place undue reliance on them, whether included in
this report or made elsewhere from time to time by the Company or on its behalf.
Except as may be required by applicable law or regulation, the Company assumes
no obligation to update any forward-looking statements.
Financial Condition
Total assets increased 7.4% from $282.8 million at December 31, 2001 to
$303.7 million at September 30, 2002. Investment securities and net loans
receivable provided the majority of this growth. The funding was provided by
increases in deposits and borrowings from the Federal Home Loan Bank of
Indianapolis.
Net loans receivable grew from $201.7 million at December 31, 2001 to
$211.1 million at September 30, 2002, a 4.6% increase. Residential mortgages and
home equity lines of credit increased $10.3 million and $5.4 million,
respectively, during this time period. Commercial and installment loans
decreased by $1.8 million and $1.3 million, respectively, to offset some of the
loan growth.
Securities available for sale increased $12.8 million from $54.9 million at
December 31, 2001 to $67.7 million at September 30, 2002. The increase was
primarily due to purchases of $23.5 million offset by maturities of $10.6
million, principal repayments of $965,000 and sales of $235,000.
Investment securities held-to-maturity decreased $189,000 as a result of
purchases of $300,000, offset by maturities of $419,000 and principal repayments
of $68,000.
Cash and interest bearing deposits with banks decreased from $12.4 million
at December 31, 2001 to $10.4 million at September 30, 2002 due to excess
liquidity being invested in securities which generate higher yields than
overnight funds.
Total deposits grew 5.8%, from $204.1 million at December 31, 2001 to
$215.9 million at September 30, 2002. Checking and savings accounts increased
$6.6 million while time deposits increased $5.2 million during the period.
E-49
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC. AND SUBSIDIARIES
Federal Home Loan Bank borrowings increased $6.5 million from $42.8 million
at December 31, 2001 to $49.3 million at September 30, 2002. The new advances
were drawn primarily to fund loan growth while taking advantage of historically
low interest rates at favorable terms.
Total stockholders' equity increased from $33.5 million at December 31,
2001 to $35.8 million at September 30, 2002 primarily as a result of retained
net income of $1.4 million and net unrealized gains of $773,000 on securities
available for sale.
Results of Operations
Net income for the nine month periods ended September 30, 2002 and 2001.
Net income was $2.4 million ($.96 per share diluted) for the nine months ended
September 30, 2002 compared to $2.3 million ($.92 per share diluted) for the
nine months ended September 30, 2001. Net income increased due to an increase in
net interest income partially offset by increases in noninterest expense and the
provision for loan losses and a decrease in noninterest income.
Net income for the three month periods ended September 30, 2002 and 2001.
Net income was $829,000 ($.33 per share diluted) for the three months ended
September 30, 2002 compared to $775,000 ($.31 per share diluted) for the three
months ended September 30, 2001. Net income increased for 2002 compared to 2001
due to increases in net interest income and noninterest income offset by
increases in noninterest expense and the provision for loan losses.
Net interest income for the nine month periods ended September 30, 2002 and
2001. Net interest income increased 11.9% from $6.7 million in 2001 to $7.5
million in 2002 primarily as a result of a decrease in the average cost of funds
partially offset by an increase in interest-earning assets.
Total interest income decreased $25,000 during the nine months ended
September 30, 2002 compared to the nine months ended September 30, 2001. The
average balance of interest-earning assets was $276.6 million for the nine month
period ended September 30, 2002 compared to $246.8 for the same period in 2001.
However, the average tax-equivalent yield on interest-earning assets decreased
from 7.76% in 2001 to 6.92% in 2002 due to the markedly lower interest rate
environment.
