<PAGE>
As filed with the Securities and Exchange Commission on September 16, 1999
Registration No. ___________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
______________________________
FIRST CAPITAL, INC.
(Exact Name of Registrant as Specified in its Charter)
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<CAPTION>
<S> <C> <C>
Indiana 6035 35-2056949
(State or Other Jurisdiction
of Incorporation or Organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number)
</TABLE>
220 Federal Drive, N.W.
Corydon, Indiana 47112
(812) 738-2198
(Address, including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principle Executive Offices)
Samuel E. Uhl
President
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:
Paul M. Aguggia, Esq. Andrew B. Buroker, Esq.
Aaron M. Kaslow, Esq. Krieg DeVault Alexander &
Muldoon, Murphy & Faucette LLP Capehart
5101 Wisconsin Avenue, N.W. One Indiana Square, Suite 2800
Washington, D.C. 20016 Indianapolis, Indiana 46204-2017
(202) 362-0840 (317) 636-4341
____________________________
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(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. [_]
If this Form is a post-effective amendment filed 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. [_]
____________________________
Calculation of Registration Fee
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<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Title of Each Amount Offering Aggregate Amount of
Class of Securities To Be To Be Price Offering Registration
Registered Registered(1) Per Share(2) Price (2) Fee
- --------------------------------------------------------------------------------------------------------------
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Common Stock, par
value $0.01 per 1,245,812 N/A $12,139,328 $3,375
share ("Common Stock")
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the estimated maximum number of shares of common stock, par
value $.01 per share, issuable by First Capital, Inc. ("First Capital")
upon the consummation of the merger with HCB Bancorp and computed based on
the estimated maximum number of such shares (80,375), including shares
issuable upon the exercise of outstanding stock options, that may be
exchanged for the securities being registered. 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 Rules 457(f)(2), the registration fee for the First Capital
common stock is based on the book value of HCB Bancorp common stock, no par
value per share, on June 30, 1999 ($12,139,328).
_____________________________
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) or
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.
<PAGE>
FIRST CAPITAL LOGO HCB BANCORP LOGO
MERGER OF EQUALS PROPOSED - YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of First Capital, Inc. and HCB Bancorp have agreed
to combine First Capital and HCB Bancorp in a merger of equals. The combined
company will have the leading market share in Harrison County, Indiana, as
measured by total deposits. We believe that the combined company will be an
effective competitor in its market area and will be well positioned to offer
superior community banking services.
In the merger, each share of HCB Bancorp common stock will be converted
into 15.5 shares of First Capital common stock and each share of First Capital
common stock will remain unchanged. First Capital common stock is listed on the
Nasdaq SmallCap Market under the symbol FCAP. The market value of the
consideration that HCB Bancorp shareholders will receive in the merger would be
$_____________ based on First Capital's closing stock price on ____________,
1999. We expect the merger to be a tax-free transaction for First Capital
shareholders and, in general, HCB Bancorp shareholders, except that HCB Bancorp
shareholders would have to pay tax on cash received instead of fractional shares
of First Capital. After completion of the merger, First Capital shareholders
and HCB Bancorp shareholders will own 51% and 49%, respectively, of the combined
company.
We cannot complete the merger unless we obtain the necessary government
approvals and unless the shareholders of First Capital and HCB Bancorp approve
the merger agreement. Each of us will hold a meeting of our shareholders to
consider and vote on this merger proposal and other matters. Whether or not you
plan to attend your company's 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 and, for First Capital shareholders, a vote FOR the other matters to
be considered. 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.
The places, dates and times of the shareholders meetings are as follows:
For First Capital shareholders: For HCB Bancorp shareholders:
______________, 1999 ______________, 1999
___:00 a.m., local time ___:00 a.m., local time
220 Federal Drive 710 Main Street, N.E.
Corydon, Indiana Palmyra, Indiana
This document contains a more complete description of the shareholders'
meetings and the terms of the merger. We urge you to review this entire document
carefully.
We enthusiastically support the merger and join with the other members of
our Boards of Directors in recommending that you vote in favor of the merger.
J. Gordon Pendleton Earl Book
Chairman and Chief Executive Officer Chairman
First Capital, Inc. HCB Bancorp
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved the securities to be issued under this Joint Proxy
Statement-Prospectus or determined if this Joint 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 Fund, the Bank Insurance Fund or any other
governmental agency.
- --------------------------------------------------------------------------------
Joint Proxy Statement-Prospectus dated ___________, 1999
and first mailed to shareholders on or about __________, 1999
<PAGE>
First Capital, Inc.
220 Federal Drive, N.W.
Corydon, Indiana 47112
(812) 738-2198
_________________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON __________, 1999
_________________________________
NOTICE IS HEREBY GIVEN that the annual meeting of shareholders of First
Capital, Inc. will be held at 220 Federal Drive, N.W., Corydon, Indiana on
___________, _______________ at __:00 a.m., local time, for the following
purposes:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of July 19, 1999, by and among First
Capital, Inc., FC Acquisition Corp. and HCB Bancorp, pursuant to which
FC Acquisition Corp. will merge with and into HCB Bancorp and each share
of common stock, no par value per share, of HCB Bancorp will be
converted into the right to receive 15.5 shares of common stock, par
value $.01 per share, of First Capital, all on and subject to the terms
and conditions contained therein;
2. To elect two directors to serve for a term of one year, two directors to
serve for a term of two years and three directors to serve for a term of
three years;
3. To consider and vote upon a proposal to approve the First Capital, Inc.
1999 Stock-Based Incentive Plan;
4. To ratify the appointment of Monroe Shine & Co., Inc. as independent
auditors for First Capital for the fiscal year ending June 30, 2000; and
5. To transact any other business as may properly come before the meeting
or any adjournment or postponement.
Only shareholders of record at the close of business on __________, 1999
will be entitled to notice of and to vote at the meeting and at any adjournment
or postponement.
By Order of the Board of Directors
Joel E. Voyles
Corporate Secretary
Corydon, Indiana
_________, 1999
The Board of Directors unanimously recommends that you vote "FOR" the above
proposals.
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.
<PAGE>
HCB Bancorp
710 Main Street, N.E.
Palmyra, Indiana 47164
(812) 364-6192
_________________________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON __________, 1999
_________________________________
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of HCB
Bancorp will be held at 710 Main Street, N.E., Palmyra, Indiana on __________,
______________ at __:00 a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of July 19, 1999, by and among First
Capital, Inc., FC Acquisition Corp. and HCB Bancorp, pursuant to which
FC Acquisition Corp. will merge with and into HCB Bancorp and each share
of common stock, no par value per share, of HCB Bancorp will be
converted into the right to receive 15.5 shares of common stock, par
value $.01 per share, of First Capital, 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 shareholders of record at the close of business on __________, 1999
will be entitled to notice of and to vote at the meeting and at any adjournment
or postponement.
HCB Bancorp shareholders have the right to dissent from the merger and
obtain payment in cash of the fair value of their shares of HCB Bancorp common
stock under applicable provisions of Indiana law. In order to perfect
dissenters' rights, HCB Bancorp shareholders must give written notice of their
intent to demand payment of their shares 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 D to the
accompanying Joint Proxy Statement-Prospectus and a summary of the provisions
are included herein under the caption "THE MERGER--Rights of Dissenting
Shareholders."
By Order of the Board of Directors
William W. Harrod
President and Chief Executive Officer
Palmyra, Indiana
__________, 1999
The Board of Directors unanimously recommends that you vote "FOR" the
proposal to approve and adopt the merger agreement.
Whether or not you plan to attend the special meeting, please complete,
sign, date and return the enclosed proxy in the accompanying pre-addressed
postage-paid envelope.
<PAGE>
PROXY STATEMENT
TABLE OF CONTENTS
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SUMMARY....................................................................................... 1
COMPARATIVE PER SHARE DATA.................................................................... 9
SELECTED FINANCIAL DATA OF FIRST CAPITAL...................................................... 10
SELECTED FINANCIAL DATA OF HCB BANCORP........................................................ 12
SUMMARY SELECTED PRO FORMA COMBINED DATA...................................................... 14
MARKET PRICE AND DIVIDEND INFORMATION......................................................... 15
ANNUAL MEETING OF FIRST CAPITAL SHAREHOLDERS.................................................. 17
Place, Date and Time..................................................................... 17
Purpose of the Meeting................................................................... 17
Who Can Vote at the Meeting.............................................................. 17
Attending the Meeting.................................................................... 17
Vote Required............................................................................ 17
Voting by Proxy.......................................................................... 18
Participants in First Federal's ESOP..................................................... 19
SPECIAL MEETING OF HCB BANCORP SHAREHOLDERS................................................... 20
Place, Date and Time..................................................................... 20
Purpose of the Meeting................................................................... 20
Who Can Vote at the Meeting.............................................................. 20
Vote Required............................................................................ 20
Voting by Proxy.......................................................................... 20
OWNERSHIP OF FIRST CAPITAL COMMON STOCK....................................................... 22
OWNERSHIP OF HCB BANCORP COMMON STOCK......................................................... 23
THE MERGER.................................................................................... 24
The Parties to the Merger................................................................ 24
Form of the Merger; Conversion of HCB Bancorp Common Stock............................... 24
Procedures for Exchanging Your HCB Bancorp Stock Certificates............................ 25
Treatment of HCB Bancorp Stock Options................................................... 25
Tax Free Transaction for HCB Bancorp Shareholders........................................ 26
Background of the Merger................................................................. 27
Recommendation of the First Capital Board; First Capital's Reasons for the Merger........ 28
Recommendation of the HCB Bancorp Board; HCB Bancorp's Reasons for the Merger............ 29
Opinion of First Capital's Financial Advisor............................................. 31
Opinion of HCB Bancorp's Financial Advisor............................................... 34
Rights of Dissenting Shareholders........................................................ 40
Interests of HCB Bancorp's Directors and Officers in the Merger that Differ From
Your Interests...................................................................... 42
Regulatory Approvals Needed to Complete the Merger....................................... 44
Accounting Treatment of the Merger....................................................... 45
Resale of First Capital Common Stock..................................................... 46
THE MERGER AGREEMENT.......................................................................... 47
Terms of the Merger...................................................................... 47
When Will the Merger be Completed........................................................ 47
Conditions to Completing the Merger...................................................... 47
Conduct of Business Prior to the Merger.................................................. 49
Covenants of HCB Bancorp and First Capital in the Merger Agreement....................... 52
Representations and Warranties Made by First Capital and HCB Bancorp in the Merger
Agreement........................................................................... 55
Terminating the Merger Agreement......................................................... 55
Expenses and Termination Fees............................................................ 55
Changing the Terms of the Merger Agreement............................................... 56
MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER................................................ 57
Board of Directors....................................................................... 57
Management............................................................................... 57
Operations............................................................................... 58
PRO FORMA FINANCIAL INFORMATION............................................................... 59
FORWARD-LOOKING STATEMENTS.................................................................... 65
DESCRIPTION OF FIRST CAPITAL COMMON STOCK..................................................... 66
General.................................................................................. 66
Common Stock............................................................................. 66
Preferred Stock.......................................................................... 66
COMPARISON OF RIGHTS OF SHAREHOLDERS.......................................................... 67
Authorized Stock......................................................................... 67
Voting Rights............................................................................ 67
Required Vote for Authorization of Certain Actions Dividends............................. 68
Shareholders Meetings.................................................................... 68
Action by Shareholders Without a Meeting................................................. 69
Board of Directors....................................................................... 70
Amendment of the Bylaws.................................................................. 70
Amendment of the Articles of Incorporation............................................... 70
SELECTED PROVISIONS IN THE ARTICLES AND BYLAWS
OF FIRST CAPITAL......................................................................... 72
Business Combinations With Related Persons............................................... 72
Limitation on Voting Rights.............................................................. 73
Board of Directors....................................................................... 73
Special Meetings of Shareholders......................................................... 73
Advance Notice Provisions for Shareholder Nominations and Proposals...................... 73
Preferred Stock.......................................................................... 73
Amendment of Articles of Incorporation................................................... 74
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REGULATION AND SUPERVISION OF FIRST CAPITAL.................................................... 75
General................................................................................... 75
Holding Company Regulation................................................................ 75
Federal Savings Institution Regulation.................................................... 76
Federal Home Loan Bank System............................................................. 79
Federal Reserve System.................................................................... 80
PROPOSAL 2 FOR FIRST CAPITAL SHAREHOLDERS --
ELECTION OF DIRECTORS..................................................................... 80
Meetings and Committees of the Board of
Directors............................................................................ 81
Directors' Compensation................................................................... 82
Executive Compensation.................................................................... 82
Compliance with Section 16(a) of the
Exchange Act......................................................................... 83
Transactions with Management.............................................................. 84
PROPOSAL 3 FOR FIRST CAPITAL SHAREHOLDERS --
APPROVAL OF 1999 STOCK-BASED INCENTIVE
PLAN...................................................................................... 85
General................................................................................... 85
Types of Awards........................................................................... 85
Tax Treatment............................................................................. 86
Alternate Option Payments................................................................. 87
Amendments................................................................................ 87
Adjustments............................................................................... 87
Nontransferability........................................................................ 87
Stockholder Approval, Effective Date of
Plan and Regulatory Compliance....................................................... 88
New Plan Benefits......................................................................... 88
PROPOSAL 4 FOR FIRST CAPITAL SHAREHOLDERS --
RATIFICATION OF AUDITORS.................................................................. 88
LEGAL MATTERS.................................................................................. 88
EXPERTS........................................................................................ 89
WHERE YOU CAN FIND MORE INFORMATION............................................................ 89
SHAREHOLDER PROPOSALS.......................................................................... 90
</TABLE>
APPENDIX A Agreement and Plan of Merger, dated as of July 19, 1999, by and
among First Capital, Inc., FC Acquisition Corp. and HCB Bancorp
APPENDIX B Fairness Opinion of Charles Webb & Company
APPENDIX C Fairness Opinion of Young & Associates, Inc.
APPENDIX D Chapter 23-1-44 of the Indiana Business Corporation Law
APPENDIX E Financial information regarding HCB Bancorp
APPENDIX F First Capital, Inc. 1999 Stock-Based Incentive Plan
<PAGE>
SUMMARY
This summary does not contain all of the information that is important to
you. You should carefully read this entire document and the other documents
which accompany this document or to which this document refers you to fully
understand the merger. See "Where You Can Find More Information."
The Companies
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First Capital, Inc. First Capital is the savings and loan holding company for
220 Federal Drive, N.W. First Federal Bank, A Federal Savings Bank. First Federal
Corydon, Indiana 47112 operates three banking offices in southeastern Indiana. At
(812) 738-2198 June 30, 1999, First Capital had total assets of $122.7
million, deposits of $92.0 million and shareholders' equity
of $17.3 million.
For financial statements and a discussion of First Capital's
recent results of operations, see First Capital's 1999
annual report to shareholders, which accompanies this Joint
Proxy Statement-Prospectus.
HCB Bancorp HCB Bancorp is the bank holding company for Harrison County
710 Main Street, N.E. Bank. Harrison County Bank operates six banking offices in
Palmyra, Indiana 47164 southeastern Indiana. At June 30, 1999, HCB Bancorp had
(812) 364-6192 total assets of $88.1 million, deposits of $75.4 million,
and shareholders' equity of $12.1 million.
For financial statements and a discussion of HCB Bancorp's
recent results of operations, see Appendix E.
The First Capital Shareholders' Annual Meeting
Place, Date and Time (page__) First Capital's annual meeting will be held at First
Federal's main office at 220 Federal Drive, N.W., Corydon,
Indiana on __________, 1999 at __:00 a.m., local time.
Purpose of the Meeting (page__) At the annual meeting, First Capital shareholders will be
asked to:
1. approve the merger agreement with HCB Bancorp;
2. elect seven directors;
3. approve the First Capital, Inc. 1999 Stock-Based
Incentive Plan;
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4. ratify the appointment of Monroe Shine & Co., Inc. as
independent auditors for First Capital for the 2000
fiscal year; and
5. transact any other business that may properly come
before the meeting.
Who Can Vote At the Meeting (page__) You can vote at the meeting of First Capital shareholders if
you owned First Capital common stock at the close of
business on __________, 1999. You will be able to cast one
vote for each share of First Capital common stock you owned
at that time. As of __________, 1999, there were 1,291,824
shares of First Capital common stock outstanding.
What Vote is Required for Approval of In order to approve the merger agreement, the holders
the Merger Agreement (page__) of a majority of the outstanding shares of First Capital
common stock entitled to vote must vote in its favor. You
can vote your shares by attending the meeting and voting in
person or by completing and mailing the enclosed proxy card.
The HCB Bancorp Shareholders' Special Meeting
Place, Date and Time (page__) The special meeting will be held at Harrison County Bank's
main office at 710 Main Street, N.E., Palmyra, Indiana on
__________, 1999 at __:00 a.m., local time.
Purpose of the Meeting (page__) At the special meeting, HCB Bancorp shareholders will be
asked to approve the merger agreement with First Capital.
Who Can Vote At the Meeting You can vote at the special meeting of HCB Bancorp
(page__) shareholders if you owned HCB Bancorp common stock at the
close of business on __________, 1999. You will be able to
cast one vote for each share of HCB Bancorp common stock you
owned at that time. As of __________, 1999, there were
79,900 shares of HCB Bancorp common stock outstanding.
What Vote is Required for Approval of In order to approve the merger agreement, the holders
the Merger Agreement (page__) of a majority of the outstanding shares of HCB Bancorp
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.
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2
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The Merger
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Overview of the Transaction We propose a merger of equals in which HCB Bancorp will
(page__) merge with First Capital. Immediately after this merger,
Harrison County Bank will merge with First Federal Bank. The
name of the combined bank will be "First Harrison Bank."
Each HCB Bancorp Share Will Be First Capital shareholders. As a First Capital
Exchanged for 15.5 First Capital shareholder, each of your shares of First Capital common
Shares (page__) stock will remain outstanding and unchanged in the merger.
You do not need to surrender your shares or exchange them
for new ones.
HCB Bancorp shareholders. As an HCB Bancorp shareholder,
upon closing the merger, each of your shares of HCB Bancorp
common stock will automatically be converted into the right
to receive 15.5 shares of First Capital common stock. You
will have to surrender your HCB Bancorp stock certificates
to receive your shares of First Capital. First Capital will
send you written instructions for surrendering your
certificates after we have completed the merger. For more
information on how this exchange procedure works, see "The
Merger --Procedures for Exchanging Your Stock Certificates"
on page __ of this document.
Because the number of shares of First Capital common stock
that you will receive in the merger is fixed, the value of
these shares will fluctuate as the price of First Capital
common stock changes.
Transaction Generally Tax-Free for First Capital shareholders. As your shares of First Capital
First Capital Shareholders and HCB common stock will remain unchanged, the merger will not
Bancorp Shareholders (page__) cause you to recognize any gain or loss for U.S. federal
income tax purposes.
HCB Bancorp shareholders. We expect that you generally will
not recognize any gain or loss for U.S. federal income tax
purposes as a result of your exchange of shares of HCB
Bancorp common stock. You will, however, have to recognize
income or gain in connection with any cash received instead
of fractional shares of First Capital common stock.
This tax treatment may not apply to all HCB Bancorp
shareholders. Determining the actual tax consequences of the
merger to you can be complicated. You should consult your
own tax
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3
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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
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 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, which
could take a different view.
We Recommend that Shareholders Approve First Capital shareholders. The First Capital Board of
the Merger (page__) Directors believes that the merger is fair to you and in
your 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 First Capital's Board of
Directors in approving the merger agreement, see pages __
through __.
HCB Bancorp shareholders. The HCB Bancorp Board of Directors
believes that the merger is fair to you and in your 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 HCB Bancorp's Board of
Directors in approving the merger agreement, see pages __
through __.
Our Financial Advisors Believe the First Capital shareholders. Charles Webb & Company, a
Exchange Ratio Is Fair to Division of Keefe, Bruyette & Woods, has delivered to the
Shareholders (page__) First Capital Board of Directors its opinion that, as of the
date of this document, the exchange ratio is fair to the
holders of First Capital common stock from a financial point
of view. A copy of this opinion is provided as Appendix B to
this document. You should read it completely to understand
the procedures followed, assumptions made, matters
considered, and qualifications and limitations on the review
made by Charles Webb in providing this opinion. First
Capital has agreed to pay Charles Webb $50,000 for its
services in connection with the merger.
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4
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HCB Bancorp shareholders. Young & Associates, Inc. has
delivered to the HCB Bancorp Board of Directors its opinion
that, as of the date of this document, the terms of the
merger are fair to the holders of HCB Bancorp common stock
from a financial point of view. A copy of this opinion is
provided as Appendix C to this document. You should read it
completely to understand the procedures followed,
assumptions made, matters considered, and qualifications and
limitations on the review made by Young & Associates in
providing this opinion. HCB Bancorp has agreed to pay Young
& Associates $55,000 for its services in connection with the
merger.
Only HCB Bancorp Shareholders Have First Capital shareholders. First Capital shareholders will
Appraisal Rights in the Merger (page__) not have appraisal rights as a result of the merger.
HCB Bancorp shareholders. Indiana law provides you with
dissenters' 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 have the value of
your shares independently determined and to receive payment
in cash based on that valuation. To exercise your
dissenters' rights you must deliver written notice of your
intent to demand payment for your shares to HCB Bancorp at
or before the special meeting of HCB Bancorp shareholders
and you must not vote in favor of the merger. Notices should
be addressed to HCB Bancorp's Corporate Secretary and sent
to HCB Bancorp at 710 Main Street, N.E., Palmyra, Indiana
47164. 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 D to this
document.
Interests of Directors and Officers in Some of our directors and officers have interests in the
the Merger that Differ From Your merger that are different from, or are in addition to,
Interests (page__) their interests as shareholders in our companies. The
members of our Boards of Directors knew about these
additional interests, and considered them, when they
approved the merger. These include:
1. employment or severance agreements that officers of HCB
Bancorp will enter into upon completion of the merger;
2. the vesting of HCB Bancorp stock options as a result of
consummation of the merger; and
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5
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3. provisions in the merger agreement relating to
indemnification of directors and officers and insurance
for directors and officers of HCB Bancorp for events
occurring before the merger.
Regulatory Approvals Needed to We cannot complete the merger unless it is approved by the
Complete the Merger (page__) Office of 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.
We Expect "Pooling of Interests" We expect the merger to qualify for "pooling of interests"
Accounting Treatment (page__) accounting treatment. This means that, for accounting and
financial reporting purposes, we will treat our companies as
if they had always been one. We will not be required to
complete the merger unless we receive a letter from our
independent accountant telling us that the merger will
qualify for pooling of interests accounting treatment.
Shared Responsibility for Management The present management of our respective companies will
and Operations after the Merger (page__) share the responsibility of managing the combined company.
The Boards of Directors of First Capital and First Harrison
Bank after the merger will be comprised of 14 directors and
will include the seven current directors of First Capital
and the seven current directors of HCB Bancorp. James G.
Pendleton, currently Chairman and Chief Executive Officer of
First Capital, will serve as Chairman of the Board of First
Capital after the merger. Earl Book, currently Chairman of
the Board of HCB Bancorp, will serve as Chairman of First
Harrison Bank after the merger. William H. Harrod, currently
President and Chief Executive Officer of HCB Bancorp and
Harrison County Bank, will serve as President and Chief
Executive Officer of First Capital after the merger. Samuel
E. Uhl, currently President of First Capital and First
Federal, will serve as President and Chief Executive Officer
of First Harrison Bank after the merger.
</TABLE>
6
<PAGE>
The Merger Agreement
A copy of the merger agreement is provided as Appendix A to this Joint Proxy
Statement-Prospectus. Please read the entire merger agreement carefully. It is
the legal document that governs the merger.
<TABLE>
<S> <C>
Conditions to Completing the Merger (page__) The completion of the merger depends on a number of
conditions being met. In addition to the parties complying
with the merger agreement, these conditions include:
1. approval of the merger agreement by both First
Capital's shareholders and HCB Bancorp's shareholders;
2. approval of the merger by regulatory authorities;
3. receipt of letters from our independent accountant
telling us that the merger will qualify as a pooling of
interests;
4. receipt of a tax opinion that the merger qualifies as a
tax-free reorganization; and
5. HCB Bancorp's shareholders having exercised dissenters'
rights with respect to not more than 10% of the
outstanding shares of HCB Bancorp common stock.
Where the law permits, we could decide to complete the
merger even though one or more of these conditions has not
been met. We cannot be certain when or if the conditions to
the merger will be satisfied or waived, or that the merger
will be completed.
Terminating the Merger Agreement (page__) We can agree at any time not to complete the merger, even if
the shareholders of both our companies have approved it.
Also, either of us can decide, without the consent of the
other, to terminate the merger agreement if:
1. the shareholders of either company do not approve the
merger;
2. a required regulatory approval is denied or a
governmental authority blocks the merger;
3. we do not complete the merger by April 30, 2000;
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
4. 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;
5. the other party's Board of Directors withdraws or
revises its recommendation to its shareholders to
approve the merger agreement; or
6. the other party's Board of Directors determines that it
must accept a superior offer from a third party in the
exercise of its fiduciary duties.
Termination Fees (page__) If either company terminates the merger agreement in order
to accept a superior acquisition offer or if, after another
party proposes to acquire one of us, that company's
shareholders fail to approve the merger agreement or that
company's Board of Directors fails to recommend the merger
agreement to its shareholders and within 12 months that
company enters into a merger agreement with a third party,
that company will pay the other a termination fee of
$500,000.
We May Amend the Terms of the Merger We can agree to amend the merger agreement, and each of us
and Waive Some Conditions (page__) can waive our right to require the other party to adhere to
the terms and conditions of the merger agreement, where the
law allows. However, after our shareholders approve the
merger agreement, they must approve any amendment or waiver
that reduces or changes the consideration to be received by
them in the merger.
</TABLE>
8
<PAGE>
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 reflecting
the merger (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.
We also assumed that we will treat our companies as if they had always been
combined for accounting and financial reporting purposes (a method known as
"pooling of interests" accounting). The information listed as "pro forma
equivalent" was obtained by multiplying the pro forma amounts by the exchange
ratio of 15.5. We present this information to reflect the fact that HCB Bancorp
shareholders will receive 15.5 shares of First Capital common stock for each
share of HCB Bancorp common stock exchanged in the merger. We expect that we
will incur merger and integration charges as a result of combining our
companies. 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 expenses or 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 follow table is based on, and should be read
together with, the historical financial information that First Capital has
presented in its prior Securities and Exchange Commission filings and that HCB
Bancorp has included in this document. First Capital has incorporated its prior
filings into this document by reference. See "Where You Can Find More
Information" on page ___.
<TABLE>
<CAPTION>
At June 30, 1999
----------------
<S> <C>
Book value per share:
First Capital historical.......................... $ 13.41
HCB Bancorp historical............................ 151.93
Pro forma combined/(1)/........................... 11.46
HCB Bancorp pro forma equivalent/(2)/............. 177.63
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended June 30,
-------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash dividends declared per share:
First Capital historical.......................... $ 0.29 $ 0.27 $ 0.27
HCB Bancorp historical............................ 6.00 5.75 4.80
Pro forma/(3)/.................................... 0.29 0.27 0.27
HCB Bancorp pro forma equivalent/(2)/............. 4.49 4.19 4.19
Diluted net income per share:
First Capital historical.......................... $ 0.77 $ 0.74 $ 0.62
HCB Bancorp historical/(4)/....................... 12.77 14.24 13.24
Pro forma combined................................ 0.79 0.83 0.74
HCB Bancorp pro forma equivalent/(2)/............. 12.25 12.87 11.43
</TABLE>
______________________________
(1) The pro forma combined book value per share of First Capital common stock
is based upon the historical total combined common stockholders' equity for
First Capital and HCB Bancorp divided by total pro forma common shares of
the combined entities.
(2) The pro forma equivalent amounts are computed by multiplying the pro forma
combined amounts by a factor of 15.5 to reflect the exchange ratio in the
merger.
(3) Pro forma dividends per share represent First Capital's historical
dividends per share.
(4) Historical information for HCB Bancorp, which has a December 31 fiscal year
end, has been adjusted to reflect a June 30 fiscal year by adding the
subsequent six month period and subtracting the comparable preceding year
interim amounts from the amounts for the year ended December 31.
9
<PAGE>
SELECTED FINANCIAL DATA OF FIRST CAPITAL
The following tables show summarized historical financial data for First
Capital. The information in the following tables is based on historical
financial information that either First Capital has presented in its prior
filings with the Securities and Exchange Commission or that First Federal has
presented in its prior filings with the Office of Thrift Supervision. You should
read this summary financial information in connection with First Capital's
historical financial information. Financial information for periods before 1999
reflects First Federal only, as First Capital did not commence operations until
December 1998. The audited financial statements of First Capital are included in
First Capital's 1999 annual report to shareholders, which accompanies this
document and in First Capital's filings with the Securities and Exchange
Commission. See "Where You Can Find More Information."
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets.............................................. $ 122,698 $ 93,958 $ 89,372 $ 81,317 $ 72,989
Loans receivable, net..................................... 83,887 74,887 69,909 63,365 59,174
Mortgage-backed securities, held to maturity.............. 767 1,473 2,045 2,547 3,023
Other debt securities, held to maturity................... 8,480 1,580 4,023 5,267 4,403
Securities available for sale............................. 20,205 4,849 3,684 2,135 603
Cash and interest-bearing deposits/(1)/................... 2,611 6,135 5,039 5,385 3,485
Deposits.................................................. 92,014 77,462 70,756 68,232 61,722
Advances from FHLB........................................ 12,250 5,250 8,250 3,750 2,750
Shareholders' equity, substantially restricted............ 17,340 10,341 9,493 8,805 8,087
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income........................................... $ 7,799 $ 6,860 $ 6,500 $ 5,997 $ 5,637
Interest expense.......................................... 4,435 4,112 3,885 3,605 3,176
---------- ---------- ---------- ---------- ----------
Net interest income....................................... 3,364 2,748 2,615 2,392 2,461
Provision for loan losses................................. 44 -- -- -- 17
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses........................................ 3,320 2,748 2,615 2,392 2,444
Non-interest income/(2)/.................................. 301 411 176 159 125
Non-interest expense/(3)/................................. 1,987 1,612 1,854 1,200 1,140
---------- ---------- ---------- ---------- ----------
Income before income taxes................................ 1,634 1,547 937 1,351 1,429
Income taxes.............................................. 632 589 131 501 526
---------- ---------- ---------- ---------- ----------
Net income................................................ $ 1,002 $ 958 $ 806 $ 850 $ 903
========== ========== ========== ========== ==========
Per Share Data:
Basic net income.......................................... $ 0.78 $ 0.74 $ 0.63 $ 0.66 $ 0.71
Diluted net income........................................ 0.77 0.74 0.62 0.65 0.70
Dividends(4).............................................. 0.29 0.27 0.27 0.27 0.27
</TABLE>
__________________
(1) Includes interest-bearing deposits in other depository institutions.
(2) Includes one-time gain on sale of old main office building of $169,000 in
1998.
(3) Includes one-time SAIF assessment of $403,000 in 1997.
(4) Prior to First Federal's conversion to the stock holding company form of
organization, First Federal's mutual holding company waived the receipt of
all dividends.
10
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Selected Consolidated Financial
Ratios and Other Data:
Return on average assets/(1)/............................. 0.95% 1.08% 0.96% 1.10% 1.25%
Return on average equity/(2)/............................. 6.56 9.56 8.81 10.00 11.64
Interest rate spread during period/(3)/................... 2.71 2.72 2.70 2.59 2.97
Net interest margin/(4)/.................................. 3.37 3.27 3.27 3.22 3.51
Non-interest expenses to average assets................... 1.89 1.82 2.22 1.56 1.58
Non-performing assets to total assets/(5)/................ -- 0.35 0.14 0.31 0.14
Allowance for loan losses to total loans.................. 0.54 0.67 0.71 0.79 0.88
Dividend payout ratio/(6)/................................ 40.85 36.74 43.77 44.19 38.78
</TABLE>
__________________________
(1) Calculated by dividing net income by average outstanding assets.
(2) Calculated by dividing net income by average shareholders' equity.
(3) Represents the difference between the weighted average yield on average
interest-earning assets and the weighted average cost of average interest-
bearing liabilities.
(4) Represents net interest income as a percent of average interest-earning
assets.
(5) Non-performing assets consist of nonaccrual loans and foreclosed real
estate.
(6) Dividend payout ratio is calculated by dividing cash dividends by net
income. Percentages for periods prior to 1999 are computed for First
Federal's public shareholders only (i.e., excluding First Federal's former
mutual holding company), considering only their proportionate share of net
income. First Federal's former mutual holding company waived receipt of all
dividends paid by First Federal.
11
<PAGE>
SELECTED FINANCIAL DATA OF HCB BANCORP
The following tables show summarized historical financial data for HCB
Bancorp. You should read this summary financial information in connection with
the historical financial statements and the other more detailed financial
information regarding HCB Bancorp contained in this document. Financial
information for the periods before 1995 reflects Harrison County Bank only, as
HCB Bancorp did not commence operations until March 31, 1995. The audited
financial statements of HCB Bancorp and the unaudited financial statements of
HCB Bancorp for the six months ended June 30, 1999 and 1998 are included in
Appendix E. HCB Bancorp's unaudited financial statements for the six months
ended June 30, 1999 and 1998 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.
<TABLE>
<CAPTION>
At June 30, Year Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets............................. $ 88,113 $ 86,405 $ 83,062 $ 81,511 $ 68,030 $ 70,152
Loans receivable, net.................... 59,318 58,036 48,767 47,786 39,400 38,793
Securities held to maturity.............. 2,750 3,646 8,954 11,924 17,277 25,959
Securities available for sale/(1)/....... 12,904 12,542 14,504 12,295 4,892 --
Cash and interest-bearing deposits/(2)/.. 5,991 6,640 4,532 3,444 3,562 2,880
Federal funds sold....................... 2,800 1,900 3,000 1,100 300 --
Deposits................................. 75,355 74,078 71,241 70,451 57,684 60,088
Shareholders' equity..................... 12,139 11,736 11,118 10,416 9,814 9,137
</TABLE>
<TABLE>
<CAPTION>
For the Six
Months Ended
June 30, Year Ended December 31,
---------------------- --------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income........................... $ 3,123 $ 3,160 $ 6,335 $ 6,299 $ 5,777 $ 5,222 $ 5,014
Interest expense.......................... 1,280 1,340 2,664 2,659 2,492 2,220 2,055
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income.................... 1,843 1,820 3,671 3,640 3,285 3,002 2,959
Provision (credit) for loan losses........ 66 5 65 -- -- (40) (4)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses........................ 1,777 1,815 3,606 3,640 3,285 3,042 2,963
Non-interest income....................... 316 357 669 563 464 380 361
Non-interest expense...................... 1,368 1,351 2,687 2,488 2,309 1,904 1,787
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes................ 725 821 1,588 1,715 1,440 1,518 1,537
Income tax expense........................ 234 265 503 583 488 511 499
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............................. $ 491 $ 556 $ 1,085 $ 1,132 $ 952 $ 1,007 $ 1,038
========== ========== ========== ========== ========== ========== ==========
Per Share Data:
Net income per common share - basic/(3)/.. $ 6.14 $ 6.96 $ 13.58 $ 14.15 $ 11.90 $ 12.58 $ 12.98
Dividends................................. -- -- 6.00 5.75 4.80 4.00 3.50
</TABLE>
________________________________
(1) Effective January 1, 1994, HCB Bancorp adopted FASB Statement No. 115 which
requires securities classified as available for sale to be carried at fair
value. On December 31, 1995, HCB Bancorp transferred securities from the
held to maturity classification to available for sale in accordance with
Statement No. 115 implementation guidance issued by FASB.
(2) Includes interest-bearing deposits in other depository institutions.
(3) HCB Bancorp had no potentially dilutive common shares for the periods
presented.
12
<PAGE>
<TABLE>
<CAPTION>
At or For
the Six Months
Ended June 30, At or For the Year Ended December 31,
---------------------- --------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Consolidated Financial
Ratios and Other Data:
Return on average assets/(1)/............. 0.57% 0.67% 1.29% 1.38% 1.26% 1.47% 1.47%
Return on average equity/(2)/............. 4.20 4.87 9.28 10.14 9.29 10.44 11.85
Interest rate spread during period/(3)/... 3.88 3.90 3.90 3.94 4.51 4.44 3.96
Net interest margin/(4)/.................. 4.60 4.69 4.71 4.76 4.89 4.84 4.67
Non-interest expenses to average assets... 1.58 1.62 3.21 3.03 3.05 2.78 2.53
Non-performing assets to total
assets/(5)/............................. 0.17 0.19 0.17 0.11 0.50 0.68 0.51
Allowance for loan losses to total loans.. 1.18 1.22 1.20 1.42 1.54 1.72 1.72
Dividend payout ratio..................... -- -- 44.18 40.59 40.34 31.78 26.97
</TABLE>
____________________
(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.
(4) Net interest income as a percentage of average interest-earning assets.
(5) Nonperforming assets consist of nonperforming loans and foreclosed real
estate.
13
<PAGE>
SUMMARY SELECTED PRO FORMA COMBINED DATA
The following unaudited pro forma condensed combined selected financial
data combines First Capital's historical results with HCB Bancorp's historical
results, in each case, for the fiscal years ended June 30, 1999 and 1998 and, in
each case, giving effect to the merger as if it had occurred on July 1, 1997.
The pro forma information reflects the "pooling of interests" method of
accounting.
We expect that we will incur merger and integration charges as a result of
combining our companies. We also 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 expenses or 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 Information."
<TABLE>
<CAPTION>
At or For the Years Ended
June 30,
-------------------------------------
1999 1998
----------------- -----------------
(in thousands, except per share data)
<S> <C> <C>
Pro forma combined income statement data:
Interest income.............................................................. $ 14,091 $ 13,197
Interest expense............................................................. 7,039 6,796
Net interest income.......................................................... 7,052 6,401
Provision for loan losses.................................................... 170 5
Net interest income after provision for loan losses.......................... 6,882 6,396
Non-interest income.......................................................... 932 1,066
Non-interest expense......................................................... 4,691 4,205
Net income................................................................... 2,018 2,096
Pro forma combined balance sheet data:
Total assets................................................................. $ 210,890 $ 178,007
Loans receivable, net........................................................ 143,205 129,326
Deposits..................................................................... 167,369 149,177
Total shareholders' equity................................................... 29,017 22,007
Pro forma per share data:
Basic net income............................................................. $ 0.80 $ 0.83
Diluted net income........................................................... 0.79 0.83
Dividends declared (1)....................................................... 0.29 0.27
</TABLE>
______________________
(1) Pro forma dividends per share represent First Capital's historical
dividends per share.
14
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
First Capital common stock is listed on the Nasdaq SmallCap Market under
the symbol FCAP. There is no established trading market for HCB Bancorp common
stock and trading in HCB Bancorp common stock is limited. The absence of an
established market may affect the prices at which HCB Bancorp's shares are
traded.
The following table lists the high and low prices per share for First
Capital common stock and the cash dividends declared by First Capital and HCB
Bancorp for the periods indicated. On December 31, 1998, First Capital became
the holding company for First Federal in connection with First Federal's
conversion from the mutual holding company to the stock holding company form of
organization. In connection with this conversion, First Capital exchanged 2.5638
shares of its common stock for each share of First Federal common stock. For
periods before December 31, 1998, the following table reflects the price per
share and dividends for First Federal common stock divided by 2.5638. As First
Federal common stock was not listed or quoted on an established market before
December 31, 1998, share price information for periods before that date reflect
trades known to management.
<TABLE>
<CAPTION>
HCB
Bancorp
Common
First Capital Common Stock Stock
----------------------------------------- ----------------
High Low Dividends Dividends/(1)/
-------- -------- --------- -----------------
<S> <C> <C> <C> <C>
Fiscal 1998
Quarter ended September 30, 1997.... $ 7.80 $ 7.80 $ 0.068 $ --
Quarter ended December 31, 1997..... 7.80 7.80 0.068 5.75
Quarter ended March 31, 1998........ 7.80 7.80 0.068 --
Quarter ended June 30, 1998......... 7.80 7.80 0.068 --
Fiscal 1999
Quarter ended September 30, 1998.... 8.60 7.80 0.068 --
Quarter ended December 31, 1998..... 8.60 7.80 0.068 6.00
Quarter ended March 31, 1999........ 10.94 8.50 0.07 --
Quarter ended June 30, 1999......... 11.81 8.88 0.08 --
Fiscal 2000 --
Quarter ended September 30, 1999
(through __________, 1999)..... 0.10
</TABLE>
________________
(1) HCB Bancorp pays an annual dividend at the end of its fiscal year.
Based on First Capital's current quarterly dividend, the equivalent per
share annual dividend for each share of HCB Bancorp common stock is $6.20. This
amount was computed by multiplying $.40, which is the indicated annual dividend
for each share of First Capital common stock, by the exchange ratio of 15.5.
15
<PAGE>
The following table shows the closing price per share of First Capital
common stock, and the equivalent per share price for HCB Bancorp common stock
giving effect to the merger on (1) July 19, 1999, which is the last business day
preceding the public announcement of the proposed merger; and (2) _________,
1999, which is the last practicable trading day before the mailing of this
document. The equivalent per share price of HCB Bancorp common stock was
computed by multiplying the price of First Capital common stock by the exchange
ratio of 15.5.
Equivalent Price
First Capital Per Share of
Common Stock HCB Bancorp Stock
------------- -----------------
July 19, 1999............... $ 11.25 $ 174.38
__________, 1999............ $ $
The last known trade of HCB Bancorp common stock prior to the announcement
of the proposed merger agreement occurred in September, 1998, at a price of
$176.00 per share.
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. Because the number of shares of First Capital common stock
that HCB Bancorp stockholders will receive is fixed and because the market price
of First Capital common stock fluctuates, the value of the shares of First
Capital common stock that HCB Bancorp stockholders will receive may increase or
decrease before and after the merger.
As of ______________, 1999, there were approximately 1063 holders of record
of First Capital common stock. As of __________, 1999, there were approximately
311 holders of record of HCB Bancorp 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 the First Capital Board of Directors (as combined) 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 the First Capital
Board of Directors. As described under "Regulation And Supervision of First
Capital--Federal Savings Institution Regulation--Limitation on Capital
Distributions," federal law limits the ability of First Federal to pay dividends
to First Capital. The merger agreement restricts cash dividends payable on First
Capital common stock and HCB Bancorp common stock pending consummation of the
merger. See "The Merger Agreement--Conduct of Business Prior to the Merger."
16
<PAGE>
ANNUAL MEETING OF FIRST CAPITAL SHAREHOLDERS
Place, Date and Time
The meeting will be held at First Federal's main office at 220 Federal
Drive, N.W., Corydon, Indiana on _______, __________, 1999, at __:00 a.m., local
time.
Purpose of the Meeting
The purpose of the meeting is to:
1. consider and vote on a proposal to approve and adopt the merger
agreement;
2. elect directors;
3. consider and vote on a proposal to approve the First Capital, Inc.
1999 Stock-Based Incentive Plan;
4. ratify the appointment of Monroe Shine & Co., Inc. as independent
auditors; and
5. act on any other matters brought before the meeting.
Who Can Vote at the Meeting
You are entitled to vote your First Capital common stock if the records of
First Capital showed that you held your shares as of the close of business on
__________, 1999. As of the close of business on that date, a total of 1,291,824
shares of First Capital common stock were outstanding. Each share of common
stock has one vote. As provided in First Capital's Articles of Incorporation,
record holders of First Capital's common stock who beneficially own, either
directly or indirectly, in excess of 10% of First Capital's outstanding shares
are not entitled to any vote in respect of the shares held in excess of the 10%
limit.
Attending the Meeting
If you are a beneficial owner of First Capital common stock held by a
broker, bank or other nominee (i.e., in "street name"), you will need proof of
ownership to be admitted to the meeting. A recent brokerage statement or letter
from a bank or broker are examples of proof of ownership. If you want to vote
your shares of First Capital common stock held in street name 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.
Vote Required
The annual 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
17
<PAGE>
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.
The approval and adoption of the merger agreement will require the
affirmative vote of the holders of at least a majority of the outstanding shares
of 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 also will have
the same effect as a vote against the merger agreement.
In voting on the election of directors, you may vote in favor of all
nominees, withhold votes as to all nominees, or withhold votes as to specific
nominees. There is no cumulative voting for the election of directors. Directors
must be elected by a plurality of the votes cast at the annual meeting. This
means that the nominees receiving the greatest number of votes will be elected.
Votes that are withheld and broker non-votes will have no effect on the outcome
of the election. In voting on the approval of the 1999 Stock-Based Incentive
Plan and the ratification of the appointment of Monroe Shine & Co. as
independent auditors, you may vote in favor of the proposal, vote against the
proposal or abstain from voting. These matters will be decided by the
affirmative vote of a majority of the votes cast at the annual meeting. On any
such matter, abstentions and broker non-votes will have no effect on the voting.
As of __________, 1999, directors and executive officers of First Capital,
and persons closely associated with them, beneficially owned 143,419 shares of
First Capital common stock, not including shares that may be acquired upon the
exercise of stock options. This equals 11.1% of the outstanding shares of First
Capital common stock. As of the same date, HCB Bancorp and its directors and
executive officers beneficially owned 26,269 shares of First Capital common
stock.
Voting by Proxy
This document is being sent to you by the Board of Directors of First
Capital for the purpose of requesting that you allow your shares of First
Capital common stock to be represented at the annual meeting by the persons
named in the enclosed proxy card. All shares of First Capital 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 First Capital's Board of Directors. The First Capital
Board unanimously recommends a vote "FOR" approval of the merger agreement, the
election of the nominees for director, approval of the 1999 Stock-Based
Incentive Plan, and the appointment of independent auditors.
If any matters not described in this document are properly presented at the
annual 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. First Capital does not know of any other matters to be
presented at the meeting.
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 First
Capital in writing before your common stock has been voted at the annual
meeting, deliver proxy instructions with a later date, or attend the meeting and
vote your shares in person. Attendance at the annual meeting will not in itself
constitute revocation of your proxy.
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<PAGE>
If your First Capital 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. Your broker or bank may allow you to deliver
your voting instructions via the telephone or the Internet. Please see the
instruction form that accompanies this document.
First Capital will pay the cost of this proxy solicitation. In addition to
soliciting proxies by mail, directors, officers and employees of First Capital
may solicit proxies personally and by telephone. None of these persons will
receive additional or special compensation for soliciting proxies. First Capital
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. First Capital has retained Regan &
Associates, Inc. to assist in soliciting proxies for a fee of $3,000 plus
reimbursable expenses up to $1,500.
Participants in First Federal's ESOP
If you participate in First Federal's Employee Stock Ownership Plan
("ESOP"), the proxy card represents a voting instruction to the trustees of the
ESOP as to the number of shares in your plan account. Each participant in the
ESOP may direct the trustees as to the manner in which shares of common stock
allocated to the participant's plan account are to be voted. Unallocated shares
of common stock held by the ESOP and allocated shares for which no voting
instructions are received will be voted by the trustees in the same proportion
as shares for which the trustees have received voting instructions, subject to
the trustees' exercise of their fiduciary obligations.
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<PAGE>
SPECIAL MEETING OF HCB BANCORP SHAREHOLDERS
Place, Date and Time
The meeting will be held at Harrison County Bank's main office at 710 Main
Street, N.W., Palmyra, Indiana on _______, __________, 1999, at __:00 a.m.,
local time.
Purpose of the Meeting
The purpose of the special 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
You are entitled to vote your HCB Bancorp common stock if the records of
HCB Bancorp showed that you held your shares as of the close of business on
__________, 1999. As of the close of business on that date, a total of 79,900
shares of HCB Bancorp common stock were outstanding. Each share of common stock
has one vote.
Vote Required
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.
Approval and adoption of the merger agreement requires the affirmative vote
of the holders of at least a majority of the outstanding shares of HCB Bancorp
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 will have the same effect as a vote
against the merger agreement.
As of __________, 1999, directors and executive officers of HCB Bancorp,
and persons closely associated with them, beneficially owned 12,650 shares of
HCB Bancorp common stock, not including shares that may be acquired upon the
exercise of stock options. This equals 15.8% of the outstanding shares of HCB
Bancorp common stock. As of the same date, neither First Capital nor any of
its directors and executive officers owned any shares of HCB Bancorp common
stock.
Voting by Proxy
This document is being sent to you by the Board of Directors of HCB Bancorp
for the purpose of requesting that you allow your shares of HCB Bancorp common
stock to be represented at the special meeting by the persons named in the
enclosed proxy card. All shares of HCB Bancorp 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
HCB Bancorp's Board of Directors. The HCB Bancorp Board 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
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<PAGE>
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. HCB Bancorp does not
know of any other matters to be presented at the meeting.
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 HCB
Bancorp 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.
HCB Bancorp will pay the cost of this proxy solicitation. In addition to
soliciting proxies by mail, directors, officers and employees of HCB Bancorp may
solicit proxies personally and by telephone. None of these persons will receive
additional or special compensation for soliciting proxies.
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<PAGE>
OWNERSHIP OF FIRST CAPITAL COMMON STOCK
The following table provides information as of ______, 1999 with respect to
persons known to First Capital that may be considered to own more than 5% of the
outstanding shares of First Capital common stock. A person may be considered to
own any shares of common stock over which he or she has, directly or indirectly,
sole or shared voting or investing power.
Number of Percent of Common
Name and Address Shares Owned Stock Outstanding
- ---------------- ------------ -----------------
Douglas T. Breeden 78,450(1) 6.1%
Smith Breeden Associates, Inc.
100 Europa Drive, Suite 200
Chapel Hill, NC 27514
_______________________
(1) The number of shares owned by Mr. Breeden is based on a Schedule 13G filed
with the Securities and Exchange Commission on July 2, 1999. This filing
reports ownership by Mr. Breeden of 28,250 shares and ownership by Smith
Breeden Associates, Inc., which is controlled by Mr. Breeden, of 50,200
shares.
The following table provides information about the shares of First Capital
common stock that may be considered to be owned by each director of First
Capital and by all directors and executive officers of First Capital as a group
as of _______________, 1999.