Total interest expense decreased $822,000 to $6.7 million for the nine
months ended September 30, 2002 compared to $7.5 million for the same period in
2001. Interest on deposits decreased by $1.3 million while the interest on
Federal Home Loan Bank advances increased by $465,000 when comparing the first
nine months of 2002 against the same period in 2001. The average balance of
interest-bearing liabilities increased from $208.2 million in 2001 to $235.7
million in 2002 while the average rate on interest-bearing liabilities decreased
from 4.81% in 2001 to 3.78% in 2002. The Bank's tax-equivalent interest rate
spread increased from 2.95% to 3.14% when comparing the first nine months
results of 2001 with the same period in 2002 primarily due to the Bank's
interest-bearing liabilities repricing faster than the interest-earning assets.
E-50
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC. AND SUBSIDIARIES
Net interest income for the three month periods ended September 30, 2002
and 2001. Net interest income increased from $2.3 million for the three months
ended September 30, 2001 to $2.5 million for the same period in 2002 due
primarily to a decrease in the average cost of funds.
Total interest income decreased $43,000 for the three months ended
September 30, 2002 compared to the same period in 2001. The decrease was a
result of a lower average yield on interest-earning assets which was offset by
higher average balances in these interest-earning assets. The average balance of
net loans receivable and investment securities increased from $193.2 million and
$54.5 million, respectively, for the three months ended September 30, 2001 to
$209.3 million and $66.5 million for the three months ended September 30, 2002.
The average yield on interest-earning assets decreased from 7.60% for the three
months ended September 30, 2001 to 6.84% for the same period in 2002.
Total interest expense decreased $282,000 to $2.2 million for the three
months ended September 30, 2002 compared to $2.5 million for the same period in
2001 due to the average cost of interest-bearing liabilities decreasing from
4.65% for the three months ended September 30, 2001 to 3.71% for the same period
in 2002.
Provision for loan losses. The provision for loan losses was $155,000 for
the nine month period ended September 30, 2002 compared to $36,000 for the same
period in 2001. During 2002, net loans receivable increased by $9.4 million
primarily due to increases in residential mortgages and home equity lines of
credit by $15.7 million. Offsetting these increases were decreases of $3.1
million in commercial and consumer loans. Residential mortgage loans and home
equity lines of credit have an inherently lower degree of credit risk than
commercial and consumer loans. However, the consistent application of
management's allowance methodology resulted in an increase in the provision for
loan losses due to net charge-offs during the nine months ended September 30,
2002 of $150,000 compared to $118,000 for the same period in 2001 and the
general weakening of economic conditions.
Provisions for loan losses are charges to earnings to maintain the total
allowance for loan losses at a level considered reasonable by management to
provide for probable known and inherent loan losses based on management's
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical loss experience,
specified impaired loans, and economic conditions. Although management uses the
best information available, future adjustments to the allowance may be necessary
due to changes in economic, operating, regulatory and other conditions that may
be beyond the Bank's control. While the Bank maintains the allowance for loan
losses at a level which it considers adequate to provide for estimated losses,
there can be no assurance that further additions will not be made to the
allowance for loan losses and that actual losses will not exceed the estimated
amounts.
E-51
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC. AND SUBSIDIARIES
The methodology used in determining the allowance for loan losses includes
segmenting the loan portfolio by identifying risk characteristics common to
groups of loans, determining and measuring impairment of individual loans based
on the present value of expected future cash flows or the fair value of
collateral, and determining and measuring impairment for groups of loans with
similar characteristics by applying loss factors that consider the qualitative
factors which may effect the loss rates.
The allowance for loan losses was $1.1 million at both September 30, 2002
and December 31, 2001. Management has deemed these amounts as adequate on those
dates based on its risk analysis. At September 30, 2002 nonperforming loans
totaled $1.4 million, compared to $1.3 million at December 31, 2001. Included in
nonperforming loans are loans over 90 days past due secured by one-to-four
family residential real estate in the amount of $680,000, nonresidential
mortgages amounting to $176,000 and consumer and commercial loans of $171,000.
These loans are accruing interest as the estimated value of the collateral and
collection efforts are deemed sufficient to ensure full recovery.
Noninterest income for the nine month periods ended September 30, 2002 and
2001. Noninterest income decreased 2.6%, or $34,000, for the nine months ended
September 30, 2002 compared to the same period of 2001. The Bank recognized
gains of $134,000 on the sale of loans during the first nine months of 2001. The
Bank sold no loans during the same period in 2002 in an effort to better
leverage the Bank's capital. Service charges on deposits increased to $1.0
million for the nine months ended September 30, 2002 compared to $888,000 for
the nine months ended September 30, 2001. Overdraft charges on the new "Carefree
checking" account offered by the Bank is the primary reason for this increase.
Noninterest income for the three month periods ended September 30, 2002 and
2001. Noninterest income increased 15.8% to $447,000 for the three months ended
September 30, 2002 compared to $386,000 during the same period in 2001. Service
charges on deposits and commission income increased $46,000 and $30,000,
respectively, when comparing the three months ended September 30, 2002 to the
same period in 2001.
Noninterest expense for the nine month periods ended September 30, 2002 and
2001. Noninterest expense increased 10.8% to $4.9 million for the nine month
period ended September 30, 2002, compared to $4.4 million for the same period in
2001 primarily due to increases in compensation and benefits and other operating
expenses.
Compensation and benefits increased by $281,000 when comparing the first
nine months of 2002 and 2001. This increase is due to normal salary increases,
an increase in staff, an increase in the cost of employee health insurance and a
reduction in compensation and benefit costs deferred in connection with loan
originations. The refinancing wave the Bank experienced during the first nine
months of 2001 resulted in a reduction of compensation and benefits of $364,000
during that time period due to the deferral of these costs associated with
underwriting loans. During the first nine months of 2002, that figure has
decreased by $81,000 as the pace of loan originations has declined.
E-52
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST CAPITAL, INC. AND SUBSIDIARIES
Other operating expenses increased $185,000 compared to the same period in
2001 primarily due to increases in ATM processing fees, office supplies,
correspondent banking expenses and consulting fees.
Noninterest expense for the three month periods ended September 30, 2002
and 2001. Noninterest expense increased 10.0%, or $148,000, for the three month
period ended September 30, 2002 compared to the three month period ended
September 30, 2001. Compensation and benefits increased $95,000 compared to the
same quarter last year. Normal salary increases and an increase in staff were
the primary factors in this increase. Other operating expenses increased $43,000
due to increases in postage, ATM processing fees, consulting fees and community
donations.
Income tax expense. Income tax expense for the nine month periods ended
September 30, 2002 and September 30, 2001 was $1.3 million. The effective tax
rate decreased from 35.6% for 2001 to 35.1% for 2002. Income tax expense for the
three month period ended September 30, 2002 was $456,000, compared to $423,000
for the same quarter in 2001. The effective tax rate for the three month period
in 2002 was 35.5% compared to 35.3% for 2001.
Liquidity and Capital Resources
The Bank's primary sources of funds are customer deposits, proceeds from
loan repayments, maturing securities and FHLB advances. While loan repayments
and maturities are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by market interest rates, general economic
conditions and competition. At September 30, 2002, the Bank had cash and
interest-bearing deposits with banks of $10.4 million and securities
available-for-sale with a fair value of $67.7 million. If the Bank requires
funds beyond its ability to generate them internally, it has additional
borrowing capacity with the FHLB of Indianapolis and collateral eligible for
repurchase agreements.
The Bank's primary investing activity is the origination of one-to-four
family mortgage loans and, to a lesser extent, consumer, multi-family,
commercial real estate and residential construction loans. The Bank also invests
in U.S. Government and agency securities and mortgage-backed securities issued
by U.S. Government agencies.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. Historically, the Bank has been able to retain a significant
amount of its deposits as they mature.
The Bank is required to maintain specific amounts of capital pursuant to
OTS requirements. As of September 30, 2002, the Bank was in compliance with all
regulatory capital requirements, which were effective as of such date with
tangible, core and risk-based capital ratios of 10.8%, 10.8% and 19.2%,
respectively. The regulatory requirements at that date were 1.5%, 3.0% and 8.0%,
respectively.