<TABLE>
<CAPTION>
Number of Shares
That May Be
Number of Acquired Within Percent of
Shares Owned 60 Days By Common Stock
Name/Title (excluding options) Exercising Options Outstanding
- ---------------------------------- ------------------- ------------------ -----------
<S> <C> <C> <C>
J. Gordon Pendleton 23,793 -- 1.8%
Chief Executive Officer and Director
Samuel E. Uhl 19,192 5,129 1.9
President and Director
Mark D. Shireman 31,223(1) -- 2.4
Director
Dennis L. Huber 5,870 -- 0.5
Director
Kenneth R. Saulman 9,103(2) -- 0.7
Director
John W. Buschmeyer 22,717(3) -- 1.8
Director
Gerald L. Uhl 26,824(4) 409(5) 2.1
Director
All directors and executive officers 143,419 16,177 12.2
as a group (10 persons)
</TABLE>
____________________
(1) Includes 6,000 shares owned by Mr. Shireman's spouse and 500 shares owned by
Mr. Shireman's children.
(2) Includes 1,795 shares owned by a corporation controlled by Mr. Saulman.
(3) Includes 5,560 shares owned by Mr. Buschmeyer's spouse.
(4) Includes 10,626 shares owned by Mr. Uhl's spouse.
(5) Includes 409 shares that may be acquired pursuant to options held by Mr.
Uhl's spouse.
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<PAGE>
OWNERSHIP OF HCB BANCORP COMMON STOCK
The following table provides information as of _____________, 1999 with
respect to persons known to HCB Bancorp that may be considered to own more than
5% of HCB Bancorp's outstanding common stock. A person may be considered to own
any shares of common stock over which he or she has, directly or indirectly,
sole or shared voting or investing power.
Number of Percent of Common
Name and Address Shares Owned Stock Outstanding
- ---------------- ------------ -----------------
Mary Barry 5,228(1) 6.5%
3150 Railroad Avenue
Crandall, Indiana 47144
Earl H. Book 4,970(2) 6.2
11570 N. Bradford Rd., N.E.
Palmyra, Indiana 47164
_______________
(1) Includes 3,064 shares owned by Mrs. Barry's mother over which Mrs. Barry has
voting power.
(2) Includes 1,300 shares owned by Mr. Book's spouse.
The following table provides information about the shares of HCB Bancorp
common stock that may be considered to be owned by each director of HCB Bancorp
and by all directors and executive officers of HCB Bancorp as a group as of
_______________, 1999.
<TABLE>
<CAPTION>
Number of Shares
That May Be
Number of Acquired Within Percent of
Shares Owned 60 Days By Common Stock
Name/Title (excluding options) Exercising Options Outstanding
- ---------------------------------- ------------------- ------------------ -----------
<S> <C> <C> <C>
Earl H. Book 4,970(1) -- 6.2%
Chairman of the Board
William W. Harrod 100 150 0.3
President, Chief Executive Officer and Director
James S. Burden 770(2) -- 1.0
Director
Marvin E. Kiesler 2,600(3) -- 3.3
Director
Michael L. Shireman 400(4) -- 0.5
Director
Loren E. Voyles 3,420(5) -- 4.3
Director
James E. Nett 200 -- 0.3
Director
All directors and executive officers 12,650 250 16.1
as a group (nine persons)
</TABLE>
________________
(1) Includes 1,300 shares owned by Mr. Book's spouse.
(2) Includes 200 shares owned by Mr. Burden's spouse.
(3) Includes 1,480 shares owned by Mr. Kiesler's spouse and 90 shares owned by a
minor for whom Mr. Kiesler acts as guardian.
(4) Includes 200 shares owned by Mr. Shireman's spouse.
(5) Includes 3,170 shares owned by Mr. Voyles' spouse.
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<PAGE>
THE MERGER
The following discussion of the merger is qualified by reference to the
merger agreement, which is attached to this Joint 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 became the holding company for First
Federal in December 1998 in connection with First Federal's conversion from the
mutual holding company to the stock holding company form of organization. As a
savings and loan holding company, First Capital is subject to regulation by the
Office of Thrift Supervision (the "OTS"). Since its formation, First Capital's
principle business has been to direct and coordinate the business of First
Federal.
First Federal, which was founded in 1891, is a federally chartered savings
bank located in Corydon, Indiana. First Federal is regulated by the OTS and its
deposits are insured by the FDIC up to applicable limits. First Federal operates
as a retail financial institution dedicated to financing home ownership and
other consumer needs. First Federal currently operates three banking offices in
Harrison County, Indiana.
FC Acquisition Corp. is a wholly owned subsidiary of First Capital that was
formed by First Capital solely for the purpose of effecting the merger with HCB
Bancorp.
For financial statements of First Capital and a discussion of First
Capital's recent results of operations, see First Capital's 1999 annual report
to shareholders, which accompanies this Joint Proxy Statement-Prospectus.
HCB Bancorp. HCB Bancorp is an Indiana corporation and a bank holding
company organized on March 31, 1995, and is headquartered in Palmyra, Indiana.
HCB Bancorp owns all of the issued and outstanding shares of common stock of
Harrison County Bank, and its business consists primarily of the ownership,
supervision and control of Harrison County Bank. The common stock of Harrison
County Bank is HCB Bancorp's principal asset and dividends paid by Harrison
County Bank are HCB Bancorp's principal source of income.
Harrison County Bank is an Indiana-chartered bank originally organized and
chartered on September 10, 1938, and has continuously operated since that date.
Harrison County Bank conducts a general banking business and provides commercial
and retail banking services to individuals, partnerships, corporations,
associations and other entities from its six banking offices located in
Harrison, Floyd and Washington Counties, Indiana. These services including
accepting demand, savings and time deposits; making commercial, real estate,
agricultural, industrial and consumer loans; providing fiduciary and trust
services; and providing other services relating to the general commercial
banking business.
Harrison County Bank has a wholly-owned subsidiary, HCB Insurance Agency,
Inc., which was formed in 1993. HCB Insurance Agency, Inc. markets and sells
non-deposit investment products, such as mutual funds and annuities, and
property, casualty and life insurance products to both customers of Harrison
County Bank and to the general public in the communities served by Harrison
County Bank.
For financial statements of HCB Bancorp and a discussion of the HCB
Bancorp's recent results of operations, see Appendix E.
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<PAGE>
Form of the Merger; Conversion of HCB Bancorp Common Stock
Our Boards of Directors each have unanimously approved a merger agreement
that provides for the combination of First Capital and HCB Bancorp. The
combination will be accomplished through the merger of HCB Bancorp with FC
Acquisition Corp., a wholly owned subsidiary of First Capital. HCB Bancorp will
survive the merger and become a wholly owned subsidiary of First Capital. HCB
Bancorp will then merge into First Capital, with First Capital being the
surviving corporation. Upon completion of the merger, each share of HCB Bancorp
common stock will be converted into the right to receive 15.5 shares of First
Capital common stock. The common stock of First Capital will continue to trade
on the Nasdaq SmallCap Market under the symbol "FCAP" after completion of the
merger.
Immediately after the merger, Harrison County Bank will merge into First
Federal Bank. The surviving bank will be First Federal Bank. Upon completion of
the bank merger, the combined bank will adopt the name "First Harrison Bank."
Procedures for Exchanging Your HCB Bancorp Stock Certificates
Within ten days after the completion of the merger, First Capital's
transfer agent, Registrar and Transfer Company, will mail to each HCB Bancorp
shareholder a form of transmittal letter with instructions on how to surrender
certificates representing shares of HCB Bancorp common stock.
Please do not send in your HCB Bancorp stock certificates until you receive
the letter of transmittal and instructions from Registrar and Transfer Company.
Do not return your stock certificates with the enclosed proxy.
After you mail the letter of transmittal and your HCB Bancorp stock
certificates to Registrar and Transfer Company, your First Capital stock
certificates will be mailed to you. The HCB Bancorp certificates you surrender
will be canceled.
Until you surrender your HCB Bancorp 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 First Capital common stock into which
your shares have been converted. When you surrender your HCB Bancorp 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 HCB Bancorp common stock. HCB Bancorp stock
certificates presented for transfer after the completion of the merger will be
canceled and exchanged for First Capital common stock.
If your HCB Bancorp stock certificates have been 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.
Registrar and Transfer Company will send you instructions on how to provide
evidence of ownership.
Holders of First Capital common stock will not be required to exchange
certificates representing their shares of First Capital common stock or
otherwise take any action as a result of the completion of the merger. There is
no need for First Capital shareholders to submit their First Capital common
stock certificates to First Capital, Registrar and Transfer Company or to any
other person in connection with the merger.
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<PAGE>
Treatment of HCB Bancorp Stock Options
Each stock option to acquire HCB Bancorp common stock granted under HCB
Bancorp's stock option plan that is outstanding and unexercised immediately
before the completion of the merger will automatically become a stock option to
purchase shares of common stock of First Capital and will continue to be
governed by the terms of the HCB Bancorp stock option plan under which it was
granted. First Capital will assume the HCB Bancorp stock option plan. In each
case, the number of shares of First Capital common stock subject to the new
First Capital stock option will be equal to the product of the number of shares
of HCB Bancorp common stock subject to the HCB Bancorp stock option and the
exchange ratio, rounded to the nearest whole share. The exercise price per share
of First Capital common stock subject to the new First Capital stock option will
be equal to the exercise price per share of HCB Bancorp common stock under the
HCB Bancorp stock option divided by the exchange ratio, rounded to the nearest
whole cent. The duration and other terms of each new First Capital stock option
will be the same as the prior stock option. In any event, stock options that are
incentive stock options under the Internal Revenue Code will be adjusted in the
manner prescribed by the Internal Revenue Code.
Tax Free Transaction for HCB Bancorp Shareholders
The following is a discussion of the material federal income tax
consequences of the merger to holders of HCB Bancorp common stock. The
discussion is based upon the Internal Revenue Code, Treasury regulations, IRS
rulings, and judicial and administrative decisions in effect as of the date of
this Joint Proxy Statement-Prospectus. This discussion assumes that the HCB
Bancorp common stock is generally held for investment. In addition, this
discussion does not address all of the tax consequences that may be relevant to
you in light of your particular circumstances or to HCB Bancorp shareholders
subject to special rules, such as foreign persons, financial institutions, tax-
exempt organizations, dealers in securities or foreign currencies or insurance
companies. The opinion of counsel referred to in this section will be based on
facts existing at the completion of the merger. In rendering its opinion,
counsel will require and rely upon representations contained in certificates of
officers of First Capital, HCB Bancorp and others.
It is a condition to the obligation of First Capital and HCB Bancorp to
complete the merger that the parties receive an opinion of Muldoon, Murphy &
Faucette LLP, dated as of the completion of the merger, that the merger will be
treated as a reorganization within the meaning of the Internal Revenue Code. If
either of us waives the requirement of receiving a tax opinion and there is a
material change in tax consequences to First Capital shareholders or HCB Bancorp
shareholders, you will be notified and given the opportunity to confirm or
change your vote. Because the merger will be treated as a reorganization:
. neither First Capital nor HCB Bancorp will recognize any gain or loss as
a result of the merger;
. HCB Bancorp shareholders who exchange all of their shares of HCB Bancorp
common stock solely for First Capital common stock pursuant to the
merger will recognize no gain or loss, except for cash received instead
of fractional shares;
. the aggregate tax basis of the shares of First Capital common stock
received by HCB Bancorp shareholders, including fractional shares deemed
received and redeemed as described below, will equal the aggregate tax
basis of the shares of HCB Bancorp common stock surrendered in exchange
for that First Capital common stock;
. the holding period of a share of First Capital common stock received in
the merger, including a fractional share deemed received and redeemed as
described below, will include the holder's
26
<PAGE>
holding period in the HCB Bancorp common stock surrendered in exchange
for that First Capital common stock; and
. cash received by an HCB Bancorp shareholder instead of a fractional
share interest in First Capital common stock will be treated as received
in redemption of that fractional share interest, and an HCB Bancorp
shareholder will recognize capital gain or loss for U.S. federal income
tax purposes measured by the difference between the amount of cash
received and the portion of the tax basis of the share of HCB Bancorp
common stock allocable to that fractional share interest. If, however,
the cash received has the effect of the distribution of a dividend with
respect to an HCB Bancorp shareholder, part or all of the cash received
may be treated as a dividend.
The tax opinion to be delivered to us in connection with the merger is not
binding on the Internal Revenue Service or the courts, and we do not intend to
request a ruling from the Internal Revenue Service with respect to the merger.
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.
Background of the Merger
Since First Capital formed a mutual holding company in 1993, the First
Capital Board and management has considered various strategic alternatives for
growth. Several years ago, management of First Capital identified a merger with
HCB Bancorp as an opportunity to combine with a similarly sized institution with
a comparable operating strategy and complimentary market area. Over the years,
the two companies had occasional informal discussions regarding a possible
business combination, but had been unable to accomplish a combination while
First Capital had a mutual holding company structure.
During the 1990's, HCB Bancorp has on a regular basis analyzed the present
condition of Harrison County Bank, the marketplace and its prospects for growth
and success. In 1994, the Board of Directors of Harrison County Bank instituted
the formation of HCB Bancorp as a holding company for Harrison County Bank,
which was consummated on March 31, 1995. This action was intended to provide
greater flexibility to grow, expand and change as the marketplace changed in
order to remain successful. In addition to the bank holding company structure,
the HCB Bancorp Board has explored other corporate strategies to realize the
maximum return on capital for shareholders while effectively competing in its
marketplace.
In late February 1999, after the completion of First Federal's conversion
from a mutual holding company form to a stock holding company form of
organization, J. Gordon Pendleton, the Chairman and Chief Executive Officer of
First Capital, contacted Earl Book, the Chairman of HCB Bancorp, to discuss the
possibility of a business combination between First Capital and HCB Bancorp.
Following their discussion, Mr. Pendleton, Samuel E. Uhl, the President of First
Capital, and two directors of First Capital met twice in February and March
with Mr. Book, William W. Harrod, the President and Chief Executive Officer of
HCB Bancorp, and a director of HCB Bancorp to further discuss the nature of a
business combination between First Capital and HCB Bancorp. Having determined
that a business combination with HCB Bancorp merited further consideration, in
May, 1999, First Capital requested and received approval from the OTS to engage
in discussions with HCB Bancorp. Approval from the OTS was necessary pursuant to
customary conditions imposed in the OTS's approval of First Federal's conversion
to the stock holding company form of organization.
27
<PAGE>
In late May, 1999, HCB Bancorp, with the assistance of its financial
advisor, Young & Associates, evaluated the combined companies and suggested an
exchange ratio for converting HCB Bancorp common stock to First Capital common
stock. First Capital, with the assistance of Charles Webb, considered this
evaluation and suggested modifications to the exchange ratio.
On June 10, 1999, Mr. Pendleton reported to the First Capital Board on the
progress of discussions with HCB Bancorp. Over the next few weeks,
representatives of First Capital and HCB Bancorp met several times to discuss
the exchange ratio, the composition of the Board of Directors and management
after the merger, and other operational issues. At the end of June, 1999,
representatives of First Capital and HCB Bancorp conducted a due diligence
investigation with respect to each other. This investigation included a review
of operational matters, loans, investments, contractual obligations, regulatory
relations and the status of each party's preparations to be Year 2000 compliant.
On July 6, 1999, First Capital provided HCB Bancorp with an initial draft
of a definitive merger agreement. Over the next two weeks, representatives of
First Capital and HCB Bancorp negotiated the terms of the merger agreement. The
progress of the negotiations were reported to the members of the First Capital
Board throughout this period.
A final draft of the merger agreement was provided to the First Capital
Board on July 17, 1999. On July 19, the First Capital Board met with legal
counsel to review the contents of the merger agreement. Legal counsel also
reviewed with First Capital's Board its fiduciary duties to shareholders in the
context of a combination with HCB Bancorp. Charles Webb presented its analysis
and delivered its opinion that the exchange ratio was fair, from a financial
point of view, to the shareholders of First Capital. The First Capital Board
then discussed the terms of the merger agreement and the presentation by Charles
Webb. After conclusion of the review and discussion, a vote was taken and First
Capital's Board unanimously approved the merger agreement and authorized Mr.
Pendleton and Mr. Uhl to execute the merger agreement and related documents on
behalf of First Capital.
The HCB Bancorp Board of Directors met on July 16, 1999 to review the final
draft of the merger agreement negotiated between First Capital and HCB Bancorp
and assisted by legal counsel for both parties. The HCB Bancorp Board met with
its legal counsel to review the structure of the transaction, the terms of the
merger and many other details of the final agreement. After lengthy discussion
regarding the terms of the merger, the specific provisions of the merger
agreement, and the chance to review the draft merger agreement, the Board met
again on July 17, 1999 to discuss the transaction. Legal counsel advised the
HCB Bancorp Board of its fiduciary duties to the shareholders in considering the
proposed transaction with First Capital. A representative of Young & Associates
delivered its fairness opinion and presented its analysis as to the fairness of
the transaction from a financial perspective to the shareholders of HCB Bancorp.
The HCB Bancorp Board discussed the terms of the proposed merger and the merger
agreement and the information provided by Young & Associates. The HCB Bancorp
Board then voted unanimously to approve the merger agreement, proceed with the
transaction and recommend the merger agreement to HCB Bancorp's shareholders for
their approval.
Recommendation of the First Capital Board; First Capital's Reasons for the
Merger
First Capital's Board of Directors has unanimously approved the merger
agreement and recommends that First Capital shareholders vote "FOR" the approval
of the merger agreement.
First Capital's Board has determined that the merger and the merger
agreement are fair to, and in the best interests of, First Capital and its
shareholders. In reaching this determination, the First Capital Board
28
<PAGE>
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, the First Capital Board also considered a number of factors,
including the following:
. Information concerning the businesses, earnings, operations, financial
condition and prospects of HCB Bancorp and First Capital, both
individually and as combined. The First Capital Board took into account
the results of First Capital's due diligence review of HCB Bancorp.
. The opinion rendered by Charles Webb, as financial advisors to First
Capital, that the exchange ratio is fair, from a financial standpoint,
to First Capital shareholders (see "--Fairness Opinion of First
Capital's Financial Advisor").
. The complimentary nature of the businesses and market areas of First
Capital and HCB Bancorp.
. The terms of the merger agreement and the structure of the merger,
including the fact that the fixed exchange ratio provides certainty as
to the number of shares of First Capital common stock to be issued in
the merger 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 and as a pooling of interests for accounting purposes.
. The belief of senior management of First Capital that First Capital and
HCB Bancorp share a common vision with respect to operating a retail
financial institution and that their management and employees possess
complimentary skills and expertise.
. The proposed management of the combined company, including the fact that
Mr. Pendleton will serve as Chairman of First Capital and Mr. Uhl will
serve as President and Chief Executive Officer of First Harrison Bank.
. The historical trading prices for First Capital common stock.
. The current and prospective economic, competitive and regulatory
environment facing First Capital, HCB Bancorp and the financial services
industry.
. Consideration of the effect of the merger on First Capital's other
constituencies, including the customers and communities served by First
Capital and its employees.
The discussion of the information and factors considered by the First
Capital Board is not intended to be exhaustive, but includes all material
factors considered by the First Capital Board. In reaching its determination to
approve and recommend the merger, the First Capital Board did not assign any
specific or relative weights to any of the foregoing factors, and individual
directors may have weighed factors differently.
Recommendation of the HCB Bancorp Board; HCB Bancorp's Reasons for the Merger
HCB Bancorp's Board of Directors has unanimously approved the merger
agreement and recommends that HCB Bancorp shareholders vote "FOR" the approval
of the merger agreement.
29
<PAGE>
In response to the factors set forth under "Background of the Merger" on
page __, HCB Bancorp's Board has determined that the merger and the merger
agreement are in the best interests of HCB Bancorp and its shareholders. In
approving the merger agreement, the HCB Bancorp Board 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. In arriving at its determination, the HCB Bancorp Board also
considered a number of factors, including the following:
. Information concerning the businesses, earnings, operations, financial
condition and prospects of HCB Bancorp and First Capital, both
individually and as combined. The HCB Bancorp Board took into account
the results of HCB Bancorp's due diligence review of First Capital.
. The financial advice rendered by Young & Associates, as financial
advisors to HCB Bancorp, that the terms of the merger are fair and
equitable, from a financial standpoint, to the HCB Bancorp shareholders
(see "--Fairness Opinion of HCB Bancorp's Financial Advisor");
. The terms of the merger agreement and the structure of the merger,
including the fact that the fixed exchange ratio provides certainty as
to the number of shares of First Capital common stock to be issued in
the merger 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 and as a pooling of interests for accounting purposes.
. The proposed management of the combined company, including the fact that
Mr. Book will serve as Chairman of First Harrison Bank and Mr. Harrod
will serve as President and Chief Executive Officer of First Capital.
. The historical trading prices for First Capital common stock and the
fact that First Capital common stock is listed on the Nasdaq SmallCap
Market, which will give HCB Bancorp shareholders a more liquid
investment than HCB Bancorp common stock.
. The current and prospective economic, competitive and regulatory
environment facing HCB Bancorp, First Capital and the financial services
industry generally.
. Consideration of the effect of the merger on HCB Bancorp's customers and
communities served by HCB Bancorp and its employees.
. A combination with First Capital would preserve Harrison County Bank's
tradition of a strong, independent community bank and would provide
access to First Federal's customer base, technology and physical assets
in markets not currently served by Harrison County Bank.
The discussion of the information and factors considered by the HCB Bancorp
Board is not intended to be exhaustive, but includes all material factors
considered by the HCB Bancorp Board. In reaching its determination to approve
and recommend the merger, the HCB Bancorp Board did not assign any specific or
relative weights to any of the foregoing factors, and individual directors may
have weighed factors differently.
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Opinion of First Capital's Financial Advisor
In May 1999, First Capital retained Webb to provide financial advisory and
investment banking services in connection with the merger with HCB Bancorp.
Webb is a nationally recognized investment banking firm, and as part of its
investment banking business, is regularly engaged in the valuation of bank, bank
holding company, and thrift institution securities in connection with mergers
and acquisitions, negotiated underwritings, distributions of listed and unlisted
securities, private placements, and valuations for various other purposes. Webb
is familiar with the market for common stocks of publicly traded banks, thrifts,
and bank and thrift holding companies. The First Capital Board of Directors
selected Webb based on Webb's qualifications, reputation, and its experience and
expertise in transactions similar to the merger and its prior work for and
relationship with First Capital. Webb has acted exclusively for the First
Capital Board of Directors in rendering its fairness opinion and will receive a
fee for its services.
Pursuant to its engagement, Webb was asked to render an opinion regarding
the fairness, from a financial point of view to the shareholders of First
Capital, of the consideration to be issued in the merger. Webb delivered its
opinion to the First Capital Board of Directors that, as of July 19, 1999, the
exchange ratio is fair, from a financial point of view, to the shareholders of
First Capital. That opinion was updated as of the date of this document.
Although Webb evaluated the fairness to First Capital's shareholders of the
exchange ratio in the merger, Webb did not recommend the exchange ratio, which
was determined by First Capital and HCB Bancorp through arms-length
negotiations. No limitations were imposed by the First Capital Board of
Directors upon Webb with respect to the investigations made or procedures
followed by it in rendering its opinion. Webb has consented to the inclusion in
this document of the summary of its opinion to the First Capital Board of
Directors and to the reference to the entire opinion attached to this document
as Appendix B.
The full text of the opinion of Webb, which is attached as Appendix B to
this Joint Proxy Statement-Prospectus, sets forth certain assumptions made,
matters considered, and limitations on the review undertaken by Webb, and should
be read in its entirety. The summary of the opinion of Webb set forth in this
Joint Proxy Statement-Prospectus is qualified in its entirety by reference to
the opinion.
In rendering its opinion, Webb reviewed certain financial and other
business data supplied to it by HCB Bancorp including Annual Reports and Proxy
Statements for the years ended December 31, 1996, 1997 and 1998, financial
reports for the quarter ended March 31,1999, as well as certain other
information deemed relevant. Webb discussed with senior management of HCB
Bancorp and its wholly owned subsidiary, Harrison County Bank, the current
position and prospective outlook for HCB Bancorp. For First Capital, Webb
reviewed audited financial statements for the fiscal years ended June 30, 1997
and 1998, the Prospectus dated November 12, 1998 for its conversion to a stock
holding company, Form 10-QSB for the quarter ended March 31, 1999, and certain
other information it deemed relevant. Because this transaction has been
structured as a merger of equals, Webb reviewed the relative contribution of
First Capital and HCB Bancorp to the combined company and the resulting relative
percentage ownership of the shareholders of each company.
Webb also reviewed the merger agreement. Webb assumed that the merger will
be accounted for as a pooling of interests and that neither HCB Bancorp nor
First Capital has taken any action that individually or as part of a series of
actions would prohibit the pooling of interests method of accounting for the
merger.
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For purposes of its opinion, Webb relied, without independent verification,
on the accuracy and completeness of the material furnished to it by the First
Capital and HCB Bancorp and the material otherwise made available to it,
including information from published sources, and did not make any independent
effort to verify such data. With respect to the financial information,
including forecasts and asset valuations Webb received from First Capital, Webb
assumed (with First Capital's consent) that they had been reasonably prepared
reflecting the best currently available estimates and judgment of the First
Capital's management. In addition, Webb did not make or obtain any independent
appraisals or evaluations of the assets or liabilities, nor of the potential
exposure resulting from Year 2000 issues of First Capital or HCB Bancorp, and
potential and/or contingent liabilities of First Capital or HCB Bancorp. Webb
further relied on the assurances of management of First Capital and HCB Bancorp
that they are not aware of any facts that would make such information inaccurate
or misleading. Webb expressed no opinion on matters of a legal, regulatory, tax
or accounting nature or the ability of the parties to complete the merger, as
set forth in the merger agreement.
The following is a summary of the material analyses prepared by Webb in
connection with the rendering of its opinion. The preparation of a fairness
opinion is not necessarily susceptible to partial analysis or summary
description. Webb believes that its analysis and the summary below must be
considered as a whole and that selecting portions of its analysis without
considering all analyses, or selecting part of the summary, without considering
all factors and analyses, would create an incomplete view of the process
underlying the analysis set forth in Webb's presentation and opinion.
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Contribution Analysis. In rendering its opinion, Webb analyzed the
contribution of both First Capital and HCB Bancorp in terms of total assets,
deposits, equity, net interest income, non operating income and expenses and net
income. This contribution was compared to the resultant percentage ownership of
the combined company.
First Capital HCB Bancorp
Contribution to Contribution to
Combined Company Combined Company
---------------- ----------------
Balance Sheet (as of March 31, 1999)
Assets 57.2% 42.8%
Loans, net 57.7% 42.3%
Deposits 53.6% 46.4%
Equity 59.0% 41.0%
Income Statement(1)
Net Interest Income 47.2% 52.8%
Noninterest Income 30.8% 69.2%
Noninterest Expense 41.4% 58.6%
Net Income 50.2% 49.8%
Pro Forma Ownership Pro Forma Ownership
of First Capital HCB Bancorp
Shareholders in the Shareholders in the
Combined Company Combined Company
------------------- -------------------
Primary (2) 51.1% 48.9%
Fully-diluted (3) 51.4% 48.6%
_______________________
1. Based on annualized amounts for First Capital for the nine months ended March
31, 1999 and annualized amounts for HCB Bancorp for the three months ended
March 31, 1999.
2. HCB primary shares are based on multiplying the exchange ratio of 15.5 times
the 79,900 shares outstanding.
3. HCB fully-diluted shares include primary shares plus the 475 options times
the exchange ratio of 15.5
In rendering its opinion, Webb assumed that in the course of obtaining the
necessary approvals for the merger, no restrictions or conditions will be
imposed that would have a material adverse effect on the contemplated benefits
of the merger to First Capital or the ability to consummate the merger. Webb's
opinion is based on the market, economic and other relevant considerations as
they exist and can be evaluated on the date of this document.
In preparing its analysis, Webb made numerous assumptions with respect to
industry performance, business and economic conditions, and other matters, many
of which are beyond the control of Webb, First Capital and HCB Bancorp. The
analyses performed by Webb are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses and do not purport to be appraisals or reflect the prices at
which a business may be sold or the prices at which any securities may trade at
the present time or at any time in the future. In addition, as described above,
Webb's opinion, along with its presentation to the First Capital Board of
Directors, was just one of the many factors taken into consideration by the
First Capital Board of Directors in approving the merger agreement.
Pursuant to the engagement letter with First Capital, Webb will receive a
fee of $50,000. As of the date of the Proxy Statement, Webb has received $12,500
of such fee. The remainder is due upon completion of the merger. First Capital
has also agreed to indemnify Webb against certain liabilities, including
liabilities under the federal securities laws, and to reimburse Webb for certain
out-of-pocket expenses.
Webb has in the past provided other financial services to First Capital,
including serving as marketing agent for First Capital's initial public offering
in 1998, and has received compensation for such services.
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Opinion of HCB Bancorp's Financial Advisor
HCB Bancorp retained Young & Associates, Inc. a financial institution
consulting firm of Kent, Ohio, to issue a fairness opinion in connection with
the merger. Young & Associates issued its written opinion to the HCB Bancorp
Board of Directors on July 17, 1999, stating that the terms of the merger
agreement were fair and equitable to HCB Bancorp and its shareholders from a
financial point of view. Young & Associates updated its opinion to the date of
this document, and reaffirmed that the terms of the merger agreement were fair
and equitable both to HCB Bancorp and its shareholders. A copy of the opinion
of Young & Associates is set forth as Appendix C to this Joint Proxy Statement-
Prospectus and should be read in its entirety.
Young & Associates regularly evaluates financial institutions and their
securities for a wide range of purposes, including but not limited to, mergers
and acquisitions. HCB Bancorp selected Young & Associates to issue a fairness
opinion on the basis of its experience, reputation, and qualifications.
Young & Associates provided certain financial analysis to HCB Bancorp
during the negotiations between the parties. The terms of the merger agreement,
including the exchange ratio, were negotiated by the parties and their legal
representatives at arms-length.
Young & Associates analyzed various public and non-public sources of
information in developing its opinion, including but not limited to, (1)
financial data of HCB Bancorp and its subsidiary, Harrison County Bank, from
December 31, 1995 through June 30, 1999 from published annual reports, internal
bank reports and interviews with bank management; (2) financial data regarding
First Capital from publicly available regulatory reports; (3) comparative
financial data of peers for each institution from public sources; (4) published
reports from various sources regarding transactions similar in nature to that
proposed in the merger; and (5) the merger agreement.
The Young & Associates fairness opinion was provided to the HCB Bancorp
Board for its information and is directed only to the fairness, from a financial
point of view, of the terms of the merger to the holders of HCB Bancorp common
stock. It does not address the underlying business decision of HCB Bancorp to
engage in the merger and does not constitute a recommendation to the holders of
shares of HCB Bancorp common stock as to how they should vote on the merger or
related matters.
Young & Associates performed several analyses which are common within the
banking industry and made certain assumptions, which it believes to be
reasonable, about future performance. As with any projection of future
outcomes, actual performance may vary. While the analysis used various
analytical techniques and made use of comparative date, the analysis is not
mathematical and involves complex considerations and judgments concerning the
financial performance of the institutions. The focus of the analysis was on the
value of both HCB Bancorp and First Capital as independent entities, and whether
the merger produced equivalent or greater earnings per share to each group of
shareholders; whether the price/book and price/earnings to HCB Bancorp, given
recent share prices of First Capital, was relative to similar and recent merger
transactions; and how the earnings of the institution after the merger might be
expected to benefit from the combination of the two entities.
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<PAGE>
Financial Analysis of HCB Bancorp and Forecast. Young & Associates
analyzed the past and present earnings performance of HCB Bancorp, compared it
with peers and projected earnings ten years into the future based on assumptions
developed through interviews with management.
The earnings of HCB Bancorp through Harrison County Bank measured by return
on average assets ("ROA") have been higher than banks sharing similar
characteristics from December 31, 1995 through June 30, 1999. During this
period, HCB Bancorp's return on ROA averaged nearly 1.4%. Banks within the peer
group, as reported in the Uniform Bank Performance Report, which compares each
individual bank's performance with all banks in the country to the average of
those sharing similar characteristics of size, structure and markets, typically
earned approximately 1.1%. The return on average equity ("ROE") for HCB Bancorp
trailed peer banks during those same periods, reflecting approximately 10.4% for
HCB Bancorp versus average peer ratios of 12.0%. HCB Bancorp's ROE has been
negatively impacted by its higher levels of Tier 1 leverage capital which has
averaged over 13.0%, while peer banks had ratios of approximately 9.0%.
HCB Bancorp's earnings performance has been affected positively by lower
than average non-interest expense as a percentage of average assets and better
than average control of loan losses. Both net interest margin and non-interest
income have both been near the levels experienced by peer banks. Both
components of net interest income, yield on earnings assets and interest cost to
fund earning assets, are approximately equal to peer banks. Non-interest
expense control, particularly through the control of personnel expense, and the
control of loan losses have been the major causes of HCB Bancorp's better than
average ROA.
Young & Associates forecasted earnings of HCB Bancorp and Harrison County
ten years into the future based on certain assumptions which it believes to be
reasonable. Since the performance of HCB Bancorp over the past five years has
been consistent in most of the key ratios, Young & Associates assumed that the
ratio relationships, including the rate of growth, would continue to show this
stability. Assets were expected to continue to grow modestly at the 5.0% level
achieved in recent years and all measures of profitability components were
continued at 1998 levels with only minor adjustments. Based on these
assumptions, Young & Associates concluded that HCB Bancorp, as an independent
financial institution, would reach total assets of approximately $140 million in
the tenth year of the forecast and achieve ROA of approximately 1.6% and ROE of
approximately 9.5%.
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<PAGE>
The following tables show the specific assumptions used and the financial
results of the forecast:
Assumptions - HCB
Year 1 Year 5 Year 10
-------- -------- ---------
Asset growth rate 5.00% 5.00% 5.00%
Net interest income 4.77 5.00 5.01
Non-interest income/average assets .88 .88 .88
Non-interest expense/average assets 3.20 3.14 3.07
Loan loss provision/average assets .10 .10 .10
Dividend payout ratio 42.50 42.50 42.50
Forecast Results - HCB
Year 1 Year 5 Year 10
-------- --------- ---------
Total assets $90,523 $110,032 $140,431
Total equity 12,134 15,473 21,037
Net profit after tax 1,179 1,545 2,205
EPS - (common size without options in dollars) .95 1.25 1.78
EPS - (common size including options in dollars) .94 1.24 1.77
Financial Analysis of First Capital and Forecast. As of June 30, 1999,
First Capital through its subsidiary First Federal Bank achieved an ROA of
approximately 1.03%. Other thrift institutions with similar characteristics
have typically earned slightly less than 1.0%. The components of earnings of
First Capital share several similarities with HCB Bancorp, particularly those of
lower non-interest expense and better than average control of loan losses. The
primary difference between the two organizations can be found in the lower net
interest margin experienced by First Capital. That differential between these
two institutions has recently been nearly 1.5% of average assets pre-tax. It is
partially offset by the relatively lower non-interest expense at First Capital,
which gives it an advantage of nearly 1.2% of average assets pre-tax.
Young & Associates forecasted the earnings of First Capital ten years into
the future using certain assumptions which it believes to be reasonable. Most
performance measures were continued into the future based on current levels
achieved by First Capital. An initial forecast considered how First Capital
would have performed in the absence of the merger. A second forecast considered
the possible improvements in earnings of the combined companies. Interviews
with management of HCB Bancorp identified certain cost savings and earnings
enhancements, which were included in the forecast. In the absence of the
merger, we assumed that First Capital would continue to grow assets at its
recent 7.0% rate, reaching total assets by the tenth year of the forecast of
over $221 million. The first year of the forecast was also adjusted to reflect
the additional capital raised by First Capital and additional borrowings by
First Capital from the Federal Home Loan Bank, both of which were considered to
be non-recurring events. Young & Associates assumed that the earnings of First
Capital would improve slightly to a level of 1.1% ROA.
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The following tables show the specific assumptions used and the financial
results of the forecast:
Assumptions - First Capital
Year 1 Year 5 Year 10
-------- -------- ---------
Asset growth rate 20.34% 6.35% 6.53%
Net interest income 3.02 3.05 3.05
Non-interest income/average assets .43 .43 .43
Non-interest expense/average assets 1.87 1.82 1.76
Loan loss provision/average assets .02 .02 .02
Dividend payout ratio 42.50 42.50 42.50
Forecast Results - First Capital
Year 1 Year 5 Year 10
-------- -------- ---------
Total assets $126,714 $161,731 $221,183
Total equity 17,683 21,219 27,255
Net profit after tax 1,175 1,698 2,406
EPS - (common size without options in dollars) .91 1.31 1.86
EPS - (common size including options in .90 1.30 1.84
dollars)
Combined Company - Ten Year Forecast. The forecast for the combined
companies combined the forecast for the two institutions, described above, in
the absence of the merger and added the projected cost savings and earnings
enhancements identified by HCB Bancorp's management. The enhancements included
in the forecast are $200,000 in Year 1 growing to $634,000 by Year 10 of the
forecast:
Combined Company
Year 1 Year 5 Year 10
-------- -------- ---------
Additional earnings from merger - less taxes $ 159 $ 335 $ 415
Total combined earnings 2,513 3,578 5,026
EPS - (without options in dollars) .99 1.41 1.99
EPS - (including options in dollars) .98 1.40 1.97
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Contribution Analysis. Young & Associates reviewed the relative
contributions of the two institutions, using information available June 30,
1999, to total assets, total net loans, total deposits, total common equity and
total earnings. Earnings were reviewed on the basis of the last twelve months
of reported earnings for each institution through June 30, 1999, as well as the
pro forma earnings contributed by the institutions from the forecast described
above, in which HCB Bancorp would contribute an average of 48.0% of the combined
company's earnings over the first five years. The following table shows the
percentages contributed by the respective institutions for each of those factors
considered:
HCB First Capital
--------- -----------------
Total assets 41.78% 58.22%
Total net loans 41.42 58.58
Total deposits 45.01 54.99
Common equity 41.17 58.83
Earnings LTM 50.32 49.68
Pro Forma (Young & Associates)
Earnings 1999 50.00 50.00
Earnings 2000 48.00 52.00
Earnings 2003 47.97 52.13
Terms of Agreement - Exchange Ratio. The merger provides that each of the
shares of HCB Bancorp will be exchanged for 15.5 shares of First Capital. Based
on the outstanding shares of each institution, shareholders of HCB Bancorp would
own 49.0% of the combined company. If all of the outstanding options were
exercised, shareholders of HCB Bancorp would own 48.7% of the combined company.
Valuation of Exchange to Shareholders of HCB Bancorp. Assuming a price of
$11.25 per share for First Capital common stock, which was the current market
price prior to the announcement of the merger, each existing shareholder of HCB
Bancorp would receive shares of First Capital common stock worth $174.38. The
most recent price, known too management of HCB Bancorp, was $176.00 per share
and occurred in the last half of 1998. The shares of HCB Bancorp, however, have
traded infrequently and no determination of market value should be based on this
single trade. The final value to HCB Bancorp's shareholders will depend upon
the market value of First Capital at the time of the merger.
Impact on Earnings per Share. Young & Associates compared the earnings per
share that each company would have achieved in the absence of the merger and
compared that result with the post-merger earnings per share. To make the
comparison understandable, the shares of HCB Bancorp were restated at the book
value per share of First Capital to place HCB Bancorp on a common size. In the
absence of the merger, based on the Young & Associates' forecast, HCB Bancorp
would earn $.95 per share in 1999, growing to $1.32 per share in Year 5 of the
forecast. Those same shares would receive $.99 in 1999 under the merger,
growing to $1.39 in Year 5, increases of 4.2% and 5.3%, respectively. Using the
same method, but considering the effect of the outstanding options of both
institutions, HCB Bancorp would earn $.94 per share in 1999, growing to $1.24 by
Year 5 in the absence of the merger, and $.97 and $1.36 respectively after
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the merger. In all of the ten years forecast, the shareholders of HCB Bancorp
would receive greater earnings per share if the merger were consummated.
The following table shows a comparison of the anticipated earnings per
share to HCB Bancorp shareholders before and after the merger considering the
effect of all options:
Year 1 Year 5 Year 10
-------- -------- ---------
Pre-Merger EPS (including HCB Bancorp options) $.94 $1.24 $1.77
Post-Merger EPS (including all options) .97 1.36 1.85
Comparison with Selected Merger Transactions. At $11.25 per share for First
Capital common stock, the transaction is valued at 1.15 times the common equity
of HCB Bancorp, and 13.65 times its last twelve months earnings through June 30,
1999. Young & Associates analyzed 49 transactions involving merger/acquisition
between financial institutions in which the acquired institution had assets
between $75 million and $125 million. The transactions were selected from 229
transactions announced during the last half of 1998 as reported by Sheshunoff
Information Services, Inc.
The selected transactions reflected an average multiple of the book value
of the acquired institution of 2.4 times with the minimum and maximums reported
at 1.01 and 4.8 respectively. Those same transactions, as a percentage of the
last twelve months reported earnings of the acquired institutions, reflected an
average multiple of 20.2 with minimums and maximums of 8.2 and 72.9 times
earnings respectively.
No institution in the selected transactions, however, is identical to HCB
Bancorp and no transaction is identical to the merger.
The analysis by Young & Associates was performed independently and without
limitations imposed by any of the parties involved in the merger. In conducting
its analysis, Young & Associates used information from publicly available
financial data resources, financial data from internal bank records of HCB
Bancorp and representations of the parties in the merger agreement and/or the
Joint Proxy Statement-Prospectus. That information was assumed to be reliable
and no attempt was made to verify the information independently. It was further
assumed that the merger will be completed as planned and that no other
conditions will be imposed which might work to the detriment of either
shareholder group.
HCB Bancorp will pay Young & Associates a fee of $55,000, plus reasonable
out-of-pocket expenses, for providing assistance during the negotiations,
including $7,500 for the issuance of this opinion of the fairness to the
shareholders of HCB Bancorp, indemnify Young & Associates against certain
liabilities, including liabilities under the securities laws.
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Rights of Dissenting Shareholders
HCB Bancorp Shareholders. Under Indiana Code Chapter 23-1-44, any holder of
record of HCB Bancorp common stock who does not vote in favor of the merger may
exercise dissenting shareholder rights and demand payment in cash for the fair
value of his or her shares by complying with the requirements of Chapter 23-1-
44. For purposes of Chapter 23-1-44, the fair value of a dissenting
shareholder's shares is the value of the shares immediately before the
effectuation of the merger, excluding any appreciation or depreciation in
anticipation of the merger unless the exclusion would be inequitable.
Set forth below is a summary of the procedures relating to the exercise of
dissenters' rights under Chapter 23-1-44. This summary does not purport to be
complete and is qualified in its entirety by express reference to applicable
Indiana law, including Indiana Code Chapter 23-1-44, a copy of which is appended
as Appendix D to this document and incorporated herein. Any shareholder of HCB
Bancorp contemplating exercising dissenters' rights with respect to HCB Bancorp
common stock is urged to review carefully these provisions and to consult an
attorney, because dissenters' rights will be lost if the procedural requirements
under Chapter 23-1-44 are not fully and precisely satisfied. Each step must be
taken in strict compliance with the applicable provisions of Chapter 23-1-44 in
order for holders to perfect dissenters' rights.
Under Chapter 23-1-44, an HCB Bancorp shareholder of record for the special
meeting who desires to assert dissenters' rights must (1) deliver to HCB Bancorp
before the shareholder vote is taken written notice of the shareholder's intent
to demand payment in cash for shares owned if the merger is effectuated, and (2)
not vote the shareholder's shares in favor of the merger, either in person or by
proxy. Dissenting shareholders cannot dissent as to only some but not all of
the HCB Bancorp common stock registered in their names, except in limited
circumstances. Dissenting shareholders may send their written notice to William
W. Harrod, President, HCB Bancorp, P.O. Box 37, 710 Main Street, N.E., Palmyra,
Indiana 47164.
If the merger is approved by the HCB Bancorp shareholders, HCB Bancorp must
mail or deliver a written notice of dissenters' rights to each dissenting
shareholder satisfying the above conditions within ten days after shareholder
approval has occurred. The notice to dissenting shareholders 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;
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 merger, which was July 20, 1999, and require that the
dissenting shareholder certify whether or not that shareholder
acquired beneficial ownership of the shares before that date;
4. set a date by which HCB Bancorp 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.
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An HCB Bancorp shareholder who is sent a notice to dissenters must then (a)
demand payment for the shareholder's shares of HCB Bancorp common stock, (b)
certify whether the shareholder acquired beneficial ownership of the HCB Bancorp
common stock before July 20, 1999 and (c) deposit the shareholder's certificates
representing shares of HCB Bancorp common stock in accordance with the terms of
the notice to dissenters. An HCB Bancorp shareholder who fails to take these
steps by the date set forth in the notice to dissenters will not be entitled to
payment for the shareholder's shares through the dissenters' rights process and
will be considered to have voted his or her shares in favor of the merger.
An HCB Bancorp shareholder 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. Shareholders 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 shareholder 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
shareholder who has complied with all statutory requirements and the notice to
dissenters, and who was the beneficial owner of HCB Bancorp common stock before
July 20, 1999 (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. For those dissenters who became beneficial owners of shares on or after
July 20, 1999, 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 shareholder agrees to accept the estimated fair
value amount in full satisfaction of the dissenting shareholder's demand or
until First Capital is otherwise directed by a court of competent jurisdiction.
If the dissenting shareholder believes the amount paid or estimated by
First Capital is less than the fair value for his or her shares of HCB Bancorp
common stock or if First Capital fails to make payment to the dissenting
shareholder within 60 days after the date set for demanding payment, the
dissenting shareholder may notify First Capital in writing of the shareholder'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 shareholder). Demand for payment must be made in
writing within 30 days after First Capital has made payment for the dissenting
shareholder's shares or has offered to pay its estimate of fair value for the
dissenting shareholder's shares. First Capital will not give further notice to
the dissenting shareholder of this deadline. A dissenting shareholder who fails
to make the demand within this time waives the right to demand payment for the
shareholder's shares.
First Capital can elect to agree with the dissenting shareholder's fair
value demand or if a demand for payment remains unsettled, First Capital must
commence a proceeding in the circuit or superior court of Harrison County within
60 days after receiving the payment demand from the dissenting shareholder 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 shareholder whose demand remains unsettled the amount demanded.
First Capital must make all dissenting shareholders 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
shareholder 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
shareholder's shares, plus interest, exceeds the amount paid by First Capital.
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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
shareholder 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 HCB Bancorp 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 HCB Bancorp common stock, HCB Bancorp will return the
deposited certificates. If after returning the deposited certificates HCB
Bancorp and First Capital consummate the merger, HCB Bancorp will send a new
notice to dissenters and repeat the payment demand process.
Every HCB Bancorp shareholder who does not deliver a notice of intent to
demand payment for his or her shares as aforesaid, or who votes in favor of the
merger, is bound by the vote of the assenting shareholders and will have no
right to dissent and to demand payment of the fair value of the shareholder's
shares of HCB Bancorp common stock as a result of the merger. Such a
shareholder will only be entitled to the same consideration described in this
document to be offered to every other assenting HCB Bancorp shareholder 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.
First Capital Shareholders. First Capital shareholders do not have
appraisal rights as a result of the merger.
Interests of HCB Bancorp's Directors and Officers in the Merger that Differ From
Your Interests
Some members of HCB Bancorp's management and Board of Directors may have
interests in the merger that are in addition to or different from the interests
of HCB Bancorp shareholders. The First Capital Board and HCB Bancorp Board were
aware of these interests and considered them in approving the merger agreement.
Employment Agreement with William W. Harrod. The merger agreement provides
that William W. Harrod, the current President and Chief Executive Officer of HCB
Bancorp and Harrison County Bank, will enter into a three-year employment
agreement with First Capital and First Harrison Bank relating to his employment
after the completion of the merger. This employment agreement will supersede
his current employment agreement with HCB Bancorp.
Under his new employment agreement, the initial salary level for Mr. Harrod
will remain $102,500, which amount will be paid by First Capital and First
Harrison Bank and may be increased at the discretion of the Board of Directors.
On each anniversary of the commencement date of the employment agreement, the
term may be extended for an additional year at the discretion of the Board. The
agreement is terminable by First Capital at any time, by Mr. Harrod if he is
assigned duties inconsistent with his initial position, duties, responsibilities
and status, or upon the occurrence of certain events specified by federal
regulations. In the event that Mr. Harrod's employment is terminated without
cause or upon his voluntary termination in certain circumstances, First Capital
would be required to honor the terms of the agreement through the expiration of
the then current term, including payment of current cash compensation and
continuation of employee benefits.
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The employment agreement also provides for severance payments and other
benefits in the event of involuntary termination of employment in connection
with any change in control of First Capital. Severance payments also will be
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, Mr. Harrod is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to the change in control. The term "change in control" is
defined in the agreement as having occurred when, among other things, (a) a
person other than First Capital purchases shares of First Capital common stock
pursuant to a tender or exchange offer for First Capital shares, (b) any person
(as this term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or
becomes the beneficial owner, directly or indirectly, of securities of First
Capital representing 25% or more of the combined voting power of First Capital's
then outstanding securities, (c) the membership of the Board of Directors
changes as the result of a contested election, or (d) shareholders of First
Capital approve a merger, consolidation, sale or disposition of all or
substantially all of First Capital's assets, or a plan of partial or complete
liquidation.
The maximum value of the severance benefits under the employment agreement
is 2.99 times Mr. Harrod's average annual compensation during the five-year
period preceding the effective date of the change in control (the "base
amount"). The employment agreement provides that the value of the maximum
benefit may be distributed, at Mr. Harrod's election, (i) in the form of a lump
sum cash payment equal to 2.99 times the executive's base amount or (ii) a
combination of a cash payment and continued coverage under First Capital's
health, life and disability programs for a 36-month period following the change
in control, the total present value of which does not exceed 2.99 times Mr.