E-53
PART I - ITEM 3
CONTROLS AND PROCEDURES
FIRST CAPITAL, INC. AND SUBSIDIARIES
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined on Section 13(a) -
14(c) of the Securities and Exchange Act of 1934 (the "Act") was carried out
under the supervision and with the participation of the Company's Chief
Executive Officer, Chief Financial Officer and several other members of the
Company's senior management within the 90-day period preceding the filing date
of this quarterly report. The Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures as currently in effect are effective in ensuring that the information
required to be disclosed by the Company in the reports it files or submits under
the Act is (i) accumulated and communicated to the Company's management
(including the Chief Executive Officer and Chief Financial Officer) in a timely
manner, and (ii) recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended September 30, 2002,
the Company did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
significantly affect these controls.
E-54
PART II
OTHER INFORMATION
FIRST CAPITAL, INC.
Item 1. Legal Proceedings
The Company is not a party to any legal proceedings. Periodically,
there have been various claims and lawsuits involving the Bank, mainly
as a plaintiff, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests,
claims involving the making and servicing of real property loans and
other issues incident to the Bank's business. The Bank is not a party
to any pending legal proceedings that it believes would have a
material adverse affect on its financial condition or operations.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of First Capital, Inc. (incorporated
by reference to Registration Statement on Form SB-2, and
amendments thereto, File Number 333-63515)
3.2 Second Amended and Restated Bylaws of First Capital, Inc.
(incorporated by reference to Form 10-KSB filed on April 1,
2002)
99.1 CEO Certifications required under Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 CFO Certifications required under Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On September 30, 2002, the Company filed a Form 8-K to announce a
merger agreement with Hometown Bancshares, Inc. under which Hometown
will merge with and into the Company.
E-55
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST CAPITAL, INC.
(Registrant)
Dated November 13, 2002 BY: /s/ William W. Harrod
-------------------------------- ---------------------------------
William W. Harrod
President and CEO
Dated November 13, 2002 BY: /s/ Michael C. Frederick
--------------------------------- ---------------------------------
Michael C. Frederick
Senior Vice President
and Treasurer
E-56
CERTIFICATION
I, William W. Harrod, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of First Capital, Inc.
and Subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATE: November 13, 2002 BY: /s/ William W. Harrod
------------------- -----------------------
William W. Harrod
President and Chief Executive Officer
E-57
CERTIFICATION
I, Michael C. Frederick, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of First Capital, Inc.
and Subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
e) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATE: November 13, 2002 BY: /s/ Michael C. Frederick
------------------- ------------------------
Michael C. Frederick
Senior Vice President and Treasurer
E-58
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article SEVEN of the Articles of Incorporation of First Capital, Inc.
requires indemnification of officers and directors as follows:
ARTICLE VII:
-----------
Section 7.01. General Provisions. The corporation shall, to the fullest
extent to which it is empowered to do so by the Indiana Business Corporation Law
or any other applicable laws, as from time to time in effect, indemnify any
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal, by
reason of the fact that he is or was a director, officer or employee of the
corporation, or who, while serving as such director, officer or employee of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
whether for profit or not, against expenses (including attorneys' fees),
judgments, settlements, penalties and fines (including excise taxes assessed
with respect to employee benefit plans) actually or reasonably incurred by him
in accordance with such action, suit or proceeding, if he acted in good faith
and in a manner he reasonably believed, in the case of conduct in his official
capacity, was in the best interest of the corporation, and in all other cases,
was not opposed to the best interests of the corporation, and with respect to
any criminal action or proceeding, he either had reasonable cause to believe his
conduct was lawful or no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order, settlement
or conviction, or upon a plea of nolo contendere or its equivalent, shall not,
of itself, create a presumption that the person did not meet the prescribed
standard of conduct.
Section 7.02. Indemnification Authorized. To the extent that a director,
officer or employee of the corporation has been successful, on the merits or
otherwise, in the defense of any action, suit or proceeding referred to in
Section 7.01 of this Article, or in the defense of any claim, issue or matter
therein, the corporation shall indemnify such person against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith. Any other indemnification under Section 7.01 of this Article (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case, upon a determination that indemnification of the director,
officer or employee is permissible in the circumstances because he has met the
applicable standard of conduct. Such determination shall be made (a) by the
board of directors by a majority vote of a quorum consisting of directors who
were not at the time parties to such action, suit or proceeding; or (b) if a
quorum cannot be obtained under subdivision (a), by a majority vote of a
committee duly designated by the board of directors (in which designation
directors who are parties may participate), consisting solely of two or more
directors not at the time parties to such action, suit or proceeding; or (c) by
special legal counsel: (i) selected by the board of directors or its committee
in the manner prescribed in subdivision (a) or (b), or (ii) if a quorum of the
board of directors cannot be obtained under subdivision (a) and a committee
cannot be designated under subdivision (b), selected by a majority vote of the
full board of directors (in which selection directors who are parties may
participate); or (d) by stockholders, but shares owned by or voted under the
control of directors who are at the time parties to such action, suit or
proceeding may not be voted on the determination.
II-1
Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under subsection (c)
to select counsel.
Section 7.03. Definition of Good Faith. For purposes of any determination
under Section 7.01 of this Article, a person shall be deemed to have acted in
good faith and to have otherwise met the applicable standard of conduct set
forth in Section 7.01 if his action is based on information, opinions, reports,
or statements, including financial statements and other financial data, if
prepared or presented by (a) one or more officers or employees of the
corporation or other enterprise whom he reasonably believes to be reliable and
competent in the matters presented; (b) legal counsel, public accountants,
appraisers or other persons as to matters he reasonably believes are within the
person's professional or expert competence; or (c) a committee of the board of
directors of the corporation or another enterprise of which the person is not a
member if he reasonably believes the committee merits confidence. The term
"another enterprise" as used in this Section 7.03 shall mean any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise of which such person is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee or agent. The
provisions of this Section 7.03 shall not be deemed to be exclusive or to limit
in any way the circumstances in which a person may be deemed to have met the
applicable standards of conduct set forth in Section 7.01 of this Article.
Section 7.04. Advancement of Expenses. Expenses incurred in connection with
any civil or criminal action, suit or proceeding may be paid for or reimbursed
by the corporation in advance of the final disposition of such action, suit or
proceeding, as authorized in the specific case in the same manner described in
Section 7.02 of this Article, upon receipt of a written affirmation of the
director, officer or employee's good faith belief that he has met the standard
of conduct described in Section 7.01 of this Article and upon receipt of a
written undertaking on behalf of the director, officer or employee to repay such
amount if it shall ultimately be determined that he did not meet the standard of
conduct set forth in this Article, and a determination is made that the facts
then known to those making the determination would not preclude indemnification
under this Article.
Section 7.05. Non-Exclusivity. The indemnification provided by this Article
shall not be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled under these Articles of Incorporation, the
corporation's Bylaws, any resolution of the board of directors or stockholders,
any other authorization, whenever adopted, after notice, by a majority vote of
all voting stock then outstanding, or any contract, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer or employee, and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 7.06. Vestment of Rights. The right of any individual to
indemnification under this Article shall vest at the time of occurrence or
performance of any event, act or omission giving rise to any action, suit or
proceeding of the nature referred to in Section 7.01 of this Article and, once
vested, shall not later be impaired as a result of any amendment, repeal,
alteration or other modification of any or all of these provisions.
Notwithstanding the foregoing, the indemnification afforded under this Article
shall be applicable to all alleged prior acts or omissions of any individual
seeking indemnification hereunder, regardless of the fact that such alleged acts
or omissions may have occurred prior to the adoption of this Article. To the
extent such prior acts or omissions cannot be deemed to be covered by
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this Article, the right of any individual to indemnification shall be governed
by the indemnification provisions in effect at the time of such prior acts or
omissions.