Harrod's base amount. Section 280G of the Internal Revenue Code provides that
severance payments that equal or exceed three times the individual's base amount
are deemed to be "excess parachute payments" if they are contingent upon a
change in control. Individuals receiving excess parachute payments are subject
to a 20% excise tax on the amount of the excess payments, and First Capital
would not be entitled to deduct the amount of the excess payments.
The employment agreement restricts Mr. Harrod's right to compete against
First Capital for a period of one year from the date of termination of the
agreement if his employment is terminated without cause, except if termination
occurs after a change in control.
Severance Agreements with Executive Officers of HCB Bancorp. The merger
agreement provides that Dennis L. Thomas and Bradley B. Backherms, currently
executive officers of HCB Bancorp, will enter into agreements with First Capital
and First Harrison Bank that would provide them with severance benefits if their
employment with First Capital and First Harrison Bank is terminated after the
completion of the merger as a result of a change in control of First Capital.
The severance agreements will have a term of three years and may be extended for
an additional year on each anniversary of the agreement.
The severance agreements provide for severance payments and other benefits
in the event of involuntary termination of employment in connection with any
change in control of First Capital. Severance payments also will be provided on
a similar basis in connection with a voluntary termination of employment where,
subsequent to a change in control, an executive is assigned duties inconsistent
with his position, duties, responsibilities and status immediately prior to the
change in control. The term "change in control" is defined in the agreement as
having occurred when, among other things, (a) a person other than First Capital
purchases shares of First Capital common stock pursuant to a tender or exchange
offer for First Capital shares, (b) any person (as this term is used in Sections
13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner,
directly or indirectly, of securities of First Capital representing 25% or more
of the combined voting power of First Capital's then outstanding securities, (c)
the membership of the Board of Directors changes as the result of a contested
election, or (d) shareholders of First Capital approve
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a merger, consolidation, sale or disposition of all or substantially all of
First Capital's assets, or a plan of partial or complete liquidation.
The maximum value of the severance benefits under the severance agreements
is 2.99 times the executive's average annual compensation during the five-year
period preceding the effective date of the change in control (the "base
amount"). The severance agreements provide that the value of the maximum benefit
may be distributed, at the executive's election, (1) in the form of a lump sum
cash payment equal to 2.99 times the executive's base amount or (2) a
combination of a cash payment and continued coverage under First Capital's
health, life and disability programs for a 36-month period following the change
in control, the total present value of which does not exceed 2.99 times the
executive's base amount.
Stock Options. The merger agreement provides that, upon completion of the
merger, each outstanding and unexercised option to acquire shares of HCB Bancorp
common stock granted under the HCB Bancorp stock option plan will cease to
represent the right to acquire shares of HCB Bancorp common stock and will be
converted into and become a right with respect to First Capital common stock,
and the HCB Bancorp stock option plan will be assumed by First Capital. See "-
Treatment of HCB Bancorp Stock Options."
Upon completion of the merger, all shares subject to previously granted
stock options will become exercisable in accordance with the terms of the grants
under the HCB Bancorp stock option plan.
Protection of HCB Bancorp Directors and Officers Against Claims. First
Capital has agreed to indemnify and hold harmless each present and former
director and officer of HCB Bancorp for a period of three 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 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 HCB Bancorp's
directors and officers for two 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
Completion of the merger and the bank merger are subject to prior
regulatory approval. The merger of HCB Bancorp with First Capital is subject to
the approval of the Board of Governors of the Federal Reserve System under the
Bank Holding Company Act. First Capital filed a request for a waiver of this
application requirement and the Federal Reserve granted the waiver request on
___________, 1999. The bank merger is subject to the prior approval of the OTS
under the Bank Merger Act. In reviewing applications under the Bank Merger Act,
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 ______,
1999.
Under the Community Reinvestment Act of 1977, the OTS must take into
account the record of performance of First Federal and Harrison County Bank 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
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others. First Federal and Harrison County Bank 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 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 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 and the bank 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."
We are not aware of any other regulatory approvals that are required for
completion of the merger, except as described above. Should any other approvals
be required, we presently contemplate that we should seek those approvals.
There can be no assurance that any other approvals, if required, will be
obtained.
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 exchange ratio for converting HCB
Bancorp 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
We expect that the pooling of interests method of accounting will be used
to account for the merger. As required by generally accepted accounting
principles, under pooling of interests accounting the assets, liabilities and
shareholders' equity of HCB Bancorp would be added to those of First Capital at
their recorded book values on First Capital's consolidated balance sheet and no
goodwill will be created. On a pooling of interests accounting basis, income
and other financial statements of First Capital issued after consummation of the
merger would be restated retroactively to reflect the consolidated combined
financial position and results of operations of First Capital and HCB Bancorp as
if the merger had taken place at the beginning of the periods covered by those
financial statements. However, the combined company must treat certain expenses
incurred to effect the merger as current charges against income, rather than
adjustments to the combined company balance sheet. In order for the merger to
qualify for pooling of interests accounting treatment, among other things, 90%
or more of the outstanding shares of HCB Bancorp common stock must be exchanged
for First Capital common stock.
It is a condition to consummation of the merger that each of us receive a
letter from our independent accountants, Monroe Shine & Co., Inc., that the
merger will be accounted for as a pooling of interests. See "The Merger
Agreement-Conditions to Completing the Merger."
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Resale of First Capital Common Stock
The shares of First Capital common stock to be issued to shareholders of
HCB Bancorp 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 shareholders not deemed to be "affiliates" of
HCB Bancorp, as that term is defined in the rules under the Securities Act.
First Capital common stock received by those shareholders of HCB Bancorp who are
deemed to be "affiliates" of HCB Bancorp at the time the merger is submitted for
vote of the shareholders of HCB Bancorp 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 HCB Bancorp is
an individual or entity that controls, is controlled by or is under common
control with, HCB Bancorp, and may include the executive officers and directors
of HCB Bancorp, as well as certain principal shareholders of HCB Bancorp. 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.
SEC guidelines regarding qualifying for the pooling of interests method of
accounting also limit sales of shares of the combining companies by affiliates
of either company in a business combination. SEC guidelines indicate that the
pooling of interests method of accounting will generally not be challenged on
the basis of sales by affiliates of the combining companies if those affiliates
do not dispose of any of the shares of the corporation they own or shares of a
corporation they receive in connection with a merger during the period beginning
30 days before the merger and ending when financial results covering at least 30
days of post-merger operations of the combined entity have been published.
HCB Bancorp and First Capital have agreed in the merger agreement to use
their best efforts to cause each person who is an affiliate of that party for
purposes of Rule 145 under the Securities Act, and for purposes of qualifying
the merger for pooling of interests accounting treatment, to deliver to the
other party a written agreement intended to ensure compliance with the
Securities Act and preserve the ability to treat the merger as a pooling of
interests.
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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 Joint Proxy Statement-Prospectus.
Terms of the Merger
The merger agreement provides for a business combination in which HCB
Bancorp will merge with FC Acquisition Corp., a wholly owned subsidiary of First
Capital. HCB Bancorp will be the surviving corporation in the merger and will
become a wholly owned subsidiary of First Capital. Immediately after this
merger, HCB Bancorp will merge into First Capital, with First Capital being the
surviving corporation. Under the merger agreement, First Capital has the right
to revise the structure of the transaction so long as the revised structure does
not change the amount or kind of consideration being paid to HCB Bancorp
shareholders, adversely affect the tax consequences of the merger to HCB Bancorp
shareholders, or materially delay or impede the receipt of any required
regulatory approval.
As a result of the merger, except as noted below, each outstanding share of
HCB Bancorp common stock will be converted into the right to receive 15.5 shares
of First Capital common stock. First Capital will not issue fractions of shares
of First Capital common stock, but instead will pay each holder of HCB Bancorp
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 immediately 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 HCB Bancorp 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 HCB Bancorp 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 Chapter 23-1-44 of the Indiana
Business Corporation Law.
Upon completion of the merger, each option to acquire HCB Bancorp common
stock that is then outstanding and unexercised will become and be converted into
an option to acquire First Capital common stock on the same terms and conditions
as the option to acquire HCB Bancorp common stock. See "The Merger-Treatment of
HCB Bancorp Stock Options."
In connection with the merger, First Federal and Harrison County Bank have
entered into a plan of merger under which First Federal and Harrison County Bank
will merge, with First Federal being the surviving bank. Upon completion of the
bank merger, the combined bank will adopt the name "First Harrison Bank." The
bank merger agreement may be terminated by mutual consent of the parties at any
time and will be terminated automatically in the event the merger agreement is
terminated.
When Will the Merger be Completed
The closing of the merger will take place on a date designated by First
Capital that is no earlier than January 1, 2000 and no later than 14 days
following the date on which the last waiting period under the required
regulatory approvals expires and 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
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merging HCB Bancorp into FC Acquisition Corp., First Capital's wholly owned
subsidiary. The merger will become effective at the time stated in the articles
of merger.
We expect to complete the merger in the first calendar quarter of 2000.
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 April 30,
2000, 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
The obligations of First Capital and HCB Bancorp to consummate the merger
are conditioned on the following:
. approval of the merger agreement by HCB Bancorp's shareholders and
First Capital's shareholders;
. receipt of all required regulatory approvals without any materially
adverse conditions 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 Joint Proxy Statement-
Prospectus forms a part being declared effective by the SEC, the
absence of any pending or threatened proceeding by the SEC to suspend
the effectiveness of the registration statement and the receipt of all
required state "blue sky" approvals;
. receipt by First Capital and HCB Bancorp of letters from their
respective independent accountants to the effect that it is not aware
of any facts or circumstances that might cause the merger not to
qualify for pooling of interests accounting treatment;
. receipt by First Capital and HCB Bancorp 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;
. receipt of certificates from appropriate authorities as to the
corporate existence of the other party and other documents and
certificates to evidence fulfillment of the conditions to the merger
as each party may reasonably require; 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.
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The obligations of First Capital to complete the merger are also
conditioned on the number of shares for which dissenters' rights have been
exercised not exceeding 10% of the outstanding shares of HCB Bancorp common
stock and receipt by HCB Bancorp of all consents and approvals required to
permit First Capital to assume any obligation, right or interest of HCB Bancorp
under any agreement or instrument to which HCB Bancorp is a party or is
otherwise bound, unless failure to obtain those consents or approvals would not
have a material adverse effect on 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. If the merger is not
completed on or before April 30, 2000, either party may terminate the merger
agreement by a vote of a majority of our Board of Directors.
Conduct of Business Before the Merger
First Capital and HCB Bancorp have each agreed that, until the completion
of the merger, each of them will use its best efforts to:
. conduct its business in the regular, ordinary and usual course
consistent with past practice;
. 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 no action which would interfere with the ability of First Capital
or HCB Bancorp to perform their respective covenants and agreements on
a timely basis under the merger agreement; and
. take no action which would interfere with any party's ability to
obtain any necessary approvals, consents or waivers of any
governmental authority required for the transactions contemplated by
the merger agreement or which would reasonably be expected to result
in those approvals, consents or waivers containing any material
condition or restriction.
Further, except as otherwise provided in the merger agreement, until the
completion of the merger, each of First Capital and HCB Bancorp have agreed
that, unless permitted to by the other party, neither it nor its subsidiaries
will:
Governing documents
. amend its articles of incorporation or bylaws;
Capital stock
. issue any shares of its capital stock other than shares issued upon
the exercise of outstanding stock options;
. change the terms of any of its outstanding stock options or warrants;
. issue any securities convertible or exercisable for any shares of its
capital stock;
. change its capitalization;
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Dividends and stock repurchases
. pay any cash or stock dividends, other than regular quarterly cash
dividends on First Capital common stock not more than $0.10 per share
and an annual cash dividend for 1999 on HCB Bancorp common stock not
more than $6.10 per share;
. make any other distribution;
. purchase any shares of its capital stock;
Indebtedness
. incur any indebtedness or become responsible for the obligations of
any individual, corporation or entity, other than in the ordinary
course of business;
Dispositions
. dispose of any of its material assets or cancel or release any
indebtedness, other than in the ordinary course of business consistent
with past practice;
Employees
. increase the compensation or fringe benefits of any of its employees
or directors, other than general increases in compensation for non-
executive officer employees in the ordinary course of business
consistent with past practice;
. pay any pension or retirement allowance not required by any existing
plan or agreement to any employees or directors;
. become a party to, commit to fund or otherwise establish any trust or
account related to any employee benefit plan with or for the benefit
of any employee or director (except First Capital may adopt a stock-
based benefit plan or plans pursuant to which it would reserve 76,876
shares for issuance upon the exercise of stock options awarded under
the plan and 30,750 shares for awards of restricted stock);
. voluntarily accelerate the vesting of any stock options or other
compensation or benefit;
. make any discretionary contribution to any employee benefit plan;
. hire any employee with an annual total compensation payment in excess
of $35,000 or enter into any employment contract;
Accounting
. change its method of accounting, except as required by changes in
generally accepted accounting principles or regulatory guidelines;
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Settling claims
. settle any claim against it for more than $100,000 or agree to
material restrictions on its operations;
Acquisitions
. acquire any business or assets of another business that would be
material to it;
Loans
. make, renew, increase, extend or purchase any loans other than in
conformance with written lending policies in effect as of the date of
the merger agreement;
Branches
. establish or commit to establish any new branch or other office;
Investments
. make any investment other than in the ordinary course of business
consistent with past practice in individual amounts not to exceed
$50,000;
. make any investment in any debt security (including mortgage-backed
and mortgage-related securities) except for short- to intermediate-
term U.S. government and U.S. government agency securities, mortgage-
backed or mortgage related securities which would not be considered
"high risk" securities or securities of the Federal Home Loan Bank in
each case that are purchased in the ordinary course of business,
consistent with past practice;
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;
Capital expenditures
. make any capital expenditures in excess of $20,000 per expenditure
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;
Management
. elect any new executive officer or director;
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Adverse actions
. knowingly take any action that would impede the merger from qualifying
for pooling of interests accounting treatment or as a reorganization
within the meaning of Section 368 of the Internal Revenue Code;
. take or omit to take any action that is intended or may reasonably be
expected to result in any of its representations and warranties
contained in the merger agreement being or becoming untrue, or in any
of the conditions to the merger not being satisfied, or in a violation
of any provision of the merger agreement; or
Other agreements
. agree to take or make any commitment to take any of the actions listed
above.
Covenants of HCB Bancorp and First Capital in the Merger Agreement
Agreement Not to Solicit Other Proposals
First Capital and HCB Bancorp have each 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;
. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 10% or more of the assets of First Capital or HCB
Bancorp; and
. any tender offer or exchange offer for 10% or more of the outstanding
shares of capital stock of First Capital or HCB Bancorp.
Despite the agreement of each party not to solicit other acquisition
proposals, the Board of Directors of each party may generally enter into
discussions or negotiations with anyone who makes an unsolicited, written, bona
fide acquisition proposal that is a financially superior proposal to the merger.
A proposal of this nature is one about which First Capital's or HCB Bancorp's
financial advisors opine in writing is superior to this merger from a financial
point of view. For either Board to enter into negotiations on a superior
proposal, it would also have to first determine that its fiduciary duties
obligate it to do so. If either party enters into negotiations with a third
party regarding a superior proposal, it has to notify the other party and
provide the other party with information about the third party and its proposal.
Employee Matters
Each person who is an employee of HCB Bancorp or Harrison County Bank as of
the closing of the merger will become an employee of First Capital or First
Harrison Bank. No HCB Bancorp or Harrison County Bank employee will be an
officer of First Capital or First Harrison Bank unless and until that employee
is duly elected as an officer in accordance with the bylaws of First Capital or
First Harrison Bank. Except for William W. Harrod, each HCB Bancorp or Harrison
County Bank employee who becomes an employee of First Capital or First Harrison
Bank will be employed at the will of First Capital or First Harrison Bank.
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First Capital and HCB Bancorp will develop a new program of compensation
and benefits to cover all employees on a uniform basis at or as soon as
practicable following the merger. For current employees of either company who
continue as employees of the combined company after the merger, the new
compensation and benefits program will recognize all service with either company
as service with the combined company for all purposes, including eligibility and
vesting. Also, all HCB Bancorp and Harrison County Bank employees who continue
as employees of the combined company after the merger will be eligible to
participate in First Federal Bank's Employee Stock Ownership Plan.
Upon completion of the merger, each HCB Bancorp employee who is a
participant in the HCB Bancorp 401(k) plan will become fully vested in his or
her account balance in the plan and the plan will either be merged into First
Federal's 401(k) plan or terminated.
HCB Bancorp will pay eligible employees bonuses for the 1999 calendar year
in accordance with the procedures used in 1998. First Capital will pay employees
bonuses for the six months ended December 31, 1999 in accordance with the
procedures used for the 1999 fiscal year. After the merger, First Capital will
implement a new bonus program to cover all First Capital and First Harrison Bank
employees.
Indemnification of HCB Bancorp Officers and Directors
First Capital has agreed to indemnify and hold harmless each present and
former director and officer of HCB Bancorp for a period of three 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 HCB Bancorp's current policy, for the benefit of HCB Bancorp's
directors and officers who are currently covered by insurance for two 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 the conduct
of the parties before consummation of the merger, including the following:
. After all required regulatory and shareholder approvals have been
received, HCB Bancorp will cause Harrison County Bank to revise any of
its loan, litigation and real estate valuation policies and practices,
and investment and asset/liability management policies and practices
that First Capital and HCB Bancorp mutually determine should be
revised to conform to those of First Federal Bank. First Capital must
first confirm that it is not aware of any fact that would prevent the
completion of the merger.
. First Capital and HCB Bancorp will each give the other party
reasonable access during normal business hours to its property, books,
records and personnel and furnish all information the other party may
reasonably request.
. First Capital and HCB Bancorp will 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
and will use their respective best efforts to obtain any consent,
authorization or approval of any third party that is required in
connection with this transaction.
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<PAGE>
. First Capital and HCB Bancorp will take any necessary action to exempt
the parties and this transaction from any antitakeover provisions
contained in their respective articles of incorporation or bylaws or
federal or state law.
. First Capital and HCB Bancorp will use all reasonable efforts to take
all actions necessary to consummate the merger.
. First Capital and HCB Bancorp 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 and HCB Bancorp will take all actions necessary to
convene a meeting of their respective shareholders to vote on the
merger agreement. The First Capital Board and the HCB Bancorp Board
will each recommend at its respective shareholder meeting that the
shareholders vote to approve the merger and will each use its
reasonable best efforts to solicit shareholder approval, unless it
determines that its actions would not comply with its fiduciary
obligations to its shareholders.
. Prior to completion of the merger, First Capital will notify the
Nasdaq SmallCap Market of the additional shares of First Capital
common stock that First Capital will issue in exchange for shares of
HCB Bancorp.
. HCB Bancorp will use its best efforts to cause each person who is an
affiliate of it under Rule 145 of the Securities Act and the pooling
of interests accounting rules to deliver to First Capital a letter to
the effect that such person will comply with Rule 145 and will refrain
from transferring shares as required by the pooling of interests
accounting rules. First Capital will use its best efforts to cause
each person who is an affiliate of it under the pooling of interests
accounting rules to deliver to HCB Bancorp a letter to the effect that
such person will refrain from transferring shares as required by the
pooling of interests accounting rules.
. First Capital and HCB Bancorp each will notify the other of any
contract defaults, any events which would reasonably be likely to
result in a material adverse effect on it and any information that
would have been disclosed under the merger agreement had it been known
at the time the merger agreement was signed. First Capital and HCB
Bancorp will notify each other of any communication from a third party
regarding the need to obtain that party's consent to the merger.
. First Capital and HCB Bancorp will use their best efforts to implement
their Year 2000 plans.
54
<PAGE>
Representations and Warranties Made by First Capital and HCB Bancorp in the
Merger Agreement
Both First Capital and HCB Bancorp have made certain customary
representations and warranties to each other relating to their businesses in the
merger agreement. 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 the party's business, financial condition or results of operations.
See "--Conditions to Completing the Merger."
Terminating the Merger Agreement
The merger agreement may be terminated at or prior to the completion of the
merger, either before or after approval of the merger agreement by the
shareholders of First Capital and the shareholders of HCB Bancorp by:
. the mutual consent of First Capital and HCB Bancorp;
. either party if the shareholders of either company fail to approve the
merger agreement;
. either party if a required regulatory approval is denied or any
governmental entity prohibits the merger or bank merger;
. either party if the merger is not consummated by April 30, 2000;
. either party if the other party makes a misrepresentation, breaches a
warranty or fails to fulfill a covenant that is not cured within a
specified time and that would have a material adverse effect on the
party seeking to terminate;
. either party if the Board of Directors of the other party does not
recommend approval of the merger in the Joint Proxy Statement-
Prospectus or withdraws or revises its recommendation; or
. either party if its Board of Directors determines that it must accept
a superior offer from a third party in the exercise of its fiduciary
duties.
Expenses and Termination Fees
Each party will pay its own costs and expenses incurred in connection with
the merger.
If either party terminates the merger agreement in order to accept a
superior offer or if, after a third party proposes to acquire either party, the
shareholders fail to approve the merger agreement or the Board of Directors
fails to recommend the merger agreement and within 12 months the terminating
party enters into a merger agreement with a third party, the terminating party
will pay the other party a termination fee of $500,000.
55
<PAGE>
Changing the Terms of the Merger Agreement
Before the completion of the merger, we may agree to waive, amend or modify
any provision of the merger agreement. However, after the vote by the
shareholders of HCB Bancorp or First Capital, no amendment or modification may
be made that would reduce the consideration to be received by HCB Bancorp's
shareholders under the terms of the merger.
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<PAGE>
MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER
Board of Directors
Upon completion of the merger, First Capital will cause its Board of
Directors to be increased to 14 members and to be constituted of the then-
current members of the First Capital Board and the then-current members of the
HCB Bancorp Board. Also, upon completion of the merger, First Federal will
cause its Board of Directors to be increased to 14 members and to be constituted
of the then-current members of the First Federal Board and the then-current
members of the Harrison County Bank Board.
Information regarding the current directors of HCB Bancorp is provided
below. Unless otherwise stated, each director has held his current occupation
for the past five years. The age indicated for each individual is as of June 30,
1999. The indicated period for service as a director includes service as a
director of Harrison County Bank. Information regarding the current directors of
First Capital is provided under "Proposal 2 For First Capital Shareholders --
Election of Directors."
Earl H. Book is the President of Carriage Ford, Inc., retail automobile
dealership in Clarksville, Indiana. Age 70. Director since 1972.
James S. Burden is the owner and operator of Tracy's Mobile Home Park in
Georgetown, Indiana and a bus driver for Floyd County Schools in New Albany,
Indiana. Age 53. Director since 1991.
William W. Harrod is the President and Chief Executive Officer of HCB
Bancorp and Harrison County Bank. Age 43. Director since 1993.
Marvin E. Kiesler is a retired businessman. Age 68. Director since 1981.
James E. Nett is an accountant for Koetter Woodworking, Inc. in Borden,
Indiana. Age 55. Director since 1993.
Michael L. Shireman is President of Uhl Truck Sales, a medium and heavy
truck dealer in Palmyra, Indiana. Age 51. Director since 1989.
Loren E. Voyles is the retired President of Harrison County Bank. Age 70.
Director since 1968.
The following family relationships exist between the directors and officers
of HCB Bancorp and the directors and officers of First Capital: Earl H. Book is
the brother-in-law of Samuel E. Uhl and Gerald L. Uhl; Michael L. Shireman is
the brother of Mark D. Shireman; and Loren E. Voyles is the father of Joel E.
Voyles.
Management
Following the merger, William W. Harrod will serve as Chief Executive
Officer and President of First Capital and Samuel E. Uhl will serve as Chief
Executive Officer and President of First Harrison Bank, each to hold office
until their respective successors are duly elected, qualified and are serving.
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<PAGE>
In addition, the following individuals will hold offices in the combined
company as follows:
. Chris Frederick - Chief Financial Officer and Treasurer of First
Capital and Chief Financial Officer, Treasurer and Senior Vice
President of First Harrison Bank.
. Joel E. Voyles - Corporate Secretary of First Capital and Senior Vice
President, Retail Banking Operations and Branch Administrator of First
Harrison Bank.
. Bradley B. Backherms - Senior Vice President, Data Information Systems
of First Harrison Bank.
. Dennis L. Thomas - Senior Vice President, Consumer Lending Processing
and Servicing of First Harrison Bank.
Operations
While there can be no assurance as to the achievement of business and
financial goals, we currently expect to achieve cost savings equal to 8% of our
combined general and administrative expenses through revenue enhancement,
consolidation of back office operations, elimination of duplicate professional
expenses and normal attrition. We expect to achieve most of these savings in
the first year following the merger. We also expect to incur a $462,000 after-
tax charge to earnings upon completion of the merger. This charge includes
transaction costs, exit costs and facilities-related charges, and accelerated
depreciation in excess of normal scheduled depreciation on duplicate systems
that will be taken out of service. See "Forward-looking Statements."
58
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as of
June 30, 1999 and the unaudited pro forma condensed combined statements of
income for each of the years in the two-year period ended June 30, 1999 give
effect to the pending merger, accounted for as a pooling of interests.
The unaudited pro forma condensed combined financial information is based
on the historical consolidated financial statements of First Capital and HCB
Bancorp under the assumptions and adjustments set forth in the accompanying
notes to the unaudited pro forma condensed combined financial statements, and
gives effect to the merger as if the merger had been consummated at the
beginning of the earliest period presented. 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 consolidated historical financial statements of
First Capital and HCB Bancorp, 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.
Pro forma per share amounts for the combined company are based on the
exchange ratio.
59
<PAGE>
First Capital, Inc. and HCB Bancorp
Unaudited Pro Forma Condensed Combined Balance Sheet
As of June 30, 1999
<TABLE>
<CAPTION>
HCB Pro Forma Pro Forma
First Capital Bancorp Adjustments Combined
------------- ------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks................................... $ 929,524 $ 3,320,887 $ -- $ 4,250,411
Interest-bearing deposits with banks...................... 1,681,356 2,670,000 -- 4,351,356
Securities available for sale, at fair value.............. 20,204,556 12,903,721 -- 33,108,277
Securities held to maturity............................... 9,246,467 2,749,694 -- 11,996,161
Federal funds sold........................................ -- 2,800,000 -- 2,800,000
Loans receivable, net..................................... 83,886,960 59,318,041 -- 143,205,001
Federal Home Loan Bank stock.............................. 662,500 314,900 -- 977,400
Premises and equipment.................................... 3,688,258 2,989,376 -- 6,677,634
Accrued interest receivable............................... 917,174 598,702 -- 1,515,876
Other assets.............................................. 1,480,756 447,231 80,000 2,007,987
------------- ----------- --------- ------------
Total assets........................................ $ 122,597,551 $88,112,552 $ 80,000 $210,890,103
============= =========== ========= ============
LIABILITIES:
Deposits.................................................. $ 92,014,256 $75,354,746 $ -- $167,369,002
Advances from Federal Home Loan Bank...................... 12,250,000 -- -- 12,250,000
Accrued interest payable.................................. 470,352 420,848 -- 891,200
Other liabilities......................................... 623,279 197,630 542,000 1,362,909
------------- ----------- --------- ------------
Total liabilities................................... 105,357,887 75,973,224 542,000 181,873,111
------------- ----------- --------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock........................................... -- -- -- --
Common stock.............................................. 12,927 799,000 (786,616) 25,311
Additional paid-in capital................................ 9,401,787 2,500,000 786,616 12,688,403
Retained earnings......................................... 8,916,432 8,844,724 (462,000) 17,434,156
Accumulated other comprehensive income - net unrealized
loss on securities available for sale................... (407,222) (4,396) -- (411,618)
Unearned ESOP shares...................................... (584,260) -- -- (584,260)
------------- ----------- --------- ------------
Total stockholders' equity.......................... 17,339,664 12,139,328 (462,000) 29,016,992
------------- ----------- --------- ------------
Total liabilities and stockholders' equity.......... $ 122,697,551 $88,112,552 $ 80,000 $210,890,103
============= =========== ========= ============
</TABLE>
See Notes to the Unaudited Pro Forma Condensed Combined Financial
Statements.
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<PAGE>
First Capital, Inc. and HCB Bancorp
Unaudited Pro Forma Condensed Combined Balance Sheet
As of June 30, 1999
<TABLE>
<CAPTION>
HCB Pro Forma Pro Forma
First Capital BANCORP Adjustments Combined
------------- ------- ----------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees.................................................. $6,495,452 $5,068,931 $ -- $11,564,383
Securities............................................................. 1,123,311 946,987 (3,750) 2,066,548
Federal funds sold..................................................... -- 137,839 -- 137,839
Interest-bearing deposits in banks..................................... 179,946 142,768 -- 322,714
---------- ---------- ----------- -----------
Total interest income............................................... 7,798,709 6,296,525 (3,750) 14,091,484
---------- ---------- ----------- -----------
INTEREST EXPENSE:
Deposits............................................................... 4,016,573 2,604,822 -- 6,621,395
Advances from Federal Home Loan Bank................................... 417,995 -- -- 417,995
---------- ---------- ----------- -----------
Total interest expense.............................................. 4,434,568 2,604,822 -- 7,039,390
---------- ---------- ----------- -----------
Net interest income................................................. 3,364,141 3,691,703 (3,750) 7,052,094
Provision for loan losses.............................................. 44,000 126,250 -- 170,250
---------- ---------- ----------- -----------
Net interest income after provision for loan losses................. 3,320,141 3,565,453 (3,750) 6,881,844
NON-INTEREST INCOME:
Service charges on deposit accounts.................................... 170,620 349,153 -- 519,773
Commission income...................................................... -- 128,000 -- 128,000
Other income........................................................... 130,588 153,555 -- 284,143
---------- ---------- ----------- -----------
Total non-interest income........................................... 301,208 630,708 -- 931,916
---------- ---------- ----------- -----------
NON-INTEREST EXPENSES:
Compensation and benefits.............................................. 1,032,773 1,467,122 -- 2,499,895
Net occupancy expenses................................................. 398,177 181,864 -- 580,041
Equipment expense...................................................... 46,729 227,079 -- 273,808
Other expenses......................................................... 509,850 827,828 -- 1,337,678
---------- ---------- ----------- -----------
Total non-interest expenses......................................... 1,987,529 2,703,893 -- 4,691,422
---------- ---------- ----------- -----------
Income before income taxes.......................................... 1,633,820 1,492,268 (3,750) 3,122,338
Income tax expense..................................................... 631,769 471,863 446 1,104,078
---------- ---------- ----------- -----------
Net income.......................................................... $1,002,051 $1,020,405 $(4,196) $ 2,018,260
========== ========== =========== ===========
Net income per common share, basic..................................... $ 0.78 $ 12.77 $ 0.80
========== ========== ===========
Net income per common share, diluted................................... $ 0.77 $ 12.77 $ 0.79
========== ========== ===========
</TABLE>
See Notes to the Unaudited Pro Forma Condensed Combined Financial
Statements.
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<PAGE>
First Capital, Inc. and HCB Bancorp
Unaudited Pro Forma Condensed Combined Income Statement
For the Year Ended June 30, 1998
<TABLE>
<CAPTION>
HCB Pro Forma Pro Forma
First Capital Bancorp Adjustments Combined
------------- ------- ----------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees......................................... $6,209,266 $4,768,943 $ -- $10,978,209
Securities.................................................... 477,859 1,295,570 -- 1,773,429
Federal funds sold............................................ -- 163,183 -- 163,183
Interest-bearing deposits in banks............................ 173,192 108,627 -- 281,819
---------- ---------- ----------- -----------
Total interest income...................................... 6,860,317 6,336,323 -- 13,196,640
---------- ---------- ----------- -----------
INTEREST EXPENSE:
Deposits...................................................... 3,808,317 2,683,953 -- 6,492,270
Advances from Federal Home Loan Bank.......................... 303,551 -- -- 303,551
---------- ---------- ----------- -----------
Total interest expense..................................... 4,111,868 2,683,953 -- 6,795,821
---------- ---------- ----------- -----------
Net interest income........................................ 2,748,449 3,652,370 -- 6,400,819
Provision for loan losses..................................... -- 5,000 -- 5,000
---------- ---------- ----------- -----------
Net interest income after provision for loan losses........ 2,748,449 3,647,370 -- 6,395,819
-----------
NON-INTEREST INCOME:
Service charges on deposit accounts........................... 123,806 317,814 -- 441,620
Commission income............................................. -- 146,172 -- 146,172
Gain on sale of premises and equipment........................ 169,087 -- -- --
Other income.................................................. 117,889 191,282 -- 309,171
---------- ---------- ----------- -----------
Total non-interest income.................................. 410,782 655,268 -- 1,066,050
---------- ---------- ----------- -----------
NON-INTEREST EXPENSES:
Compensation and benefits..................................... 858,303 1,396,997 -- 2,255,300
Net occupancy expenses........................................ 309,943 160,018 -- 469,961
Equipment expense............................................. 44,198 221,700 -- 265,898
Other expenses................................................ 399,120 815,195 -- 1,214,315
---------- ---------- ----------- -----------
Total non-interest expenses................................ 1,611,564 2,593,910 -- 4,205,474
---------- ---------- ----------- -----------
Income before income taxes................................. 1,547,667 1,708,728 -- 3,256,395
Income tax expense............................................ 589,215 570,997 -- 1,160,212
---------- ---------- ----------- -----------
Net income................................................. $ 958,452 $1,137,731 -- $ 2,096,183
========== ========== =========== ===========
Net income per common share, basic............................ $ 0.74 $ 14.24 $ 0.83
========== ========== ===========
Net income per common share, diluted.......................... $ 0.74 $ 14.24 $ 0.83
========== ========== ===========
</TABLE>
See Notes to the Unaudited Pro Forma Condensed Combined Financial
Statements.
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Notes to the Unaudited Pro Forma Condensed
Combined Financial Statements
Note 1. Basis of Presentation
The pro forma information presented is not necessarily indicative of the
results of operations or the combined financial position that would have
resulted had the merger been consummated at the beginning of the periods
indicated, nor is it necessarily indicative of the results of operations in
future periods or the future financial position of the combined company. It is
anticipated that the merger will be completed early in the first quarter of
2000.
Under generally accepted accounting principles, the transaction will be
accounted for as a pooling of interests and, as such, the assets and liabilities
of HCB Bancorp will be combined with those of First Capital at book value. In
addition, the statements of income of HCB Bancorp will be combined with the
statements of income of First Capital as of the earliest period presented. 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. The unaudited pro forma condensed combined balance sheet assumes the
merger was consummated on June 30, 1999. Certain reclassifications have been
included in the unaudited pro forma condensed combined balance sheet and
unaudited pro forma condensed combined statements of income to conform
presentation.
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.
Notes 3. Merger- and Restructuring-Related Charges
A liability of $542,000 (pre-tax) has been recorded in the unaudited pro
forma condensed combined balance sheet to reflect First Capital's and HCB
Bancorp's best estimate of merger- and restructuring-related charges in
connection with the merger. This liability resulted in a $462,000 post-tax
charge to retained earnings in the unaudited pro forma condensed combined
balance sheet. The following table provides details of the estimate charges by
type, post-tax:
<TABLE>
<CAPTION>
Estimated Costs
(Post-Tax)
Type of Cost (Dollars in Thousands)
------------ ----------------------
<S> <C>
Technology and operations.............. $187,000
Facilities............................. 16,000
Transaction costs and other............ 339,000
--------
Total................................ $542,000
========
</TABLE>
Technology and operations costs include accelerated depreciation in excess
of normal scheduled depreciation and certain liabilities that will be incurred
as a result of the elimination of duplicate systems. Facilities charges consist
of facilities-related exit costs, as well as accelerated depreciation in excess
of normal depreciation, resulting from consolidation of duplicate operational
facilities. The effect of the proposed charge has been reflected in the
unaudited pro forma condensed combined balance sheet as of June
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<PAGE>
30, 1999. However, since the proposed charge is nonrecurring, it has not been
reflected in the unaudited pro forma condensed combined statements of income. In
addition it is estimated that $67,000 (post-tax) in other expenses related to
the merger will be recognized in future periods as they are incurred. These
charges have not been reflected in the unaudited pro forma condensed combined
balance sheet as of June 30, 1999.
Note 4. Pro Forma Adjustments
(a) Pro forma adjustments to common stock and additional paid-in capital
at June 30, 1999, reflect the merger accounted for as a pooling of interests,
through: (1) the exchange of 1,238,450 shares of First Capital common stock
(using the exchange ratio of 15.5) for 79,900 outstanding shares of HCB Bancorp
common stock at June 30, 1999, and (2) the reclassification adjustment from
common stock to additional paid-in capital to reflect the $.01 par value of
First Capital common stock.
(b) Pro forma adjustments to accrued expenses and other liabilities and
retained earnings reflect the $542,000 merger- and restructuring-related charge
and a $80,000 increase in the deferred tax asset for the anticipated tax benefit
of such charge. For additional information on the merger- and restructuring-
related charges, see Note 3.
(c) The pro forma combined weighted average common shares outstanding for
each of the years in the two-year period ended June 30, 1999, reflect First
Capital weighted average common shares outstanding plus the converted HCB
Bancorp weighted average common shares outstanding. Each share of HCB Bancorp
common stock was converted into 15.5 shares of First Capital common stock.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This Joint 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
HCB Bancorp, as well as certain information relating to the merger, including,
without limitation,
. statements relating to the cost savings and accretion to reported
earnings estimated to result from the merger,
. statements relating to revenues of the combined company after the
merger,
. statements relating to the restructuring charges estimate to be
incurred in connection with the merger, and
. statements preceded by, followed by or that 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 HCB Bancorp 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 HCB Bancorp is engaged,
. technological changes, including year 2000 data systems compliance
issues, may be more difficult or expensive than anticipated, and
. changes may occur in the securities markets.
See "Where You Can Find More Information."
65
<PAGE>
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 which 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 therefor. 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 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 a 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 the First Capital Board of Directors may from time to
time determine. The Board of Directors can, without shareholder 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.
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<PAGE>
COMPARISON OF RIGHTS OF SHAREHOLDERS
First Capital's shareholders' rights are currently governed by First
Capital's articles of incorporation, bylaws and applicable provisions of the
Indiana Business Corporation Law. HCB Bancorp's shareholders' rights are
currently governed by HCB Bancorp's articles of incorporation, bylaws and the
same provisions of the Indiana Business Corporation Law. If we complete the
merger, HCB Bancorp shareholders who do not exercise dissenters' rights will
receive First Capital common stock and will become First Capital shareholders
and their rights will likewise be governed by First Capital's articles and
bylaws.
Because First Capital and HCB Bancorp are both organized under the laws of
the State of Indiana, any differences in your rights as a shareholder of HCB
Bancorp and First Capital will arise solely from differences in the articles of
incorporation and bylaws of First Capital and HCB Bancorp rather than from
differences of law. This summary is not a complete discussion of the First
Capital and HCB Bancorp 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.
Authorized Stock
First Capital HCB Bancorp
. The First Capital articles . The HCB Bancorp articles authorize
authorize 6,000,000 shares of 1,000,000 shares of capital stock,
capital stock, consisting of consisting solely of common stock,
5,000,000 shares of common stock, no par value.
$.01 par value, and 1,000,000
shares of serial preferred stock,
$.01 par value.
. As of July 19, 1999, there were . As of July 19, 1999, there were
1,291,824 shares of First Capital 79,900 shares of HCB Bancorp common
common stock issued and stock issued and outstanding.
outstanding.
. As of July 19, 1999, there were no
shares of preferred stock issued
or outstanding.
Voting Rights
First Capital HCB Bancorp
. The holders of the common stock . Holders of common stock exclusively
exclusively possess all voting possess all voting power.
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.
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Required Vote for Authorization of Certain Actions
First Capital HCB Bancorp
. At least 80% of the outstanding . A majority vote of the Board of
shares of voting stock must Directors and of the outstanding
approve certain "business shares entitled to vote is required
combinations" involving a "related to approve business combinations
person." In addition, a business unless otherwise provided under the
combination with a related person Indiana Business Corporation Law.
must be approved by at least a
majority of outstanding shares of
voting stock other than shares
beneficially owned by the related
person. See "SELECTED PROVISIONS
IN THE ARTICLES 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 HCB Bancorp
. Holders of common stock are . Holders of common stock are
entitled, when declared by the entitled, when declared by the HCB
First Capital Board, to receive Bancorp Board, to receive dividends.
dividends, subject to the rights
of holders of preferred stock.
Shareholders Meetings
First Capital HCB Bancorp
. First Capital must deliver . Same.
notice of the meeting and a
description of its purpose no
fewer than ten days and no more
than 60 days before the meeting
to each shareholder entitled to
vote.
. The Chairman of the Board or the . The Chairman of the Board will
highest ranking officer present chair the meeting.
will chair the meeting.
. Only the Chairman or a majority . A special meeting may be called by
of the directors may call a the Board of Directors or the
special meeting. President and must be called by
the President or Secretary upon
the written request of at least
one-fourth of the shares
outstanding entitled to vote on
the business to be conducted at
the meeting.
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. For purposes of determining . For purposes of determining
shareholders entitled to vote at shareholders entitled to vote at
a meeting, the Board of a meeting, the Board of
Directors may fix a record date Directors may prescribe a period
that is not less than 10 days or not exceeding 70 days prior to
more than 70 days before the the meeting during which no
meeting. transfer of stock may be made or
may fix a record date that is
not more than 70 days before the
meeting, provided that if no
record date is fixed, such date
shall be the date 10 days prior
to the date of the meeting.
. The Board of Directors or any . Same.
shareholder may nominate
directors for election or
propose new business.
. To nominate a director or . There are no prior notice
propose new business, requirements or making
shareholders must give written nominations or proposing new
notice to the Secretary of First business.
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
shareholders, written notice of
the shareholder proposal or
nomination must be delivered to
the Secretary within 10 days of
the date notice of the meeting
was mailed to shareholders. Each
notice given by a shareholder
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 shareholder
making the nomination or
proposal.
Action by Shareholders Without a Meeting
First Capital HCB Bancorp
. Any action that requires the . Same.
approval of the shareholders may
be taken without a meeting by the
unanimous written consent of all
shareholders entitled to vote on
the action.
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Board of Directors
First Capital HCB Bancorp
. The articles and bylaws provide . The bylaws provide that the number
that the number of directors shall of directors is seven.
be no fewer than five nor more
than 15 and that the Board of
Directors shall fix the number of
directors by resolution.
. There are currently seven members . There are currently seven members
of the First Capital Board of of the HCB Bancorp Board of
Directors. Directors.
. The Board of Directors is divided . All of the directors are elected
into three classes as equal in annually.
number as possible and
approximately one-third of the
directors are elected at each
annual meeting.
. Vacancies on the Board of . Same.
Directors will be filled by the
remaining directors or by the
shareholders at the next annual
meeting.
. Directors may be removed only for . Directors may be removed with or
cause by the vote of at least without cause by the vote of at
two-thirds of the outstanding least a majority of the shares
shares entitled to vote for entitled to vote for the election
directors. Cause for removal is of directors.
deemed to exist only if the
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 HCB Bancorp
. The bylaws may be amended or . At least a majority of the HCB
repealed only with the approval of Bancorp Board must approve a measure
at least two-thirds of the Board of to repeal, amend or rescind the
Directors. Bylaws.
Amendment of the Articles of Incorporation
First Capital HCB Bancorp
. The articles may be amended or . The articles may be amended or
repealed upon approval of at repealed upon approval of at
least two-thirds of the Board of least a majority of the Board of
Directors and by a majority of Directors and by a majority of
shares entitled to vote on the shares entitled to vote on the
matter, unless otherwise matter, unless otherwise provided
provided in the articles or the in the Indiana Business
Indiana Business Corporation Corporation Law.
Law. However, amendments to the
articles that would revise the
provisions relating to the
number, terms and
classification, election
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and removal procedures for
directors, the process for calling
special meetings of shareholders,
voting restrictions applicable to
beneficial owners of 10% or more
of the voting stock, shareholder
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
require approval by at least a two-
thirds vote of the outstanding
shares.
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SELECTED PROVISIONS IN THE ARTICLES 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
a future takeover attempt that is not approved by the First Capital Board, but
which First Capital shareholders may deem to be in their best interests or in
which shareholders may receive a substantial premium for their shares over then
current market prices. As a result, shareholders 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 that 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 combined assets of First
Capital and its subsidiaries to a related person;
. 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.
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Limitation on Voting Rights
The articles of incorporation of First Capital 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 that person or any of
his or her affiliates (as defined in the articles of incorporation), shares
which that person or his or her affiliates have the right to acquire upon the
exercise of conversion rights or options and shares as to which that 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
Federal 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 that 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. After their initial election at First Capital's first annual meeting,
the shareholders will 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
shareholder 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 shareholders to remove directors and replace them with their own
nominees.
Special Meetings of Shareholders
The articles of incorporation provide that only the Chairman or a majority
of the Board of Directors of First Capital may call special meetings of the
shareholders of First Capital. Shareholders are not able to call a special
meeting or require that the Board do so. At a special meeting, shareholders may
consider only the business specified in the notice of meeting given by First
Capital. This provision prevents shareholders from forcing shareholder
consideration of a proposal between annual meetings over the opposition of the
Chairman and the First Capital Board by calling a special meeting of
shareholders.
Advance Notice Provisions for Shareholder Nominations and Proposals
The First Capital bylaws establish an advance notice procedure for
shareholders to nominate directors or bring other business before an annual
meeting of shareholders 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
the First Capital Board or by a shareholder who has given appropriate notice to
First Capital before the meeting. Similarly, a shareholder may not bring
business before an annual meeting unless the shareholder 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 nor more than 60 days prior to the annual meeting. A shareholder
who desires to raise new business must provide certain information to First
Capital concerning the nature of the new business, the shareholder and the
shareholder's interest in the
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business matter. Similarly, a shareholder wishing to nominate any person for
election as a director must provide First Capital with certain information
concerning the nominee and the proposing shareholder.
Advance notice of nominations or proposed business by shareholders gives
the First Capital Board time to consider the qualifications of the proposed
nominees, the merits of the proposals and, to the extent deemed necessary or
desirable by the First Capital Board, to inform shareholders and make
recommendations about those matters.
Preferred Stock
The articles of incorporation authorize the First Capital Board 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 the First Capital Board
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. The First Capital Board will make any
determination to issue shares with those terms based on its judgment as to the
best interests of First Capital and its shareholders.
Amendment of Articles of Incorporation
First Capital's articles of incorporation require 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
shareholders to amend these provisions of the First Capital articles of
incorporation.
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REGULATION AND SUPERVISION OF FIRST CAPITAL
General
As a savings and loan holding company, First Capital is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the OTS. First Federal is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. First Federal is a member of the FHLB and its deposit accounts
are insured up to applicable limits by the SAIF managed by the FDIC. First
Federal must file reports with the OTS and the FDIC concerning its activities
and financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other savings institutions. The OTS and/or the FDIC conduct periodic
examinations to test First Federal's safety and soundness and compliance with
various regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress, could have a material adverse impact on First Capital,
First Federal and their operations. Certain of the regulatory requirements
applicable to First Federal and to First Capital are referred to below or
elsewhere herein. The description of statutory provisions and regulations
applicable to savings institutions and their holding companies set forth in this
document does not purport to be a complete description of such statutes and
regulations and their effects on First Capital and First Federal.
Holding Company Regulation
First Capital is a nondiversified unitary savings and loan holding company
within the meaning of federal law. As a unitary savings and loan holding
company, First Capital generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that First Federal
continues to be a qualified thrift lender. See "-Federal Savings Institution
Regulation--QTL Test." Upon any non-supervisory acquisition by First Capital of
another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, First Capital
would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally be limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (1) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (2) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
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Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. First Federal must notify
the OTS 30 days before declaring any dividend to First Capital. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets. In
addition, certain activities, such as mergers and acquisitions, and branching
are subject to the prior approval of the OTS.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage ratio and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMEL financial institution rating system),
and, together with the risk-based capital standard itself, a 4% Tier I risk-
based capital standard. The OTS regulations also require that, in meeting the
tangible, leverage and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier I) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair values. Overall, the amount of supplementary capital included
as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk component. At June 30, 1999, First Federal met each of
its capital requirements.
Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be
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"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the OTS is required to appoint
a receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date a savings institution
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company in an amount of up to the lesser of 5% of the
institution's assets or the amount which would bring the institution into
compliance with all capital standards. In addition, numerous mandatory
supervisory actions become immediately applicable to an undercapitalized
institution, including, but not limited to, increased monitoring by regulators
and restrictions on growth, capital distributions and expansion. The OTS could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
Insurance of Deposit Accounts. Deposits of First Federal are presently
insured by the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998,
FICO payments for SAIF members, including First Federal, approximated 6.10 basis
points, while Bank Insurance Fund ("BIF") members paid 1.22 basis points. By
law, there will be equal sharing of FICO payments between SAIF and BIF members
on the earlier of January 1, 2000 or the date the SAIF and BIF are merged. The
FDIC has authority to increase insurance assessments. A significant increase in
SAIF insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of First Federal. Management cannot predict
what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of First Federal does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. Legislation enacted in 1996 provided that
the BIF and SAIF were to have merged on January 1, 1999 if there were no more
savings associations as of that date. Various proposals to eliminate the federal
savings association charter, create a uniform financial institutions charter,
abolish the OTS and restrict savings and loan holding company activities have
been introduced in Congress. Pending legislation would place activities
restrictions on unitary savings and loan holding companies, subject to an
exception for existing holding companies such as First Capital. First Federal is
unable to predict whether such legislation will be enacted or the extent to
which the legislation would restrict or disrupt its operations.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At June 30,
1999, First Federal's limit on loans to one borrower was $3.7 million, and First
Federal's largest aggregate outstanding balance of loans to one borrower was
$939,000.
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QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lender test. Under the test, a savings association is required to either qualify
as a "domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" (total assets less: (1)
specified liquid assets up to 20% of total assets; (2) intangibles, including
goodwill; and (3) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least nine
months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of June 30, 1999, First Federal met the qualified thrift lender
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified thrift
investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. The rule effective in 1998 established
three tiers of institutions based primarily on an institution's capital level.