Section 7.07. Insurance. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or who is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against any liability asserted against or incurred by the
individual in that capacity or arising from the individual's status as a
director, officer, employee or agent, whether or not the corporation would have
power to indemnify the individual against the same liability under this Article.
Section 7.08. Other Definitions.
For purposes of this Article, serving an employee benefit plan at the
request of the corporation shall include any service as a director, officer or
employee of the corporation which imposes duties on, or involves services by
such director, officer or employee with respect to an employee benefit plan, its
participants, or beneficiaries. A person who acted in good faith and in a manner
he reasonably believed to be in the best interests of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interest of the corporation" referred to in this
Article.
For purposes of this Article, "party" includes any individual who is or was
a plaintiff, defendant or respondent in any action, suit or proceeding.
For purposes of this Article, "official capacity," when used with respect
to a director, shall mean the office of director of the corporation; and when
used with respect to an individual other than a director, shall mean the office
in the corporation held by the officer or the employment or agency relationship
undertaking by the employee or agent on behalf of the corporation. "Official
capacity" does not include service for any other foreign or domestic corporation
or any partnership, joint venture, trust, employee benefit plan, or other
enterprise, whether for profit or not, except as set forth in Section 7.01 of
this Article.
Section 7.09. Business Expenses. Any payments made to any indemnified party
under this Article under any other right of indemnification shall be deemed to
be an ordinary and necessary business expense of the corporation, and payment
thereof shall not subject any person responsible for the payment, or the board
of directors, to any action for corporate waste or to any similar action.
Director and Officer Insurance Policy
-------------------------------------
First Capital, Inc. maintains standard insurance coverage for its directors
and officers. Such insurance coverage limits the payment of claims arising from
covered actions to directors and officers to $1 million per occurrence.
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Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
2.0 Agreement and Plan of Merger, dated as of September 25, 2002, by
and between First Capital, Inc. and Hometown Bancshares, Inc.
(included as Appendix A to the proxy statement-prospectus
contained in this Registration Statement).
4.0 Form of Certificate for Common Stock of First Capital, Inc.
(incorporated herein by reference to Exhibit 4.0 to First
Capital, Inc.'s Registration Statement on Form SB-2, initially
filed on September 16, 1998, Registration No. 333-63515).
5.0 Opinion of Muldoon Murphy & Faucette LLP regarding legality.
8.0 Opinion of Muldoon Murphy & Faucette LLP regarding tax matters.
10.1 Employment Agreement with Samuel E. Uhl (incorporated herein by
reference to Exhibit 10.2 to the First Capital, Inc.'s Annual
Report on Form 10-KSB for the year ended December 31, 1999, filed
March 22, 2000).
10.2 Employment Agreement with M. Chris Frederick (incorporated herein
by reference to Exhibit 10.3 to the First Capital, Inc.'s Annual
Report on Form 10-KSB for the year ended December 31, 1999, filed
March 22, 2000).
10.3 Employment Agreement with Joel E. Voyles (incorporated herein by
reference to Exhibit 10.4 to the First Capital, Inc.'s Annual
Report on Form 10-KSB for the year ended December 31, 1999, filed
March 22, 2000).
10.4 Employee Severance Compensation Plan (incorporated herein by
reference to Exhibit 8.5 to the First Capital, Inc.'s Quarterly
Report on Form 10-QSB for the quarter ended December 31, 1998,
filed February 16, 1999).
10.5 First Federal Bank, A Federal Savings Bank 1994 Stock Option Plan
(as assumed by First Capital, Inc. effective December 31, 1998)
(incorporated herein by reference to Exhibit 4.0 to the First
Capital, Inc.'s Registration Statement on Form S-8, and any
amendments thereto, filed April 19, 1999, Registration Statement
No. 333-76543).
10.6 First Capital, Inc. 1999 Stock-Based Incentive Plan (incorporated
herein by reference to Exhibit 10.2 to the First Capital, Inc.'s
Registration Statement on Form S-8, and any amendments thereto,
filed February 2, 2000, Registration Statement No. 333-95987).
10.7 1998 Officers' and Key Employees' Stock Option Plan for HCB
Bancorp (incorporated herein by reference to Exhibit 10.3 to the
First Capital, Inc.'s Registration Statement on Form S-8, and any
amendments thereto, filed February 2, 2000, Registration
Statement No. 333-95987).
II-4
10.8 Employment Agreement with William W. Harrod (incorporated herein
by reference to Exhibit 10.9 to the First Capital, Inc.'s Annual
Report on Form 10-KSB for the year ended December 31, 1999, filed
March 22, 2000).
13.1 Annual report to stockholders for the year ended December 31,
2001 (included as Appendix E to the proxy statement-prospectus
contained in this Registration Statement).
13.2 Quarterly report on Form 10-QSB for the quarter ended September
30, 2002 (included as Appendix E to the proxy
statement-prospectus contained in this Registration Statement).
23.1 Consent of Muldoon Murphy & Faucette LLP (included in Exhibit
5.0).
23.2 Consent of Muldoon Murphy & Faucette LLP (included in Exhibit
8.0).
23.3 Consent of Monroe Shine & Co., Inc.
23.4 Consent of Monroe Shine & Co., Inc.
23.5 Consent of David A. Noyes & Company.
24.0 Powers of Attorney (previously filed).
99.1 Opinion of David A. Noyes & Company (included as Appendix B to
the proxy statement-prospectus contained in this Registration
Statement).
99.2 Proxy materials of Hometown Bancshares, Inc.
99.3 Cover letter for Election Form.
99.4 Election Form and Letter of Transmittal.
99.5 Notice of Guaranteed Delivery.
99.6 Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
Item 22. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by Section 10(a)
(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events
which, individually or together, represent a
fundamental change in the information in this
II-5
Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would notexceed that which was
registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
SEC pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
and
(iii) To include any additional or changed material
information on the plan of distribution.
(2) That, for determining liability under the Securities Act,
treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide
offering.
(3) To file a post-effective amendment to remove from
registration any of the securities that remain unsold at the
end of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has
been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business
issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication
of such issue.
(c) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into
the prospectus pursuant to Items 4 and 13 of this Form, within
one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration
statement through the date of responding to the request.
(d) The undersigned Registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration
Statement when it became effective.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act, First
Capital, Inc., the Registrant, has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Corydon, State of Indiana, on January 30, 2003.
FIRST CAPITAL, INC.
By: /s/ William W. Harrod
---------------------
William W. Harrod
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on January 30, 2003.
Name Title
---- -----
/s/ William W. Harrod
------------------------------ President, Chief Executive Officer and
William W. Harrod Director
(principal executive officer)
*
------------------------------ Chairman
J. Gordon Pendleton
/s/ Michael C. Frederick
------------------------------ Chief Financial Officer and Treasurer
Michael C. Frederick (principal accounting and financial officer)
/s/ Samuel E. Uhl
------------------------------ Director
Samuel E. Uhl
*
------------------------------ Director
Mark D Shireman
*
------------------------------ Director
Dennis L. Huber
*
------------------------------ Director
Kenneth R. Saulman
*
------------------------------ Director
John W. Buschemeyer
*
--------------------------------- Director
Gerald L. Uhl
*
--------------------------------- Director
James S. Burden
*
--------------------------------- Director
James E. Nett
*
--------------------------------- Director
Michael L. Shireman
--------------------------------- Director
Kathryn W. Ernstberger
* Pursuant to the Power of Attorney included as part of the signature page to
the Registration Statement on Form S-4 for First Capital, Inc. filed on November
22, 2002.