An institution that exceeded all capital requirements before and after a
proposed capital distribution ("Tier I Bank") and had not been advised by the
OTS that it was in need of more than normal supervision, could, after prior
notice but without obtaining approval of the OTS, make capital distributions
during the calendar year equal to the greater of (i) 100% of its net earnings to
date during the calendar year plus the amount that would reduce by one-half the
excess capital over its capital requirements at the beginning of the calendar
year or (ii) 75% of its net income for the previous four quarters. Any
additional capital distributions required prior regulatory approval. At June 30,
1999, First Federal was a Tier I Bank. Effective April 1, 1999, the OTS's
capital distribution regulation changed. Under the new regulation, an
application to and the prior approval of the OTS will be required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
safety and soundness, compliance and Community Reinvestment Act examination
ratings in the two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with OTS. If an application is not required,
the institution must still provide prior notice to OTS of the capital
distribution. In the event First Federal's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, First Federal's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
Liquidity. First Federal is required to maintain an average daily balance
of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the OTS to any amount within the range of 4% to 10%. Monetary
penalties may be imposed for failure to meet these liquidity requirements. First
Federal has never been subject to monetary penalties for failure to meet its
liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in First Federal's latest
quarterly thrift financial report.
Transactions with Related Parties. First Federal's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the
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Company and its non-savings institution subsidiaries) is limited by federal law.
The aggregate amount of covered transactions with any individual affiliate is
limited to 10% of the capital and surplus of the savings institution. The
aggregate amount of covered transactions with all affiliates is limited to 20%
of the savings institution's capital and surplus. Certain transactions with
affiliates are required to be secured by collateral in an amount and of a type
described in federal law. The purchase of low quality assets from affiliates is
generally prohibited. The transactions with affiliates must be on terms and
under circumstances, that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
First Federal's authority to extend credit to executive officers, directors
and 10% shareholders ("insiders"), as well as entities such persons control, is
also governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans First Federal may make to insiders based, in part,
on First Federal's capital position and requires certain board approval
procedures to be followed. Special limitations apply to loans made to executive
officers of the institution.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Federal Home Loan Bank System
First Federal is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. First Federal, as a member of the FHLB, is required to acquire and
hold shares of capital stock in that FHLB in an amount at least equal to 1.0% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. First Federal was in
compliance with this requirement with an investment in FHLB stock at June 30,
1999, of $662,500. FHLB advances must be secured by specified types of
collateral and all long-term advances may only be obtained for the purpose of
providing funds for residential housing finance.
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The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future FHLB
advances increased, First Federal's net interest income would likely also be
reduced.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $46.5 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $46.5
million. The first $4.9 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. First Federal complies with the foregoing requirements.
PROPOSAL 2 FOR FIRST CAPITAL SHAREHOLDERS -- ELECTION OF DIRECTORS
First Capital's Board of Directors consists of seven members. Five of them
are independent directors and two are members of management. The Board is
divided into three classes with three-year staggered terms, with approximately
one-third of the directors elected each year. Pursuant to Indiana law, all seven
directors will be elected at the annual meeting to serve for a one, two or
three-year term, or until their respective successors have been elected and
qualified. The nominees for election to serve for a one-year term, or until
their respective successors have been elected and qualified, are John W.
Buschemeyer and Kenneth R. Saulman. The nominees for election to serve for a
two-year term, or until their respective successors have been elected and
qualified, are Samuel E. Uhl and Mark D. Shireman. The nominees for election to
serve for a three-year term, or until their respective successors have been
elected and qualified, are J. Gordon Pendleton, Gerald L. Uhl and Dennis L.
Huber. All of the nominees are current members of the Boards of Directors of
First Capital and First Federal.
It is intended that the proxies solicited by the Board of Directors will be
voted for the election of the nominees named above. If any nominee is unable to
serve, the persons named in the proxy card would vote your shares to approve the
election of any substitute proposed by the Board of Directors. Alternatively,
the Board of Directors may adopt a resolution to reduce the size of the Board.
At this time, the Board of Directors knows of no reason why any nominee might be
unable to serve.
The Board of Directors recommends a vote "FOR" the election of all of the
nominees.
Information regarding the nominees for First Capital is provided below.
Unless otherwise stated, each director has held his current occupation for the
last five years. The age indicated in each nominee's biography is as of June 30,
1999. The indicated period for service as a director includes service as a
director of First Federal. There are no family relationships among the directors
and executive officers of First Capital, except that Samuel E. Uhl and Gerald L.
Uhl are brothers.
J. Gordon Pendleton has been affiliated with First Federal since 1961 and
served as President and Chief Executive Officer from 1961 to 1996. Since 1996 he
has served as Chief Executive Officer. Mr. Pendleton is the President of the
Harrison County Community Foundation, a member of the Harrison County Education
Council, a member of the Board of the South Harrison 1998 School Building
Corporation, a member of the Board of Directors of the Capital Courts Senior
Housing Council, a member of "Main Street" steering committee, past President of
the South Harrison School Corporation, past President of the Corydon
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Rotary Club and past Vice President of the Harrison County Chamber of Commerce.
Age 65. Director since 1963.
Mark D. Shireman is the President of James L. Shireman Construction Co.,
Inc. in Corydon, Indiana. He is a director of the Harrison County Chamber of
Commerce and the Southern Indiana Economic Development Council. Mr. Shireman is
also a member of the Corydon Rotary Club, the Lanesville Lions Club and the
Community Foundation of Southern Indiana. Age 47. Director since 1989.
Dennis L. Huber is the President and Publisher of O'Bannon Publishing
Company, Inc. in Corydon, Indiana. He is a member of the Corydon Rotary Club,
the Harrison County Chamber of Commerce and the Downtown Corydon Merchants
Association. Age 59. Director since 1997.
Samuel E. Uhl has been affiliated with First Federal since 1994 and
succeeded Mr. Pendleton as First Federal's President in 1996. Before joining
First Federal, Mr. Uhl was a First Vice President with First Nationwide Bank
from 1988 to 1994. He is a director of the United Way, a director of the Corydon
Rotary Club and a director and member of the industrial committee of the
Harrison County Chamber of Commerce. Age 53. Director since 1995.
Kenneth R. Saulman has been employed as a right-of-way supervisor for Clark
County REMC, an electrical service company in Sellersburg, Indiana, since March
1995. From July 1991 to March 1995 he was an area supervisor for Asplundh Tree
Trimming in Ramsey, Indiana. Mr. Saulman was elected to a four year term as a
County Council member in 1998. He served as Harrison County Commissioner from
1992 to 1996. Mr. Saulman is a member of the South Harrison Water Co. and the
Pleasant Ridge United Methodist Church. Age 57. Director since 1997.
John W. Buschemeyer is the President and sole owner of Hurst Lumber Co. in
Corydon, Indiana. He is a member of the Corydon Rotary Club and the Downtown
Corydon Merchants Association. Age 61. Director since 1973.
Gerald L. Uhl is the Business Manager for Jacobi Sales, Inc., a farm
implement dealership in Palmyra, Indiana. He has served as Chairman of the
Harrison County 4-H Council and President of the Corydon Country Club. Age 58.
Director since 1973.
Meetings and Committees of the Board of Directors
The business of First Capital and First Federal is conducted through
meetings and activities of their Board of Directors and their committees. During
the fiscal year ended June 30, 1999, the Board of Directors of First Capital
held 12 meetings and the Board of Directors of First Federal held 12 meetings.
No director attended fewer than 75% of the total meetings of the Boards of
Directors and committees on which that director served.
The Executive Committee, which consists of Directors Buschemeyer, Saulman,
Shireman and Pendleton, meets as necessary between meetings of the full Board of
Directors. All actions of the Executive Committee must be ratified by the full
Board of Directors. The Executive Committee reviews directors' and officers'
compensation and makes recommendations to the full Board of Directors in this
regard. The Executive Committee met four times during the fiscal year ended June
30, 1999.
The Audit Committee, consisting of Directors Pendleton, G. Uhl and
Shireman, is responsible for developing and monitoring First Federal's audit
program. The Audit Committee selects the outside auditor and meets with them to
discuss the results of the annual audit and any related matters. The Audit
Committee also receives and reviews all the reports and findings and other
information presented to them by officers
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regarding financial reporting policies and practices. The Audit Committee meets
as necessary and met two times during the fiscal year ended June 30, 1999.
The Compensation Committee, consisting of Directors S. Uhl, Buschemeyer and
Shireman, is responsible for establishing and recommending employee and
executive compensation policy to the full Board of Directors. The Compensation
Committee met one time during the fiscal year ended June 30, 1999.
The full Board of Directors serves as a nominating committee. The Board of
Directors met once in its capacity as the nominating committee to nominate
directors for the election at the annual meeting.
Directors' Compensation
Fees. Members of First Federal's Board of Directors receive $400 per
month. Members of committees of the Board of Directors who are not employees of
First Federal also receive $50 per committee meeting attended. Directors of
First Federal also receive fees for reviewing appraisals at a rate of $10.00 per
appraisal. No separate fees are paid for service on First Capital's Board of
Directors. During the fiscal year ended June 30, 1999, each non-employee
Director of First Federal received a bonus of $4,756.
Directors' Deferred Compensation Plan. Directors may elect to defer their
monthly directors' fees until retirement with no income tax payable by the
director until retirement benefits are received. Upon the director's
termination of service on or after attaining age 70, the retired director
receives between $217 and $676 per month for 180 months. Benefits are also
payable upon disability, early retirement, other termination of service or
death. All directors participate in the plan other than Directors S. Uhl, Huber
and Saulman, who have elected not to participate.
Executive Compensation
Summary Compensation Table. The following information is furnished for Mr.
Pendleton. No other executive officer of First Federal received salary and
bonus of $100,000 or more during the year ended June 30, 1999.
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------
Other Annual All Other
Name And Position Year Salary Bonus Compensation (2) Compensation (3)
- ----------------- ---- -------- ------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
J. Gordon Pendleton 1999 $87,420 $5,528 $6,801 $4,276
Chairman and Chief Executive 1998 82,409 615 7,062 4,010
Officer 1997 77,484 650 7,592 2,359
</TABLE>
____________________
(2) Consists primarily of directors fees. Does not include the aggregate amount
of perquisites and other personal benefits, which was less than 10% of the
total annual salary and bonus reported.
(3) Consists of employer contributions to First Federal's 401(k) plan.
Employment Agreement. Effective December 31, 1998, First Capital and First
Federal entered into a one-year employment agreement with Mr. Pendleton. Under
the employment agreement, the initial salary level for Mr. Pendleton is $90,000,
which amount is paid by First Federal and may be increased at the discretion of
the Board of Directors or an authorized committee of the Board. On the
anniversary of the commencement date of the employment agreement, the term may
be extended for an additional year or a shorter period at the discretion of the
Board. The agreement is terminable by the employers at any time, by Mr.
Pendleton if he is assigned duties inconsistent with his initial position,
duties, responsibilities and status, or upon the occurrence of certain events
specified by federal regulations. If Mr. Pendleton's employment
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is terminated without cause or upon Mr. Pendleton's voluntary termination
following the occurrence of an event described in the preceding sentence, First
Federal would be required to honor the terms of the agreement through the
expiration of the current term, including payment of current cash compensation
and continuation of employee benefits.
The employment agreement also provides for a severance payment and other
benefits in the event of involuntary termination of employment in connection
with any change in control of First Capital or First Federal. A severance
payment also will be provided on a similar basis in connection with a voluntary
termination of employment where, subsequent to a change in control, Mr.
Pendleton is assigned duties inconsistent with his position, duties,
responsibilities and status immediately prior to the change in control.
On July 19, 1999, the employment agreement with Mr. Pendleton was amended
to provide that the merger of First Capital and HCB Bancorp and the approval of
the merger agreement by shareholders of First Capital would not constitute a
change in control of First Capital for purposes of Mr. Pendleton's employment
agreement.
The maximum present value of the severance benefits under the employment
agreements is 2.99 times the executive's average annual compensation during the
five-year period preceding the effective date of the change in control (the
"base amount"). The employment agreements provide that the value of the maximum
benefit may be distributed, at the executive's election, in the form of a lump
sum cash payment equal to 2.99 times the executive's base amount or a
combination of a cash payment and continued coverage under First Federal's
health, life and disability programs for a 36-month period following the change
in control, the total value of which does not exceed 2.99 times the executive's
base amount. Section 280G of the Internal Revenue Code provides that severance
payments that equal or exceed three times the individual's base amount are
deemed to be "excess parachute payments" if they are contingent upon a change in
control. Individuals receiving excess parachute payments are subject to a 20%
excise tax on the amount of the excess payments, and First Capital would not be
entitled to deduct the amount of the excess payments.
The employment agreement restricts Mr. Pendleton's right to compete against
First Capital and First Federal for a period of one year from the date of
termination of the agreement if he voluntarily terminates employment, except in
the event of a change in control.
Executive Retirement Income Agreements. First Federal has entered into an
agreement with James G. Pendleton to provide him with additional retirement
income. The agreement provides for an annual benefit of $24,500 upon Mr.
Pendleton's retirement at or after attaining age 65, payable for 15 years
following retirement. Benefits are also payable upon disability, early
retirement, other termination of service or death. First Federal has purchased a
life insurance policy with Mr. Pendleton as insured to assist in funding First
Federal's obligation under the agreement.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires First
Capital's executive officers and directors, and persons who own more than 10% of
any registered class of First Capital's equity securities, to file reports of
ownership and changes in ownership with the SEC. Executive officers, directors
and greater than 10% shareholders are required by regulation to furnish First
Capital with copies of all Section 16(a) reports they file.
Based solely on its review of the copies of the reports it has received and
written representations provided to First Capital from the individuals required
to file the reports, First Capital believes that each of First Capital's
executive officers and directors has complied with applicable reporting
requirements for transactions in First Capital common stock during the fiscal
year ended June 30, 1999.
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Transactions with Management
Federal regulations require that all loans or extensions of credit to
executive officers and directors of insured financial institutions must be made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons,
except for loans made pursuant to programs generally available to all employees,
and must not involve more than the normal risk of repayment or present other
unfavorable features. First Federal is therefore prohibited from making any new
loans or extensions of credit to executive officers and directors at different
rates or terms than those offered to the general public, except for loans made
pursuant to programs generally available to all employees, and has adopted a
policy to this effect. In addition, loans made to a director or executive
officer in an amount that, when aggregated with the amount of all other loans to
such person and his or her related interests, are in excess of the greater of
$25,000 or 5% of the institution's capital and surplus (up to a maximum of
$500,000) must be approved in advance by a majority of the disinterested members
of the Board of Directors.
Director Gerald L. Uhl is a shareholder and the Business Manager of Jacobi
Sales, Inc. ("JSI"), a farm implement dealership that has contracted with First
Federal to provide sales financing to customers of JSI. First Federal does not
grant preferential credit under this arrangement. All sales contracts are
presented to First Federal on a 50% recourse basis, with JSI responsible for the
sale and disposition of any repossessed equipment. During the fiscal year ended
June 30, 1999, First Federal granted approximately $772,000 of credit to JSI
customers. At June 30, 1999, none of such loans were delinquent 30 days or
more.
James L. Shireman Construction Co., Inc., for which director Mark D.
Shireman serves as president, constructed First Federal's New Salisbury branch
in 1999 at a cost of $750,000. Mr. Shireman recused himself from the discussion
and voting on the construction bid.
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PROPOSAL 3 FOR FIRST CAPITAL SHAREHOLDERS --
APPROVAL OF 1999 STOCK-BASED INCENTIVE PLAN
The Board of Directors of First Capital is presenting for shareholder
approval the First Capital Inc. 1999 Stock-Based Incentive Plan (the "Incentive
Plan"), in the form attached to this document as Appendix F. The purpose of the
Incentive Plan is to attract and retain qualified personnel in key positions,
provide officers, employees and non-employee directors of First Capital and
First Federal, with a proprietary interest in First Capital as an incentive to
contribute to the success of First Capital, promote the attention of management
to other shareholder's concerns, and reward employees for outstanding
performance. The following is a summary of the material terms of the Incentive
Plan which is qualified in its entirety by the complete provisions of the
Incentive Plan attached to this document as Appendix F.
General
The Incentive Plan authorizes the granting of options to purchase common
stock of First Capital and awards of restricted shares of common stock. Subject
to certain adjustments to prevent dilution of awards to participants, the
maximum number of shares of common stock reserved for awards under the Incentive
Plan is 107,626 shares, consisting of 76,876 shares reserved for options and
30,750 shares reserved for restricted stock awards. All employees and non-
employee directors of First Capital and its affiliates are eligible to receive
awards under the Incentive Plan. The Incentive Plan will be administered by a
committee (the "Committee") consisting of members of the Board of Directors who
are not employees of First Capital or its affiliates. Authorized but unissued
shares or shares previously issued and reacquired by First Capital may be used
to satisfy awards under the Incentive Plan. If authorized but unissued shares
are used to satisfy restricted stock awards and the exercise of options granted
under the Incentive Plan, it will result in an increase in the number of shares
outstanding and will have a dilutive effect on the holdings of existing
shareholders. First Capital may establish a trust under which the trustee will
purchase, with contributions from First Capital or First Federal, previously
issued shares to fund First Capital's obligation for restricted stock awards. As
of the date of this document, no awards have been granted under the Incentive
Plan.
Types of Awards
General. The Incentive Plan authorizes the grant of awards in the form of:
(1) options intended to qualify as incentive stock options under Section 422 of
the Internal Revenue Code (options which provide certain tax benefits to the
recipients upon compliance with applicable requirements, but which do not result
in tax deductions to First Capital); (2) options that do not so qualify (options
which do not provide the same income tax benefits to recipients, but which may
provide tax deductions to First Capital), referred to as "non-statutory stock
options"; and (3) grants of restricted shares of stock. Each type of award may
be subject to certain vesting or service requirements or other conditions
imposed by the Committee.
Options. Subject to the terms of the Incentive Plan, the Committee has the
authority to determine the amount of options granted to any individual and the
date or dates on which each option will become exercisable and any other
conditions applicable to an option. The exercise price of all options will be
determined by the Committee but will be at least 100% of the fair market value
of the underlying common stock at the time of grant. The exercise price of any
option may be paid in cash, common stock, or any other form permitted by the
Committee at its discretion. See "-Alternate Option Payments." The term of
options will be determined by the Committee, but in no event will an option be
exercisable more than ten years from the date of grant (or five years from date
of grant for a 10% owner with respect to incentive stock options).
All options granted under the Incentive Plan to officers and employees may,
at the discretion of the Committee, qualify as incentive stock options to the
extent permitted under Section 422 of the Internal Revenue Code. Under certain
circumstances, incentive stock options may be converted into non-statutory stock
options. In order to qualify as incentive stock options under Section 422 of
the Internal Revenue Code,
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the option must generally be granted only to an employee, must not be
transferable (other than by will or the laws of descent and distribution), the
exercise price must not be less than 100% of the fair market value of the common
stock on the date of grant, the term of the option may not exceed ten years from
the date of grant, and no more than $100,000 of options may become exercisable
for the first time in any calendar year. Notwithstanding the foregoing
requirements, incentive stock options granted to any person who is the
beneficial owner of more than 10% of the outstanding voting stock of First
Capital may be exercised only for a period of five years from the date of grant
and the exercise price must be at least equal to 110% of the fair market value
of the underlying common stock on the date of grant. Each non-employee director
of First Capital or its affiliates, as well as employees, will be eligible to
receive non-statutory stock options.
Unless otherwise determined by the Committee, upon termination of an option
holder's services for any reason other than death, disability or termination for
cause, all then exercisable options will remain exercisable for a period of time
following termination (three months in the case of termination from service in
general and one year in the cases of death, disability, retirement or
termination following a change in control, as defined in the Incentive Plan) and
all unexercisable options will be canceled. In the event of the death or
disability of an option holder or upon the occurrence of a change in control,
all unexercisable options held by the option holder will become fully
exercisable and remain exercisable for up to one year thereafter. In the event
of termination for cause, all exercisable and unexercisable options held by the
option holder will be canceled. In the event of the retirement of an option
holder, the Committee will, under certain circumstances set forth in the
Incentive Plan, have the discretion to allow unexercisable options to continue
to vest or become exercisable in accordance with their original terms.
Under generally accepted accounting principles, compensation expense is
generally not recognized with respect to the award of stock options.
Restricted Stock Awards. Subject to the terms of the Incentive Plan and
applicable regulation, the Committee has the authority to determine the amounts
of restricted stock awards granted to any individual and the dates on which
restricted stock awards granted will vest or any other conditions which must be
satisfied before vesting.
Stock award recipients may also receive amounts equal to accumulated cash
and stock dividends or other distributions (if any) with respect to shares
awarded in the form of restricted stock. In addition, prior to vesting,
recipients of restricted stock awards may also direct the voting of shares of
common stock granted to them.
Unless otherwise determined by the Committee, upon termination of the
services of a holder of a stock award for any reason other than death,
disability, retirement or termination for cause, all the holder's rights in
unvested restricted stock awards will be canceled. In the event of the death or
disability of the holder of the stock award or upon the occurrence of a change
in control, all unvested restricted stock awards held by the individual will
become fully vested. In the event of termination for cause of a holder of a
stock award, all unvested stock awards held by the individual will be canceled.
In the event of retirement of the holder of a stock award, the Committee will,
under certain circumstances set forth in the Incentive Plan and subject to
applicable regulation, have the discretion to determine that all unvested
restricted stock awards will continue to vest or be vested in accordance with
the original terms of the grant.
Tax Treatment
Options. An option holder will generally not be deemed to have recognized
taxable income upon grant or exercise of any incentive stock option, provided
that shares transferred in connection with the exercise are not disposed of by
the optionee for at least one year after the date the shares are transferred in
connection with the exercise of the option and two years after the date of grant
of the option. If these holding periods are satisfied, upon disposal of the
shares, the aggregate difference between the per share option
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exercise price and the fair market value of the common stock is recognized as
income taxable at capital gains rates. No compensation deduction may be taken by
First Capital as a result of the grant or exercise of incentive stock options,
assuming these holding periods are met.
In the case of the exercise of a non-statutory stock option, an option
holder will be deemed to have received ordinary income upon exercise of the
option in an amount equal to the aggregate amount by which the fair market value
of the common stock exceeds the exercise price of the option. In the event
shares received through the exercise of an incentive stock option are disposed
of prior to the satisfaction of the holding periods (a "disqualifying
disposition"), the exercise of the option will essentially be treated as the
exercise of a non-statutory stock option, except that the option holder will
recognize the ordinary income for the year in which the disqualifying
disposition occurs. The amount of any ordinary income recognized by an optionee
upon the exercise of a non-statutory stock option or due to a disqualifying
disposition will be a deductible expense of First Capital for federal income tax
purposes.
Restricted Stock Awards. When shares of common stock, as restricted stock
awards, are distributed upon vesting, the recipient recognizes ordinary income
equal to the fair market value of the shares at the date of distribution plus
any dividends and earnings on the shares (provided that date is more than six
months after the date of grant) and First Capital is permitted a commensurate
compensation expense deduction for income tax purposes.
Alternate Option Payments
Subject to the terms of the Incentive Plan, the Committee has discretion to
determine the form of payment for the exercise of an option. The Committee may
indicate acceptable forms in the award agreement covering the options or may
reserve its decision to the time of exercise. No option is to be considered
exercised until payment in full is accepted by the Committee. Any shares of
common stock tendered in payment of the exercise price of an option will be
valued at the fair market value of the common stock on the date prior to the
date of exercise.
Amendments
Subject to certain restrictions contained in the Incentive Plan, the Board
of Directors or the Committee may amend the Incentive Plan in any respect, at
any time, provided that no amendment may affect the rights of the holder of an
award without his or her permission and the amendment must comply with
applicable law and regulation.
Adjustments
In the event of any change in the outstanding shares of common stock of
First Capital by reason of any stock dividend or split, recapitalization,
merger, consolidation, spin-off, reorganization, combination or exchange of
shares, or other similar corporate change, or other increase or decrease in such
shares without receipt or payment of consideration by First Capital, or in the
event an extraordinary capital distribution is made, including the payment of an
extraordinary dividend, the Committee may make adjustments to previously granted
awards to prevent dilution, diminution or enlargement of the rights of the
holder; provided, however, that in the case of an extraordinary dividend, the
Committee may be required to obtain OTS approval prior to any adjustment. All
awards under this Incentive Plan will be binding upon any successors or assigns
of First Capital.
Nontransferability
Unless determined otherwise by the Committee, awards under the Incentive
Plan will not be transferable by the recipient other than by will or the laws of
intestate succession or pursuant to a domestic
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relations order. With the consent of the Committee, a recipient may permit
transferability or assignment for valid estate planning purposes of a non-
statutory stock option as permitted under the Internal Revenue Code or federal
securities laws and a participant may designate a person or his or her estate as
beneficiary of any award to which the recipient would then be entitled, in the
event of the death of the participant.
Stockholder Approval, Effective Date of Plan and Regulatory Compliance
The Incentive Plan is subject to the regulations of the OTS. The OTS has
not endorsed or approved the Incentive Plan.
The Incentive Plan provides that it shall become effective on January 1,
2000, subject to prior approval of the Incentive Plan by First Capital's
shareholders. The effective date of the Incentive Plan has been delayed until
January 1, 2000 to ensure compliance with federal regulations that would
otherwise limit the terms of awards under the Incentive Plan and, specifically,
the circumstances in which the vesting of outstanding awards may be accelerated.
Accordingly, assuming shareholder approval, the Incentive Plan will not be
implemented and no awards will be made before January 1, 2000.
New Plan Benefits
As of the date of this document, no determination had been made regarding
the granting of awards under the Incentive Plan. First Capital and HCB Bancorp
have agreed that persons who were employees or directors of First Capital prior
to the merger plus William H. Harrod will be eligible to receive awards of
restricted stock and that all persons who are employees or directors of First
Capital after the merger is completed, which will include the employees and
directors of HCB Bancorp, will be eligible to receive awards of stock options.
The First Capital Board of Directors recommends that First Capital
shareholders vote "FOR" approval of the First Capital, Inc. 1999 Stock-Based
Incentive Plan.
PROPOSAL 4 FOR FIRST CAPITAL SHAREHOLDERS --
RATIFICATION OF AUDITORS
The Board of Directors has appointed Monroe Shine & Co., Inc. to be its
auditors for the 2000 fiscal year, subject to the ratification by stockholders.
A representative of Monroe Shine & Co., Inc. is expected to be present at the
annual meeting to respond to appropriate questions from stockholders and will
have the opportunity to make a statement should he or she desire to do so.
If the ratification of the appointment of the auditors is not approved by a
majority of the votes cast by stockholders at the annual meeting, other
independent public accountants will be considered by the Board of Directors. The
Board of Directors recommends that stockholders vote FOR the ratification of the
appointment of auditors.
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.
Muldoon, Murphy & Faucette LLP, counsel to First Capital, will deliver an
opinion concerning federal income tax consequences of the merger.
88
<PAGE>
EXPERTS
The financial statements of First Capital as of June 30, 1999 and 1998 and
for the years then ended have been incorporated in this Joint Proxy Statement-
Prospectus by reference to First Capital's annual report to shareholders in
reliance upon the report of Monroe Shine & 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.
The financial statements of the HCB Bancorp as of December 31, 1999 and
1998 and for the years then ended have been included in this Joint Proxy
Statement-Prospectus in reliance upon the report of Monroe Shine & Co., Inc.,
independent certified public accountants, appearing elsewhere herein, 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 SEC a Registration Statement under the
Securities Act that registers the distribution to HCB Bancorp shareholders of
the shares of First Capital common stock to be issued in connection with the
merger. The Registration Statement, including the exhibits, contain additional
relevant information about First Capital and First Capital common stock. The
rules and regulations of the SEC allow us to omit certain information included
in the Registration Statement from this Joint 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 rooms in Washington, D.C., New York, New York, and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the 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 Joint 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 which 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)
. Management's discussion and analysis of financial condition and results
of operations on Pages __ through __ of First Capital's 1999 annual
report to stockholders
. Annual Report on Form 10-KSB for the year ended June 30, 1999
. Current Report on Form 8-K dated July 19, 1999
First Capital also incorporates by reference additional documents that it
might file with the SEC between the date of this document and the date of the
meeting. These include periodic reports, such as Annual Reports on Form 10-KSB,
Quarterly Reports on Form 10-QSB and Current Reports on Form 8-K, as well as
proxy statements.
89
<PAGE>
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 First Capital at the following address:
First Capital, Inc.
220 Federal Drive, NW
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
_________, 1999 in order to receive them before the annual meeting of
stockholders. If you request any incorporated documents from us we will mail
them to you by first-class mail, or other equally prompt means, within one
business day of our receipt of your request.
First Capital has supplied all information contained in this Joint Proxy
Statement-Prospectus relating to First Capital, and HCB Bancorp has supplied all
information relating to HCB Bancorp.
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
__________, 1999. 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 shareholders nor the issuance of First Capital's
securities in the merger shall create any implication to the contrary.
SHAREHOLDER PROPOSALS
Any proposal to be presented by any shareholder for action at First
Capital's 2000 annual meeting must be received by the Secretary of First Capital
no later than _____________, 1999 in order to be eligible for inclusion in First
Capital's proxy materials for the annual meeting.
If a shareholder wishes to nominate a person for election as a director or
present a proposal at First Capital's annual meeting, the shareholder must give
advance notice to First Capital not less than 30 days prior to the meeting,
unless less than 31 days' notice of the date of the meeting is given, in which
case the shareholder must give notice to First Capital within ten days after
notice of the meeting date. First Capital's bylaws specify the information that
must accompany notice of a shareholder proposal or nomination. Copies of the
bylaws may be obtained from the Secretary of First Capital.
90
<PAGE>
APPENDIX A
================================================================================
AGREEMENT AND PLAN OF MERGER
DATED AS OF JULY 19, 1999
BY AND AMONG
FIRST CAPITAL, INC.,
FC ACQUISITION CORP.
AND
HCB BANCORP
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
Introductory Statement.................................................................. A-4
ARTICLE I
The Merger.............................................................................. A-4
Section 1.1. Structure of the Merger........................................... A-4
Section 1.2. Effect on Outstanding Shares of HCB Common Stock.................. A-5
Section 1.3. Exchange Procedures............................................... A-6
Section 1.4. Effect on Outstanding Shares of Merger Sub Common Stock........... A-8
Section 1.5. Directors of HCB after Effective Time............................. A-8
Section 1.6. Articles of Incorporation and Bylaws of the Surviving Corporation. A-8
Section 1.7. Stock Options..................................................... A-8
Section 1.8. Bank Merger....................................................... A-9
Section 1.9. Alternative Structure............................................. A-9
ARTICLE II
Representations and Warranties.......................................................... A-9
Section 2.1. Disclosure Letters................................................ A-9
Section 2.2. Standards......................................................... A-9
Section 2.3. Representations and Warranties of HCB............................. A-10
Section 2.4. Representations and Warranties of First Capital................... A-26
ARTICLE III
Conduct Pending the Merger.............................................................. A-41
Section 3.1. Conduct of Business Prior to the Effective Time................... A-41
Section 3.2. Forbearances...................................................... A-41
ARTICLE IV
Covenants............................................................................... A-44
Section 4.1. Acquisition Proposals............................................. A-44
Section 4.2. Certain Policies of HCB........................................... A-47
Section 4.3. Access and Information............................................ A-47
Section 4.4. Applications; Consents............................................ A-48
Section 4.5. Antitakeover Provisions........................................... A-48
Section 4.6. Additional Agreements............................................. A-48
Section 4.7. Publicity......................................................... A-48
Section 4.8. Shareholders Meetings............................................. A-48
Section 4.9. Registration of First Capital Common Stock........................ A-49
Section 4.10. Affiliate Letters................................................. A-50
Section 4.11. Notification of Certain Matters................................... A-50
Section 4.12. Employees, Directors and Officers................................. A-50
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C>
Section 4.13. Indemnification................................................... A-53
Section 4.14. Year 2000......................................................... A-54
ARTICLE V
Conditions to Consummation.............................................................. A-54
Section 5.1. Conditions to Each Party's Obligations............................ A-54
Section 5.2. Conditions to the Obligations of First Capital.................... A-56
Section 5.3. Conditions to the Obligations of HCB.............................. A-57
ARTICLE VI
Termination............................................................................. A-57
Section 6.1. Termination....................................................... A-57
Section 6.2. Effect of Termination............................................. A-59
Section 6.3. Termination Fees.................................................. A-59
ARTICLE VII
Closing, Effective Date and Effective Time.............................................. A-60
Section 7.1. Effective Date and Effective Time................................. A-60
Section 7.2. Deliveries at the Closing......................................... A-60
ARTICLE VIII
Certain Other Matters................................................................... A-60
Section 8.1. Certain Definitions; Interpretation............................... A-60
Section 8.2. Survival.......................................................... A-61
Section 8.3. Waiver; Amendment................................................. A-61
Section 8.4. Counterparts...................................................... A-61
Section 8.5. Governing Law..................................................... A-61
Section 8.6. Expenses.......................................................... A-61
Section 8.7. Notices........................................................... A-62
Section 8.8. Entire Agreement; etc............................................. A-63
Section 8.9. Successors and Assigns; Assignment................................ A-63
</TABLE>
A-3
<PAGE>
Agreement and Plan of Merger
----------------------------
This is an Agreement and Plan of Merger, dated as of the 19th day of
July, 1999 ("Agreement"), by and among First Capital, Inc., an Indiana
corporation ("First Capital"), FC Acquisition Corp., an Indiana corporation and
wholly-owned subsidiary of First Capital ("Merger Sub"), and HCB Bancorp, an
Indiana corporation ("HCB").
Introductory Statement
----------------------
The Board of Directors of each of First Capital, Merger Sub and HCB
(i) has determined that this Agreement and the business combination and related
transactions contemplated hereby are in the best interests of First Capital and
HCB, respectively, and in the best long-term interests of their respective
shareholders, (ii) has determined that this Agreement and the transactions
contemplated hereby are consistent with, and in furtherance of, its respective
business strategies and (iii) has approved, at meetings of each of such Boards
of Directors, this Agreement.
The parties hereto intend that the Merger as defined herein shall
qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended ("IRC"), for federal income tax
purposes, and that the Merger shall be accounted for as a pooling-of-interests
transaction for accounting purposes.
First Capital and HCB 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.
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
The Merger
----------
Section 1.1. Structure of the Merger. On the Effective Date (as
-----------------------
defined in Section 7.1), Merger Sub will merge with and into HCB ("Merger"),
with HCB being the surviving entity, pursuant to the provisions of, and with the
effect provided for in, the Indiana Business Corporation Law ("IBCL"). Upon
consummation of the Merger, the separate corporate existence of Merger Sub shall
cease. HCB shall be the surviving corporation in the Merger and shall continue
to be governed by the laws of the State of Indiana and its name and separate
corporate existence, with all of its rights, privileges, immunities, powers and
franchises, shall continue unaffected by the Merger. From and after the
Effective Time (as defined in Section
A-4
<PAGE>
7.1), HCB shall possess all of the properties and rights and be subject to all
of the liabilities and obligations of Merger Sub, all as more fully described in
Chapter 23-1-40 of the IBCL. Upon the Merger becoming effective, HCB will adopt
a plan of complete liquidation pursuant to which HCB shall merge with and into
First Capital immediately after the Effective Time.
Section 1.2. Effect on Outstanding Shares of HCB Common Stock.
------------------------------------------------
(a) By virtue of the Merger, automatically and without any action on
the part of the holder thereof, each share of common stock, no par value per
share, of HCB ("HCB Common Stock") issued and outstanding at the Effective Time,
other than Excluded Shares (as defined below), shall become and be converted
into the right to receive 15.5 shares of common stock, par value $0.01 per
share, of First Capital ("First Capital Common Stock") (the "Exchange Ratio");
provided, however, that, notwithstanding any other provision hereof, 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
HCB 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 average of the closing sales
price of First Capital Common Stock, as reported on the Nasdaq SmallCap Market
of The Nasdaq Stock Market, Inc. ("Nasdaq SmallCap Market"), for the 10
consecutive trading days immediately preceding the Closing Date (as defined in
Section 7.1) (collectively, the "Merger Consideration"). In the event First
Capital Common Stock does not trade on one or more of the trading days in such
period, any such date shall be disregarded in computing the average closing
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 such period.
(b) As used herein, "Excluded Shares" shall consist of (i) shares the
holder of which, pursuant to any applicable law providing for dissenters' or
appraisal rights, is entitled to receive payment in accordance with the
provisions of any such law, such holder to have only the rights provided under
any such law (the "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).
(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 correspondingly to the
extent appropriate to reflect such change.
(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 HCB, 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.
A-5
<PAGE>
(e) Shareholders of HCB who properly exercise and perfect statutory
dissenters' rights shall have the rights accorded to dissenting shareholders
under Chapter 23-1-44 of the IBCL.
Section 1.3. Exchange Procedures.
-------------------
(a) Appropriate transmittal materials ("Letter of Transmittal") shall
be mailed within ten calendar days after the Effective Time to each holder of
record of HCB Common Stock as of the Effective Time. A Letter of Transmittal
will be deemed properly completed only if accompanied by certificates
representing all shares of HCB Common Stock to be converted thereby.
(b) At and after the Effective Time, each certificate ("HCB
Certificate") previously representing shares of HCB Common Stock (except as
specifically set forth in Section 1.2) shall represent only the right to receive
the Merger Consideration.
(c) Prior to the Effective Time, First Capital shall deposit, or shall
cause to be deposited, with its transfer agent and registrar or such bank or
trust company that is selected by First Capital and is reasonably acceptable to
HCB to act as exchange agent ("Exchange Agent"), for the benefit of the holders
of shares of HCB Common Stock, for exchange in accordance with this Section 1.3,
an estimated amount of cash sufficient to pay the aggregate amount of cash in
lieu of fractional shares to be paid pursuant to Section 1.2, and First Capital
shall 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
Merger Consideration.
(d) The Letter of Transmittal shall (i) specify that delivery shall be
effected, and risk of loss and title to the HCB Certificates shall pass, only
upon delivery of the HCB 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 HCB
Certificates in exchange for the Merger Consideration. Upon the proper
surrender of the HCB Certificates to the Exchange Agent, together with a
properly completed and duly executed Letter of Transmittal, the holder of such
HCB Certificates shall be entitled to receive in exchange therefor (m) a
certificate representing that number of whole shares of First Capital Common
Stock that such holder has the right to receive pursuant to Section 1.2 and (n)
a check in the amount equal to the cash in lieu of fractional shares, if any,
that such holder has the right to receive pursuant to Section 1.2 and any
dividends or other distributions to which such holder is entitled pursuant to
this Section 1.3. HCB Certificates so surrendered shall forthwith be cancelled.
As soon as practicable following 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
A-6
<PAGE>
account of the persons entitled thereto. If there is a transfer of ownership of
any shares of HCB Common Stock not registered in the transfer records of HCB,
the Merger Consideration shall be issued to the transferee thereof if the HCB
Certificates representing such HCB Common Stock are presented to the Exchange
Agent, accompanied by all documents required, in the reasonable judgment of
First Capital and the Exchange Agent, (x) to evidence and effect such transfer
and (y) 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 shall be remitted to
any person entitled to receive shares of First Capital Common Stock hereunder
until such person surrenders his or her HCB Certificates in accordance with this
Section 1.3. Upon the surrender of such person's HCB Certificates, such person
shall be entitled to receive any dividends or other distributions, without
interest thereon, which theretofore had become payable with respect to shares of
First Capital Common Stock represented by such person's HCB Certificates.
(f) From and after the Effective Time there shall be no transfers on
the stock transfer records of HCB of any shares of HCB Common Stock. If, after
the Effective Time, HCB Certificates are presented to First Capital, they shall
be cancelled and exchanged for the Merger Consideration deliverable in respect
thereof pursuant to this Agreement in accordance with the procedures set forth
in this Section 1.3.
(g) Any portion of the aggregate amount of cash to be paid in lieu of
fractional shares pursuant to Section 1.2, any dividends or other distributions
to be paid pursuant to this Section 1.3 or any proceeds from any investments
thereof that remains unclaimed by the shareholders of HCB 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
shareholders of HCB who have not theretofore complied with this Section 1.3
shall look only to First Capital for the Merger Consideration deliverable in
respect of each share of HCB Common Stock such shareholder holds, as determined
pursuant to Section 1.2 of this Agreement, without any interest thereon. If
outstanding HCB Certificates are not surrendered 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 (and, to the extent not in its possession, shall be paid over to
it), free and clear of all claims or interest of any person previously entitled
to such claims. 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 HCB 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 HCB'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 HCB Certificate, First Capital and the
A-7
<PAGE>
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 HCB Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such HCB
Certificate to be lost, stolen or destroyed and, if required by the Exchange
Agent, 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 HCB Certificate, the Exchange Agent will issue in exchange for
such lost, stolen or destroyed HCB Certificate the Merger Consideration
deliverable in respect thereof pursuant to Section 1.2.
Section 1.4. Effect on Outstanding Shares of Merger Sub Common
-------------------------------------------------
Stock. By virtue of the Merger, automatically and without any action on the
part of the holder thereof, each share of common stock, par value $0.01 per
share, of Merger Sub issued and outstanding as of the Effective Time shall be
converted into one share of HCB Common Stock, as the surviving corporation.
Section 1.5. Directors of HCB after Effective Time. From and after
-------------------------------------
the Effective Time, until duly changed in compliance with applicable law, the
Board of Directors of HCB shall consist of the directors of Merger Sub
immediately prior to the Effective Time.
Section 1.6. Articles of Incorporation and Bylaws of the Surviving
-----------------------------------------------------
Corporation. The Articles of Incorporation and Bylaws of HCB in effect
- -----------
immediately prior to the Effective Time shall be the Articles of Incorporation
and Bylaws of the surviving corporation until thereafter amended in accordance
with applicable law.
Section 1.7. Stock Options. At the Effective Time, by virtue of the
-------------
Merger and without any action on the part of any holder of an option, each
option to acquire shares of HCB Common Stock (an "HCB Option") granted pursuant
to HCB's 1998 Officers' and Key Employees' Stock Option Plan (the "HCB Option
Plan") that is then outstanding and unexercised shall be converted into and
become an option to acquire First Capital Common Stock on the same terms and
conditions as are in effect with respect to the HCB Option immediately prior to
the Effective Time (such option being referred to herein as a "Converted
Option"), except that (i) the number of shares of First Capital Common Stock
subject to such HCB Option shall be equal to the number of shares of HCB Common
Stock subject to such HCB Option immediately prior to the Effective Time
multiplied by the Exchange Ratio, the product being rounded, if necessary, up or
down to the nearest whole share, and (ii) the per share exercise price of the
HCB Option shall be adjusted by dividing the per share exercise price of the HCB
Option by the Exchange Ratio, and rounding to the nearest whole cent. It is
intended that the foregoing assumption of HCB Options shall be effected in a
manner which is consistent with the requirements of Section 424 of the IRC as to
any HCB Option that is an incentive stock option.
A-8
<PAGE>
Section 1.8. Bank Merger. Concurrently with or as soon as
-----------
practicable after the execution and delivery of this Agreement, First Federal
Bank, a Federal Savings Bank ("First Federal"), a wholly-owned subsidiary of
First Capital, and Harrison County Bank ("HC Bank"), a wholly-owned subsidiary
of HCB, shall enter into the Plan of Bank Merger, in the form attached hereto as
Exhibit A, pursuant to which HC Bank will merge with and into First Federal (the
- ---------
"Bank Merger"). The parties hereto intend that the Bank Merger shall become
effective on the Effective Date.
Section 1.9. Alternative Structure. Notwithstanding anything to the
---------------------
contrary contained in this Agreement, prior to the Effective Time, First Capital
may specify that the structure or the proposed accounting treatment of the
transactions contemplated hereby be revised and the parties shall enter into
such alternative transactions as First Capital may determine to effect the
purposes of this Agreement; provided, however, that such revised structure shall
not (i) adversely affect the tax effects of the Merger to HCB's shareholders or
alter or change the amount or kind of the Merger Consideration or (ii)
materially impede or delay the receipt of any Requisite Regulatory Approvals (as
defined in Section 2.3(f)). This Agreement and any related documents shall be
appropriately amended in order to reflect any such revised structure.
ARTICLE II
Representations and Warranties
------------------------------
Section 2.1. Disclosure Letters. Prior to the execution and
------------------
delivery of this Agreement, HCB and First Capital each have 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 (as defined in Section 8.1).
Section 2.2. Standards.
---------
(a) No representation or warranty of First Capital or HCB contained in
Sections 2.3 or 2.4, respectively, shall be deemed untrue or incorrect, and no
party hereto shall be deemed to have breached a representation or warranty, on
account of the existence or absence of any fact, circumstance or event unless,
as a direct or indirect consequence of such fact, circumstance or event,
individually or taken together with all other facts, circumstances or events
inconsistent with any paragraph of Sections 2.3 or 2.4, as applicable, there is
reasonably likely to exist a Material Adverse Effect. Neither First Capital's
nor HCB's representations, warranties and covenants contained in this Agreement
shall be deemed to be untrue or breached as a result of effects solely from
actions taken in compliance with a written request of the other party.
A-9
<PAGE>
Section 2.3. Representations and Warranties of HCB. Subject to
-------------------------------------
Sections 2.1 and 2.2, HCB represents and warrants to First Capital, with respect
to itself and HC Bank, that, except as disclosed in HCB's Disclosure Letter:
(a) Organization; Qualification.
---------------------------
(i) HCB is a corporation duly organized and validly existing
under the laws of the State of Indiana and is registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended ("BHCA").
(ii) HC Bank is a commercial bank duly organized and validly
existing under the laws of the State of Indiana and is wholly owned by HCB. The
deposits of HC Bank are insured by the Bank Insurance Fund of the Federal
Deposit Insurance Corporation ("FDIC") to the extent provided in the Federal
Deposit Insurance Act, as amended ("FDIA"). HC Bank is a member of Federal Home
Loan Bank of Indianapolis.
(iii) HCB and HC Bank each has all requisite corporate power and
authority to own, lease and operate its properties and to conduct the business
currently being conducted by it. HCB and HC Bank are each duly qualified to
transact business and 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 necessary, each of which jurisdictions
is listed on HCB's Disclosure Letter, except where the failure to be so
qualified would not have a Material Adverse Effect on HCB.
(iv) The Articles of Incorporation and Bylaws of HCB and HC
Bank delivered with HCB's Disclosure Letter are complete and correct as of the
date hereof.
(b) Subsidiaries.
------------
(i) HCB's Disclosure Letter sets forth (i) the name,
percentage ownership and number of shares of stock owned or controlled by HCB of
each corporation, partnership, joint venture or other entity in which HCB has,
directly or indirectly, an equity interest representing 5% or more of any class
of the capital stock thereof or other equity interests therein (individually, a
"Subsidiary" and collectively, "Subsidiaries"); (ii) the jurisdiction of
incorporation, capitalization and ownership of each Subsidiary; (iii) the names
of the officers and directors of each Subsidiary; and (iv) the jurisdictions in
which each Subsidiary is qualified or licensed to do business as a foreign
corporation. All such Subsidiaries and ownership interests are in compliance
with all applicable laws, rules and regulations relating to direct investments
in equity ownership interests.
(ii) HCB owns of record and beneficially all the capital stock
of each of its Subsidiaries free and clear of any claims, liens, encumbrances or
restrictions and there are no agreements or understandings with respect to the
voting or disposition of any such shares.
A-10
<PAGE>
Each of HCB'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 carry on its
business as now being conducted and is duly qualified to do business as a
foreign corporation 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 necessary, except where the failure to
be so qualified would not have a Material Adverse Effect on HCB. The outstanding
shares of capital stock of each Subsidiary have been validly authorized and
issued and are validly outstanding, fully paid and nonassessable.
(iii) None of HCB's Subsidiaries holds shares of its capital
stock in its treasury, and there are not, and on the Closing Date there will not
be, outstanding any (i) options, warrants or other rights with respect to the
capital stock of any Subsidiary, (ii) any securities convertible into or
exchangeable for shares of such capital stock or any other debt or equity
security of any Subsidiary or (iii) any other commitments 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 HCB other than HC Bank is an "insured
depository institution" as defined in the FDIA and the applicable regulations
thereunder.
(c) Capital Structure.
-----------------
(i) The authorized capital stock of HCB consists of 1,000,000
shares of HCB Common Stock. As of the date of this Agreement: (A) 79,900 shares
of HCB Common Stock were issued and outstanding, (B) no shares of HCB Common
Stock were reserved for issuance, except that 4,000 shares of HCB Common Stock
were reserved for issuance pursuant to the HCB Option Plan, and (C) no shares of
HCB Common Stock were held by HCB in its treasury or by its Subsidiaries. The
authorized capital stock of HC Bank consists of 8,000 shares of common stock,
par value $100 per share. As of the date of this Agreement, 8,000 shares of such
common stock were outstanding. All outstanding shares of capital stock of HCB
are duly authorized and validly issued, fully paid and nonassessable and not
subject to any preemptive rights and there are no agreements or understandings
with respect to the voting or disposition of any such shares. HCB's Disclosure
Letter sets forth a complete and accurate list of all outstanding options to
purchase HCB Common Stock that have been granted pursuant to the HCB Option
Plan, including the names of the option holders, dates of grant, exercise
prices, dates of vesting, dates of termination and shares subject to each grant.
(ii) No bonds, debentures, notes or other indebtedness having
the right to vote on any matters on which shareholders of HCB may vote are
issued or outstanding.
(iii) As of the date of this Agreement, except for the HCB
Option Plan, HCB neither has nor is bound by any outstanding subscriptions,
options, warrants, calls, rights,
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<PAGE>
convertible securities, commitments or agreements of any character obligating
HCB to issue, deliver or sell, or cause to be issued, delivered or sold, any
additional shares of capital stock of HCB or obligating HCB to grant, extend or
enter into any such subscription, option, warrant, call, right, convertible
security, commitment or agreement. As of the date hereof, there are no
outstanding contractual obligations of HCB to repurchase, redeem or otherwise
acquire any shares of capital stock of HCB.