/s/ William W. Harrod
--------------------------------- President, Chief Executive
William W. Harrod Officer and Director
EXHIBIT INDEX
-------------
2.0 Agreement and Plan of Merger, dated as of September 25,
2002, by and between First Capital, Inc. and Hometown
Bancshares, Inc. (included as Appendix A to the proxy
statement-prospectus contained in this Registration
Statement).
4.0 Form of Certificate for Common Stock of First Capital, Inc.
(incorporated herein by reference to Exhibit 4.0 to First
Capital, Inc.'s Registration Statement on Form SB-2,
initially filed on September 16, 1998, Registration No.
333-63515).
5.0 Opinion of Muldoon Murphy & Faucette LLP regarding legality.
8.0 Opinion of Muldoon Murphy & Faucette LLP regarding tax
matters.
10.1 Employment Agreement with Samuel E. Uhl (incorporated herein
by reference to Exhibit 10.2 to the First Capital, Inc.'s
Annual Report on Form 10-KSB for the year ended December 31,
1999, filed March 22, 2000).
10.2 Employment Agreement with M. Chris Frederick (incorporated
herein by reference to Exhibit 10.3 to the First Capital,
Inc.'s Annual Report on Form 10-KSB for the year ended
December 31, 1999, filed March 22, 2000).
10.3 Employment Agreement with Joel E. Voyles (incorporated
herein by reference to Exhibit 10.4 to the First Capital,
Inc.'s Annual Report on Form 10-KSB for the year ended
December 31, 1999, filed March 22, 2000).
10.4 Employee Severance Compensation Plan (incorporated herein by
reference to Exhibit 8.5 to the First Capital, Inc.'s
Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1998, filed February 16, 1999).
10.5 First Federal Bank, A Federal Savings Bank 1994 Stock Option
Plan (as assumed by First Capital, Inc. effective December
31, 1998) (incorporated herein by reference to Exhibit 4.0
to the First Capital, Inc.'s Registration Statement on Form
S-8, and any amendments thereto, filed April 19, 1999,
Registration Statement No. 333-76543).
10.6 First Capital, Inc. 1999 Stock-Based Incentive Plan
(incorporated herein by reference to Exhibit 10.2 to the
First Capital, Inc.'s Registration Statement on Form S-8,
and any amendments thereto, filed February 2, 2000,
Registration Statement No. 333-95987).
10.7 1998 Officers' and Key Employees' Stock Option Plan for HCB
Bancorp (incorporated herein by reference to Exhibit 10.3 to
the First Capital, Inc.'s Registration Statement on Form
S-8, and any amendments thereto, filed February 2, 2000,
Registration Statement No. 333-95987).
10.8 Employment Agreement with William W. Harrod (incorporated
herein by reference to Exhibit 10.9 to the First Capital,
Inc.'s Annual Report on Form 10-KSB for the year ended
December 31, 1999, filed March 22, 2000).
13.1 Annual report to stockholders for the year ended December
31, 2001 (included as Appendix E to the proxy
statement-prospectus contained in this Registration
Statement).
13.2 Quarterly report on Form 10-QSB for the quarter ended
September 30, 2002 (included as Appendix E to the proxy
statement-prospectus contained in this Registration
Statement).
23.1 Consent of Muldoon Murphy & Faucette LLP (included in
Exhibit 5.0).
23.2 Consent of Muldoon Murphy & Faucette LLP (included in
Exhibit 8.0).
23.3 Consent of Monroe Shine & Co., Inc.
23.4 Consent of Monroe Shine & Co., Inc.
23.5 Consent of David A. Noyes & Company.
24.0 Powers of Attorney (previously filed).
99.1 Opinion of David A. Noyes & Company (included as Appendix B
to the proxy statement-prospectus contained in this
Registration Statement).
99.2 Proxy materials of Hometown Bancshares, Inc.
99.3 Cover letter for Election Form.
99.4 Election Form and Letter of Transmittal.
99.5 Notice of Guaranteed Delivery.
99.6 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.