(d) Authority.
---------
(i) HCB has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of HCB. This Agreement has been duly and validly executed and
delivered by HCB and constitutes a valid and binding obligation of HCB,
enforceable 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.
(ii) HC Bank has all requisite corporate power and authority to
enter into the Plan of Bank Merger and to consummate the transactions
contemplated thereby. The execution and delivery of the Plan of Bank Merger and
the consummation of the transactions contemplated thereby have been duly
authorized by the Board of Directors of HC Bank. The Plan of Bank Merger, upon
execution and delivery by HC Bank, will be duly and validly executed and
delivered by HC Bank and will constitute a valid and binding obligation of HC
Bank, enforceable 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) Shareholder Approval; Fairness Opinion. The affirmative vote of
--------------------------------------
a majority of the outstanding shares of HCB Common Stock entitled to vote on
this Agreement is the only vote of the shareholders of HCB required for approval
of this Agreement and the consummation of the Merger and the related
transactions contemplated hereby. HCB has received the written opinion of Young
& Associates, Inc. to the effect that, as of the date hereof, the Exchange Ratio
is fair, from a financial point of view, to the shareholders of HCB.
(f) No Violations. The execution, delivery and performance of this
-------------
Agreement by HCB do not, and the consummation of the transactions contemplated
hereby will not, assuming receipt of all Requisite Regulatory Approvals and
requisite shareholder approvals, constitute (i) a violation of any law, rule or
regulation or any judgment, decree, order, governmental permit or license of HCB
or any of its Subsidiaries, or to which HCB or any of its Subsidiaries (or any
of their respective properties) is subject, (ii) a violation of the Articles of
Incorporation or Bylaws of HCB or the similar organizational documents of any of
its Subsidiaries or (iii) a breach or violation of, or a default under (or an
event which, with due
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<PAGE>
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, pledge, security interest, charge or other encumbrance
upon any of the properties or assets of HCB 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 HCB
or any of its Subsidiaries is a party, or to which any of their respective
properties or assets may be subject. The consummation by HCB and HC Bank of the
transactions (including the Bank Merger) contemplated hereby (exclusive of the
effect of any changes effected pursuant to Section 1.9) will not require any
approval, consent or waiver under any such law, rule, regulation, judgment,
decree, order, governmental permit or license or the approval, consent or waiver
of any other party to any such agreement, indenture or instrument, other than
(x) the approval of the holders of a majority of the outstanding shares of HCB
Common Stock entitled to vote and the approval of HCB as the sole shareholder of
HC Bank and (y) the approval of the Office of Thrift Supervision ("OTS") under
the Home Owners' Loan Act, as amended ("HOLA"), the approval of the Indiana
Department of Financial Institutions ("IDFI"), the approval of the Board of
Governors of the Federal Reserve System ("FRB") under the BHCA, if necessary (or
the receipt of a waiver of such requirement), and the approval of the
appropriate regulatory authority under Section 18(c) of the FDIA (collectively,
the "Requisite Regulatory Approvals") and (z) such approvals, consents or
waivers as are required under the federal and state securities or "blue sky"
laws in connection with the transactions contemplated by this Agreement. As of
the date hereof, the executive officers of HCB know of no reason pertaining to
HCB why any of the approvals referred to in this Section 2.3(f) or in Section
2.4(f) should not be obtained without the imposition of any material condition
or restriction described in the proviso in Section 5.1(b).
(g) Reports and Financial Statements.
--------------------------------
(i) HCB and each of its Subsidiaries have each timely filed
all material reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file since
December 31, 1996 with (A) the IDFI, (B) the FRB and (C) the FDIC (collectively,
"HCB's Reports"), and have paid all fees and assessments due and payable in
connection therewith. As of their respective dates, none of HCB'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.
(ii) Set forth in HCB's Disclosure Letter are true and complete
copies of:
(A) the audited consolidated balance sheets of HCB and its
Subsidiaries as of the end of last three fiscal years, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended; and
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<PAGE>
(B) the unaudited consolidated balance sheet of HCB and
its Subsidiaries at March 31, 1999 and related consolidated statement of income
for the three months then ended.
The financial statements in the foregoing clauses (A) and (B) are
collectively referred to herein as the "HCB Financial Statements." The HCB
Financial Statements were prepared from the books and records of HCB and its
Subsidiaries, fairly present the consolidated financial position of HCB 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 HCB and its
Subsidiaries for the periods indicated, and except as otherwise set forth in the
notes thereto were prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied throughout the periods covered thereby;
provided, however, that the financial statements described in clause (C) above
are subject to normal year-end adjustments (which will not be material
individually or in the aggregate) and lack a statement of cash flows and
footnotes.
(h) Absence of Certain Changes or Events. Since December 31, 1998,
------------------------------------
(i) HCB and its Subsidiaries have not incurred any material liability, except in
the ordinary course of their business consistent with past practice, (ii) HCB
and its Subsidiaries have conducted their respective businesses only in the
ordinary and usual course of such businesses, (iii) there has not been any
Material Adverse Effect with respect to HCB, and (iv) there has been no change
in any accounting principles, practices or methods of HCB or any of its
Subsidiaries other than as required by GAAP.
(i) Absence of Claims. No litigation, controversy, claim, action,
-----------------
suit or other legal, administrative or arbitration proceeding before any court,
governmental agency or arbitrator is pending against HCB or any of its
Subsidiaries, and no such litigation, controversy, claim, action, suit or other
proceeding has been threatened. To the knowledge of HCB, there are no
investigations, reviews or inquiries by any court or governmental agency pending
or threatened against HCB or any of its Subsidiaries.
(j) Absence of Regulatory Actions. Since December 31, 1993, neither
-----------------------------
HCB 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, or has been a recipient of any extraordinary supervisory letter
from 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 and/or savings and loan deposits
("Government Regulators"), 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, cease and desist order, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter, board
resolutions or similar undertaking.
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<PAGE>
(k) Taxes. All federal, state, local and foreign tax returns
-----
required to be filed by or on behalf of HCB 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 HCB or any of its
Subsidiaries have been paid in full or adequate provision has been made for any
such taxes on HCB's balance sheet (in accordance with GAAP). For purposes of
this Section 2.3(k), the term "taxes" shall include all income, franchise, gross
receipts, real and personal property, real property transfer and gains, wage and
employment taxes. As of the date of this Agreement, there is no audit
examination, deficiency assessment, tax investigation or refund litigation with
respect to any taxes of HCB or any of its Subsidiaries, and no claim has been
made by any authority in a jurisdiction where HCB or any of its Subsidiaries do
not file tax returns that HCB 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 HCB or
any of its Subsidiaries have been paid in full or adequate provision has been
made for any such taxes on HCB's balance sheet (in accordance with GAAP). HCB
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. HCB 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, shareholder or other third
party, and HCB 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.
(l) Agreements.
----------
(i) HCB's Disclosure Letter lists any contract, arrangement,
commitment or understanding (whether written or oral) to which HCB or any of its
Subsidiaries is a party or is bound:
(A) which would be a material contract as defined in Item
601(b)(10) of Regulation S-K of the rules and regulations of the Securities and
Exchange Commission ("SEC");
(B) with any executive officer or other key employee of
HCB 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 HCB or any of its Subsidiaries of the nature contemplated by this
Agreement;
(C) with respect to the employment of any directors,
officers employees or consultants;
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<PAGE>
(D) (including any stock option plan, phantom stock or
stock appreciation rights plan, restricted stock plan or stock purchase plan)
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;
(E) containing covenants that limit the ability of HCB 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, HCB (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);
(F) pursuant to which HCB or any of its Subsidiaries may
become obligated to invest in or contribute capital to any entity;
(G) not fully disclosed in the HCB Financial Statements
that relates to borrowings of money (or guarantees thereof) by HCB or HC Bank,
other than in the ordinary course of business; or
(H) 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 $10,000 on an annual
basis.
To the knowledge of HCB, each of the agreements and other documents
referenced in HCB's Disclosure Letter with respect to this Section 2.3(l)(i) is
a valid, binding and enforceable obligation of the parties sought to be bound
thereby, 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. HCB has previously
delivered to First Capital true and complete copies of each agreement and other
documents referenced in HCB's Disclosure Letter with respect to this Section
2.3(l)(i).
(ii) Neither HCB 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.
(iii) HCB 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, servicemarks and trademarks used in its
businesses, and neither HCB nor any of its Subsidiaries has received any notice
of conflict with respect thereto that asserts the right of others. Each of HCB
and its Subsidiaries has performed all the obligations required to be
A-16
<PAGE>
performed by it and are not in default under any contact, agreement, arrangement
or commitment relating to any of the foregoing.
(m) Labor Matters. HCB and its Subsidiaries are in material
-------------
compliance with all applicable laws respecting employment, retention of
independent contractors and employment practices, terms and conditions of
employment and wages and hours. Neither HCB 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 HCB or any of
its Subsidiaries the subject of any proceeding asserting that it has committed
an unfair labor practice or seeking to compel HCB or any of its Subsidiaries to
bargain with any labor organization as to wages and conditions of employment,
nor is there any strike, other labor dispute or organizational effort involving
HCB or any of its Subsidiaries pending or overtly threatened.
(n) Employee Benefit Plans.
----------------------
(i) HCB'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 the Employee Retirement Income
Security Act of 1974, as amended ("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 employees of HCB
or any of its Subsidiaries (hereinafter referred to collectively as the "HCB
Employee Plans"). There has been no announcement or commitment by HCB or any of
its Subsidiaries to create an additional HCB Employee Plan, or to amend any HCB
Employee Plan, except for amendments required by applicable law which do not
materially increase the cost of such HCB Employee Plan. With respect to each HCB
Employee Plan, included with HCB's Disclosure Letter is a true and correct copy
of (A) the annual report on the applicable form of the Form 5500 series filed
with the Internal Revenue Service ("IRS") for the most recent three plan years,
if required to be filed, (B) such HCB Employee Plan, including amendments
thereto, (C) each trust agreement, insurance contract or other funding
arrangement relating to such HCB Employee Plan, including amendments thereto,
(D) the most recent summary plan description and summary of material
modifications thereto for such HCB Employee Plan, if the HCB Employee Plan is
subject to Title I of ERISA, (E) the most recent actuarial report or valuation
if such HCB Employee Plan is a HCB Pension Plan (as defined below) and any
subsequent changes to the actuarial assumptions contained therein and (F) the
most recent determination letter issued by the IRS if such HCB Employee Plan is
a HCB Qualified Plan (as defined below).
(ii) There is no pending or threatened litigation,
administrative action or proceeding relating to any HCB Employee Plan. All of
the HCB Employee Plans comply in all material respects with all applicable
requirements of ERISA, the IRC and other applicable
A-17
<PAGE>
laws. There has occurred no "prohibited transaction" (as defined in Section 406
of ERISA or Section 4975 of the IRC) with respect to the HCB Employee Plans
which is likely to result in the imposition of any penalties or taxes under
Section 502(i) of ERISA or Section 4975 of the IRC upon HCB or any of its
Subsidiaries.
(iii) No liability to the Pension Benefit Guarantee Corporation
has been or is expected by HCB or any of its Subsidiaries to be incurred with
respect to any HCB Employee Plan which is subject to Title IV of ERISA ("HCB
Pension Plan"), or with respect to any "single-employer plan" (as defined in
Section 4001(a) of ERISA) currently or formerly maintained by HCB or any entity
which is considered one employer with HCB under Section 4001(b)(1) of ERISA or
Section 414 of the IRC (an "ERISA Affiliate"). No HCB Pension Plan had an
"accumulated funding deficiency" (as defined in Section 302 of ERISA), whether
or not waived, as of the last day of the end of the most recent plan year ending
prior to the date hereof; the fair market value of the assets of each HCB
Pension Plan exceeds the present value of the "benefit liabilities" (as defined
in Section 4001(a)(16) of ERISA) under such HCB Pension Plan as of the end of
the most recent plan year with respect to the respective HCB Pension Plan ending
prior to the date hereof, calculated on the basis of the actuarial assumptions
used in the most recent actuarial valuation for such HCB Pension Plan as of the
date hereof; and no notice of a "reportable event" (as defined in Section 4043
of ERISA) for which the 30-day reporting requirement has not been waived has
been required to be filed for any HCB Pension Plan within the 12-month period
ending on the date hereof. Neither HCB nor any of its Subsidiaries has provided,
or is required to provide, security to any HCB Pension Plan or to any single-
employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the IRC.
Neither HCB, its Subsidiaries, nor any ERISA Affiliate has contributed to any
"multiemployer plan," as defined in Section 3(37) of ERISA, on or after
September 26, 1980.
(iv) Each HCB 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 (an "HCB Qualified Plan") has received
a favorable determination letter from the IRS, and HCB and its Subsidiaries are
not aware of any circumstances likely to result in revocation of any such
favorable determination letter. Each HCB Qualified Plan that is an "employee
stock ownership plan" (as defined in Section 4975(e)(7) of the IRC) has
satisfied all of the applicable requirements of Sections 409 and 4975(e)(7) of
the IRC and the regulations thereunder in all respects and any assets of any
such HCB Qualified Plan that are not allocated to participants' individual
accounts are pledged as security for, and may be applied to satisfy, any
securities acquisition indebtedness.
(v) HCB and its Subsidiaries do not have any obligations for
post-retirement or post-employment benefits under any HCB 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. With respect to HCB or any of its
Subsidiaries, for the HCB Employee Plans listed in HCB's Disclosure Letter, the
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execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not result in any payment or series of
payments by HCB or any of its Subsidiaries to any person which is an "excess
parachute payment" (as defined in Section 280G of the IRC), increase or secure
(by way of a trust or other vehicle) any benefits payable under any HCB Employee
Plan or accelerate the time of payment or vesting of any such benefit.
(o) Title to Assets. HCB's Disclosure Letter contains a complete and
---------------
accurate list of all real property owned or leased by HCB or any of its
Subsidiaries, including all properties of HCB or any of its Subsidiaries
classified as "other real estate owned" or words of similar import (the "Real
Property"). To the knowledge of HCB, none of the buildings, structures or other
improvements located on the Real Property encroaches upon or over any adjoining
parcel or real estate or any easement or right-of-way. HCB and each of its
Subsidiaries has good and marketable title to its properties and assets
(including any intellectual property asset such as any trademark, service mark,
tradename or copyright) and property acquired in a judicial foreclosure
proceeding or by way of a deed in lieu of foreclosure or similar transfer, other
than property as to which it is lessee, in which case the related lease is valid
and in full force and effect. Each lease pursuant to which HCB or any of its
Subsidiaries is lessor is valid and in full force and effect and no lessee under
any such lease is in default or in violation of any provisions of any such
lease. All material tangible properties of HCB and each of its Subsidiaries are
in a good state of maintenance and repair, conform with all applicable
ordinances, regulations and zoning laws and are considered by HCB to be adequate
for the current business of HCB and its Subsidiaries.
(p) Compliance with Laws. HCB 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 federal, state, local
and foreign governmental or regulatory bodies (each a "Governmental Entity")
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. Since the date of its incorporation,
the corporate affairs of HCB have not been conducted in violation of any law,
ordinance, regulation, order, writ, rule, decree or condition to approval of any
Governmental Entity. The businesses of HCB and its Subsidiaries are not being
conducted in violation of any law, ordinance, regulation, order, writ, rule,
decree or condition to approval of any Governmental Entity.
(q) Fees. Other than financial advisory services performed for HCB by
----
Young & Associates, Inc., pursuant to an agreement dated July 13, 1999, a true
and complete copy of which has been previously delivered to First Capital,
neither HCB 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 HCB
or any of its Subsidiaries in connection with this Agreement or the transactions
contemplated hereby.
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<PAGE>
(r) Environmental Matters.
---------------------
(i) With respect to HCB and each of its Subsidiaries:
(A) Each of HCB and its Subsidiaries, the Participation
Facilities (as defined below), and, to HCB's knowledge, the Loan Properties (as
defined below) are, and have been, in substantial compliance with, and are not
liable under, all Environmental Laws (as defined below);
(B) 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
against HCB or any of its Subsidiaries or any Participation Facility (1) for
alleged noncompliance (including by any predecessor) with, or liability under,
any Environmental Law or (2) relating to the presence of or release into the
environment of any Hazardous Material (as defined below), whether or not
occurring at or on a site owned, leased or operated by HCB or any of its
Subsidiaries or any Participation Facility;
(C) To HCB's knowledge, 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 HCB or any of its
Subsidiaries in respect of such Loan Property) (1) relating to alleged
noncompliance (including by any predecessor) with, or liability under, any
Environmental Law or (2) 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 a Loan Property;
(D) To HCB's knowledge, the properties currently owned or
operated by HCB or any of its Subsidiaries (including, without limitation, soil,
groundwater or surface water on or under the properties, and buildings thereon)
are not contaminated with and do not otherwise contain any Hazardous Material
other than as permitted under applicable Environmental Law;
(E) Neither HCB 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;
(F) To HCB's knowledge, there are no underground storage
tanks on, in or under any properties owned or operated by HCB or any of its
Subsidiaries or any Participation Facility and no underground storage tanks have
been closed or removed from any properties owned or operated by HCB or any of
its Subsidiaries or any Participation Facility; and
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(G) To HCB's knowledge, during the period of (1) HCB's or
any of its Subsidiaries' ownership or operation of any of their respective
current properties or (2) HCB's or any of its Subsidiaries' participation in the
management of any Participation Facility, there has been no contamination by or
release of Hazardous Materials in, on, under or affecting such properties. To
HCB's knowledge, prior to the period of (1) HCB's or any of its Subsidiaries'
ownership or operation of any of their respective current properties or (2)
HCB's or any of its Subsidiaries' 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.
(ii) The following definitions apply for purposes of this
Section 2.3(r) and Section 2.4(r):
"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.
"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.
"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, legal requirement or agreement with any
Governmental Entity relating to (A) the protection, preservation or restoration
of the environment (which includes, without limitation, air, water vapor,
surface water, groundwater, drinking water supply, structures, 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 (B) 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 all federal, state and local laws, rules, regulations
or requirements relating to the protection of the environment or health and
safety, including, without limitation, the Federal Comprehensive 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 (including, but not limited to, the
Hazardous and Solid Waste Amendments thereto and Subtitle I relating to
underground storage tanks), 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
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Environmental Policy Act, the Rivers and Harbors Appropriation Act or any so-
called "Superfund" or "Superlien" law, each as amended and as now or hereafter
in effect.
"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, and polychlorinated biphenyls.
(s) Loan Portfolio; Allowance; Asset Quality.
----------------------------------------
(i) With respect to each loan owned by HCB or its Subsidiaries
in whole or in part, to HCB's knowledge:
(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;
(B) neither HCB 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) HCB or a Subsidiary of HCB is the sole holder of legal
and beneficial title to each loan (or HCB's or its Subsidiary's applicable
participation interest, as applicable), except as otherwise referenced on the
books and records of HCB or a Subsidiary of HCB;
(D) the note and the related security documents, copies of
which are included in the loan files, are true and correct copies of the
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;
(E) there is no pending or threatened condemnation
proceeding or similar proceeding affecting the property that serves as security
for a loan, except as otherwise referenced on the books and records of HCB;
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<PAGE>
(F) there is no litigation or proceeding pending or
threatened relating to the property that serves as security for a loan that
would have a Material Adverse Effect upon the related loan; and
(G) 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.
(ii) The allowance for possible loan losses reflected in HCB's
audited statement of condition at December 31, 1998 was, and the allowance for
possible losses shown on the balance sheets in HCB's Reports for periods ending
after December 31, 1998, in the opinion of management, was or will be adequate,
as of the dates thereof, under GAAP.
(iii) HCB's Disclosure Letter sets forth by category the amounts
of all loans, leases, advances, credit enhancements, other extensions of credit,
commitments and interest-bearing assets of HCB and its Subsidiaries that have
been classified (whether regulatory or internal) as "special mention,"
"substandard," "doubtful," "loss" or words of similar import, and HCB and its
Subsidiaries shall promptly after the end of any month inform First Capital of
any such classification arrived at any time after the date hereof. The "other
real estate owned" or words of similar import included in any non-performing
assets of HCB or any of its Subsidiaries is carried net of reserves at the lower
of cost or fair value, less estimated selling costs, based on current
independent appraisals or evaluations or current management appraisals or
evaluations; provided, however, that "current" shall mean within the past 12
months.
(t) Deposits. None of the deposits of HCB or any of its Subsidiaries
--------
is a "brokered" deposit.
(u) Accounting Matters. Neither HCB nor any of its Subsidiaries or,
------------------
to the best of HCB's knowledge, any of its other affiliates has, through the
date hereof, taken or agreed to take any action that would prevent First Capital
from accounting for the Merger contemplated herein as a pooling-of-interests
transaction, and HCB has no knowledge of any fact or circumstance relating to it
that would prevent such accounting treatment.
(v) Antitakeover Provisions Inapplicable. HCB and its Subsidiaries
------------------------------------
have taken all actions required to exempt HCB, HC Bank, the Agreement, the
Merger and the Plan of Bank Merger from any provisions of an antitakeover nature
in their organization certificates and bylaws, and the provisions of any federal
or state "antitakeover," "fair price," "moratorium," "control share acquisition"
or similar laws or regulations.
(w) Material Interests of Certain Persons. No officer or director of
-------------------------------------
HCB or any of its Subsidiaries, or any "associate" (as such term is defined in
Rule 12b-2 under the Securities Exchange Act of 1934 ("Exchange Act")) of any
such officer or director, has any interest in any material contract or property
(real or personal), tangible or intangible, used in or pertaining to the
business of HCB or any of its Subsidiaries.
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<PAGE>
(x) Insurance. In the opinion of management, HCB and its Subsidiaries
---------
are presently insured for amounts deemed reasonable by management with, to HCB's
knowledge, financially sound insurance companies, against such risks as
companies engaged in a similar business would, in accordance with good business
practice, customarily be insured. All of the insurance policies and bonds
maintained by HCB and its Subsidiaries are in full force and effect, HCB and its
Subsidiaries are not in default thereunder and all material claims thereunder
have been filed in timely fashion.
(y) Investment Securities; Derivatives; Borrowings.
----------------------------------------------
(i) Except for investments in Federal Home Loan Bank ("FHLB")
stock, pledges to secure FHLB borrowings, reverse repurchase agreements entered
into in arms-length transactions pursuant to normal commercial terms and
conditions and entered into in the ordinary course of business and restrictions
that exist for securities to be classified as "held to maturity," none of the
investments reflected in the consolidated balance sheet of HCB as of December
31, 1998, and none of the investment securities acquired by it or any of its
Subsidiaries since December 31, 1998, 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) Except for adjustable-rate mortgage loans and adjustable-
rate FHLB advances, neither HCB nor any Subsidiary of HCB 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.
(iii) Set forth in HCB's Disclosure Letter is a true and
complete list of HCB's borrowed funds (excluding deposit accounts) as of the
date hereof.
(z) Indemnification. Except as provided in the Articles of
---------------
Incorporation or Bylaws of HCB or the similar governing documents of its
Subsidiaries, neither HCB nor any Subsidiary of HCB is a party to any agreement
that provides for the indemnification of any of its present or future directors,
officers, employees or other persons who serve or served in any other capacity
with any other enterprise at the request of HCB, and, to the knowledge of HCB,
there are no claims for which any person would be entitled to indemnification
under the Articles of Incorporation or Bylaws of HCB or the similar governing
documents of any of its Subsidiaries, under any applicable law or regulation or
under any indemnification agreement.
A-24
<PAGE>
(aa) Books and Records. The books and records of HCB and its
-----------------
Subsidiaries on a consolidated basis have been, and are being, maintained in
accordance with applicable legal and accounting requirements and reflect in all
material respects the substance of events and transactions that should be
included therein.
(bb) Corporate Documents. The minute books of HCB constitute a
-------------------
complete and correct record of all actions taken by its board of directors (and
each committee thereof) and its shareholders. The minute books of each of HCB's
Subsidiaries constitutes a complete and correct record of all actions taken by
the respective boards of directors (and each committee thereof) and the
shareholders of each such Subsidiary.
(cc) Tax Treatment of the Merger. As of the date hereof, HCB has no
---------------------------
knowledge of any fact or circumstance relating to it that would prevent the
transactions contemplated by this Agreement from qualifying as a tax-free
reorganization under the IRC.
(dd) Beneficial Ownership of First Capital Common Stock. As of the
--------------------------------------------------
date hereof, HCB beneficially owns 25,000 shares of First Capital Common Stock
and does not have any option, warrant or right of any kind to acquire the
beneficial ownership of any shares of First Capital Common Stock.
(ee) Year 2000 Matters. HCB has completed a review of its computer
-----------------
systems to identify systems that could be affected by the "Year 2000" issue and
reasonably believes it has identified all such Year 2000 problems. HCB's
management has developed and commenced implementation of a plan which is
designed to complete any required initial changes to its computer systems ("HCB
Y2K Plan") and to complete testing of those changes by September 30, 1999. Year
2000 issues have not had, and are not reasonably expected to have, a Material
Adverse Effect on HCB.
(ff) Registration Statement. The information regarding HCB and its
----------------------
Subsidiaries to be supplied by HCB for inclusion in the Registration Statement
on Form S-4 to be filed by First Capital with the SEC under the Securities Act
of 1933, as amended ("Securities Act") for the purpose of registering the shares
of First Capital Common Stock to be issued to HCB's shareholders in the Merger
(including the joint proxy statement and prospectus ("Joint Proxy Statement-
Prospectus") constituting a part thereof) (as amended or supplemented from time
to time, the "Registration Statement"), will not, at the time the Registration
Statement becomes effective, 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.
(gg) Community Reinvestment Act Compliance. HC Bank is in compliance
-------------------------------------
with the applicable provisions of the Community Reinvestment Act ("CRA") and the
regulations promulgated thereunder, and HC Bank currently has a CRA rating of
satisfactory or better. To HCB's knowledge, there is no fact or circumstance or
set of facts or circumstances that would
A-25
<PAGE>
cause HC Bank to fail to comply with such provisions or cause the CRA rating of
HC Bank to fall below satisfactory.
(hh) Undisclosed Liabilities. As of the date hereof, HCB and its
-----------------------
Subsidiaries have not incurred any debt, liability or obligation of any nature
whatsoever (whether accrued, contingent, absolute or otherwise and whether due
or to become due) except for (i) liabilities reflected on or reserved against in
the consolidated financial statements of HCB as of December 31, 1998, and (ii)
liabilities incurred since December 31, 1998 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 HCB.
Section 2.4. Representations and Warranties of First Capital.
-----------------------------------------------
Subject to Sections 2.1 and 2.2, First Capital represents and warrants to HCB,
with respect to itself, Merger Sub and First Federal, that, except as
specifically disclosed in First Capital's Disclosure Letter:
(a) Organization; Qualification.
---------------------------
(i) First Capital is a corporation duly organized and validly
existing under the laws of the State of Indiana and is registered as a savings
and loan holding company under the HOLA.
(ii) First Federal is a stock savings bank duly organized and
validly existing under the laws of the United States and is wholly owned by
First Capital. The deposits of First Federal are insured by the Savings
Association Insurance Fund of the FDIC to the extent provided in the FDIA. First
Federal is a member of Federal Home Loan Bank of Indianapolis.
(iii) Merger Sub is a corporation duly organized and validly
existing under the laws of the State of Indiana. Merger Sub does not currently
conduct any business.
(iv) First Capital and First Federal each 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 and First
Federal are each duly qualified to transact business and 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
necessary, each of which jurisdictions is listed on First Capital's Disclosure
Letter, except where the failure to be so qualified would not have a Material
Adverse Effect on First Capital.
(v) The Articles of Incorporation and Bylaws of First Capital
and Merger Sub and the Federal Stock Charter and Bylaws of First Federal
delivered with First Capital's Disclosure Letter are complete and correct as of
the date hereof.
A-26
<PAGE>
(b) Subsidiaries.
------------
(i) First Capital's Disclosure Letter sets forth (i) the name,
percentage ownership and number of shares of stock owned or controlled by First
Capital of each corporation, partnership, joint venture or other entity in which
First Capital has, directly or indirectly, an equity interest representing 5% or
more of any class of the capital stock thereof or other equity interests therein
(individually, a "Subsidiary" and collectively, "Subsidiaries"); (ii) the
jurisdiction of incorporation, capitalization and ownership of each Subsidiary
other than First Federal; (iii) the names of the officers and directors of each
Subsidiary other than First Federal; and (iv) the jurisdictions in which each
Subsidiary is qualified or licensed to do business as a foreign corporation. All
such Subsidiaries and ownership interests are in compliance with all applicable
laws, rules and regulations relating to direct investments in equity ownership
interests.
(ii) First Capital owns of record and beneficially all the
capital stock of each of its Subsidiaries free and clear of any claims, liens,
encumbrances or restrictions and there are no agreements or understandings with
respect to the voting or disposition of any such shares. 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 carry on its business
as now being conducted and is duly qualified to do business as a foreign
corporation 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 necessary, except where the failure to be so
qualified would not have a Material Adverse Effect on First Capital. The
outstanding shares of capital stock of each Subsidiary have been validly
authorized and issued and are validly outstanding, fully paid and nonassessable.
(iii) None of First Capital's Subsidiaries holds shares of its
capital stock in its treasury, and there are not, and on the Closing Date there
will not be, outstanding any (i) options, warrants or other rights with respect
to the capital stock of any Subsidiary, (ii) any securities convertible into or
exchangeable for shares of such capital stock or any other debt or equity
security of any Subsidiary or (iii) any other commitments 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 Federal is
an "insured depository institution" as defined in the FDIA, and the applicable
regulations thereunder.
(c) Capital Structure.
-----------------
(i) The authorized capital stock of First Capital consists of
5,000,000 shares of First Capital Common Stock and 1,000,000 shares of preferred
stock, par value $.01
A-27
<PAGE>
per share ("First Capital Preferred Stock"). As of the date of this Agreement:
(A) 1,291,824 shares of First Capital Common Stock were issued and outstanding,
exclusive of shares held in treasury, (B) no shares of First Capital Preferred
Stock were issued and outstanding, (C) no shares of First Capital Common Stock
were reserved for issuance, except that 40,077 shares of First Capital Common
Stock were reserved for issuance pursuant to First Capital's 1994 Stock Option
Plan ("First Capital Option Plan"), (D) no shares of First Capital Preferred
Stock were reserved for issuance, and (E) no shares of First Capital Common
Stock were held by First Capital in its treasury or by First Federal. The
authorized capital stock of First Federal consists of 4,000,000 shares of common
stock, par value $1.00 per share, and 1,000,000 shares of preferred stock, par
value $1.00 per share. As of the date of this Agreement, 1,000 shares of such
common stock were outstanding and no shares of such preferred stock were
outstanding. The authorized capital stock of Merger Sub consists of 1,000 shares
of common stock, par value $.01 per share. As of the date of this Agreement, 100
shares of such common stock were issued and outstanding. All outstanding shares
of capital stock of First Capital are duly authorized and validly issued, fully
paid and nonassessable and not subject to any preemptive rights and there are no
agreements or understandings with respect to the voting or disposition of any
such shares.
(ii) No bonds, debentures, notes or other indebtedness having
the right to vote on any matters on which shareholders of First Capital may vote
are issued or outstanding.
(iii) As of the date of this Agreement, except for this
Agreement and the First Capital Option Plan, First Capital neither has, nor is
bound by any outstanding subscriptions, options, warrants, calls, rights,
convertible securities, commitments or agreements of any character obligating
First Capital 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 to grant, extend or enter into any such subscription, option,
warrant, call, right, convertible security, commitment or agreement. As of the
date hereof, there are no outstanding contractual obligations of First Capital
to repurchase, redeem or otherwise acquire any shares of capital stock of First
Capital.
(d) Authority.
---------
(i) First Capital and Merger Sub each have the requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by the Boards of Directors of each of First Capital and Merger Sub.
This Agreement has been duly and validly executed and delivered by First Capital
and Merger Sub and constitutes a valid and binding obligation of First Capital
and Merger Sub, enforceable 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.
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<PAGE>
(ii) First Federal has all requisite corporate power and
authority to enter into the Plan of Bank Merger and to consummate the
transactions contemplated thereby. The execution and delivery of the Plan of
Bank Merger and the consummation of the transactions contemplated thereby have
been duly authorized by the Board of Directors of First Federal. The Plan of
Bank Merger, upon execution and delivery by First Federal, will be duly and
validly executed and delivered by First Federal and will constitute a valid and
binding obligation of First Federal, enforceable 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) Shareholder Approval; Fairness Opinion. The affirmative vote of
--------------------------------------
a majority of the outstanding shares of First Capital Common Stock entitled to
vote on this Agreement is the only vote of the shareholders of First Capital
required for approval of the Agreement and the consummation of the Merger and
the related transactions contemplated hereby. First Capital has received the
written opinion of Charles Webb & Company, a Division of Keefe, Bruyette &
Woods, Inc. to the effect that, as of the date hereof, the Exchange Ratio is
fair, from a financial point of view, to shareholders of First Capital.
(f) No Violations. The execution, delivery and performance of this
-------------
Agreement by First Capital do not, and the consummation of the transactions
contemplated hereby will not, assuming receipt of all Requisite Regulatory
Approvals and requisite shareholder approvals, constitute (i) a violation of any
law, rule or regulation or any judgment, decree, order, governmental permit or
license of First Capital or any of its Subsidiaries, or to which First Capital
or any of its Subsidiaries (or any of their respective properties) is subject,
(ii) a violation of the Articles of Incorporation or Bylaws of First Capital or
similar organizational documents of any of its Subsidiaries or (iii) 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, pledge, security interest, charge or other encumbrance 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. The consummation by First
Capital and First Federal of the transactions (including the Bank Merger)
contemplated hereby (exclusive of the effect of any changes effected pursuant to
Section 1.9) will not require any approval, consent or waiver under any such
law, rule, regulation, judgment, decree, order, governmental permit or license
or the approval, consent or waiver of any other party to any such agreement,
indenture or instrument, other than (1) the approval of the holders of a
majority of the outstanding shares of First Capital Common Stock and the
approval of First Capital as the sole shareholder of Merger Sub and First
Federal, (2) the Requisite Regulatory Approvals and (3) such approvals, consents
or waivers as are required under the federal and state securities or "blue sky"
laws in connection with the transactions contemplated by this Agreement. As of
the date hereof, the executive officers of First Capital know of no reason
pertaining to First Capital why
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<PAGE>
any of the approvals referred to in this Section 2.4(f) should not be obtained
without the imposition of any material condition or restriction described in the
last proviso in Section 5.1(b).
(g) Reports and Financial Statements.
--------------------------------
(i) First Capital and each of its Subsidiaries have timely
filed all material reports, registrations and statements, together with any
amendments required to be made with respect thereto, that they were required to
file since December 31, 1996 with (A) the OTS, (B) the SEC, (C) the National
Association of Securities Dealers ("NASD"), and (D) the FDIC (collectively,
"First Capital's Reports"), and have paid all fees and assessments due and
payable in connection therewith. As of their respective dates, 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. All of First Capital's Reports filed with the SEC complied
in all material respects with the applicable requirements of the Exchange Act
and the rules and regulations of the SEC promulgated thereunder.
(ii) Each of the financial statements of First Capital included
in First Capital's Reports filed with the SEC complied as to form, as of their
respective dates of filing with the SEC, in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto. The financial statements included in First
Capital's Reports 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, retained earnings 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 cash flows and footnotes.
(h) 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, 1998, (i) First Capital and its Subsidiaries have not incurred
any material liability, except in the ordinary course of their business
consistent with past practice, (ii) First Capital and its Subsidiaries have
conducted their respective businesses only in the ordinary and usual course of
such businesses, (iii) there has not been any Material Adverse Effect with
respect to First Capital, and (iv) there has been no change in any accounting
principles, practices or methods of First Capital or any of its Subsidiaries
other than as required by GAAP.
(i) Absence of Claims. No litigation, controversy, claim, action,
-----------------
suit or other legal, administrative or arbitration proceeding before any court,
governmental agency or arbitrator is pending against First Capital or any of its
Subsidiaries, and, to First Capital's
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<PAGE>
knowledge, no such litigation, controversy, claim, action, suit or other
proceeding has been threatened. To the knowledge of First Capital, there are no
investigations, reviews or inquiries by any court or governmental agency pending
or threatened against First Capital or any of its Subsidiaries.
(j) Absence of Regulatory Actions. Since December 31, 1993, neither
-----------------------------
First Capital nor First Federal has been a party to any cease and desist order,
written agreement or memorandum of understanding with, or any commitment letter
or similar written undertaking to, or has been subject to any action,
proceeding, order or directive by, or has been a recipient of any extraordinary
supervisory letter from 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, cease and desist order, written agreement,
memorandum of understanding, extraordinary supervisory letter, commitment
letter, board resolutions or similar written undertaking.
(k) 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). For purposes of this Section 2.4(k), the term "taxes" shall include all
income, franchise, gross receipts, real and personal property, real property
transfer and gains, wage and employment taxes. As of the date of this Agreement,
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 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 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 have
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, shareholder or other third party, and First Capital and each of its
Subsidiaries have 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.
A-31
<PAGE>
(l) Agreements.
----------
(i) First Capital's Disclosure Letter lists any contract,
arrangement, commitment or understanding (whether written or oral) to which
First Capital or any of its Subsidiaries is a party or is bound:
(A) which is a material contract as defined in Item
601(b)(10) of Regulation S-K of the rules and regulations of the SEC;
(B) with any executive officer or other key employee of
First Capital 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 First Capital or any of its Subsidiaries of the nature
contemplated by this Agreement;
(C) with respect to the employment of any directors,
officers employees or consultants;
(D) (including any stock option plan, phantom stock or
stock appreciation rights plan, restricted stock plan or stock purchase plan)
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;
(E) containing covenants that limit the ability of First
Capital 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, First Capital (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);
(F) pursuant to which First Capital or any of its
Subsidiaries may become obligated to invest in or contribute capital to any
entity;
(G) not fully disclosed in the First Capital's Reports
that relates to borrowings of money (or guarantees thereof) by First Capital or
First Federal, other than in the ordinary course of business; or
(H) 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 $10,000 on an annual
basis.
To the knowledge of First Capital, each of the agreements and other
documents referenced in First Capital's Disclosure Letter with respect to this
Section 2.4(l)(i) is a valid,
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binding and enforceable obligation of the parties sought to be bound thereby,
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. First Capital has
previously delivered to HCB true and complete copies of each agreement and other
documents referenced in First Capital's Disclosure Letter with respect to this
Section 2.4(l)(i).
(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.
(iii) First Capital 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, servicemarks and trademarks
used in its businesses, and neither First Capital nor any of its Subsidiaries
has received any notice of conflict with respect thereto that asserts the right
of others. Each of First Capital and its Subsidiaries has performed all the
obligations required to be performed by it and are not in default under any
contract, agreement, arrangement or commitment relating to any of the foregoing.
(m) Labor Matters. First Capital and its Subsidiaries are in material
-------------
compliance with all applicable laws respecting employment, retention of
independent contractors and employment practices, terms and conditions of
employment and wages and hours. Neither First Capital 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 First Capital or any of its Subsidiaries the subject of any
proceeding asserting that it has committed an unfair labor practice or seeking
to compel First Capital or any of its Subsidiaries to bargain with any labor
organization as to wages and conditions of employment, nor is there any strike,
other labor dispute or organizational effort involving First Capital or any of
its Subsidiaries pending or overtly threatened.
(n) Employee Benefit Plans.
----------------------
(i) First Capital'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 employees of First Capital or any of its Subsidiaries (hereinafter
referred to collectively as the "First Capital Employee Plans").
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<PAGE>
Except as set forth in First Capital's Disclosure Letter, there has been no
announcement or commitment by First Capital or any of its Subsidiaries to create
an additional First Capital Employee Plan, or to amend any First Capital
Employee Plan, except for amendments required by applicable law which do not
materially increase the cost of such First Capital Employee Plan.
(ii) There is no pending or threatened litigation, administrative
action or proceeding relating to any First Capital Employee Plan. All of the
First Capital 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 First Capital Employee Plans which is likely to
result in the imposition of any penalties or taxes under Section 502(i) of ERISA
or Section 4975 of the IRC upon First Capital or any of its Subsidiaries.
(iii) No liability to the Pension Benefit Guarantee Corporation
has been or is expected by First Capital or any of its Subsidiaries to be
incurred with respect to any First Capital Employee Plan which is subject to
Title IV of ERISA ("First Capital Pension Plan"), or with respect to any
"single-employer plan" (as defined in Section 4001(a) of ERISA) currently or
formerly maintained by First Capital or any ERISA Affiliate. No First Capital
Pension Plan had an "accumulated funding deficiency" (as defined in Section 302
of ERISA), whether or not waived, as of the last day of the end of the most
recent plan year ending prior to the date hereof; the fair market value of the
assets of each First Capital Pension Plan exceeds the present value of the
"benefit liabilities" (as defined in Section 4001(a)(16) of ERISA) under such
First Capital Pension Plan as of the end of the most recent plan year with
respect to the respective First Capital Pension Plan ending prior to the date
hereof, calculated on the basis of the actuarial assumptions used in the most
recent actuarial valuation for such First Capital Pension Plan as of the date
hereof; and no notice of a "reportable event" (as defined in Section 4043 of
ERISA) for which the 30-day reporting requirement has not been waived has been
required to be filed for any First Capital Pension Plan within the 12-month
period ending on the date hereof. Neither First Capital nor any of its
Subsidiaries has provided, or is required to provide, security to any First
Capital Pension Plan or to any single-employer plan of an ERISA Affiliate
pursuant to Section 401(a)(29) of the IRC. Neither First Capital, any of its
Subsidiaries, nor any ERISA Affiliate has contributed to any "multiemployer
plan," as defined in Section 3(37) of ERISA, on or after September 26, 1980.
(iv) Each First Capital 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 "First Capital
Qualified Plan") has received a favorable determination letter from the IRS, and
First Capital and its Subsidiaries are not aware of any circumstances likely to
result in revocation of any such favorable determination letter. Each First
Capital Qualified Plan that is an "employee stock ownership plan" (as defined in
Section 4975(e)(7) of the IRC) has satisfied all of the applicable requirements
of Sections 409 and 4975(e)(7) of the IRC and the regulations thereunder in all
respects and any assets of any such
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First Capital Qualified Plan that are not allocated to participants' individual
accounts are pledged as security for, and may be applied to satisfy, any
securities acquisition indebtedness.
(v) First Capital and its Subsidiaries do not have any
obligations for post-retirement or post-employment benefits under any First
Capital 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. With respect to
First Capital or any of its Subsidiaries, for the First Capital Employee Plans
listed in First Capital's Disclosure Letter, the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby will not
result in any payment or series of payments by First Capital or any of its
Subsidiaries to any person which is an "excess parachute payment" (as defined in
Section 280G of the IRC), increase or secure (by way of a trust or other
vehicle) any benefits payable under any First Capital Employee Plan or
accelerate the time of payment or vesting of any such benefit.
(o) Title to Assets. First Capital's Disclosure Letter contains a
---------------
complete and accurate list of all real property owned or leased by First Capital
or any of its Subsidiaries, including all properties of First Capital or any of
its subsidiaries classified as "real estate owned" or words of similar import
(the "Real Property"). To the knowledge of First Capital, none of the
buildings, structures or other improvements located on the Real Property
encroaches upon or over any adjoining parcel or real estate or any easement or
right-of-way. First Capital and each of its Subsidiaries has good and marketable
title to its properties and assets (including any intellectual property asset
such as any trademark, service mark, tradename or copyright) and property
acquired in a judicial foreclosure proceeding or by way of a deed in lieu of
foreclosure or similar transfer, other than property as to which it is lessee,
in which case the related lease is valid and in full force and effect. Each
lease pursuant to which First Capital or any of its Subsidiaries is lessor is
valid and in full force and effect and no lessee under any such lease is in
default or in violation of any provisions of any such lease. All material
tangible properties of First Capital and each of its Subsidiaries are in a good
state of maintenance and repair, conform with all applicable ordinances,
regulations and zoning laws and are considered by First Capital to be adequate
for the current business of First Capital and its Subsidiaries.
(p) Compliance with Laws. Each of 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, to First
Capital's knowledge, no suspension or cancellation of any of them is threatened.
Since the date of its incorporation, the corporate affairs of First Capital have
not been conducted in violation of any law, ordinance, regulaion, order, writ,
rule, decree or condition to approval of any Governmental Entity. The business
of First Capital and its Subsidiaries are not being conducted in violation
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<PAGE>
of any law, ordinance, regulation, order, writ, rule, decree or condition to
approval of any Governmental Entity.
(q) Fees. Other than the financial advisory services performed for
----
First Capital by Charles Webb & Company, a Division of Keefe, Bruyette & Woods,
Inc., pursuant to an agreement dated June 3, 1999, a true and complete copy of
which has been previously delivered to HCB, neither First Capital 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 First Capital or any of
its Subsidiaries in connection with this Agreement or the transactions
contemplated hereby.
(r) Environmental Matters. With respect to First Capital and each of
---------------------
its Subsidiaries:
(i) Each of First Capital and its Subsidiaries, the
Participation Facilities and, to First Capital's knowledge, the Loan Properties
are, and have been, in substantial compliance with, and are not liable under,
all Environmental Laws;
(ii) 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
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 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 First Capital's knowledge, 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 or on a site
owned, leased or operated by a Loan Property;
(iv) To First Capital's knowledge, the properties currently
owned or operated by First Capital or any of its Subsidiaries (including,
without limitation, soil, groundwater or surface water on or under the
properties, and buildings thereon) are not contaminated with and do not
otherwise contain any Hazardous Material other than as permitted under
applicable Environmental Law;
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<PAGE>
(v) 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;
(vi) To First Capital's knowledge, there are no underground
storage tanks on, in or under any properties owned or operated by First Capital
or any of its Subsidiaries 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 any Participation Facility; and
(vii) To First Capital's knowledge, during the period of (A)
First Capital's or any of its Subsidiaries' ownership or operation of any of
their respective current properties or (B) First Capital's or any of its
Subsidiaries' participation in the management of any Participation Facility,
there has been no contamination by or release of Hazardous Materials in, on,
under or affecting such properties. To First Capital's knowledge, prior to the
period of (x) First Capital's or any of its Subsidiaries' ownership or operation
of any of their respective current properties or (y) First Capital's or any of
its Subsidiaries' 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.
(s) Loan Portfolio; Allowance; Asset Quality.
----------------------------------------
(i) With respect to each loan owned by First Capital or its
Subsidiaries in whole or in part, to First Capital's knowledge:
(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;
(B) neither First Capital 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) First Capital or a Subsidiary of First Capital is the sole
holder of legal and beneficial title to each loan (or First Capital's or its
Subsidiary's applicable participation interest, as applicable), except as
otherwise referenced on the books and records of First Capital or a Subsidiary;
(D) the note and the related security documents, copies of
which are included in the loan files, are true and correct copies of the
documents they purport to
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<PAGE>
be and have not been suspended, amended, modified, canceled or
otherwise changed except as otherwise disclosed by documents in the applicable
loan file;
(E) there is no pending or threatened condemnation
proceeding or similar proceeding affecting the property that serves as security
for a loan, except as otherwise referenced on the books and records of First
Capital;
(F) there is no litigation or proceeding pending or
threatened relating to the property that serves as security for a loan that
would have a Material Adverse Effect upon the related loan; and
(G) 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.
(ii) The allowance for possible loan losses reflected in First
Capital's audited statement of condition at June 30, 1998 was, and the allowance
for possible losses shown on the balance sheets in First Capital's Reports for
periods ending after June 30, 1998, in the opinion of management, was or will be
adequate, as of the dates thereof, under GAAP.
(iii) First Capital's Disclosure Letter sets forth by
category the amounts of all loans, leases, advances, credit enhancements, other
extensions of credit, commitments and interest-bearing assets of First Capital
and its Subsidiaries that have been classified (whether regulatory or internal)
as "special mention," "substandard," "doubtful," "loss," or words of similar
import, and First Capital and First Federal shall promptly after the end of any
month inform HCB of any such classification arrived at any time after the date
hereof. The "real estate owned" or words of similar import included in any non-
performing assets of First Capital or any of its Subsidiaries is carried net of
reserves at the lower of cost or fair value, less estimated selling costs, based
on current independent appraisals or evaluations or current management
appraisals or evaluations; provided, however, that "current" shall mean within
the past 12 months.
(t) Deposits. None of the deposits of First Capital or any of its
--------
Subsidiaries is a "brokered" deposit.
(u) Accounting Matters. Neither First Capital nor any of its
------------------
Subsidiaries or, to the best of First Capital's knowledge, any of its other
affiliates has, through the date hereof, taken or agreed to take any action that
would prevent First Capital from accounting for the merger contemplated herein
as a pooling-of-interests transaction, and First Capital has no knowledge of any
fact or circumstance relating to it that would prevent such accounting
treatment.
(v) Antitakeover Provisions Inapplicable. First Capital and its
------------------------------------
Subsidiaries have taken all actions required to exempt First Capital, Merger
Sub, First Federal, the Agreement, the Merger and the Plan of Bank Merger from
any provisions of an antitakeover
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<PAGE>
nature in their organization certificates and bylaws, and the provisions of any
federal or state "antitakeover," "fair price," "moratorium," "control share
acquisition" or similar laws or regulations.
(w) Material Interests of Certain Persons. Except as disclosed in
-------------------------------------
First Capital's Reports, no officer or director of First Capital or any of its
Subsidiaries, or any "associate" (as such term is defined in Rule 12b-2 under
the Exchange Act) of any such officer or director, has any interest in any
material contract or property (real or personal), tangible or intangible, used
in or pertaining to the business of First Capital or any of its Subsidiaries.
(x) Insurance. In the opinion of management, First Capital and its
---------
Subsidiaries are presently insured for amounts deemed reasonable by management
with, to First Capital's knowledge, financially sound insurance companies,
against such risks as companies engaged in a similar business would, in
accordance with good business practice, customarily be insured. All of the
insurance policies and bonds maintained by First Capital and its Subsidiaries
are in full force and effect, First Capital and its Subsidiaries are not in
default thereunder and all material claims thereunder have been filed in timely
fashion.
(y) Investment Securities; Derivatives; Borrowing.
---------------------------------------------
(i) Except for investments in FHLB stock, pledges to secure FHLB
borrowings, reverse repurchase agreements entered into in arms-length
transactions pursuant to normal commercial terms and conditions and entered into
in the ordinary course of business and restrictions that exist for securities to
be classified as "held to maturity," none of the investments reflected in the
consolidated balance sheet of First Capital as of March 31, 1999, and none of
the investment securities acquired by it or any of its Subsidiaries since March
31, 1999 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) Except for adjustable-rate mortgages and adjustable-rate
FHLB advances, neither First Capital nor any Subsidiary of First Capital 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.
(iii) Set forth in First Capital's Disclosure Letter is a
true and complete list of First Capital's borrowed funds (excluding deposit
accounts) as of the date hereof.
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<PAGE>
(z) Indemnification. Except as provided in the Articles of
---------------
Incorporation or Bylaws of First Capital or the similar governing documents of
its Subsidiaries, neither First Capital nor any Subsidiary of First Capital is a
party to any agreement that provides for the indemnification of any of its
present or future directors, officers, employees, or other persons who serve or
served in any other capacity with any other enterprise at the request of First
Capital, and, to the knowledge of First Capital, there are no claims for which
any person would be entitled to indemnification under the Articles of
Incorporation or Bylaws of First Capital or the similar governing documents of
any of its Subsidiaries, under any applicable law or regulation or under any
indemnification agreement.
(aa) Books and Records. The books and records of First Capital and
-----------------
its Subsidiaries on a consolidated basis have been, and are being, maintained in
accordance with applicable legal and accounting requirements and reflect in all
material respects the substance of events and transactions that should be
included therein.
(bb) Corporate Documents. The minute books of First Capital
-------------------
constitute a complete and correct record of all actions taken by its board of
directors (and each committee thereof) and its shareholders. The minute books
of each of First Capital's Subsidiaries constitutes a complete and correct
record of all actions taken by the respective boards of directors (and each
committee thereof) and the shareholders of each such Subsidiary.
(cc) Tax Treatment of the Merger. As of the date hereof, 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
tax-free reorganization under the IRC.
(dd) Beneficial Ownership of HCB Common Stock. As of the date
----------------------------------------
hereof, First Capital beneficially owns no shares of HCB Common Stock and does
not have any option, warrant or right of any kind to acquire the beneficial
ownership of any shares of HCB Common Stock.
(ee) Year 2000 Matters. First Capital has completed a review of
-----------------
its computer systems to identify systems that could be affected by the "Year
2000" issue and reasonably believes it has identified all Year 2000 problems.
First Capital's management has developed and commenced implementation of a plan
which is designed to complete any required initial changes to its computer
systems ("First Capital Y2K Plan") and to complete testing of those changes by
September 30, 1999. Year 2000 issues have not had, and are not reasonably
expected to have, a Material Adverse Effect on First Capital.
(ff) Registration Statement. The information regarding First
---------------------
Capital and its Subsidiaries to be supplied by First Capital for inclusion in
the Registration Statement will not, at the time the Registration Statement
becomes effective, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
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to make the statements therein, in light of the circumstances under which they
are made, not misleading.
(gg) Community Reinvestment Act Compliance. First Federal is in
-------------------------------------
material compliance with the applicable provisions of the CRA and the
regulations promulgated thereunder, and First Federal currently has a CRA rating
of satisfactory or better. To First Capital's knowledge, there is no fact or
circumstance or set of facts or circumstances that would cause First Federal to
fail to comply with such provisions or cause the CRA rating of First Federal to
fall below satisfactory.
(hh) Undisclosed Liabilities. As of the date hereof, First Capital
-----------------------
and its Subsidiaries have not incurred any debt, liability or obligation of any
nature whatsoever (whether accrued, contingent, absolute or otherwise and
whether due or to become due) except for (i) liabilities reflected on or
reserved against in the financial statements of First Capital as of June 30,
1998, and (ii) liabilities incurred since June 30, 1998 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.
ARTICLE III
Conduct Pending the Merger
--------------------------
Section 3.1. Conduct of Business Prior to the Effective Time.
-----------------------------------------------
Except as expressly provided in this Agreement, during the period from the date
of this Agreement to the Effective Time, each of First Capital and HCB shall,
and shall cause each of their respective Subsidiaries to, use commercially
reasonable efforts to (a) conduct its business in the regular, ordinary and
usual course consistent with past practice; (b) maintain and preserve intact its
business organization, properties, leases, employees and advantageous business
relationships and retain the services of its officers and key employees, (c)
take no action which would adversely affect or delay the ability of HCB or First
Capital to perform their respective covenants and agreements on a timely basis
under this Agreement and (d) take no action which would adversely affect or
delay the ability of HCB, HC Bank, First Capital or First Federal to obtain any
necessary approvals, consents or waivers of any governmental authority required
for the transactions contemplated hereby or which would reasonably be expected
to result in any such approvals, consents or waivers containing any material
condition or restriction.
Section 3.2. Forbearances. Without limiting the covenants set forth
------------
in Section 3.1 hereof, except as otherwise provided in 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, neither First
Capital nor HCB shall, and neither First Capital nor HCB shall permit any of
their respective Subsidiaries to, without the prior written consent of the other
party:
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(a) change any provisions of its Articles of Incorporation or Bylaws
or the similar governing documents of its Subsidiaries (except that First
Capital and First Federal may amend their respective Bylaws to impose an age
limitation on directors);
(b) (i) issue any shares of capital stock except pursuant to the
exercise of stock options or warrants outstanding as of the date of this
Agreement; (ii) change the terms of any outstanding stock options or warrants;
(iii) issue, grant or sell any option, warrant, call, commitment, stock
appreciation right, right to purchase or agreement of any character relating to
the authorized or issued capital stock of First Capital or HCB; or (iv) split,
combine, reclassify or adjust any shares of its capital stock or otherwise
change its capitalization;
(c) make, declare or pay any cash or stock dividend or make any other
distribution on, or directly or indirectly redeem, purchase or otherwise
acquire, any shares of its capital stock or any securities or obligations
convertible into or exchangeable for any shares of its capital stock (except (i)
in the case of First Capital, for regular quarterly cash dividends at a rate not
in excess of $0.10 per share of First Capital Common Stock, (ii) in the case of
HCB, for an annual cash dividend for 1999 at a rate not in excess of $6.10 per
share of HCB Common Stock, which shall be paid prior to the Closing Date and
(iii) dividends paid by any of the Subsidiaries of each of First Capital and HCB
to First Capital or HCB, respectively, for the purpose of enabling First Capital
or HCB to pay the dividends specified in (i) and (ii));
(d) other than in the ordinary course of business, incur any
indebtedness for borrowed money or assume, guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of any individual,
corporation or entity (it being understood and agreed that incurrence of
indebtedness in the ordinary course of business shall include, without
limitation, the creation of deposit liabilities, borrowings from the Federal
Home Loan Bank, sales of certificates of deposit and entering into repurchase
agreements);
(e) other than in the ordinary course of business consistent with past
practice, (i) sell, transfer, mortgage, encumber or otherwise dispose of any of
its material properties, leases or assets to any individual, corporation or
other entity other than a direct or indirect wholly owned Subsidiary or (ii)
cancel, release or assign any indebtedness of any such individual, corporation
or other entity;
(f) increase in any manner the compensation or fringe benefits of any
of its employees or directors, other than general increases in compensation for
non-executive officer employees in the ordinary course of business consistent
with past practice; pay any pension or retirement allowance not required by any
existing plan or agreement to any such employees or directors, or become a party
to, amend or commit itself to fund or otherwise establish any trust or account
related to any First Capital Employee Plan or HCB Employee Plan with or for the
benefit of any employee or director (except First Capital may adopt a stock-
based benefit plan or plans pursuant to which it would reserve 76,876 shares for
issuance upon the exercise of stock options awarded under such plan and 30,750
shares for awards of restricted stock); voluntarily
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<PAGE>
accelerate the vesting of any stock options or other compensation or benefit;
make any discretionary contribution to any First Capital Employee Plan or HCB
Employee Plan; hire any employee with an annual total compensation payment in
excess of $35,000 or enter into any employment contract;
(g) implement or adopt any change in its accounting principles,
practices or methods, except as may be required by GAAP or regulatory
guidelines;
(h) settle any claim, action or proceeding involving any liability for
money damages in excess of $100,000 or impose material restrictions upon the
operations of First Capital or HCB or any of their respective Subsidiaries;
(i) acquire or agree to acquire, by merging or consolidating with, or
by purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof or otherwise
acquire or agree to acquire any assets, in each case which are material,
individually or in the aggregate, to First Capital or HCB, except in
satisfaction of debts previously contracted;
(j) make, renew, increase, extend or purchase any loans other than in
conformance with written lending policies in effect as of the date of this
Agreement;
(k) establish or commit to the establishment of any new branch or
other office facilities other than those for which all regulatory approvals have
been obtained;
(l) other than in the ordinary course of business consistent with past
practice in individual amounts not to exceed $50,000, make any investment either
by purchase of stock or securities, contributions to capital, property
transfers, or purchase of any property or assets of any other individual,
corporation or other entity other than a Subsidiary;
(m) make any investment in any debt security, including mortgage-
backed and mortgage-related securities (other than US government and US
government agency securities with final maturities not greater than five years,
mortgage-backed or mortgage related securities which would not be considered
"high risk" securities pursuant to Thrift Bulletin Number 52 issued by the OTS
or securities of the FHLB, in each case that are purchased in the ordinary
course of business consistent with past practice);
(n) 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;
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(o) knowingly take any action that would prevent or impede the Merger
from qualifying (i) for pooling-of-interests accounting treatment or (ii) as a
reorganization within the meaning of Section 368 of the IRC;
(p) make any capital expenditures in excess of $20,000 per expenditure
from the date of this Agreement until the Effective Date 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;
(q) elect to any executive office any person who is not an executive
officer as of the date of this Agreement or elect to the Board of Directors any
person who is not a member of the Board of Directors as of the date of this
Agreement;
(r) take any action that is intended or expected to result in any of
its representations and warranties set forth in this Agreement becoming untrue
at any time prior to the Effective Time, or in any of the conditions to the
Merger set forth in Article V not being satisfied, or in a violation of any
provision of this Agreement, except, in every case, as may be required by
applicable law; or
(s) agree or make any commitment to take any action that is prohibited
by this Section 3.2.
ARTICLE IV
Covenants
---------
Section 4.1. Acquisition Proposals.
---------------------
(a) From and after the date hereof until the termination of this
Agreement, neither HCB or HC Bank, nor any of their respective officers,
directors, employees, representatives, agents or affiliates (including, without
limitation, any investment banker, attorney or accountant retained by HCB or any
of its Subsidiaries), will, directly or indirectly, initiate, solicit or
knowingly encourage (including by way of furnishing non-public information or
assistance), or facilitate knowingly, any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any HCB
Acquisition Proposal (as defined below), or enter into or maintain or continue
discussions or negotiate with any person or entity in furtherance of such
inquiries or to obtain an HCB Acquisition Proposal or agree to or endorse any
HCB Acquisition Proposal, or authorize or permit any of its officers, directors
or employees or any of its Subsidiaries or any investment banker, financial
advisor, attorney, accountant or other representative retained by any of its
Subsidiaries to take any such action, and HCB shall notify First Capital orally
(within 1 business day) and in writing (as promptly as practicable, but in no
event later than 2 calendar days) of such inquiries and proposals which it or
any of its Subsidiaries or any such officer, director, employee, investment
banker, financial advisor,
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attorney, accountant or other representative may receive relating to any of such
matters and, if such inquiry or proposal is in writing, HCB shall deliver to
First Capital a copy of such inquiry or proposal promptly; provided, however,
that nothing contained in this Section 4.1(a) shall prohibit the Board of
Directors of HCB from (i) furnishing information to, or entering into
discussions or negotiations with any person or entity that makes an unsolicited
written, bona fide proposal to acquire HCB pursuant to a merger, consolidation,
share exchange, business combination, tender or exchange offer or other similar
transaction, if, and only to the extent that, (A) the Board of Directors of HCB
receives a written opinion from its independent financial advisor that such
proposal may be superior to the Merger from a financial point-of-view to HCB's
shareholders, (B) the Board of Directors of HCB, after consultation with and
based on the written advice of independent legal counsel, determines in good
faith that such action is necessary for the Board of Directors of HCB to comply
with its fiduciary duties to shareholders under applicable law (such proposal
that satisfies (A) and (B) being referred to herein as an "HCB Superior
Proposal") and (C) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, HCB (1) provides
reasonable notice to First Capital to the effect that it is furnishing
information to, or entering into discussions or negotiations with, another party
and (2) receives from such person or entity an executed confidentiality
agreement in reasonably customary form, (ii) complying with Rule 14e-2
promulgated under the Exchange Act with regard to a tender or exchange offer or
(iii) failing to make or withdrawing or modifying its recommendation and
entering into an HCB Superior Proposal if there exists an HCB Superior Proposal
and the Board of Directors of HCB, after consultation with and based upon the
written advice of independent legal counsel, determines in good faith that such
action is necessary for the Board of Directors of HCB to comply with its
fiduciary duties to shareholders under applicable law. For purposes of this
Agreement, "HCB Acquisition Proposal" shall mean any of the following (other
than the transactions contemplated hereunder) involving HCB or any of its
Subsidiaries: (i) any merger, consolidation, share exchange, business
combination, or other similar transaction; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 10% or more of the assets of
HCB and its Subsidiaries, taken as a whole, in a single transaction or series of
transactions; (iii) any tender offer or exchange offer for 10% or more of the
outstanding shares of capital stock of HCB 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 any of the foregoing.
(b) From and after the date hereof until the termination of this
Agreement, neither First Capital or First Federal, nor any of their respective
officers, directors, employees, representatives, agents or affiliates
(including, without limitation, any investment banker, attorney or accountant
retained by First Capital or any of its Subsidiaries), will, directly or
indirectly, initiate, solicit or knowingly encourage (including by way of
furnishing non-public information or assistance), or facilitate knowingly, any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any First Capital Acquisition Proposal (as defined below),
or enter into or maintain or continue discussions or negotiate with any person
or entity in furtherance of such inquiries or to obtain an First Capital
Acquisition Proposal or
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<PAGE>
agree to or endorse any First Capital Acquisition Proposal, or authorize or
permit any of its officers, directors or employees or any of its Subsidiaries or
any investment banker, financial advisor, attorney, accountant or other
representative retained by any of its Subsidiaries to take any such action, and
First Capital shall notify HCB orally (within 1 business day) and in writing (as
promptly as practicable, but in no event later than 2 calendar days) of such
inquiries and proposals which it or any of its Subsidiaries or any such officer,
director, employee, investment banker, financial advisor, attorney, accountant
or other representative may receive relating to any of such matters and, if such
inquiry or proposal is in writing, First Capital shall deliver to HCB a copy of
such inquiry or proposal promptly; provided, however, that nothing contained in
this Section 4.1(b) shall prohibit the Board of Directors of First Capital from
(i) furnishing information to, or entering into discussions or negotiations with
any person or entity that makes an unsolicited written, bona fide proposal to
acquire First Capital pursuant to a merger, consolidation, share exchange,
business combination, tender or exchange offer or other similar transaction, if,
and only to the extent that, (A) the Board of Directors of First Capital
receives a written opinion from its independent financial advisor that such
proposal may be superior to the Merger from a financial point-of-view to First
Capital's shareholders, (B) the Board of Directors of First Capital, after
consultation with and based on the written advice of independent legal counsel,
determines in good faith that such action is necessary for the Board of
Directors of First Capital to comply with its fiduciary duties to shareholders
under applicable law (such proposal that satisfies (A) and (B) being referred to
herein as a "First Capital Superior Proposal") and (C) prior to furnishing such
information to, or entering into discussions or negotiations with, such person
or entity, First Capital (x) provides reasonable notice to HCB to the effect
that it is furnishing information to, or entering into discussions or
negotiations with, another party and (y) receives from such person or entity an
executed confidentiality agreement in reasonably customary form, (ii) complying
with Rule 14e-2 promulgated under the Exchange Act with regard to a tender or
exchange offer or (iii) failing to make or withdrawing or modifying its
recommendation and entering into a First Capital Superior Proposal if there
exists a First Capital Superior Proposal and the Board of Directors of First
Capital, after consultation with and based upon the written advice of
independent legal counsel, determines in good faith that such action is
necessary for the Board of Directors of First Capital to comply with its
fiduciary duties to shareholders under applicable law. For purposes of this
Agreement, "First Capital Acquisition Proposal" shall mean any of the following
(other than the transactions contemplated hereunder) involving First Capital or
any of its Subsidiaries: (i) any merger, consolidation, share exchange, business
combination, or other similar transaction; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 10% or more of the assets of
First Capital and its Subsidiaries, taken as a whole, in a single transaction or
series of transactions; (iii) any tender offer or exchange offer for 10% or more
of the outstanding shares of capital stock of First Capital 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 any of the foregoing.
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Section 4.2. Certain Policies of HCB.
-----------------------
(a) First Capital and HCB shall cooperate to determine whether HCB
shall cause HC 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 on a mutually satisfactory basis with those of First
Federal; provided, however, that HCB shall not be required to take such action
prior to the date on which all Requisite Regulatory Approvals and shareholder
approvals are received, 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.
(b) HCB'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 4.2.
Section 4.3. Access and Information. Upon reasonable notice, HCB
----------------------
and First Capital shall (and shall cause their respective Subsidiaries to)
afford to the other and their respective representatives (including, without
limitation, directors, officers and employees of such party and its affiliates
and counsel, accountants and other professionals retained by such party) 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), properties, personnel and to
such other information as either party may reasonably request and during such
period, each of HCB and First Capital shall, and shall cause their respective
Subsidiaries to, make available to the other party a copy of each report,
schedule, registration statement and other document filed or received by it
during such period pursuant to the requirements of federal securities laws or
federal or state banking laws; provided, however, that no investigation pursuant
to this Section 4.3 shall affect or be deemed to modify any representation or
warranty made herein. First Capital and HCB will not, and will cause their
respective representatives not to, use any information obtained pursuant to this
Section 4.3 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 HCB will keep confidential, and will cause their
respective representatives to keep confidential, all information and documents
obtained pursuant to this Section 4.3 unless such information (i) was already
known to such party or an affiliate of such party, other than pursuant to a
confidentiality agreement or other confidential relationship, (ii) becomes
available to such party or an affiliate of such party 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. In the event that this Agreement is terminated or
the transactions contemplated by this Agreement shall otherwise fail to be
consummated, each party shall promptly cause all copies of documents or extracts
thereof containing information and data as to another party hereto (or an
affiliate of any party hereto) to be returned to the party that furnished the
same.
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<PAGE>
Section 4.4. Applications; Consents.
----------------------
(a) As soon as practicable after the date hereof, First Capital shall
submit any requisite applications for, or requests for waiver of, the Requisite
Regulatory Approvals, and each of the parties hereto shall, and they shall cause
their respective Subsidiaries to, submit any applications, notices or other
filings to any other Governmental Entity the approval of which is required for
consummation of the Merger and the Bank Merger.
(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 Merger or the Bank
Merger.
Section 4.5. Antitakeover Provisions. First Capital, HCB and their
-----------------------
respective 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 the other party, the Agreement, the Merger and the
Bank Merger from any provisions of an antitakeover nature in First Capital's,
HCB's or their respective Subsidiaries' organization certificates and bylaws and
the provisions of any federal or state antitakeover laws.
Section 4.6. 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, including the Bank
Merger, 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.
Section 4.7. Publicity. The initial press release announcing this
---------
Agreement shall be a joint press release and thereafter HCB and First Capital
shall consult with each other in 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.
Section 4.8. Shareholders Meetings. First Capital and HCB each
---------------------
shall take all action necessary, in accordance with applicable law and their
respective Articles of Incorporation and Bylaws, to convene a meeting of their
respective shareholders (each, a "Shareholder Meeting") as promptly as
practicable for the purpose of considering and voting on approval and adoption
of the transactions provided for in this Agreement. Except to the extent
legally required for the discharge by the Board of Directors of its fiduciary
duties, the Board of Directors of each
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of First Capital and HCB shall (a) recommend at its Shareholder Meeting that the
shareholders vote in favor of and approve the transactions provided for in this
Agreement and (b) use its reasonable best efforts to solicit such approvals.
First Capital and HCB shall coordinate and cooperate with respect to the timing
of their respective Shareholder Meetings.
Section 4.9. Registration of First Capital Common Stock.
------------------------------------------
(a) As soon as practicable after the date hereof, First Capital
shall, in cooperation with HCB, prepare a Joint Proxy Statement-Prospectus for
the purpose of taking shareholder action on the Merger and this Agreement and
subject to the provisions of Section 4.4, file the Joint Proxy Statement-
Prospectus with the SEC, respond to comments of the staff of the SEC and,
promptly after the Registration Statement is declared effective by the SEC, mail
the Joint Proxy Statement-Prospectus to the respective holders of record (as of
the applicable record date) of shares of voting stock of each of HCB and First
Capital. First Capital and HCB each represents and covenants to the other that
the Joint Proxy Statement-Prospectus, and any amendment or supplement thereto,
with respect to the information pertaining to it or its Subsidiaries at the date
of mailing to its shareholders and the date of its Shareholder Meeting will be
in compliance with the Exchange Act and all relevant rules and regulations of
the SEC.
(b) First Capital shall, as promptly as practicable, prepare and file
with the SEC the Registration Statement in which the Joint Proxy Statement-
Prospectus will be included (including any pre-effective or post-effective
amendments or supplements thereto). First Capital and HCB shall use all
reasonable efforts to have the Registration Statement declared effective under
the Securities Act as promptly as practicable after such filing. First Capital
will advise HCB promptly after First Capital receives notice of the time when
the Registration Statement has become effective or any supplement or amendment
has been filed, of the issuance of any stop order or the suspension of the
qualification of the shares of capital stock issuable pursuant to the
Registration Statement, or the initiation or threat of any proceeding for any
such purpose, or of any request by the SEC for the amendment or supplement of
the Registration Statement or for additional information. First Capital will
provide HCB with as many copies of such Registration Statement and all
amendments thereto promptly upon the filing thereof as HCB may reasonably
request.
(c) First Capital shall use its best efforts to obtain, prior to the
effective date of the Registration Statement, all necessary state securities
laws or "blue sky" permits and approvals required to carry out the transactions
contemplated by this Agreement.
(d) Prior to the Effective Time, First Capital shall notify the
Nasdaq SmallCap Market of the additional shares of First Capital Common Stock to
be issued by First Capital in exchange for the shares of HCB Common Stock.
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<PAGE>
Section 4.10. Affiliate Letters.
-----------------
(a) HCB shall use its best efforts to cause each director, executive
officer and other person who is an "affiliate" of HCB under Rule 145 of the
Securities Act and the pooling-of-interests accounting rules to deliver to First
Capital as soon as practicable and prior to the mailing of the Joint Proxy
Statement-Prospectus executed letter agreements, each substantially in the form
attached hereto as Exhibit B, providing that such person will (i) comply with
---------
Rule 145, and (ii) refrain from transferring shares as required by the pooling-
of-interests accounting rules.
(b) First Capital shall use its best efforts to cause each director,
executive officer and other person who is an "affiliate" of First Capital under
the pooling of interests accounting rules to deliver to HCB as soon as
practicable and prior to the mailing of the Joint Proxy Statement-Prospectus
executed letter agreements, each substantially in the form attached hereto as
Exhibit C, providing that such person will refrain from transferring shares as
- ---------
required by the pooling-of-interests accounting rules.
Section 4.11. 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 or which would have
been required to be disclosed on such party's Disclosure Letter had such event,
condition, change or occurrence been known at the time such party delivered its
Disclosure Letter; provided, however, that no notice provided pursuant to this
Section 4.11 shall affect or be deemed to modify any representation or warranty
made herein. Each of HCB 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.
Section 4.12. Employees, Directors and Officers.
---------------------------------
(a) All persons who are employees of HCB or HCB Bank immediately
prior to the Effective Time ("HCB's Employees") shall, at the Effective Time,
become employees of First Capital or First Federal, respectively ("Continuing
Employees"); provided, however, that in no event shall any of HCB's Employees be
officers of First Capital or First Federal, 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 Capital or First
Federal. Subject to paragraph (g) of this Section 4.12, all of HCB's Employees
who remain following the
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Effective Date shall be employed at the will of First Capital or First Federal
and no contractual right to employment shall inure to such employees because of
this Agreement.
(b) Subject to the provisions of paragraphs (c), (d), (e) and (f) of
this Section 4.12, at or as soon as practicable following the Effective Time,
First Capital and First Federal shall establish and implement a new program of
compensation and benefits designed to cover all similarly situated employees on
a uniform basis (the "New Compensation and Benefits Program"). The New
Compensation and Benefits Program may contain any combination of new plans or
continuation of plans maintained by First Capital and First Federal or by HCB
and HC Bank, including plans intended to be tax-qualified under section 401(a)
of the IRC, immediately in effect prior to the Effective Time. To the extent
that it is not practicable to implement any constituent part of the New
Compensation and Benefits Program at the Effective Time, First Capital and First
Federal shall, subject to the provisions of paragraph (f) of this Section 4.12,
continue in effect any comparable plan maintained immediately prior to the
Effective Time for the respective employees of First Capital, First Federal, HCB
and HC Bank for a transition period. Notwithstanding the above, no Continuing
Employee shall become a participant in any First Capital Employee Plan that
requires a designation of the Board of Directors of First Capital or First
Federal in order to participate without such designation in advance of
participation.
(c) Subject to the provisions of paragraphs (d), (e) and (f) of this
Section 4.12, each constituent part of the New Compensation and Benefits Program
shall recognize, in the case of persons employed by First Capital, First
Federal, HCB or HC Bank immediately prior to the Effective Time who continue to
be employed by First Capital or First Federal immediately after the Effective
Time, all service with First Capital, First Federal, HCB or HC Bank as service
with First Capital and First Federal for all purposes, including eligibility and
vesting; provided, however, that such service shall not be recognized to the
extent such recognition would result in a duplication of benefits.
(d) In the case of any constituent part of the New Compensation and
Benefits Program which is a life, health or long-term disability insurance plan:
(i) such plan shall not apply any preexisting condition limitations for
conditions covered under the applicable insurance plans maintained by First
Capital, First Federal, HCB or HC Bank as of the Effective Time, (ii) each such
plan shall honor any deductible and out-of-pocket expenses incurred under the
applicable insurance plan maintained by First Capital, First Federal, HCB or HC
Bank as of the Effective Time and (iii) each such plan shall waive any medical
certification otherwise required in order to assure the continuation of coverage
of such plan (but subject to any overall limit on the maximum amount of coverage
under such plans).
(e) All Continuing Employees shall become eligible to participate in
the First Federal Bank, a Federal Savings Bank Employee Stock Ownership Plan
("First Federal ESOP"), subject to their satisfaction of the eligibility
requirements set forth in the First Federal
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ESOP, as of the later to occur of the Effective Time or the first day of the
plan year beginning in 2000.
(f) As of the Effective Time, each HCB Employee who is a participant
in the HCB 401(k) Plan (the "HCB 401(k) Plan") shall become fully vested in his
or her account balance in the HCB 401(k) Plan and the HCB 401(k) Plan will
either be merged into the First Federal Bank, FSB Profit Sharing with 401(k)
Option Plan (the "First Federal 401(k) Plan") effective as of a date following
the Effective Time selected by First Federal or terminated immediately prior to,
on, or after the Effective Time. The determination as to whether the HCB 401(k)
Plan shall be terminated or merged into the First Federal 401(k) Plan shall be
made jointly by First Capital and HCB. Effective as of the date of the merger
of the HCB 401(k) Plan into the First Capital 401(k) Plan, if applicable, or the
termination of the HCB 401(k) Plan (or the Effective Time, if subsequent to such
termination), if applicable, HCB Employees who are then participating in the HCB
401(k) Plan shall become participants in the First Federal 401(k) Plan.
(g) At the Effective Time, First Capital and First Federal shall enter
into an agreement with William D. Harrod, substantially in the form attached
hereto as Exhibit D and shall enter into agreements with Dennis Thomas and Brad
---------
Backherms, substantially in the form attached hereto as Exhibit E.
---------
(h) First Capital shall cause its Board of Directors to be increased
to 14 members as of the Effective Time and, as of the Effective Time, shall
cause its Board of Directors to be constituted of the then-current members of
the First Capital Board of Directors and the then-current members of the HCB
Board of Directors. First Federal shall cause its Board of Directors to be
increased to 14 members as of the Effective Time and, as of the Effective Time,
shall cause its Board of Directors to be constituted of the then-current members
of the First Federal Board of Directors and the then-current members of the HC
Bank Board of Directors. First Capital shall appoint J. Gordon Pendleton as
Chairman of the Board of Directors of First Capital as of the Effective Time.
First Federal shall appoint Earl Book as Chairman of the Board of Directors of
First Federal as of the Effective Time.
(i) From and after the Effective Time, Samuel E. Uhl shall serve as
Chief Executive Officer and President of First Federal and William D. Harrod
shall serve as Chief Executive Officer and President of First Capital, each to
hold office until their respective successors are duly elected or appointed and
qualified.
(j) The annual cash bonuses payable to eligible employees of HC Bank
shall be determined and paid, prior to the Effective Time, for the 1999 calendar
year in accordance with the procedures used for the 1998 calendar year. Prior
to the Effective Time, First Federal shall pay a cash bonus to eligible
employees of First Federal for the six months ended December 31, 1999 in
accordance with the procedures used for the 1999 fiscal year. No bonuses shall
be paid by First Capital, First Federal, HCB or HC Bank for any period of
service after December
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31, 1999. After the Effective time, First Capital and First Federal shall
implement a new bonus program as part of the New Compensation and Benefits
Program.
Section 4.13. Indemnification.
---------------
(a) From and after the Effective Time through the third anniversary
of the Effective Date, First Capital agrees to indemnify and hold harmless each
present and former director and officer of HCB and its Subsidiaries and each
officer or employee of HCB and its Subsidiaries that is serving or has served as
a director or trustee of another entity expressly at HCB'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 (collectively, "Costs") 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, and to advance any such Costs to each
Indemnified Party as they are from time to time incurred, in each case to the
fullest extent such Indemnified Party would have been indemnified as a director,
officer or employee of HCB and its Subsidiaries and as then permitted under
applicable law.
(b) Any Indemnified Party wishing to claim indemnification under
Section 4.13(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. In the event of any such claim, action, suit,
proceeding or investigation, (i) First Capital shall have the right to assume
the defense thereof with counsel reasonably acceptable to the Indemnified Party
and First Capital shall not be liable to such Indemnified Party for any legal
expenses of other counsel subsequently incurred by such Indemnified Party in
connection with the defense thereof, except that if First Capital does not elect
to assume such defense within a reasonable time or counsel for the Indemnified
Party at any time advises that there are issues which raise conflicts of
interest between First Capital and the Indemnified Party (and counsel for First
Capital does not disagree), the Indemnified Party may retain counsel
satisfactory to such Indemnified Party, and First Capital shall remain
responsible for the reasonable fees and expenses of such counsel as set forth
above, to be paid promptly as statements therefor are received; provided,
however, that First Capital shall be obligated pursuant to this paragraph (b) to
pay for only one firm of counsel for all Indemnified Parties in any one
jurisdiction with respect to any given claim, action, suit, proceeding or
investigation unless the use of one counsel for such Indemnified Parties would
present such counsel with a conflict of interest; (ii) the Indemnified Party
will reasonably cooperate in the defense of any such matter; and (iii) First
Capital shall not be liable for any settlement effected by an Indemnified Party
without its prior written consent, which consent may not be withheld unless such
settlement is unreasonable in light of such claims, actions, suits, proceedings
or investigations against, or defenses available to, such Indemnified Party.
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<PAGE>
(c) First Capital shall pay all reasonable Costs, including attorneys'
fees, that may be incurred by any Indemnified Party in successfully enforcing
the indemnity and other obligations provided for in this Section 4.13 to the
fullest extent permitted under applicable law. The rights of each Indemnified
Party hereunder shall be in addition to any other rights such Indemnified Party
may have under applicable law.
(d) First Capital shall maintain HCB'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 HCB'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 two 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 4.13(d), an
amount per annum in excess of 125% of the amount of the annual premiums paid by
HCB 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.
(e) 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 4.13.
(f) The provisions of this Section 4.13 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
representatives.
Section 4.14. Year 2000. From the date hereof until the Effective
---------
Time, First Capital and HCB shall use their best efforts to implement and/or to
undertake the HCB Y2K Plan or the First Capital Y2K Plan, as the case may be,
and to comply with all Federal Financial Institution Examination Council Year
2000 regulations and guidelines. Notwithstanding the foregoing, First Capital
and HCB shall consult with each other before replacing any material hardware or
software or entering into any agreement with regard to resolving any Year 2000
issues.
ARTICLE V
Conditions to Consummation
--------------------------
Section 5.1. 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:
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(a) Shareholder Approvals. This Agreement shall have been approved by
---------------------
the requisite vote of HCB's and First Capital's shareholders in accordance with
applicable laws and regulations.
(b) Regulatory Approvals. All Requisite Regulatory Approvals 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 shall contain any condition or requirement that would so materially
and adversely impact the economic or business benefits to First Capital or HCB
of the transactions contemplated hereby that, had such condition or requirement
been known, such party 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, 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, restricts or makes illegal consummation of
the Merger or the Bank 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) Pooling Letters. First Capital and HCB shall each have received a
---------------
letter from their respective independent certified public accountants addressed
to First Capital or HCB, as the case may be, to the effect that they are not
aware of any facts or circumstances that might cause the Merger not to qualify
for pooling-of-interests accounting treatment.
(f) Tax Opinion. First Capital and HCB shall have received an opinion
-----------
of Muldoon, Murphy & Faucette LLP, dated as of the Effective Date, in form and
substance customary in transactions of the type contemplated hereby, and
reasonably satisfactory to First Capital and HCB, substantially to the effect
that on the basis of the facts, representations and assumptions set forth in
such opinion which are consistent with the state of facts existing at the
Effective Time, the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the IRC and that
accordingly:
(i) No gain or loss will be recognized by First Capital, Merger
Sub, First Federal, HCB or HC Bank as a result of the Merger;
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<PAGE>
(ii) 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 shareholders of HCB who exchange their HCB Common Stock for
First Capital Common Stock pursuant to the Merger;
(iii) The tax basis of First Capital Common Stock received by
shareholders who exchange their HCB Common Stock for First Capital Common Stock
in the Merger will be the same as the tax basis of HCB Common Stock surrendered
pursuant to the Merger, reduced by any amount allocable to a fractional share
interest for which cash is received and increased by any gain recognized on the
exchange; and
(iv) The holding period of First Capital Common Stock received
by each shareholder in the Merger will include the holding period of HCB Common
Stock exchanged therefor, provided that such shareholder held such HCB Common
Stock as a capital asset on the Effective Date.
Such opinion may be based on, in addition to the review of such
matters of fact and law as Muldoon, Murphy & Faucette LLP considers appropriate,
(x) representations made at the request of Muldoon, Murphy & Faucette LLP by
First Capital, First Federal, HCB, HC Bank, shareholders of First Capital or
HCB, or any combination of such persons and (y) certificates provided at the
request of Muldoon, Murphy & Faucette LLP by officers of First Capital, First
Federal, HCB, HC Bank and other appropriate persons.
Section 5.2. 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) Representations and Warranties; Performance of Obligations. Each
----------------------------------------------------------
of the obligations of HCB and HC Bank, respectively, required to be performed by
it at or prior to the Closing pursuant to the terms of this Agreement shall have
been duly performed and complied with in all material respects and the
representations and warranties of HCB and HC Bank contained in this Agreement
shall be true and correct, subject to Sections 2.1 and 2.2, as of the date of
this Agreement and as of the Effective Time as though made at and as of the
Effective Time (except as to any representation or warranty that specifically
relates to an earlier date), and First Capital shall have received a certificate
to the foregoing effect signed by the chief executive officer and the chief
financial or principal accounting officer of HCB.
(b) Third Party Consents. HCB shall have obtained the consent or
--------------------
approval of each person (other than the governmental approvals or consents
referred to in Section 5.1(b)) whose consent or approval shall be required in
order to permit the succession by First Capital or any of its Subsidiaries to
any obligation, right or interest of HCB or its Subsidiaries under any loan or
credit agreement, note, mortgage, indenture, lease, license or other agreement
or instrument to which HCB or its Subsidiaries is a party or is otherwise bound,
except those for
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<PAGE>
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) or upon the
consummation of the transactions contemplated hereby.
(c) Good Standing and Other Certificates. First Capital shall have
------------------------------------
received certificates (such certificates to be dated as of a day as close as
practicable to the Closing Date) from appropriate authorities as to the
corporate existence of HCB and its Subsidiaries and such other documents and
certificates to evidence fulfillment of the conditions set forth in Sections 5.1
and 5.2 as First Capital may reasonably require.
(d) Dissenters' Shares. Dissenters' rights shall not have been
------------------
exercised with respect to more than 10% of the outstanding shares of HCB Common
Stock.
Section 5.3. Conditions to the Obligations of HCB. The obligations
------------------------------------
of HCB 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 HCB:
(a) Representations and Warranties; Performance of Obligations. Each
----------------------------------------------------------
of the obligations of First Capital and First Federal, respectively, required to
be performed by it at or prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed and complied with in all material
respects and the representations and warranties of First Capital and First
Federal contained in this Agreement shall be true and correct, subject to
Sections 2.1 and 2.2, as of the date of this Agreement and as of the Effective
Time as though made at and as of the Effective Time (except as to any
representation or warranty which specifically relates to an earlier date), and
HCB shall have received a certificate to the foregoing effect signed by the
chief executive officer and the chief financial or principal accounting officer
of First Capital.
(b) Good Standing and Other Certificates. HCB shall have received
------------------------------------
certificates (such certificates to be dated as of a day as close as practicable
to the Closing Date) from appropriate authorities as to the corporate existence
of First Capital and its Subsidiaries and such other documents and certificates
to evidence fulfillment of the conditions set forth in Sections 5.1 and 5.3 as
HCB may reasonably require.
ARTICLE VI
Termination
-----------
Section 6.1. Termination. This Agreement may be terminated, and
-----------
the Merger abandoned, at any time prior to the Effective Time, either before or
after any requisite shareholder approval:
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<PAGE>
(a) by the mutual consent of First Capital and HCB in a written
instrument, if the Board of Directors of each so determines by vote of a
majority of the members of its entire Board; or
(b) by either First Capital or HCB, if its Board of Directors so
determines by vote of a majority of the members of its entire Board, in the
event of the failure of the shareholders of HCB or First Capital to approve the
Agreement at its Shareholder Meeting called to consider such approval; provided,
however, that HCB or First Capital, as the case may be, 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 4.8; or
(c) by either First Capital or HCB, by written notice to the other
party, if either (i) any approval, consent or waiver of a Governmental Entity
required to permit consummation of the transactions contemplated hereby 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 HCB, if its Board of Directors so
determines by vote of a majority of the members of its entire Board, in the
event that the Merger is not consummated by April 30, 2000, unless the failure
to so consummate by such time is due to the breach of any representation,
warranty or covenant contained in this Agreement by the party seeking to
terminate; or
(e) by either First Capital or HCB (provided that the party seeking
termination is not then in material breach of any representation, warranty,
covenant or other agreement contained herein), in the event of (i) a failure to
perform or comply by the other party with any covenant or agreement of such
other party contained in this Agreement, which failure or non-compliance is
material in the context of the transactions contemplated by this Agreement, or
(ii) any inaccuracies, omissions or breach in the representations, warranties,
covenants or agreements of the other party contained in this Agreement the
circumstances as to which either individually or in the aggregate have, or
reasonably could be expected to have, a Material Adverse Effect on such other
party; in either case which has not been or cannot be cured within 30 calendar
days after written notice thereof is given by the party seeking to terminate to
such other party; or
(f) by either First Capital or HCB, if the Board of Directors of the
other party does not publicly recommend in the Joint Proxy Statement-Prospectus
that shareholders approve and adopt this Agreement or if, after recommending in
the Joint Proxy Statement-Prospectus that shareholders approve and adopt this
Agreement, the Board of Directors of the other party shall have withdrawn,
qualified or revised such recommendation in any respect materially adverse to
the party seeking to terminate this Agreement; or
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<PAGE>
(g) by First Capital, if the Board of Directors of First Capital
reasonably determines that a proposal made by a third party to acquire, directly
or indirectly, including pursuant to a tender offer, exchange offer, merger,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction, for consideration consisting of cash and/or securities,
more than 50% of the combined voting power of the shares of First Capital Common
Stock then outstanding or all or substantially all of the assets of First
Capital constitutes a First Capital Superior Proposal and that such proposal
must be accepted in order to comply with the Board of Directors' fiduciary
duties to shareholders under applicable law; or
(h) by HCB, if the Board of Directors of HCB reasonably determines
that a proposal made by a third party to acquire, directly or indirectly,
including pursuant to a tender offer, exchange offer, merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction, for consideration consisting of cash and/or securities, more than
50% of the combined voting power of the shares of HCB Common Stock then
outstanding or all or substantially all of the assets of HCB constitutes a HCB
Superior Proposal and that such proposal must be accepted in order to comply
with the Board of Directors' fiduciary duties to shareholders under applicable
law.
Section 6.2. Effect of Termination. In the event of termination of
---------------------
this Agreement by either First Capital or HCB as provided in Section 6.1, this
Agreement shall forthwith become void and have no effect, and there shall be no
liability on the part of any party hereto or their respective officers and
directors, except (i) the last three sentences of Section 4.3, and Sections 6.3,
8.6 and 8.7, shall survive any termination of this Agreement, and (ii) that
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.
Section 6.3. Termination Fees.
----------------
(a) In the event that (i) First Capital terminates this Agreement
pursuant to Section 6.1(g) or (ii) HCB or First Capital terminates this
Agreement pursuant to Section 6.1(b) or 6.1(f) after it has been publicly
announced prior to First Capital's Shareholders Meeting that a person (other
than HCB) has made or disclosed an intention to make a proposal to engage in a
merger, consolidation, share exchange or other similar transaction with First
Capital or First Federal and within 12 months after the termination of this
Agreement First Capital or First Federal enters into an agreement with any
person to effect a merger, consolidation, share exchange or other similar
transaction, then First Capital shall, within 10 business days following written
demand by HCB, pay to HCB an amount equal to $500,000.
(b) In the event that (i) HCB terminates this Agreement pursuant to
Section 6.1(h) or (ii) First Capital or HCB terminates this Agreement pursuant
to Section 6.1(b) or 6.1(f) after it has been publicly announced prior to HCB's
Shareholders Meeting that a person (other than First Capital) has made or
disclosed an intention to make a proposal to engage in a merger,
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<PAGE>
consolidation, share exchange or other similar transaction with HCB or HC Bank
and within 12 months after the termination of this Agreement HCB or HC Bank
enters into an agreement with any person to effect a merger, consolidation,
share exchange or other similar transaction, then HCB shall, within 10 business
days following written demand by First Capital, pay to First Capital an amount
equal to $500,000.
ARTICLE VII
Closing, Effective Date and Effective Time
------------------------------------------
Section 7.1. Effective Date and Effective Time. The closing of the
---------------------------------
transactions contemplated hereby ("Closing") shall take place at the offices of
Muldoon, Murphy & Faucette LLP, 5101 Wisconsin Avenue, N.W., Washington, D.C.
20016, unless another place is agreed to by First Capital and HCB, on a date
designated by First Capital ("Closing Date") that is no later than 14 days
following the date on which the expiration of the last applicable waiting period
in connection with notices to and approvals of Governmental Entities shall occur
and all conditions to the consummation of this Agreement are satisfied or
waived, or on such other date as may be agreed to by the parties; provided,
however, that the Closing shall occur no earlier than January 1, 2000. Prior to
the Closing Date, Merger Sub and HCB shall execute Articles of Merger in
accordance with all appropriate legal requirements, which shall be filed as
required by law on the Closing Date, and the Merger provided for therein shall
become effective upon such filing or on such date as may be specified in such
Articles of Merger. The date of such filing or such later effective date as
specified in the Articles of Merger is herein referred to as the "Effective
Date." The "Effective Time" of the Merger shall be as set forth in the Articles
of Merger.
Section 7.2. Deliveries at the Closing. Subject to the provisions
-------------------------
of Articles V and VI, on the Closing Date there shall be delivered to First
Capital and HCB the documents and instruments required to be delivered under
Article V.
ARTICLE VIII
Certain Other Matters
---------------------
Section 8.1. Certain Definitions; Interpretation. For purposes of
-----------------------------------
this Agreement:
"person" means an individual, corporation, limited liability company,
partnership, association, trust, unincorporated organization or other entity;
"Material Adverse Effect" means an effect which is material and
adverse to the business, financial condition or results of operations of HCB or
First Capital, as the context may dictate, and its Subsidiaries (as defined
herein) 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 First Federal and HCB and HC Bank, as the case
may be, or to similarly
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<PAGE>
situated financial and/or depository institutions or (ii) changes in economic
conditions affecting financial institutions generally, including but not limited
to, changes in the general level of market interest rates shall not be
considered in determining if a Material Adverse Effect has occurred; and
"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.
When a reference is made in this Agreement to Sections, Exhibits or
Schedules, such reference shall be to a Section of, Exhibit or Schedule 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.
Section 8.2. Survival. Only those agreements and covenants of the
--------
parties that are by their terms applicable in whole or in part after the
Effective Time, including Sections 4.12, 4.13, and 8.6 of this Agreement, shall
survive the Effective Time. All other representations, warranties, agreements
and covenants shall be deemed to be conditions of the Agreement and shall not
survive the Effective Time.
Section 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 shareholders of HCB or First Capital,
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 HCB Common
Stock or contravene any provision of the IBCL or the federal banking laws, rules
and regulations.
Section 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.
Section 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.
Section 8.6. Expenses. Each party hereto will bear all expenses
--------
incurred by it in connection with this Agreement and the transactions
contemplated hereby.
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<PAGE>
Section 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, overnight courier or
facsimile transmission (confirmed in writing) 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 HCB, to:
HCB Bancorp
P.O. Box 37
710 Main Street, NE
Palmyra, Indiana 47164
Facsimile: (812) 364-4056
Attention: William W. Harrod
President
With copies to:
Andrew B. Buroker, Esq.
Krieg DeVault Alexander & Capehart, LLP
One Indiana Square, Suite 2800
Indianapolis, Indiana 46204-2017
Facsimile: (317) 636-1507
If to First Capital, to:
First Capital, Inc.
220 Federal Drive, N.W.
Corydon, Indiana 47112
Facsimile: (812) 738-2202
Attention: J. Gordon Pendleton
Chairman of the Board and
Chief Executive Officer
and Samuel E. Uhl
President and Chief Operating Officer
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<PAGE>
With copies to:
Paul M. Aguggia, Esq.
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Facsimile: (202) 966-9409
Section 8.8. Entire Agreement; etc. This Agreement, together with
----------------------
the Plan of Bank Merger and 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 4.12 and 4.13, which confer 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.
Section 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.
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<PAGE>
In Witness Whereof, the parties hereto have caused this Agreement to
be executed by their duly authorized officers as of the 19th day of July, 1999.
First Capital, Inc.
By: /s/ J. Gordon Pendleton
------------------------------------------
J. Gordon Pendleton
Chairman of the Board and
Chief Executive Officer
FC Acquisition Corp.
By: /s/ Samuel E. Uhl
------------------------------------------
Samuel E. Uhl
President
HCB Bancorp
By: /s/ Earl Book
------------------------------------------
Earl Book
Chairman of the Board
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<PAGE>
APPENDIX B
______________, 1999
The Board of Directors
First Capital, Inc.
220 Federal Drive, NW
Corydon, Indiana 47112
Dear Board Members:
You have requested our opinion as an independent investment banking firm
regarding the fairness, from a financial point of view, to First Capital, Inc.
(the "Company"), of the merger (the "Merger") between the Company and HCB
Bancorp. We have not been requested to opine as to, and our opinion does not in
any matter address, the Company's underlying business decision to proceed with
or effect the Merger.
Pursuant to the Agreement and Plan of Merger, dated July 19, 1999, by and
between the Company and HCB Bancorp (the "Agreement"), at the effective time of
the Merger, the Company will acquire all of HCB Bancorp's issued and outstanding
shares of common stock and common stock equivalents (79,900 common shares
outstanding and 475 shares subject to currently outstanding options, for a total
of 80,375 fully diluted shares as of the date of the Agreement) and the holders
of such shares of HCB Bancorp common stock will receive in exchange for each HCB
Bancorp share, 15.5 shares of First Capital, Inc. common stock (the "Exchange
Ratio"). The unexercised and outstanding options awarded pursuant to HCB
Bancorp's stock option plans will be converted into the right to receive such
number of shares of First Capital, Inc. common stock as determined by
multiplying the number of HCB Bancorp shares subject to option by the Exchange
Ratio. The per share exercise price shall be the exercise price of the HCB
Bancorp option divided by the Exchange Ratio. The complete terms of the
proposed transaction are described in the Agreement, and this summary is
qualified in its entirety by reference thereto.
Charles Webb & Company, a Division of Keefe, Bruyette & Woods, Inc., as part of
its investment banking business, is regularly engaged in the evaluation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, and distributions of listed and unlisted securities.
We are familiar with the market for common stocks of publicly traded banks,
savings institutions and bank and savings institution holding companies.
<PAGE>
In connection with this opinion we reviewed certain financial and other business
data supplied to us by HCB Bancorp including Annual Reports and Proxy Statements
for the years ended December 31, 1996, 1997 and 1998 as well as certain other
information we deemed relevant. We discussed with senior management of HCB
Bancorp and its wholly owned subsidiary, Harrison County Bank, the current
position and prospective outlook for HCB Bancorp. For the Company, we reviewed
audited financial statements for the fiscal years ended June 30, 1997 and 1998,
Form 10-Q for the quarter ended March 31, 1998, and certain other information
deemed relevant. Considering that this transaction is a merger of equals, we
reviewed the contribution analysis of the Company and HCB in this merger and the
resulting relative percentage ownership of the each.
We have also reviewed the Agreement and Plan of Merger among the Company and HCB
Bancorp. It is our understanding that the Merger will be accounted for as a
pooling of interests and that neither HCB Bancorp nor the Company has taken any
action that individually or as part of a series of actions would prohibit the
pooling of interests method of accounting for the Merger.
For purposes of this opinion we have relied, without independent verification,
on the accuracy and completeness of the material furnished to us by the Company
and HCB Bancorp and the material otherwise made available to us, including
information from published sources, and we have not made any independent effort
to verify such data. With respect to the financial information, including
forecasts and asset valuations we received from the Company, we assumed (with
your consent) that they had been reasonably prepared reflecting the best
currently available estimates and judgment of the Company's management. In
addition, we have not made or obtained any independent appraisals or evaluations
of the assets or liabilities, and potential and/or contingent liabilities of the
Company or HCB Bancorp. We have further relied on the assurances of management
of the Company and HCB Bancorp that they are not aware of any facts that would
make such information inaccurate or misleading. We express no opinion on
matters of a legal, regulatory, tax or accounting nature or the ability of the
Merger, as set forth in the Agreement, to be consummated.
In rendering our opinion, we have assumed that in the course of obtaining the
necessary approvals for the Merger, no restrictions or conditions will be
imposed that would have a material adverse effect on the contemplated benefits
of the Merger to the Company or the ability to consummate the Merger. Our
opinion is based on the market, economic and other relevant considerations as
they exist and can be evaluated on the date hereof.
Consistent with the engagement letter with you, we have acted as financial
advisor to the Company in connection with the Merger and will receive a fee for
such services. In addition, the Company has agreed to indemnify us for certain
liabilities arising out of our engagement by the Company in connection with the
Merger.
<PAGE>
Based upon and subject to the foregoing, as outlined in the foregoing paragraphs
and based on such other matters as we considered relevant, it is our opinion
that as of the date hereof, the Exchange Ratio is fair, from a financial point
of view, to the shareholders of the Company.
This opinion may not, however, be summarized, excerpted from or otherwise
publicly referred to without our prior written consent. It is understood that
this letter is directed to the Board of Directors of the Company in its
consideration of the Agreement, and is not intended to be and does not
constitute a recommendation to any director as to how such director should vote
with respect to the Merger.
Very truly yours,
Charles Webb & Company
A Division of Keefe, Bruyette & Woods, Inc.
<PAGE>
APPENDIX C
[Young & Associates, Inc. Letterhead]
______________, 1999
Board of Directors
HCB Bancorp
P.O. Box 37
Palmyra, Indiana 47164
Attention: William W. Harrod, President
Members of the Board:
HCB Bancorp ("HCB") requested our opinion as to the fairness to HCB and its
shareholders, from a financial point of view, of the terms of the Agreement and
Plan of Merger ("Merger") dated July 19, 1999 by and among First Capital, Inc.
("First Capital"), FC Acquisition Corp. ("Acquisition Sub") and HCB. The Merger
will be completed through a merger of Acquisition Sub with and into HCB, with
HCB being the surviving corporation and the existence of Acquisition Sub ceasing
upon consummation of the Merger.
By virtue of the Merger and subject to the dissenters' rights, the
outstanding shares of HCB will be converted into the right to receive shares of
First Capital as set forth in Section 1.2 of the Merger. Based on the Exchange
Ratio, shareholders of HCB will receive 15.5 shares of First Capital for each
share of HCB held at the time of the Merger, subject to adjustment in the event
of any stock dividend, stock split or other general distribution of First
Capital Common Stock prior to the Merger.
We analyzed various public and non-public sources of information in
developing our opinion, including but not limited to, (i) financial data of HCB
from December 31, 1995 through March 31, 1999 from published annual reports,
internal bank reports and interviews with bank management; (ii) financial data
regarding First Capital from publicly available regulatory reports; (iii)
comparative financial data of peers for each institution from public sources;
(iv) published reports from various sources regarding transactions similar in
nature to that proposed in the Merger; and (v) the Agreement and Plan of Merger.
Our analysis forecasted the potential future flow of income likely to be
generated by HCB, over a ten-year horizon. This step required both a study of
historical trends of HCB from national peer group data to develop a consensus on
assumptions used to forecast potential future
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Board of Directors
_______________, 1999
Page 2
results. The assumptions were considered to be reasonable and attainable should
HCB have continued to operate without the merger. We then calculated the present
value of that ten-year flow of income to arrive at both a multiple of book value
and a price-to-earnings ratio to suggest a probable trading range for the shares
of HCB.
We also analyzed the financial performance of First Capital and its
subsidiary First Federal Bank compared with banks with similar characteristics
using available peer group data and other sources similar to those provided by
HCB. We continued our analysis of First Capital by forecasting its earnings
performance over the same ten-year horizon as we used in the analysis of HCB.
Using the forecasts developed for the two institutions, we then constructed
a pro forma balance sheet and income statement representing a merger of the
institutions. Our analysis also considered the increase in earnings from the
merger generated by cost savings and other advantages generated by the Merger.
We also considered the Merger in light of similar recent transactions and
the share prices, based on recent trades, of the two institutions and again
found the results to be fair and equitable to the shareholders of HCB.
In conducting our analysis, we assumed the information provided to us or
publicly available was both accurate and complete. We assumed further that the
transaction was a tax-free reorganization without adverse tax implications to
the shareholders of HCB and that the transaction will be completed as planned
without other conditions which would work to the detriment of the shareholders
of HCB.
Based on our analysis as described and qualified above, we believe that the
terms of the Merger, from a financial viewpoint, are fair and equitable to the
shareholders of HCB.
HCB will pay Young & Associates, Inc. a fee for the company's assistance
during negotiations and the issuance of a fairness opinion to HCB and its
shareholders, plus reasonable out-of-pocket expenses, and will indemnify Young &
Associates, Inc. against certain liabilities, including liabilities under the
securities laws.
Young & Associates, Inc.
By: ________________________________________
Tom Smith, Consultant
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APPENDIX D
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 [IC 23-1-44-8] of this chapter and who exercises that right when
and in the manner required by sections 10 through 18 [IC 23-1-44-10 -- 23-1-44-
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 IC 23-1-
40-3 or the articles of incorporation; and
(B) The shareholder is entitled to vote on the merger.
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(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. Beneficial shareholder dissent. -- (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 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:
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(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. Notice of dissenters' rights preceding shareholder vote. --
(a) If proposed corporate action creating dissenters' rights under section 8 [IC
23-1-44-8] 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 [IC 23-1-44-12] of this chapter.
23-1-44-11. Notice of intent to dissent. -- (a) If proposed corporate
action creating dissenters' rights under section 8 [IC 23-1-44-8] 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. Notice of dissenters' rights following action creating
rights. -- (a) If proposed corporate action creating dissenters' rights under
section 8 [IC 23-1-44-8] 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 [IC 23-1-44-11] 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 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;
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(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 by dissenter. -- (a) A shareholder sent a
dissenters' notice described in IC 23-1-42-11 or in section 12 [IC 23-1-44-12]
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) [IC 23-1-44-12(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. Transfer of shares restricted after demand for payment. --
(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 [IC 23-1-44-16] 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 [IC 23-1-44-17] 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 [IC 23-1-44-13] 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:
(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 [IC 23-1-44-18] of this chapter.
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23-1-44-16. Return of shares and release of restrictions. -- (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 [IC 23-1-44-12] of this chapter and repeat
the payment demand procedure.
23-1-44-17. Offer of fair value for shares obtained after first
announcement. -- (a) A corporation may elect to withhold payment required by
section 15 [IC 23-1-44-15] 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 [IC 23-1-44-18] of this chapter.
23-1-44-18. Dissenter demand for fair value under certain conditions. --
(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 [IC 23-1-44-15] of this
chapter), or reject the corporation's offer under section 17 [IC 23-1-44-17] 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.
(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. Effect of failure to pay demand -- Commencement of judicial
appraisal proceeding. --(a) If a demand for payment under IC 23-1-42-11 or under
section 18 [IC 23-1-44-18] 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.
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(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 [IC 23-1-44-17] of this chapter.
23-1-44-20. Judicial determination and assessment of costs. -- (a) The
court in an appraisal proceeding commenced under section 19 [IC 23-1-44-19] 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 [IC 23-1-44-10 -- 23-1-44-
18] of this chapter; or
(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.
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APPENDIX E
FINANCIAL INFORMATION
REGARDING
HCB BANCORP
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Management's Discussion and Analysis of Financial Condition
and Results of Operations for HCB Bancorp........................................................ E-2
Independent Auditors' Report..................................................................... E-19
Consolidated Balance Sheets as of December 31, 1998 and 1997..................................... E-20
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998 and 1997................................................... E-21
Consolidated Statements of Income for the years ended December 31, 1998 and 1997................. E-22
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997............. E-23
Notes to Consolidated Financial Statements....................................................... E-24
Condensed Consolidated Balance Sheet as of June 30, 1999 (unaudited)............................. E-38
Condensed Consolidated Statement of Changes in Stockholders' Equity for
the six months ended June 30, 1999 (unaudited)................................................... E-39
Condensed Consolidated Statements of Income for the six months ended
June 30, 1999 and 1998 (unaudited)............................................................... E-40
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 (unaudited)............................................................... E-41
Notes to Condensed Consolidated Financial Statements............................................. E-42
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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General
HCB Bancorp (the Company) is the parent to its wholly owned subsidiary, Harrison
County Bank (the Bank), a state chartered commercial bank offering a variety of
commercial banking services to individuals and business customers through its
six offices in southern Indiana. The Bank's wholly-owned subsidiary, HCB
Insurance Agency, Inc., as an agent, sells property, casualty and life insurance
and non-deposit investment products. The Company has no other material 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 report.
Operating Strategy
The Bank's results of operations depend primarily on net interest income, which
is the difference between the income earned on its interest-earning assets, such
as loans and investments, and the cost of its interest-bearing liabilities,
consisting of deposits. 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 current business strategy is to operate as a well capitalized,
locally owned community bank. This strategy has been implemented in recent years
by controlling growth, emphasizing the origination of residential mortgage loans
in the Bank's primary market area, improving asset quality, controlling
operating expenses, and expanding customer services.
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 the Company's ability to remedy any computer malfunctions that may
result from the advent of the Year 2000.
Because of the risks and uncertainties inherent in forward-looking statements,
readers are cautioned not to place undue reliance on them, whether included in
this report or made elsewhere from time to time by the Company or on its behalf.
The Company assumes no obligation to update any forward-looking statements.
Comparison of Financial Condition at June 30, 1999 and December 31, 1998
Total assets increased 2.0% from $86.4 million at December 31, 1998 to $88.1
million at June 30, 1999, primarily as a result of increases in federal funds
sold and loans receivable, net, which were funded by maturities of investment
securities, a decrease in cash and interest bearing deposits in banks, and
growth in deposits.
Loans receivable, net, were $58.0 million at December 31, 1998, compared to
$59.3 million at June 30, 1999, a 2.2% increase.
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Federal funds sold increased from $1.9 million at December 31, 1998 to $2.8
million at June 30, 1999 as the result of investment of excess liquidity.
The investment in securities held-to-maturity decreased from $3.6 million at
December 31, 1998 to $2.7 million at June 30, 1999 as a result of maturities of
$896,000.
Securities available for sale increased from $12.5 million at December 31, 1998
to $12.9 million at June 30, 1999 as a result of purchases of $2.5 million and
maturities and of $2.0 million.
Cash and interest bearing deposits with banks decreased from $6.6 million at
December 31, 1998 to $6.0 million at June 30, 1999 as a result of the growth in
loans and an increase in federal funds sold.
Total deposits increased from $74.1 million at December 31, 1998 to $75.4
million at June 30, 1999. The increase in deposits resulted primarily from
growth in savings and interest bearing demand deposit accounts.
Total stockholders' equity increased from $11.7 million at December 31, 1998 to
$12.1 million at June 30, 1999 as a result of retained net income of $491,000.
Comparison of Financial Condition at December 31, 1998 and 1997
Total assets increased 4.0% from $83.1 million at December 31, 1997 to $86.4
million at December 31, 1998, primarily as a result of increases in cash and
interest bearing deposits in banks and loans receivable, net, which were funded
by maturities of investment securities, a decrease in federal funds sold and
growth in deposits.
Loans receivable, net, were $48.8 million at December 31, 1997, compared to
$58.0 million at December 31, 1998, a 19.0% increase. Residential mortgage
loans, including residential construction loans, increased $7.1 million or
29.2%. At December 31, 1998, total mortgage loans were $40.3 million or 67.8% of
the total loan portfolio compared to 64.0% at December 31, 1997. Consumer loans
increased from $13.5 million at December 31, 1997 to $15.0 million at December
31, 1998. The Bank has emphasized loan growth to provide higher yields as
compared to investment securities.
The investment in securities held-to-maturity decreased from $9.0 million at
December 31, 1997 to $3.6 million at December 31, 1998 as a result of maturities
of $5.3 million. Maturing held to maturity securities have not been replaced as
management provides for liquidity through the available for sale portfolio and
emphasizes loan portfolio growth.
Securities available for sale decreased from $14.5 million at December 31, 1997
to $12.5 million at December 31, 1998 as a result of purchases of $3.8 million
and maturities of $5.8 million. The liquidity provided by the available for sale
portfolio has provided for the growth in the loan portfolio as noted above.
Cash and interest bearing deposits with banks increased from $4.5 million at
December 31, 1997 to $6.6 million at December 31, 1998 as a result of excess
liquidity from maturities of investment securities and growth in deposits.
Total deposits increased from $71.2 million at December 31, 1997 to $74.1
million at December 31, 1998. The increase in deposits resulted primarily from
growth in demand and savings deposit accounts, which management attributes to
its promotional efforts to attract lower cost deposits.
Total stockholders' equity increased from $11.1 million at December 31, 1997 to
$11.7 million at December 31, 1998 as a result of retained net income of
$606,000.
Comparison of Operating Results for the Six Months Ended June 30, 1999 and 1998
Net Income. Net income was $491,000 ($6.14 per share, basic) for the six months
ended June 30, 1999 compared to $556,000 ($6.96 per share, basic) for the six
months ended June 30, 1998. The decrease for 1999 compared to 1998 results
primarily from the provision for loan losses and a decrease in non-interest
income offset by a small increase in net interest income.
Net Interest Income. Net interest income for the six months ended June 30, 1999,
was comparable to net interest income for the six months ended June 30, 1998, as
a result of a decrease in the average yield earned on interest earning assets
offset by a decrease in the average cost of funds in 1999 compared to the same
period in 1998.
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Total interest income decreased $39,000, or 1.2%, to $3.1 million for the six
months ended June 30, 1999 compared to $3.2 million in the prior year as a
result of a lower yield on interest-earning assets. Interest on loans receivable
increased $119,000 as a result of a higher average balance in 1999 and interest
on investment securities decreased $185,000 as a result of a lower average
balance in 1999 compared to 1998.
Total interest expense decreased $60,000, or 4.5%, for the six months ended June
30, 1999 compared to the six months ended June 30, 1998 as a result of the
growth in deposits offset by the decrease in the average cost of funds.
The average yield on interest-earnings assets decreased from 8.13% in 1998 to
7.79% in 1999 while the average cost of interest-bearing liabilities decreased
from 4.24% in 1998 to 3.91% in 1999 due to the growth in lower cost deposits.
Provision for loan losses. The provision for loan losses was $66,000 for the six
months ended June 30, 1999, compared to $5,000 for the six months ended June 30,
1998. The Bank made provisions for the six months ended June 30, 1999 to
increase the allowance for loan losses to an amount considered reasonable by
management based on a quarterly evaluation. The provisions were made due to net
charge-offs of $63,000 during the six months ended June 30, 1999. At June 30,
1999, the allowance for loan losses was $709,000 or 1.18% of total loans.
Nonperforming assets totaled $148,000 or 0.17% of total assets at June 30, 1999.
Non-interest income. Non-interest income decreased 10.8% to $316,000 for the six
months ended June 30, 1999 compared to $355,000 for the six months ended June
30, 1998. The decrease is primarily the result of a decrease in commission
income and gains on sale of mortgage loans. Service charges on deposit accounts
increased $14,000 for 1999 compared to 1998 due to the growth in transaction
accounts during 1999.
Non-interest expenses. Non-interest expenses increased by $17,000 for the six
months ended June 30, 1999. The increase results primarily from increases in
compensation and benefits and occupancy and equipment expenses. Compensation and
benefits expense increased $65,000 due to normal compensation increases, an
increase in the cost of employee health insurance and the addition of staff for
a new branch office in New Albany, Indiana, which opened June 7, 1999. Occupancy
and equipment costs have increased in 1999 compared to 1998 as a result of an
increase in depreciation charges on data processing equipment placed in service
in 1998 and expenses related to the Year 2000 issue. The Bank experienced lower
costs related to professional services, data processing, advertising, and office
supplies in 1999 compared to 1998.
Income tax expense. Income tax expense for the six months ended June 30, 1999
was $234,000, compared to $265,000 for the same period in 1998. The effective
tax rate for 1999 is 32.3% compared to 32.2% for 1998.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
Net Income. Net income was $1.1 million for both the years ended December 31,
1998 and 1997. Net income per common share, basic was $13.58 for 1998 compared
to $14.15 per common share, basic for 1997.
Net Interest Income. Net interest income for 1998 was $3.7 million compared to
$3.6 million for 1997 as a result of a decrease in the average yield earned on
interest-earning assets offset by a decrease in the average cost of funds in
1998 compared to 1997.
Total interest income decreased $36,000 for 1998 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 $274,000 as
a result of a higher average balance in 1998 and interest on investment
securities decreased $221,000 as a result of a lower average balance in 1998.
Total interest expense for 1998 was comparable to 1997 as a result of the growth
in deposits offset by a decrease in the average cost of funds in 1998 compared
to 1997.
The average yield on interest-earnings assets decreased from 8.24% in 1997 to
8.12% in 1998 while the average cost of interest-bearing liabilities decreased
from 4.30% in 1997 to 4.22% in 1998 because of growth in lower cost deposits.
E-4
<PAGE>
Provision for loan losses. The provision for loan losses was $65,000 for the
year ended December 31, 1998. There was no provision for loan losses made for
the year ended December 31, 1997. Provisions for loan losses are charges to
operations to maintain the 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, specific impaired loans, and economic conditions. In
determining the reasonableness and adequacy of the allowance for loan losses,
management reviews all loans on a quarterly basis, and specific loans or
homogenous loans are assigned a risk weighting based on asset classification.
The Bank made provisions for 1998 to increase the allowance for loan losses to
an amount considered reasonable by management based on the quarterly valuations
and considering the net charge-offs of $63,000 for 1998. 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 its 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.
Non-interest income. Non-interest income increased 18.9% to $669,000 for the
year ended December 31, 1998 compared to $563,000 for the year ended December
31, 1997. The decrease is primarily the result of a increases in service charges
on deposit accounts, commission income and gains on the sale of mortgage loans.
Service charges on deposit accounts increased $19,000 for 1998 compared to 1997
due to the growth in transaction accounts during 1998.
Non-interest expense. Non-interest expense increased by $198,000 for 1998
compared to 1997. The increase results primarily from increases in compensation
and benefits and occupancy and equipment expenses. Compensation and benefits
expense increased $43,000 due to normal compensation increases. Occupancy and
equipment costs have increased in 1999 compared to 1998 as a result of an
increase in depreciation charges on data processing equipment placed in service
in 1998. Other operating expenses increased $124,000 for 1998 compared to 1997
due to increases in legal and professional fees, data processing costs and
office supplies.
Income tax expense. Income tax expense for the year ended December 31, 1998 was
$503,000, compared to $583,000 for the same period in 1997. The effective tax
rate for 1998 was 31.6% compared to 34.0% for 1997 due to an increase in tax
exempt interest income for 1998.
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 correspondence banks or 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, 1998, the Bank had cash and interest-bearing
deposits with banks of $6.6 million, federal funds sold of $1.9 million and
securities available for sale with a fair value of $12.5 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 one-to-four family
mortgage loans and, to a lesser extent, consumer, multi-family, commercial 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, 1998, the Bank had total commitments to extend credit of $8.5
million. See Note 13 of Notes to Consolidated Financial Statements. At December
31, 1998, the Bank had certificates of deposit scheduled to mature within one
year of $25.6 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 June 30, 1999, the Bank was in compliance with
all effective regulatory capital requirements. The Bank's June 30, 1999 and
December 31, 1998 capital ratios are presented in the following table.
E-5
<PAGE>
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------------- -------------------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets) $ 12,400 22.6% $ 11,927 20.4%
Tier I Capital (to Risk Weighted Assets) $ 11,718 21.3% $ 11,221 19.2%
Tier I Capital (to Average Assets) $ 11,718 13.4% $ 11,221 13.4%
</TABLE>
Effect of Inflation and Changing Prices
The financial statements and related financial data presented herein have been
prepared in accordance with generally accepted accounting principles, which
generally require the measurement of financial position and operating results in
terms of historical dollars, without considering the changes in relative
purchasing power of money over time due to inflation. The primary impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, virtually all the assets and liabilities of the
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on the financial institutions
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
Market Risk Analysis
Qualitative Aspects of Market Risk. The Bank's principal financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates. The Bank has sought to reduce the exposure of
its earnings to changes in market interest rates by attempting to manage the
mismatch between asset and liability maturities and interest rates. In order to
reduce the exposure to interest rate fluctuations, the Bank has developed
strategies to manage its liquidity, shorten its effective maturities of certain
interest-earning assets and decrease the interest rate sensitivity of its asset
base. Management has sought to decrease the average maturity of its assets by
emphasizing the origination of short-term commercial and consumer loans, all of
which are retained by the Bank for its portfolio. The Bank relies on retail
deposits as its primary source of funds. Management believes retail deposits,
compared to brokered deposits, reduce the effects of interest rate fluctuations
because they generally represent a more stable source of funds.
Quantitative Aspects of Market Risk. The Bank does not maintain a
trading account for any class of financial instrument nor does the Bank engage
in hedging activities or purchase high-risk derivative instruments. Furthermore,
the Bank is not subject to foreign currency exchange rate risk or commodity
price risk.
The Bank uses interest rate sensitivity analysis to measure its
interest rate risk by computing changes in NPV(net portfolio value) of its cash
flows from assets, liabilities and off-balance sheet items in the event of a
range of assumed changes in market interest rates. NPV represents the market
value of portfolio equity and is equal to the market value of assets minus the
market value of liabilities, with adjustments made for off-balance sheet items.
This analysis assesses the risk of loss in market risk sensitive instruments in
the event of a sudden and sustained 100 to 300 basis point increase or decrease
in market interest rates with no effect given to any steps that management might
take to counter the effect of that interest rate movement.
The following table is provided by management and sets forth the change in
the Bank's NPV at December 31, 1998 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.
<TABLE>
<CAPTION>
At December 31, 1998
--------------------
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
-------- ------ ------ ------ --------- ------
<S> <C> <C> <C> <C> <C>
300bp $6,740 $(5,797) (46)% 8.35% (596)bp
200bp 8,379 (4,158) (33) 10.13 (418)bp
100bp 10,339 (2,198) (18) 12.16 (215)bp
--bp 12,537 - - 14.31 --bp
(100)bp 15,008 2,471 20 16.59 228bp
(200)bp 17,818 5,281 42 19.02 472bp
(300)bp 21,038 8,501 68 21.63 732bp
</TABLE>
E-6
<PAGE>
The above table indicates that in the event of a sudden and sustained
increase in prevailing market interest rates, the Bank's NPV would be expected
to decrease, and that in the event of a sudden and sustained decrease in
prevailing market interest rates, the Bank's NPV would be expected to increase.
Certain assumptions utilized by management in assessing the interest rate
risk of banks within its region were utilized in preparing the preceding table.
These assumptions relate to interest rates, loan prepayment 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 time deposits
could deviate significantly from those assumed in calculating the table.
Year 2000 Issues
The Bank is a user of computers, computer software, and equipment utilizing
embedded microcontrollers that will be affected by the Year 2000 ("Y2K") issue.
The Y2K issue exists because many computer systems and applications use
two-digit date fields to designate a year. As the century date change occurs,
date sensitive systems may incorrectly recognize the year 2000. This inability
to recognize or properly treat the Y2K issue may cause systems to process
financial and operational information incorrectly. The Y2K issue presents
several potential risks to the Bank:
1. The banking transactions of the Bank's customers are processed by one
or more computer systems provided by a third-party service bureau. The
failure of one or more of those systems to function as a result of the
Y2K date change could result in the Bank's inability to properly
process customer transactions. If that were to occur, the Bank could
lose customers to other financial institutions, resulting in a loss of
revenue.
2. A number of the Bank's borrowers utilize computers and computer
software to varying degrees in conjunction with the operation of their
businesses. The customers and suppliers of those businesses may utilize
computers as well. Should the Bank's borrowers, or the businesses on
which they depend, experience Y2K related computer problems, such
borrowers' cash flow could be disrupted, adversely effecting their
ability to repay their loans with the Bank.
3. Concern on the part of certain depositors that the Y2K related problems
could impair access to their deposit account balances following the Y2K
date change could result in the Bank experiencing a deposit outflow
prior to December 31, 1999.
4. The Bank contracts with several outside third parties for certain of
its data processing and account servicing functions. Should the systems
of one or more of those third parties fail to function properly after
December 31, 1999, the Bank could be adversely affected.
5. Should the Y2K related problems occur which cause any of the Bank's
systems, or the systems of the third-party service bureau upon which
the Bank depends, to become inoperative, increased personnel costs
could be incurred if additional staff is required to perform functions
that the inoperative systems would have otherwise performed.
6. Certain utility services, such as electrical power and
telecommunication services, could be disrupted if those services
experience Y2K related problems. The Bank's Y2K contingency plan will
address such possible situations.
Management believes it is not possible to estimate the potential lost revenue
due to the Y2K issue, as the extent and longevity of such potential problems
cannot be predicted. The Bank adopted a Y2K Action Plan in March 1998 to assess
all systems to insure that they will function properly in the Y2K. This process
involves separate phases which include: awareness, assessment, renovation,
validation, and implementation.
During 1998, the Bank completed the systems assessment phase, identifying each
internal system that could potentially be affected by the Y2K issue. Those
systems include the Bank's in-house microcomputer systems as well as equipment
such as the alarm system, vault locks, telephone system, etc., that may contain
embedded microprocessors. For each such system, an action plan was created to
set forth the process for determining whether or not the system is Y2K
compliant. Those determinations involved obtaining Y2K compliant certifications
from vendors wherever possible, and by the Bank conducting its own validation
testing.
E-7
<PAGE>
The Bank has identified major commercial borrowers to assess their Y2K readiness
and has requested information from those borrowers. The Bank completed
evaluations of those borrowers by June 30, 1999.
When the results of the Bank's validation testing programs have revealed that a
particular system is not Y2K compliant, a contingency plan is formulated to
either upgrade the system in order to meet the Y2K compliance requirements or
replace the system with one that is certified as Y2K compliant. The Bank is
currently in the validation and implementation phases of this process.
Other third parties upon which the Bank depends for processing include the
Bank's automated teller machine network processor, correspondent banks,
brokerage firms, and the pension plan administrator. These third parties have
indicated their compliance or intended compliance with the Y2K. Should the
testing of any third-party system or service reveal that such system or service
is not Y2K compliant, a specific deadline will be set by which time the system
or service must be brought into Y2K compliance. Should Y2K compliance not be
achieved by the specified deadlines, the Bank has developed a contingency plan
for each such external system or service. Those contingency plans document the
action the Bank will take for each such non-compliant system.
In certain cases, such as the potential loss of electrical power or
telecommunication services due to Y2K problems, testing by the Bank is either
not practical or not possible. In those cases, contingency plans will be
designed that specify how the Bank will deal with such potential situations. For
example, the Bank plans to operate manually for several days to maintain
critical functions in the event power from the electric utility is interrupted.
The Bank, as a state chartered commercial bank, is regulated by the Federal
Deposit Insurance Corporation and the Indiana Department of Financial
Institutions. The regulators have established specific guidelines and time
tables to follow in addressing the Y2K issue. The Bank is currently in
compliance with the federally mandated Y2K guidelines and time tables.
As of June 30, 1999, the Bank is on schedule with its internal Y2K preparation
efforts. All internal systems identified in the assessment phase of the project
that are considered "mission critical" have been tested for Y2K compliance. The
Bank's in-house computer system, its most critical processing system, has been
certified by its respective hardware and software vendors as being Y2K
compliant. The Bank has begun testing the system for Y2K compatibility and the
testing to date has indicated that the system is Y2K compliant. All systems that
have been determined to be Y2K compliant will be retested during 1999 following
any material upgrades or enhancements. The Bank has replaced non-compliant
microcomputer equipment and has installed and tested the related software for
Y2K compliance. Other equipment containing embedded microprocessors have been
certified as Y2K compliant by the applicable vendors. The Bank's estimated total
cost to replace computer equipment, software programs, or other equipment
containing embedded microprocessors that were not Y2K compliant, is
approximately $30,000, substantially all of which has been incurred at June 30,
1999. System maintenance or modification costs are being expensed as incurred,
while the cost of new hardware, software, or other equipment, is capitalized and
amortized over their estimated useful lives.
E-8
<PAGE>
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 balances of assets or liabilities, respectively, for
the periods presented. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------------------
1998 1997
---------------------------------------- ----------------------------------------
Average Average
------- -------
Average Yield/ Average Yield/
------- ----- ------- -----
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
- ---------------------- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets(1):
Mortgage loans $ 35,176 $ 3,123 8.88% $ 32,305 $ 3,033 9.39%
Consumer loans 14,840 1,446 9.74% 12,713 1,271 10.00%
Commercial business loans 4,062 381 9.38% 4,009 372 9.28%
------------------------- --------------------------
Total loans 54,078 4,950 9.15% 49,027 4,676 9.54%
------------------------- --------------------------
Securities (2) 19,316 1,132 5.86% 22,649 1,353 5.97%
Federal funds sold 2,436 127 5.21% 2,990 161 5.38%
Interest bearing deposits with banks 2,147 126 5.87% 1,739 109 6.27%
------------------------- --------------------------
Total interest earning assets 77,977 6,335 8.12% 76,405 6,299 8.24%
------------------------- --------------------------
Non-interest earning assets 5,856 5,431
============= ==============
Total assets $ 83,833 $ 81,836
============= ==============
Interest bearing liabilities:
Regular savings $ 8,641 $ 221 2.56% $ 8,579 $ 221 2.58%
Interest bearing demand deposits 15,809 393 2.49% 14,044 355 2.53%
Time deposits 38,683 2,050 5.30% 39,199 2,083 5.31%
------------------------- --------------------------
Total deposits 63,133 2,664 4.22% 61,822 2,659 4.30%
------------------------- --------------------------
Non-interest bearing liabilities:
Non-interest bearing deposits 8,234 8,361
Other liabilities 63,908 62,523
------------- --------------
Total liabilities 72,142 70,884
Stockholders' equity 11,691 10,952
------------- --------------
Total liabilities and stockholders' equity $ 83,833 $ 81,836
============= ==============
Net interest income $ 3,671 $ 3,640
============ ============
Interest rate spread 3.90% 3.94%
=============== ============
Net interest margin 4.71% 4.76%
=============== ============
Ratio of average interest earning assets
to average interest bearing liabilities 123.51% 123.59%
=============== ============
</TABLE>
- -------------------------------------------------------------------------------
(1) Does not include interest on loans 90 days or more past due.
(2) Includes debt securities held to maturity, securities classified as
available for sale and Federal Home Loan Bank stock.
E-9
<PAGE>
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).
<TABLE>
<CAPTION>
1998 Compared to 1997
Increase (Decrease) Due to
---------------------------------------------------
Rate/
----
Rate Volume Volume Net
---- ------ ------ ---
(In thousands)
<S> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans (1) $ (165) $ 270 $ (15) $ 90
Consumer loans (1) (33) 214 (6) 175
Commercial business loans (1) 4 5 - 9
---------------------------------------------------
Total loans (194) 489 (21) 274
---------------------------------------------------
Securities (2) (25) (200) 4 (221)
Federal funds sold (5) (30) 1 (34)
Interest bearing deposits with banks (7) 26 (2) 17
---------------------------------------------------
Total net change in income
on interest earning assets (231) 285 (18) 36
---------------------------------------------------
Interest bearing liabilities:
Interest bearing deposits (49) 55 (1) 5
---------------------------------------------------
Net change in net interest income $ (182) $ 230 $ (17) $ 31
===================================================
</TABLE>
- --------------------------------------
(1) Does not include interest on loans 90 days or more past due.
(2) Includes debt securities held to maturity, securities classified as
available for sale and Federal Home Loan Bank stock.
E-10
<PAGE>
Loan Portfolio Analysis
The following tables set forth the composition of the Bank's loan portfolio as
of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
1998 1997
------------------------------- --------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage Loans:
Residential (1) $ 28,737 48.31% $ 22,253 44.47%
Secured by farm land 1,220 2.05% 1,335 2.67%
Commercial real estate 7,798 13.11% 6,456 12.90%
Residential construction 2,544 4.28% 1,960 3.92%
------------- ------------- ------------- -------------
Total mortgage loans 40,299 67.75% 32,004 63.96%
------------- ------------- ------------- -------------
Consumer Loans:
Home equity loans 2,045 3.44% 1,795 3.59%
Credit card receivables 302 0.51% 293 0.59%
Other (2) 12,637 21.25% 11,398 22.78%
------------- ------------- ------------- -------------
Total consumer loans 14,984 25.20% 13,486 26.96%
------------- ------------- ------------- -------------
Commercial business loans 4,196 7.05% 4,541 9.08%
------------- ------------- ------------- -------------
Total loans 59,479 100.00% 50,031 100.00%
------------- ============= ------------- =============
Less:
Due to borrowers on loans in process 699 525
Deferred loan fees net of direct costs 38 35
Allowance for loan losses 706 704
------------- -------------
Total loans receivable, net $ 58,036 $ 48,767
============= =============
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes conventional one-to four-family and multi-family residential
loans.
(2) Includes secured and unsecured personal loans, lawn and farm equipement
loans, other agricultural loans and student 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.
E-11
<PAGE>
Residential construction loans consist of financing the construction of 1-4
family dwellings. Usually, loan to cost ratios are limited to 75% and permanent
financing commitments are required prior to the advancement of loan proceeds. At
December 31, 1998, residential construction loans totaled $2.5 million or 4.3%
of total loans.
Loans secured by real estate mortgages comprised 67.8% and 64.0% of the
Bank's loan portfolio at the end of 1998 and 1997, respectively. Residential
real estate loans consist primarily of first mortgages on single-family homes,
with some multifamily 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 business 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, 1998
regarding the dollar amount of loans maturing in the Bank's portfolio based on
their contractual terms to maturity, but does not include potential prepayments.
Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less. Loan balances
do not include undisbursed loan proceeds, unearned discounts, unearned income
and allowance for loan losses.
<TABLE>
<CAPTION>
After After After After
OneYear 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)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $ 2,225 $ 4,728 $ 4,368 $ 8,578 $ 6,487 $ 3,571 $ 29,957
Commercial real estate 2,081 1,776 1,663 1,686 509 83 7,798
Residential construction 2,544 - - - - - 2,544
Consumer loans 5,020 6,206 2,717 386 - 655 14,984
Commercial business 2,356 1,156 513 171 - - 4,196
-------------------------------------------------------------------------------------------------
Total gross loans $ 14,226 $ 13,866 $ 9,261 $ 10,821 $ 6,996 $ 4,309 $ 59,479
=================================================================================================
</TABLE>
The following table sets forth the dollar amount of all loans due after December
31, 1999, which have fixed interest rates and have floating or adjustable
interest rates.
<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable Rates
(In thousands)
<S> <C> <C>
Mortgage loans:
Residential $ 14,789 $ 12,943
Commercial real estate 4,219 1,498
Residential construction 7,949 2,015
Consumer loans 1,777 63
-------------------------
Commercial business $ 28,734 $ 16,519
=========================
</TABLE>
E-12
<PAGE>
Nonperforming Assets
The following table sets forth information with respect to the Bank's
nonperforming assets for the periods indicated. During the periods shown, the
Bank had no restructured loans within the meaning of SFAS No. 15.
<TABLE>
<CAPTION>
At June 30, At December 31,
---------- -----------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Residential real estate $ 69 $ 70 $ 21
Commercial real estate 46 - -
Commercial business - - 29
Consumer - - -
------------- -----------------------------------
Total 115 70 50
------------- -----------------------------------
Accruing loans which are contractually
past due 90 days or more:
Residential real estate 18 19 9
Commercial real estate - - -
Commercial business 11 - -
Consumer 4 54 36
------------- -----------------------------------
Total 33 73 45
------------- -----------------------------------
Foreclosed real estate, net - - -
------------- -----------------------------------
Total nonperforming assets $ 148 $ 143 $ 95
============= ===================================
Total loans delinquent 90 days
or more to net loans 0.25% 0.25% 0.14%
Total loans delinquent 90 days
or more to total assets 0.17% 0.17% 0.08%
Total nonperforming assets to
total assets 0.17% 0.17% 0.11%
</TABLE>
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 state chartered and 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, state and
federal regulators have authority to identify problem assets and, if
appropriate, require them to be classified. There are three classifications for
problem assets: substandard, doubtful and loss.
E-13
<PAGE>
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.
On January 1, 1995, the Bank adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which 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 at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
---------- -------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Classified assets:
Loss $ - $ - $ -
Doubtful (impaired) - 70 20
Substandard 339 616 820
Special mention 509 607 248
General loss allowances:
Impaired loans - 7 2
Other 709 699 702
</TABLE>
E-14
<PAGE>
Foreclosed Real Estate
Foreclosed real estate held for sale is carried at the lower of fair value minus
estimated costs to sell, or cost. Costs of holding foreclosed real estate are
charged to expense in the current period, except for significant property
improvements, which are capitalized. Valuations are periodically performed by
management and an allowance is established by a charge to non-interest expense
if the carrying value exceeds the fair value minus estimated costs to sell. The
net income from operations of foreclosed real estate held for sale is reported
in non-interest income. At June 30, 1999 and December 31, 1998, the Bank had no
foreclosed real estate.
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 June
30, 1999 was $709,000 or 1.18% of total loans outstanding, compared with
$706,000 or 1.20% of total loans outstanding, at December 31, 1998. 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 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 June 30, 1999 and December 31, 1998 and 1997 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.
E-15
<PAGE>
Allowance for Loan Losses Analysis
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Allowance at beginning of period $ 704 $ 749
Provision for loan losses 65 -
Recoveries:
Residential real estate 79 25
Secured by farm land - -
Consumer 23 55
-------------------------
Total recoveries 102 80
-------------------------
Charge-offs:
Residential real estate 8 17
Secured by farm land - 21
Consumer 157 87
-------------------------
Total charge-offs 165 125
-------------------------
Net (charge-offs) recoveries (63) (45)
-------------------------
Balance at end of period $ 706 $ 704
=========================
Ratio of allowance to total loans
outstanding at the end of
the period 1.19% 1.42%
Ratio of net charge-offs (recoveries)
to average loans outstanding
during the period 0.12% 0.09%
</TABLE>
The following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1998 1997
---- ----
Percent of Percent of
---------- ----------
Loans in Loans in
-------- --------
Category Category
-------- --------
to Total to Total
-------- --------
Amount Loans Amount Loans
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Residential real estate (1) $ 180 56.03% $ 146 51.98%
Commercial real estate and farm land 178 15.16% 199 15.57%
Commercial business 28 7.05% 60 9.08%
Consumer 285 21.76% 166 23.37%
Unallocated 35 -- 133 --
--------------------------- ---------------------------
Total allowance for loan losses $ 706 100.00% $ 704 100.00%
=========================== ===========================
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes residential construction loans.
E-16
<PAGE>
Securities Portfolio Analysis
The following table sets forth the securities portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------
1998
-------------------------------------------------------
Weighted
Fair Amortized Percent of Average
---- ----------- ----------- ----------
Value Cost Portfolio Yield (2)
------ ---- ---------- ---------
(Dollars in thousands)
--------------------
<S> <C> <C> <C> <C>
Securities held to maturity; (1)
- --------------------------------
Debt securities:
U.S. Treasury:
Due in one year or less $ - $ - - -
U.S. Agency:
Due after one year through five years 496 496 3.09% 5.33%
Due after five years through ten years - - - -
Municipal
Due in one year or less 350 350 2.18% 8.22%
Due after one year through five years 2,049 1,944 12.11% 9.54%
Due after five years through ten years 789 740 4.61% 9.50%
Due after ten years 117 116 0.73% 8.80%
-----------------------------------------
$ 3,801 $ 3,646 22.72% 8.81%
=========================================
Securities available for sale:
- ------------------------------
Debt securities:
U.S. Treasury:
Due in one year or less $ 1,765 $ 1,753 10.92% 6.04%
Due after one year through five years 507 498 3.10% 6.33%
U.S. Agency:
Due after five years through ten years 4,207 4,183 26.06% 5.85%
Due after ten year 2,057 2,053 12.79% 5.14%
Municipal
Due after one year through five years 840 822 5.12% 6.74%
Due after five years through ten years 2,472 2,425 15.11% 6.96%
Due after ten years 444 420 2.62% 8.19%
Equity securities:
Common stock - 25,000 shares
of First Capital, Inc. 250 250 1.56% -
-----------------------------------------
$ 12,542 $ 12,404 77.28% 6.14%
=========================================
<CAPTION>
At December 31,
-------------------------------------------------
1997
-------------------------------------------------
Weighted
Fair Amortized Percent of Average
---- --------- ---------- -------
Value Cost Portfolio Yield (2)
------ ---- --------- ---------
<S> <C> <C> <C> <C>
Securities held to maturity; (1)
- --------------------------------
Debt securities:
U.S. Treasury:
Due in one year or less $ 1,002 $ 1,000 4.28% 5.83%
U.S. Agency:
Due after one year through five years 3,449 3,458 14.83% 5.23%
Due after five years through ten years 794 796 3.41% 5.71%
Municipal
Due in one year or less 518 514 2.20% 10.53%
Due after one year through five years 2,068 1,967 8.42% 9.43%
Due after five years through ten years 1,048 982 4.21% 9.22%
Due after ten years 246 237 1.01% 9.55%
------------------------------------
$ 9,125 $ 8,954 38.36% 7.21%
====================================
Securities available for sale:
- ------------------------------
Debt securities:
U.S. Treasury:
Due in one year or less $ 2,492 $ 2,476 10.61% 6.65%
Due after one year through five years 2,271 2,255 9.66% 6.10%
U.S. Agency:
Due after five years through ten years 2,506 2,498 10.70% 6.06%
Due after ten year 4,743 4,731 20.28% 6.04%
Municipal
Due after one year through five years 417 414 1.77% 6.64%
Due after five years through ten years 1,360 1,325 5.68% 7.32%
Due after ten years 715 687 2.94% 8.29%
Equity securities:
Common stock - 25,000 shares
of First Capital, Inc. - - - -
------------------------------------
$ 14,504 $ 14,386 61.64% 6.40%
====================================
</TABLE>
- --------------------------------------------------------------------------------
(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%
E-17
<PAGE>
Maturities of Time Deposits
The following table presents the maturity distributions of time deposits of
$100,000 or more as of December 31, 1998:
<TABLE>
<CAPTION>
Maturity Period Balance
--------------- -------
(In thousands)
<S> <C>
Three months or less $ 442
Three through six months 1,243
Six through twelve months 1,425
Over twelve months 1,331
-------------
Total $ 4,441
=============
</TABLE>
E-18
<PAGE>
[LETTERHEAD OF MONROE SHINE & CO., INC. APPEARS HERE]
Independent Auditor's Report
Board of Directors and Stockholders
HCB Bancorp and Subsidiary
Palmyra, Indiana
We have audited the accompanying consolidated balance sheets of HCB Bancorp and
Subsidiary as of December 31, 1998 and 1997, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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 HCB Bancorp and
Subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Monroe Shine & Co., Inc.
January 15, 1999
E-19
<PAGE>
HCB BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,971,092 $ 2,547,132
Interest bearing deposits in banks 2,669,000 1,985,000
Securities available for sale, at fair value 12,541,868 14,503,894
Securities held to maturity (fair value $3,801,171;
1997 $9,124,584) 3,646,164 8,954,127
Federal funds sold 1,900,000 3,000,000
Mortgage loans held for sale - 393,455
Loans 58,741,701 49,471,627
Less allowance for loan losses 706,068 704,371
----------------------------------
Net loans 58,035,633 48,767,256
----------------------------------
Federal Home Loan Bank Stock, at cost 264,600 -
Premises and equipment 2,381,330 1,888,139
Accrued interest receivable 680,717 721,827
Other assets 314,361 301,518
----------------------------------
Total Assets $ 86,404,765 $ 83,062,348
==================================
LIABILITIES
Deposits:
Non-interest bearing demand deposits $ 9,346,572 $ 8,614,015
Savings and interest bearing demand deposits 26,134,628 23,836,214
Time deposits 38,596,984 38,790,992
----------------------------------
Total deposits 74,078,184 71,241,221
Accrued interest payable 416,579 445,119
Other liabilities 173,830 257,565
----------------------------------
Total Liabilities 74,668,593 71,943,905
----------------------------------
STOCKHOLDERS' EQUITY
Common stock, no par value
Authorized 1,000,000 shares; issued 79,900 shares 799,000 799,000
Capital surplus 2,500,000 2,500,000
Retained earnings 8,353,900 7,747,957
Accumulated other comprehensive income-unrealized gain
on securities available for sale 83,272 71,486
----------------------------------
Total Stockholders' Equity 11,736,172 11,118,443
----------------------------------
Total Liabilities and Stockholders' Equity $ 86,404,765 $ 83,062,348
==================================
</TABLE>
See notes to consolidated financial statements.
E-20
<PAGE>
HCB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Other
Common Capital Retained Comprehensive
Stock Surplus Earnings Income Total
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1997 $ 800,000 $ 2,500,000 $ 7,091,465 $ 24,619 $ 10,416,084
COMPREHENSIVE INCOME
Net income - - 1,131,660 - 1,131,660
Other comprehensive income,
net of tax:
Change in unrealized gain
on securities available for
sale, net of deferred
income tax expense of
$27,436 - - - 41,830 41,830
Less: reclassification
adjustment, net of
deferred tax benefit of
$3,303 - - - 5,037 5,037
------------
Total comprehensive income 1,178,527
------------
Redemption of common stock
(100 shares) (1,000) - (15,743) - (16,743)
Cash dividends
($5.75 per share) - - (459,425) - (459,425)
-------------------------------------------------------------------------------------------
Balances at December 31, 1997 799,000 2,500,000 7,747,957 71,486 11,118,443
COMPREHENSIVE INCOME
Net income - - 1,085,343 - 1,085,343
Other comprehensive income,
net of tax:
Change in unrealized gain
on securities available for
sale, net of deferred
income tax expense of
$7,730 - - - 11,786 11,786
Less: reclassification
adjustment - - - - -
------------
Total comprehensive income 1,097,129
------------
Cash dividends
($6.00 per share) - - (479,400) - (479,400)
-------------------------------------------------------------------------------------------
Balances at December 31, 1998 $ 799,000 $ 2,500,000 $ 8,353,900 $ 83,272 $ 11,736,172
===========================================================================================
</TABLE>
See notes to consolidated financial statements.
E-21
<PAGE>
HCB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 4,949,795 $ 4,675,958
Securities:
U. S. Treasury and federal agency 784,129 1,018,936
State and municipal 347,908 329,986
Corporate - 4,302
Federal funds sold 127,121 160,673
Interest bearing deposits in banks 126,160 108,609
------------------------------
Total interest income 6,335,113 6,298,464
------------------------------
INTEREST EXPENSE
Deposits 2,664,589 2,658,505
------------------------------
Net interest income 3,670,524 3,639,959
Provision for loan losses 65,000 -
------------------------------
Net interest income after provision for loan losses 3,605,524 3,639,959
NON-INTEREST INCOME
Service charges on deposit accounts 335,074 315,964
Commission income 147,184 113,048
Net gain on sale of mortgage loans 92,953 61,394
Loan servicing fees 16,366 11,488
Other income 77,444 60,673
------------------------------
Total non-interest income 669,021 562,567
------------------------------
NON-INTEREST EXPENSE
Compensation and benefits 1,402,302 1,359,141
Occupancy expense 174,827 173,135
Equipment expense 222,575 185,244
Net realized loss on sales of securities - 8,340
Other expenses 886,971 762,499
------------------------------
Total non-interest expense 2,686,675 2,488,359
------------------------------
Income before income taxes 1,587,870 1,714,167
Income tax expense 502,527 582,507
------------------------------
Net Income $ 1,085,343 $ 1,131,660
==============================
Net income per common share, basic $ 13.58 $ 14.15
==============================
</TABLE>
See notes to consolidated financial statements.
E-22
<PAGE>
HCB BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,085,343 $ 1,131,660
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred income taxes 8,272 (4,243)
Depreciation of premises and equipment 199,625 165,484
Amortization of premium and accretion of discount
on securities, net (16,643) (22,304)
Provision for loan losses 65,000 -
Net realized loss on sales of securities - 8,340
Proceeds from sales of mortgage loans 2,842,488 4,060,841
Mortgage loans originated for sale (2,356,080) (3,850,286)
Net gain on sale of mortgage loans (92,953) (61,394)
Decrease in accrued interest receivable 41,110 51,128
Increase (decrease) in accrued interest payable (28,540) 17,330
(Increase) decrease in other assets (28,844) 32,328
Increase (decrease) in other liabilities (83,735) 41,494
-------------------------------
Net Cash Provided By Operating Activities 1,635,043 1,570,378
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest bearing deposits in banks (684,000) (221,000)
(Increase) decrease in federal funds sold 1,100,000 (1,900,000)
Proceeds from sales of securities available for sale - 1,888,281
Purchase of securities available for sale (3,800,244) (7,792,295)
Maturities of securities available for sale 5,800,000 3,795,000
Maturities of securities held to maturity 5,306,391 2,962,237
Net increase in loans (9,333,377) (1,524,218)
Purchase of Federal Home Loan Bank stock (264,600) -
Purchase of premises and equipment (692,816) (225,483)
-------------------------------
Net Cash Used By Investing Activities (2,568,646) (3,017,478)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings accounts 3,030,971 1,064,877
Net decrease in time deposits (194,008) (274,562)
Redemption of common stock - (16,743)
Cash dividends paid (479,400) (459,425)
-------------------------------
Net Cash Provided By Financing Activities 2,357,563 314,147
-------------------------------
Net Increase (Decrease) in Cash and Due From Banks 1,423,960 (1,132,953)
Cash and due from banks at beginning of year 2,547,132 3,680,085
-------------------------------
Cash and Due From Banks at End of Year $ 3,971,092 $ 2,547,132
===============================
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 2,693,129 2,641,175
Income taxes 557,685 557,500
</TABLE>
E-23
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
HCB Bancorp (the Company) is a one bank holding company of Harrison County
Bank (the Bank), a wholly-owned subsidiary. The Company has no operating
activities. The Bank is a state chartered commercial bank which provides a
variety of commercial banking services to individuals and business
customers through its four offices in southern Indiana. The Bank's wholly-
owned subsidiary, HCB Insurance Agency, Inc., as an agent, sells property
and casualty insurance and investments.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries and have been prepared in accordance with generally
accepted accounting principles and conform to general practices within the
banking industry. Intercompany balances and transactions have been
eliminated.
Reclassification
Certain prior year accounts have been reclassified to conform with current
year presentation.
Statements of Cash Flows
For purposes of the 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 period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowance for loan losses and foreclosed real estate, management obtains
independent appraisals for significant properties.
Securities Available for Sale
Securities available for sale consist of debt securities not classified as
held to maturity and equity securities and are stated at fair value.
Unrealized gains and losses, net of tax, are reported as a separate
component of stockholders' equity until realized. Realized gains and losses
are determined using the specific identification method. Amortization of
premium and accretion of discount are recognized in interest income using
the interest 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.
E-24
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1998 AND 1997
(1 - continued)
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 approximate market value.
Net unrealized losses are recognized through a valuation allowance by
charges to income. Realized gains on sales of mortgage loans are included
in non-interest income.
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 adjustable rate
loans collateralized by first mortgages on single family residences and
multi-family residential property located in the southern Indiana area
and commercial real estate loans. In addition to real estate loans, the
Bank makes agribusiness, commercial and consumer loans.
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 deducted from interest income.
Interest payments received on nonaccrual loans, including specific
impaired loans, are recorded as a reduction of the loan principal
balance, 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. Allowances
for impaired loans are generally determined based on collateral values or
the present value of estimated cash flows. 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.
Loan Servicing
Loan servicing fees are credited to income as monthly principal and
interest payments are collected on mortgages. Costs of loan servicing are
charged to expense as incurred.
E-25
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1998 AND 1997
(1 - continued)
Premises and Equipment
The Bank uses the straight line and accelerated methods of computing
depreciation at rates adequate to amortize the cost of the applicable
assets over their useful lives. Items capitalized as part of premises and
equipment are valued at cost. Maintenance and repairs are expensed as
incurred. The cost and related accumulated depreciation of assets sold,
or otherwise disposed of, are removed from the related accounts and any
gain or loss is included in earnings.
Mortgage Servicing Rights
Mortgage servicing rights are recognized as separate assets when
servicing rights are acquired through purchase or loan originations, when
there is a definitive plan to sell the underlying loan. Capitalized
mortgage servicing rights are periodically evaluated for impairment based
on the fair value of those rights. Capitalized mortgage servicing rights
are amortized in proportion to, and over the period of, estimated future
net servicing income of the underlying mortgage loans.
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 for losses is
established by a charge to non-interest expense if the carrying value
exceeds the fair value minus estimated costs to sell. The net of revenue
and expense from operations of foreclosed real estate held for sale is
reported in non-interest expense.
Amortization of Intangibles
Goodwill, included in other assets, represents the excess of the cost of
acquired branch banking facilities over the fair value of the net assets
acquired and is amortized over 15 years using the straight-line method.
Income Taxes
Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently due
plus deferred taxes related primarily to differences between the basis of
the 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.
Stock-Based Compensation
Under the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company elects to measure and recognize compensation
cost related to its stock-based compensation plan using the intrinsic
value method. Accordingly, no compensation costs will be charged against
earnings for stock options granted under the Company's stock incentive
plan.
E-26
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(1 - continued)
Advertising Costs
Advertising costs are charged to operations when incurred.
(2) RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances on hand and with a
correspondent bank which are non-interest bearing and unavailable for
investment. The average amount of those reserve balances for the years
ended December 31, 1998 and 1997 were approximately $477,000 and
$428,000, respectively.
(3) SECURITIES
Debt securities have been classified in the consolidated balance sheets
according to management's intent. The amortized cost and fair value of
available for sale and held to maturity securities and the related
unrealized holding gains and losses were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1998:
Securities available for sale:
Debt Securities:
U.S. Treasury $ 2,250,813 $ 21,218 $ - $ 2,272,031
Federal agency 6,235,734 29,460 1,646 6,263,548
Municipal 3,667,430 99,159 10,300 3,756,289
----------------------------------------------------------------
12,153,977 149,837 11,946 12,291,868
---------------------------------------------------------------
Equity securities:
Common stock 250,000 - - 250,000
----------------------------------------------------------------
$ 12,403,977 $ 149,837 $ 11,946 $ 12,541,868
===============================================================
Securities held to maturity:
Debt securities:
Federal agency $ 495,652 $ - $ - $ 495,652
State and municipal 3,150,512 155,007 - 3,305,519
----------------------------------------------------------------
$ 3,646,164 $ 155,007 $ - $ 3,801,171
================================================================
December 31, 1997:
Securities available for sale:
Debt Securities:
U.S. Treasury $ 4,731,208 $ 32,252 $ 287 $ 4,763,173
Federal agency 7,228,907 20,908 814 7,249,001
Municipal 2,425,405 66,315 - 2,491,720
----------------------------------------------------------------
$ 14,385,520 $ 119,475 $ 1,101 $ 14,503,894
===============================================================
Securities held to maturity:
Debt securities:
U.S. Treasury $ 1,000,333 $ 2,430 $ 1,153 $ 1,001,610
Federal agency 4,253,347 368 10,853 4,242,862
State and municipal 3,700,447 179,665 - 3,880,112
----------------------------------------------------------------
$ 8,954,127 $ 182,463 $ 12,006 $ 9,124,584
================================================================
</TABLE>
E-27
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(3 - continued)
The amortized cost and fair value of the debt securities as of December
31, 1998, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Securities Available for Sale Securities Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 5,930,639 $ 5,972,079 $ 845,652 $ 846,000
Due after one year
through five years 3,371,969 3,403,324 1,944,507 2,049,787
Due after five years
through ten years 2,425,369 2,471,849 740,327 788,746
Due after ten years 420,000 444,616 115,678 116,638
---------------------------------------------------------------
$ 12,153,977 $ 12,291,868 $ 3,646,164 $ 3,801,171
===============================================================
</TABLE>
At December 31, 1998, U.S. Treasury securities with an amortized cost
of $249,907 and a fair value of $251,016 were pledged to secure public
deposits and for other purposes.
Gross gains of $765 and gross losses of $9,105 were realized on sales
of securities available for sale during the year ended December 31,
1997.
(4) LOANS
Loans receivable at December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Real estate mortgages:
Residential $ 29,856,101 $ 23,536,319
Residential construction 1,845,420 1,435,491
Commercial real estate 7,898,392 6,456,442
Real estate contracts - 51,485
Commercial business loans 4,196,302 4,540,905
Consumer 14,983,849 13,485,862
-------------------------------
58,780,064 49,506,504
Less:
Net deferred loan fees and costs 38,363 34,877
-------------------------------
Total loans $ 58,741,701 $ 49,471,627
===============================
</TABLE>
Mortgage loans serviced for the benefit of others amounted to
$5,858,739 and $6,640,538 at December 31, 1998 and 1997, respectively.
E-28
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(4 - continued)
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Beginning balances $ 704,371 $ 749,260
Provision for loan losses 65,000 -
Recoveries 101,575 80,235
Loans charged-off (164,878) (125,124)
-----------------------------
Ending balances $ 706,068 $ 704,371
=============================
</TABLE>
At December 31, 1998 and 1997, the Bank had loans amounting to
approximately $89,000 and $21,000, respectively, that were specifically
classified as impaired. The average recorded investment in impaired
loans amounted to approximately $96,000 and $152,000 for the years
ended December 31, 1998 and 1997, respectively. The allowance for loan
losses related to impaired loans amounted to approximately $2,000 at
December 31, 1997. The Bank had no specific allowance for loan losses
related to impaired loans at December 31, 1998. Interest income on
impaired loans of $500 and $40,350 was recognized for cash payments
received in 1998 and 1997, respectively.
The Bank has entered into loan transactions with certain directors,
officers and their affiliates (related parties). 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 balances on
loans to related parties amounted to $966,187 and $1,099,810 at
December 31, 1998 and 1997, respectively.
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and land improvements $ 636,943 $ 261,924
Buildings and improvements 1,666,985 1,600,623
Equipment 1,144,476 1,096,854
------------------------------
3,448,404 2,959,401
Less accumulated depreciation 1,067,074 1,071,262
------------------------------
Net book value $ 2,381,330 $ 1,888,139
==============================
</TABLE>
(6) OPERATING LEASE
The Bank operates a branch office under an operating lease that expires
in the year 2005.
E-29
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(6 - continued)
The following is a schedule by years of future minimum rental payments
required under this operating lease as of December 31, 1998.
Year ending December 31:
1999 $ 19,200
2000 19,200
2001 19,200
2002 19,200
2003 19,200
Later years 36,800
--------
$ 132,800
========
Total rental expense for the year ended December 31, 1998 amounted to
$19,200.
(7) INCOME TAXES
The Company files consolidated income tax returns with its subsidiary,
with each charged or given credit for the applicable taxes as though
separate returns were filed.
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current $ 494,255 $ 586,750
Deferred 8,272 (4,243)
----------------------------
Total $ 502,527 $ 582,507
===========================
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 139,131 $ 117,031
Other - 19,091
------------------------------
Total deferred tax assets 139,131 136,122
Deferred tax liabilities:
Unrealized gain on securities available for sale 54,618 46,888
Depreciation 81,170 76,994
Other 7,105 -
------------------------------
Total deferred tax liabilities 142,893 123,882
------------------------------
Net deferred tax asset (liability) $ (3,762) $ 12,240
==============================
</TABLE>
E-30
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1998 AND 1997
(7 - continued)
The reconciliation of the income tax expense with the amount which
would have been provided at the federal statutory rate of 34 percent
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Provision at statutory rate $ 539,876 $ 582,817
State income tax-net of federal tax benefit 86,027 99,986
Tax exempt interest income from securities and loans (113,779) (100,210)
Other (9,597) (86)
-------------------------------
Total income tax expense $ 502,527 $ 582,507
===============================
</TABLE>
(8) DEPOSITS
The aggregate amount of time deposit accounts of $100,000 or more
amounted to approximately $4,441,000 and $4,142,000 at December 31,
1998 and 1997, respectively.
At December 31, 1998, scheduled maturities of time deposits were as
follows:
Year ending December 31:
1999 $ 25,593,169
2000 7,107,161
2001 2,894,982
2002 1,783,269
2003 and thereafter 1,218,403
------------
Total $ 38,596,984
============
The Bank held deposits of approximately $2,168,000 and $1,974,000 for
related parties at December 31, 1998 and 1997, respectively.
(9) BENEFIT PLAN
The Bank has available to all eligible employees a defined
contribution plan to which eligible employees can contribute a portion
of their pre-tax compensation. The Bank contributed $25,459 and
$20,413 to the plan for the years ended December 31, 1998 and 1997,
respectively.
(10) STOCK-BASED COMPENSATION PLAN
On January 1, 1998, the Company adopted an incentive stock option plan
for officers and key employees. The plan provides for the issuance of
incentive stock options for up to 4,000 shares of common stock of the
Company. The incentive stock options are granted at exercise prices
not less than the fair market of the common stock at the date of
grant. All options granted under the plan shall become vested and
exercisable at the rate determined by the Board of Directors at the
date of grant. The options granted expire not more than ten years
after the date of grant. Payment of the option price may be in cash or
shares of common stock at fair market value on the exercise date.
E-31
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1998 AND 1997
(10 - continued)
The following is a summary of the Company's incentive stock options as
of December 31, 1998 and the changes for the year then ended:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise
of Shares Price
<S> <C> <C>
Outstanding at beginning of year - $ -
Granted 100 145.98
Exercised - -
Forfeited - -
---
Outstanding at end of year 100 $ 145.98
===
</TABLE>
All incentive stock options outstanding at December 31, 1998 were
exercisable.
The Company elects to apply APB No. 25 and related interpretations in
accounting for its stock-based compensation plan under SFAS No. 123.
Accordingly, no compensation costs will be charged against earnings
for stock options granted. The calculated compensation cost based on
the minimum value method at grant date under the provisions of SFAS
No. 123 is immaterial in relation to net income for the year ended
December 31, 1998.
(11) STOCKHOLDERS' EQUITY AND DIVIDENDS
The dividends which the Bank may pay to the Company are subject to
various legal and regulatory restrictions. At December 31, 1998,
retained earnings of the Bank not available for payment of dividends
to the Company were approximately $7,062,000.
(12) REGULATORY MATTERS
The Company and its subsidiary 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
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
Company's 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 its subsidiary 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, 1998, that the
Company and its subsidiary meet all capital adequacy requirements to
which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
in the table below. There are no conditions or events since that
notification that management believes have changed the institution's
categories.
E-32
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1998 AND 1997
(12 - 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.
<TABLE>
<CAPTION>
Minimum
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 12,209 20.8% $ 4,708 8.0% N/A
Bank $ 11,927 20.4% $ 4,688 8.0% $ 5,860 10.0%
Tier I Capital (to Risk
Weighted Assets):
Consolidated $ 11,503 19.6% $ 2,354 4.0% N/A
Bank $ 11,221 19.2% $ 2,344 4.0% $ 3,516 6.0%
Tier I Capital (to Average
Assets):
Consolidated $ 11,503 13.7% $ 3,353 4.0% N/A
Bank $ 11,221 13.4% $ 2,515 3.0% $ 4,192 5.0%
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 11,489 23.8% $ 3,867 8.0% N/A
Bank $ 11,468 23.7% $ 3,877 8.0% $ 4,846 10.0%
Tier I Capital (to Risk
Weighted Assets):
Consolidated $ 10,885 22.5% $ 1,934 4.0% N/A
Bank $ 10,862 22.4% $ 1,939 4.0% $ 2,908 6.0%
Tier I Capital (to Average
Assets):
Consolidated $ 10,885 13.1% $ 3,325 4.0% N/A
Bank $ 10,862 13.1% 2,494 3.0% $ 4,157 5.0%
</TABLE>
(13) 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 financial
statements.
E-33
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1998 AND 1997
(13-continued)
Commitments under outstanding standby letters of credit totaled
$85,000 at December 31, 1998.
The following is a summary of the commitments to extend credit at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Construction loans $ 188,000 $ 267,000
Mortgage loans 1,882,000 833,000
Unused home equity lines of credit 2,594,000 2,430,000
Unused lines of credit on credit cards 1,087,000 827,000
Undisbursed portion of commercial lines of credit 2,075,000 529,000
Undisbursed portion of construction loans in process 699,000 525,000
---------------------------------
Total commitments to extend credit $ 8,525,000 $ 5,411,000
=================================
</TABLE>
(14) 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 13). 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
during the past two years. The Bank has not incurred any losses on
commitments in either 1998 or 1997.
(15) CONCENTRATION OF CREDIT RISK
At December 31, 1998, the Bank had concentration of credit risk with a
correspondent bank with an investment in federal funds sold of
$2,060,435.
E-34
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1998 AND 1997
(16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of financial instruments
at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
(In thousands)
Financial assets:
Cash and due from banks $ 3,971 $ 3,971 $ 2,547 $ 2,547
Interest bearing deposits in banks 2,669 2,669 1,985 1,985
Securities available for sale 12,542 12,542 14,504 14,504
Securities held to maturity 3,646 3,801 8,954 9,125
Federal funds sold 1,900 1,900 3,000 3,000
Mortgage loans held for sale - - 393 395
Loans receivable 58,742 58,964 49,472 49,090
Less: allowance for loan losses 706 706 704 704
---------------------------------------------------
Loans receivable, net 58,036 58,258 48,768 48,386
---------------------------------------------------
Federal Home Loan Bank stock 265 265 - -
Financial liabilities:
Deposits 74,078 74,522 71,241 71,438
</TABLE>
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.
Mortgage Loans Held for Sale
For mortgage loans held for sale, the fair values are based on market
price quotations from dealers.
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.
E-35
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
DECEMBER 31, 1998 AND 1997
(16-continued)
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.
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. The Bank does not charge loan commitment
fees.
(17) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Basic:
Earnings:
Net income $ 1,085,343 $ 1,242,660
================================
Shares:
Weighted average common shares outstanding 79,900 79,970
---------------------------------
Net income per common share, basic $ 13.58 $ 14.15
---------------------------------
</TABLE>
The Company has no dilutive potential common shares.
(18) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information for HCB Bancorp (parent company only)
for the year ended December 31, 1998 and 1997 follows:
Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Assets:
Cash and interest bearing deposits $ 26 $ 4
Securities available for sale, at fair value 250 -
Other assets 14 18
Investment in bank subsidiary 11,446 11,096
--------------------------------
$ 11,736 $ 11,118
--------------------------------
Liabilities and Stockholders' Equity:
Stockholders' equity $ 11,736 $ 11,118
--------------------------------
$ 11,736 $ 11,118
================================
</TABLE>
E-36
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 AND 1997
(18 - continued)
Statements of Income
(In thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income $ 760 $ 484
Other operating expenses 19 13
---------------------------
Income before income taxes and equity in
undistributed net income of subsidiary 741 471
Income tax benefit (5) (3)
---------------------------
Income before equity in undistributed net
income of subsidiary 746 474
Equity in undistributed net income of subsidiary 339 658
---------------------------
Net income $1,085 $ 1,132
===========================
Statements of Income
(In thousands)
Operating Activities:
Net income $1,085 $ 1,132
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed net income of subsidiary (339) (658)
Increase in other assets 5 4
---------------------------
Net cash provided by operating activities 751 478
---------------------------
Investing Activities:
Purchase of securities available for sale (250) -
Financing Activities:
Redemption of common stock - (17)
Cash dividends paid (479) (459)
---------------------------
Net cash provided by financing activities (479) (476)
Net decrease in cash 22 2
Cash at beginning of year 4 2
---------------------------
Cash at end of year $ 26 $ 4
===========================
</TABLE>
E-37
<PAGE>
HCB BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Cash and due from banks $ 3,320,887
Interest bearing deposits in banks 2,670,000
Securities available for sale, at fair value 12,903,721
Securities held to maturity 2,749,694
Federal funds sold 2,800,000
Loans, net 59,318,041
Federal Home Loan Bank Stock, at cost 314,900
Premises and equipment 2,989,376
Accrued interest receivable 598,702
Other assets 447,231
-------------
Total Assets $ 88,112,552
=============
LIABILITIES
Deposits $ 75,354,746
Accrued interest payable 420,848
Other liabilities 197,630
-------------
Total Liabilities 75,973,224
-------------
STOCKHOLDERS' EQUITY
Common stock, no par value
Authorized 1,000,000 shares; issued 79,900 shares 799,000
Capital surplus 2,500,000
Retained earnings 8,844,724
Accumulated other comprehensive income-unrealized loss
on securities available for sale (4,396)
-------------
Total Stockholders' Equity 12,139,328
-------------
Total Liabilities and Stockholders' Equity $ 88,112,552
=============
</TABLE>
See notes to condensed consolidated financial statements.
E-38
<PAGE>
HCB BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Common Capital Retained Comprehensive
Stock Surplus Earnings Income Total
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1999 $ 799,000 $ 2,500,000 $8,353,900 $ 83,272 $ 11,736,172
COMPREHENSIVE INCOME
Net income - - 490,824 - 490,824
Other comprehensive income, net of tax:
Change in unrealized gain on
securities available for sale, net of
deferred income tax benefit of $57,502 - - - (87,668) (87,668)
Less: reclassification adjustment - - - - -
------------
Total comprehensive income 403,156
----------------------------------------------------------------------
Balances at June 30, 1999 $ 799,000 $ 2,500,000 $8,844,724 $ (4,396) $ 12,139,328
======================================================================
</TABLE>
See notes to condensed consolidated financial statements.
E-39
<PAGE>
HCB BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 2,521,023 $ 2,401,887
Securities 449,586 634,636
Federal funds sold 76,171 65,453
Interest bearing deposits in banks 76,465 59,857
--------------------------------
Total interest income 3,123,245 3,161,833
--------------------------------
INTEREST EXPENSE
Deposits 1,280,036 1,339,803
--------------------------------
Net interest income 1,843,209 1,822,030
Provision for loan losses 66,250 5,000
--------------------------------
Net interest income after provision for loan losses 1,776,959 1,817,030
NON-INTEREST INCOME
Service charges on deposit accounts 171,367 157,288
Commission income 81,027 100,211
Other income 63,996 97,204
--------------------------------
Total non-interest income 316,390 354,703
--------------------------------
NON-INTEREST EXPENSE
Compensation and benefits 767,306 702,486
Occupancy expense 91,457 84,420
Equipment expense 109,490 104,986
Other expenses 400,423 459,566
--------------------------------
Total non-interest expense 1,368,676 1,351,458
--------------------------------
Income before income taxes 724,673 820,275
Income tax expense 233,849 264,513
--------------------------------
Net Income $ 490,824 $ 555,762
================================
Net income per common share, basic $ 6.14 $ 6.96
================================
</TABLE>
See notes to condensed consolidated financial statements.
E-40
<PAGE>
HCB BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 490,824 $ 555,762
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred income taxes (6,127) (1,454)
Depreciation of premises and equipment 94,670 95,146
Amortization of premium and accretion of discount
on securities, net 8,780 (13,361)
Provision for loan losses 66,250 5,000
Proceeds from sales of mortgage loans 1,267,970 894,077
Mortgage loans originated for sale (1,261,450) (899,800)
Net gain on sale of mortgage loans (10,580) (6,365)
Decrease in accrued interest receivable 82,015 22,795
Increase (decrease) in accrued interest payable 4,269 (4,781)
(Increase) decrease in other assets (56,958) (91,662)
Increase (decrease) in other liabilities 11,516 (24,026)
---------------------------------
Net Cash Provided By Operating Activities 691,179 531,331
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits in banks (1,000) 298,000
(Increase) decrease in federal funds sold (900,000) 100,000
Purchase of securities available for sale (2,544,984) (770,210)
Maturities of securities available for sale 2,030,000 2,300,000
Maturities of securities held to maturity 895,652 2,931,400
Net increase in loans (1,344,598) (5,270,464)
Purchase of Federal Home Loan Bank stock (50,300) (264,600)
Purchase of premises and equipment (702,716) (231,200)
---------------------------------
Net Cash Used By Investing Activities (2,617,946) (907,074)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 1,276,562 473,474
---------------------------------
Net Increase (Decrease) in Cash and Due From Banks (650,205) 97,731
Cash and due from banks at beginning of year 3,971,092 2,547,132
---------------------------------
Cash and Due From Banks at End of Year $ 3,320,887 $ 2,644,863
=================================
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 1,275,767 $ 1,344,584
Income taxes 230,032 256,641
</TABLE>
See notes to condensed consolidated financial statements.
E-41
<PAGE>
HCB BANCORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying condensed consolidated financial statements reflect the
accounts of HCB Bancorp (the "Company") and its subsidiaries as of June
30, 1999 and for the six month periods ended June 30, 1999 and 1998. 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 consolidated financial statements include, in the opinion
of management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation. For further information,
refer to the consolidated financial statements and the notes included
elsewhere in this registration statement.
The condensed consolidated financial statements include the accounts of
the Company, Harrison County Bank and its wholly-owned subsidiary, HCB
Insurance Agency, Inc. All material intercompany balances and transactions
have been eliminated in consolidation.
(2) Business Combination
On July 19, 1999, the Company entered into an agreement and plan of merger
with First Capital, Inc., whereby all the issued and outstanding common
shares of the Company would be exchanged for shares of First Capital, Inc.
common stock. The merger is subject to approval from various regulatory
authorities and the Company's shareholders. If approved, the merger is
anticipated to be consummated in the first quarter of 2000.
E-42
<PAGE>
APPENDIX F
FIRST CAPITAL, INC.
1999 STOCK-BASED INCENTIVE PLAN
1. DEFINITIONS.
-----------
(a) "Affiliate" means any "parent corporation" or "subsidiary corporation"
of the Holding Company, as such terms are defined in Sections 424(e) and 424(f)
of the Code.
(b) "Award" means, individually or collectively, a grant under the Plan of
Non-Statutory Stock Options, Incentive Stock Options and Stock Awards.
(c) "Award Agreement" means an agreement evidencing and setting forth the
terms of an Award.
(d) "Bank" means First Federal Bank, A Federal Savings Bank.
(e) "Board of Directors" means the board of directors of the Holding
Company.
(f) "Change in Control" of the Holding Company or the Bank shall mean an
event of a nature that: (i) would be required to be reported in response to Item
1(a) of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); or (ii) results in a Change in Control of the Bank or the
Holding Company within the meaning of the Home Owners' Loan Act of 1933, as
amended, the Federal Deposit Insurance Act, and the Rules and Regulations
promulgated by the Office of Thrift Supervision (or its predecessor agency), as
in effect on the date hereof (provided, that in applying the definition of
change in control as set forth under the rules and regulations of the OTS, the
Board shall substitute its judgment for that of the OTS); or (iii) without
limitation such a Change in Control shall be deemed to have occurred at such
time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of voting securities of the
Bank or the Holding Company representing 20% or more of the Bank's or the
Holding Company's outstanding voting securities or right to acquire such
securities except for any voting securities of the Bank purchased by the Holding
Company and any voting securities purchased by any employee benefit plan of the
Holding Company or its Subsidiaries, or (B) individuals who constitute the Board
on the date hereof (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board, or whose
nomination for election by the Company's stockholders was approved by a
Nominating Committee solely composed of members which are Incumbent Board
members, shall be, for purposes of this clause (B), considered as though he were
a member of the Incumbent Board, or (C) a plan of reorganization, merger,
consolidation, sale of all or substantially all the assets of the Bank or the
Holding Company or similar transaction occurs or is effectuated in which the
Bank or Holding Company is not the resulting entity; provided, however, that
such an event listed above will be deemed to have occurred or to have been
effectuated upon the receipt of all required federal regulatory approvals not
including the lapse of any statutory waiting periods, or (D) a proxy statement
has been distributed soliciting proxies from stockholders of the Holding
Company, by someone other than the current management of the Holding Company,
seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Holding Company or Bank with one or more corporations as a
result of which the outstanding shares of the
F-1
<PAGE>
class of securities then subject to such plan or transaction are exchanged for
or converted into cash or property or securities not issued by the Bank or the
Holding Company shall be distributed, or (E) a tender offer is made for 20% or
more of the voting securities of the Bank or Holding Company then outstanding.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Committee" means the committee designated by the Board of Directors,
pursuant to Section 2 of the Plan, to administer the Plan.
(i) "Common Stock" means the Common Stock of the Holding Company, par
value, $.01 per share.
(j) "Date of Grant" means the effective date of an Award.
(k) "Disability" means any mental or physical condition with respect to
which the Participant qualifies for and receives benefits for under a long-term
disability plan of the Holding Company or an Affiliate, or in the absence of
such a long-term disability plan or coverage under such a plan, "Disability"
shall mean a physical or mental condition which, in the sole discretion of the
Committee, is reasonably expected to be of indefinite duration and to
substantially prevent the Participant from fulfilling his duties or
responsibilities to the Holding Company or an Affiliate.
(l) "Effective Date" means January 1, 2000, but only if, prior to such
date, the Plan is approved by the Holding Company's shareholders. The Plan will
be so approved if at an annual or special meeting of shareholders held prior to
such date a quorum is present and the votes of the holders of a majority of the
Common Stock present or represented by proxy and entitled to vote on such matter
shall be cast in favor of its approval.
(m) "Employee" means any person employed by the Holding Company or an
Affiliate. Directors who are employed by the Holding Company or an Affiliate
shall be considered Employees under the Plan.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(o) "Exercise Price" means the price at which a Participant may purchase a
share of Common Stock pursuant to an Option.
(p) "Fair Market Value" means the market price of Common Stock, determined
by the Committee as follows:
(i) If the Common Stock was traded on the date in question on The
Nasdaq Stock Market then the Fair Market Value shall be equal to
the closing price reported for such date;
(ii) If the Common Stock was traded on a stock exchange on the date
in question, then the Fair Market Value shall be equal to the
closing price reported by the applicable composite transactions
report for such date; and
F-2
<PAGE>
(iii) If neither of the foregoing provisions is applicable, then the
Fair Market Value shall be determined by the Committee in good
faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee
shall be based on the prices reported in The Wall Street Journal. The
-----------------------
Committee's determination of Fair Market Value shall be conclusive and binding
on all persons.
(q) "Holding Company" means First Capital, Inc.
(r) "Incentive Stock Option" means a stock option granted to a
Participant, pursuant to Section 7 of the Plan, that is intended to meet the
requirements of Section 422 of the Code.
(s) "Non-Statutory Stock Option" means a stock option granted to a
Participant pursuant to the terms of the Plan but which is not intended to be
and is not identified as an Incentive Stock Option or a stock option granted
under the Plan which is intended to be and is identified as an Incentive Stock
Option but which does not meet the requirements of Section 422 of the Code.
(t) "Option" means an Incentive Stock Option or Non-Statutory Stock
Option.
(u) "Outside Director" means a member of the board(s) of directors of the
Holding Company or an Affiliate who is not also an Employee of the Holding
Company or an Affiliate.
(v) "Participant" means any person who holds an outstanding Award.
(w) "Plan" means this First Capital, Inc. 1999 Stock-Based Incentive Plan.
(x) "Retirement" means retirement from employment with the Holding Company
or an Affiliate in accordance with the then current retirement policies of the
Holding Company or Affiliate, as applicable. "Retirement" with respect to an
Outside Director means the termination of service from the board(s) of directors
of the Holding Company and any Affiliate following written notice to such
board(s) of directors of the Outside Director's intention to retire.
(y) "Stock Award" means an Award granted to a Participant pursuant to
Section 8 of the Plan.
(z) "Termination for Cause" shall mean termination because of a
Participant's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or material breach of any provision of any
employment agreement between the Holding Company and/or any subsidiary of the
Holding Company and a Participant.
(aa) "Trust" means a trust established by the Board of Directors in
connection with this Plan to hold Common Stock or other property for the
purposes set forth in the Plan.
(bb) "Trustee" means any person or entity approved by the Board of
Directors or its designee(s) to hold any of the Trust assets.
F-3
<PAGE>
2. ADMINISTRATION.
--------------
(a) The Committee shall administer the Plan. The Committee shall consist
of two or more disinterested directors of the Holding Company, who shall be
appointed by the Board of Directors. A member of the Board of Directors shall
be deemed to be "disinterested" only if he satisfies such requirements as the
Securities and Exchange Commission may establish for non-employee directors
administering plans intended to qualify for exemption under Rule 16b-3 (or its
successor) under the Exchange Act.
(b) The Committee shall (i) select the Employees and Outside Directors who
are to receive Awards under the Plan, (ii) determine the type, number, vesting
requirements and other features and conditions of such Awards, (iii) interpret
the Plan and Award Agreements in all respects and (iv) make all other decisions
relating to the operation of the Plan. The Committee may adopt such rules or
guidelines as it deems appropriate to implement the Plan. The Committee's
determinations under the Plan shall be final and binding on all persons.
(c) Each Award shall be evidenced by a written agreement ("Award
Agreement") containing such provisions as may be required by the Plan and
otherwise approved by the Committee. Each Award Agreement shall constitute a
binding contract between the Holding Company or an Affiliate and the
Participant, and every Participant, upon acceptance of an Award Agreement, shall
be bound by the terms and restrictions of the Plan and the Award Agreement. The
terms of each Award Agreement shall be in accordance with the Plan, but each
Award Agreement may include any additional provisions and restrictions
determined by the Committee, in its discretion, provided that such additional
provisions and restrictions are not inconsistent with the terms of the Plan. In
particular and at a minimum, the Committee shall set forth in each Award
Agreement: (i) the type of Award granted; (ii) the Exercise Price of any Option;
(iii) the number of shares subject to the Award; (iv) the expiration date of the
Award; (v) the manner, time, and rate (cumulative or otherwise) of exercise or
vesting of such Award; and (vi) the restrictions, if any, placed upon such
Award, or upon shares which may be issued upon exercise of such Award. The
Chairman of the Committee and such other directors and officers as shall be
designated by the Committee is hereby authorized to execute Award Agreements on
behalf of the Company or an Affiliate and to cause them to be delivered to the
recipients of Awards.
(d) The Committee may delegate all authority for: (i) the determination of
forms of payment to be made by or received by the Plan and (ii) the execution of
any Award Agreement.
3. TYPES OF AWARDS.
---------------
The following Awards may be granted under the Plan:
(a) Non-Statutory Stock Options.
(b) Incentive Stock Options.
(c) Stock Awards.
4. STOCK SUBJECT TO THE PLAN.
-------------------------
Subject to adjustment as provided in Section 14 of the Plan, the maximum
number of shares reserved for Awards under the Plan is 107,626, which number
shall not exceed 14% of the shares of the Common Stock sold in the Holding
Company's initial public offering. Subject to adjustment as provided
F-4
<PAGE>
in Section 14 of the Plan, the maximum number of shares reserved hereby for
purchase pursuant to the exercise of Options granted under the Plan is 76,876
which number shall not exceed 10% of the shares of Common Stock sold in the
Holding Company's initial public offering. The maximum number of the shares
reserved for Stock Awards is 30,750 which number shall not exceed 4% of the
shares of Common Stock sold in the Holding Company's initial public offering.
The shares of Common Stock issued under the Plan may be either authorized but
unissued shares or authorized shares previously issued and acquired or
reacquired by the Trustee or the Holding Company, respectively. To the extent
that Options and Stock Awards are granted under the Plan, the shares underlying
such Awards will be unavailable for any other use including future grants under
the Plan except that, to the extent that Stock Awards or Options terminate,
expire or are forfeited without having vested or without having been exercised,
new Awards may be made with respect to these shares.
5. ELIGIBILITY.
-----------
Subject to the terms of the Plan, all Employees and Outside Directors shall
be eligible to receive Awards under the Plan. In addition, the Committee may
grant eligibility to consultants and advisors of the Holding Company or an
Affiliate, as it sees fit.
6. NON-STATUTORY STOCK OPTIONS.
---------------------------
The Committee may, subject to the limitations of this Plan and the
availability of shares of Common Stock reserved but not previously awarded under
the Plan, grant Non-Statutory Stock Options to eligible individuals upon such
terms and conditions as it may determine to the extent such terms and conditions
are consistent with the following provisions:
(a) Exercise Price. The Committee shall determine the Exercise Price of
--------------
each Non-Statutory Stock Option. However, the Exercise Price shall not be less
than 100% of the Fair Market Value of the Common Stock on the Date of Grant.
(b) Terms of Non-statutory Stock Options. The Committee shall determine
------------------------------------
the term during which a Participant may exercise a Non-Statutory Stock Option,
but in no event may a Participant exercise a Non-Statutory Stock Option, in
whole or in part, more than ten (10) years from the Date of Grant. The
Committee shall also determine the date on which each Non-Statutory Stock
Option, or any part thereof, first becomes exercisable and any terms or
conditions a Participant must satisfy in order to exercise each Non-Statutory
Stock Option. The shares of Common Stock underlying each Non-Statutory Stock
Option may be purchased in whole or in part by the Participant at any time
during the term of such Non-Statutory Stock Option, or any portion thereof, once
the Non-Statutory Stock Option becomes exercisable.
(c) Non-Transferability. Unless otherwise determined by the Committee in
-------------------
accordance with this Section 6(c), a Participant may not transfer, assign,
hypothecate, or dispose of in any manner, other than by will or the laws of
intestate succession, a Non-Statutory Stock Option. The Committee may, however,
in its sole discretion, permit transferability or assignment of a Non-Statutory
Stock Option if such transfer or assignment is, in its sole determination, for
valid estate planning purposes and such transfer or assignment is permitted
under the Code and Rule 16b-3 under the Exchange Act. For purposes of this
Section 6(c), a transfer for valid estate planning purposes includes, but is not
limited to: (a) a transfer to a revocable intervivos trust as to which the
Participant is both the settlor and trustee, or (b) a transfer for no
consideration to: (i) any member of the Participant's Immediate Family, (ii) any
trust solely for the benefit of members of the Participant's Immediate Family,
(iii) any partnership whose only partners are
F-5
<PAGE>
members of the Participant's Immediate Family, and (iv) any limited liability
corporation or corporate entity whose only members or equity owners are members
of the Participant's Immediate Family. For purposes of this Section 6(c),
"Immediate Family" includes, but is not necessarily limited to, a Participant's
parents, grandparents, spouse, children, grandchildren, siblings (including half
bothers and sisters), and individuals who are family members by adoption.
Nothing contained in this Section 6(c) shall be construed to require the
Committee to give its approval to any transfer or assignment of any Non-
Statutory Stock Option or portion thereof, and approval to transfer or assign
any Non-Statutory Stock Option or portion thereof does not mean that such
approval will be given with respect to any other Non-Statutory Stock Option or
portion thereof. The transferee or assignee of any Non-Statutory Stock Option
shall be subject to all of the terms and conditions applicable to such Non-
Statutory Stock Option immediately prior to the transfer or assignment and shall
be subject to any other conditions proscribed by the Committee with respect to
such Non-Statutory Stock Option.
(d) Termination of Employment or Service (General). Unless otherwise
----------------------------------------------
determined by the Committee, upon the termination of a Participant's employment
or other service for any reason other than Retirement, Disability or death, a
Change in Control, or Termination for Cause, the Participant may exercise only
those Non-Statutory Stock Options that were immediately exercisable by the
Participant at the date of such termination and only for a period of three (3)
months following the date of such termination, or, if sooner, until the
expiration of the term of the Option.
(e) Termination of Employment or Service (Retirement). Unless otherwise
-------------------------------------------------
determined by the Committee, in the event of a Participant's Retirement, the
Participant may exercise only those Non-Statutory Stock Options that were
immediately exercisable by the Participant at the date of Retirement and only
for a period of one (1) year from the date of Retirement.
(f) Termination of Employment or Service (Disability or death). Unless
----------------------------------------------------------
otherwise determined by the Committee, in the event of the termination of a
Participant's employment or other service due to Disability or death, all Non-
Statutory Stock Options held by such Participant shall immediately become
exercisable and remain exercisable for a period one (1) year following the date
of such termination, or, if sooner, until the expiration of the term of the
Option.
(g) Termination of Employment or Service (Termination for Cause). Unless
------------------------------------------------------------
otherwise determined by the Committee, in the event of a Participant's
Termination for Cause, all rights with respect to the Participant's Non-
Statutory Stock Options shall expire immediately upon the effective date of such
Termination for Cause.
(h) Acceleration Upon a Change in Control. In the event of a Change in
-------------------------------------
Control all Non-Statutory Stock Options held by a Participant as of the date of
the Change in Control shall immediately become exercisable and shall remain
exercisable until the expiration of the term of the Non-Statutory Stock Options.
(i) Payment. Payment due to a Participant upon the exercise of a Non-
-------
Statutory Stock Option shall be made in the form of shares of Common Stock.
F-6
<PAGE>
7. INCENTIVE STOCK OPTIONS.
-----------------------
The Committee may, subject to the limitations of the Plan and the
availability of shares of Common Stock reserved but unawarded under this Plan,
grant Incentive Stock Options to an Employee upon such terms and conditions as
it may determine to the extent such terms and conditions are consistent with the
following provisions:
(a) Exercise Price. The Committee shall determine the Exercise Price of
--------------
each Incentive Stock Option. However, the Exercise Price shall not be less than
100% of the Fair Market Value of the Common Stock on the Date of Grant;
provided, however, that if at the time an Incentive Stock Option is granted, the
Employee owns or is treated as owning, for purposes of Section 422 of the Code,
Common Stock representing more than 10% of the total combined voting securities
of the Holding Company ("10% Owner"), the Exercise Price shall not be less than
110% of the Fair Market Value of the Common Stock on the Date of Grant.
(b) Amounts of Incentive Stock Options. To the extent the aggregate Fair
----------------------------------
Market Value of shares of Common Stock with respect to which Incentive Stock
Options that are exercisable for the first time by an Employee during any
calendar year under the Plan and any other stock option plan of the Holding
Company or an Affiliate exceeds $100,000, or such higher value as may be
permitted under Section 422 of the Code, such Options in excess of such limit
shall be treated as Non-Statutory Stock Options. Fair Market Value shall be
determined as of the Date of Grant with respect to each such Incentive Stock
Option.
(c) Terms of Incentive Stock Options. The Committee shall determine the
--------------------------------
term during which a Participant may exercise an Incentive Stock Option, but in
no event may a Participant exercise an Incentive Stock Option, in whole or in
part, more than ten (10) years from the Date of Grant; provided, however, that
if at the time an Incentive Stock Option is granted to an Employee who is a 10%
Owner, the Incentive Stock Option granted to such Employee shall not be
exercisable after the expiration of five (5) years from the Date of Grant. The
Committee shall also determine the date on which each Incentive Stock Option, or
any part thereof, first becomes exercisable and any terms or conditions a
Participant must satisfy in order to exercise each Incentive Stock Option. The
shares of Common Stock underlying each Incentive Stock Option may be purchased
in whole or in part at any time during the term of such Incentive Stock Option
after such Option becomes exercisable.
(d) Non-Transferability. No Incentive Stock Option shall be transferable
-------------------
except by will or the laws of descent and distribution and is exercisable,
during his lifetime, only by the Employee to whom the Committee grants the
Incentive Stock Option. The designation of a beneficiary does not constitute a
transfer of an Incentive Stock Option.
(e) Termination of Employment (General). Unless otherwise determined by
-----------------------------------
the Committee, upon the termination of a Participant's employment or other
service for any reason other than Retirement, Disability or death, a Change in
Control, or Termination for Cause, the Participant may exercise only those
Incentive Stock Options that were immediately exercisable by the Participant at
the date of such termination and only for a period of three (3) months following
the date of such termination, or, if sooner, until the expiration of the term of
the Option.
(f) Termination of Employment (Retirement). Unless otherwise determined by
--------------------------------------
the Committee, in the event of a Participant's Retirement, the Participant may
exercise only those Incentive Stock Options
F-7
<PAGE>
that were immediately exercisable by the Participant at the date of Retirement
and only for a period of one (1) year from the date of Retirement. Any Option
originally designated as an Incentive Stock Option shall be treated as a Non-
Statutory Stock Option to the extent the Option does not otherwise qualify as an
Incentive Stock Option pursuant to Section 422 of the Code.
(g) Termination of Employment (Disability or Death). Unless otherwise
-----------------------------------------------
determined by the Committee, in the event of the termination of a Participant's
employment or other service due to Disability or death, all Incentive Stock
Options held by such Participant shall immediately become exercisable and remain
exercisable for a period one (1) year following the date of such termination,
or, if sooner, until the expiration of the term of the Option.
(h) Termination of Employment (Termination for Cause). Unless otherwise
-------------------------------------------------
determined by the Committee, in the event of an Employee's Termination for
Cause, all rights under such Employee's Incentive Stock Options shall expire
immediately upon the effective date of such Termination for Cause.
(i) Acceleration Upon a Change in Control. In the event of a Change in
-------------------------------------
Control all Incentive Stock Options held by a Participant as of the date of the
Change in Control shall immediately become exercisable and shall remain
exercisable until the expiration of the term of the Incentive Stock Options.
Any Option originally designated as an Incentive Stock Option shall be treated
as a Non-Statutory Stock Option to the extent the Option does not otherwise
qualify as an Incentive Stock Option pursuant to Section 422 of the Code.
(j) Payment. Payment due to a Participant upon the exercise of an
-------
Incentive Stock Option shall be made in the form of shares of Common Stock.
(k) Disqualifying Dispositions. Each Award Agreement with respect to an
--------------------------
Incentive Stock Option shall require the Participant to notify the Committee of
any disposition of shares of Common Stock issued pursuant to the exercise of
such Option under the circumstances described in Section 421(b) of the Code
(relating to certain disqualifying dispositions), within 10 days of such
disposition.
8. STOCK AWARDS.
------------
The Committee may make grants of Stock Awards, which shall consist of the
grant of some number of shares of Common Stock, to a Participant upon such terms
and conditions as it may determine to the extent such terms and conditions are
consistent with the following provisions:
(a) Grants of the Stock Awards. Stock Awards may only be made in whole
--------------------------
shares of Common Stock. Stock Awards may only be granted from shares reserved
under the Plan and available for award at the time the Stock Award is made to
the Participant.
(b) Terms of the Stock Awards. The Committee shall determine the dates on
-------------------------
which Stock Awards granted to a Participant shall vest and any terms or
conditions which must be satisfied prior to the vesting of any Stock Award or
portion thereof. Any such terms or conditions shall be determined by the
Committee as of the Date of Grant.
(c) Termination of Employment or Service (General). Unless otherwise
----------------------------------------------
determined by the Committee, upon the termination of a Participant's employment
or service for any reason other than Retirement, Disability or death, a Change
in Control, or Termination for Cause, any Stock Awards in
F-8
<PAGE>
which the Participant has not become vested as of the date of such termination
shall be forfeited and any rights the Participant had to such Stock Awards shall
become null and void.
(d) Termination of Employment or Service (Retirement). Unless otherwise
-------------------------------------------------
determined by the Committee, in the event of a Participant's Retirement, any
Stock Awards in which the Participant has not become vested as of the date of
Retirement shall be forfeited and any rights the Participant had to such
unvested Stock Awards shall become null and void.
(e) Termination of Employment or Service (Disability or death). Unless
----------------------------------------------------------
otherwise determined by the Committee, in the event of a termination of the
Participant's service due to Disability or death all unvested Stock Awards held
by such Participant shall immediately vest as of the date of such termination.
(f) Termination of Employment or Service (Termination for Cause). Unless
------------------------------------------------------------
otherwise determined by the Committee, or in the event of the Participant's
Termination for Cause, all Stock Awards in which the Participant had not become
vested as of the effective date of such Termination for Cause shall be forfeited
and any rights such Participant had to such unvested Stock Awards shall become
null and void.
(g) Acceleration Upon a Change in Control. In the event of a Change in
-------------------------------------
Control all unvested Stock Awards held by a Participant shall immediately vest.
(h) Issuance of Certificates. Unless otherwise held in Trust and
------------------------
registered in the name of the Trustee, reasonably promptly after the Date of
Grant with respect to shares of Common Stock pursuant to a Stock Award, the
Holding Company shall cause to be issued a stock certificate, registered in the
name of the Participant to whom such Stock Award was granted, evidencing such
shares; provided, that the Holding Company shall not cause such a stock
certificate to be issued unless it has received a stock power duly endorsed in
blank with respect to such shares. Each such stock certificate shall bear the
following legend:
"The transferability of this certificate and the shares of
stock represented hereby are subject to the restrictions,
terms and conditions (including forfeiture provisions and
restrictions against transfer) contained in the First
Capital, Inc. 1999 Stock-Based Incentive Plan and Award
Agreement entered into between the registered owner of such
shares and First Capital, Inc. or its Affiliates. A copy of
the Plan and Award Agreement is on file in the office of the
Corporate Secretary of First Capital, Inc. located at 220
Federal Drive, N. W., Corydon, Indiana 47112.
Such legend shall not be removed until the Participant becomes vested in such
shares pursuant to the terms of the Plan and Award Agreement. Each certificate
issued pursuant to this Section 8(i), in connection with a Stock Award, shall be
held by the Holding Company or its Affiliates, unless the Committee determines
otherwise.
(i) Non-Transferability. Except to the extent permitted by the Code, the
-------------------
rules promulgated under Section 16(b) of the Exchange Act or any successor
statutes or rules:
(i) The recipient of a Stock Award shall not sell, transfer, assign,
pledge, or otherwise encumber shares subject to the Stock Award
until full vesting of such shares has occurred. For purposes of
this section, the separation of beneficial
F-9
<PAGE>
ownership and legal title through the use of any "swap"
transaction is deemed to be a prohibited encumbrance.
(ii) Unless determined otherwise by the Committee and except in the
event of the Participant's death or pursuant to a domestic
relations order, a Stock Award is not transferable and may be
earned in his lifetime only by the Participant to whom it is
granted. Upon the death of a Participant, a Stock Award is
transferable by will or the laws of descent and distribution.
The designation of a beneficiary shall not constitute a
transfer.
(iii) If a recipient of a Stock Award is subject to the provisions of
Section 16 of the Exchange Act, shares of Common Stock subject
to such Stock Award may not, without the written consent of the
Committee (which consent may be given in the Award Agreement),
be sold or otherwise disposed of within six (6) months following
the date of grant of the Stock Award.
(j) Accrual of Dividends. To the extent Stock Awards are held in Trust and
--------------------
registered in the name of the Trustee, unless otherwise specified by the Trust
Agreement whenever shares of Common Stock underlying a Stock Award are
distributed to a Participant or beneficiary thereof under the Plan, such
Participant or beneficiary shall also be entitled to receive, with respect to
each such share distributed, a payment equal to any cash dividends and the
number of shares of Common Stock equal to any stock dividends, declared and paid
with respect to a share of the Common Stock if the record date for determining
shareholders entitled to receive such dividends falls between the date the
relevant Stock Award was granted and the date the relevant Stock Award or
installment thereof is issued. There shall also be distributed an appropriate
amount of net earnings, if any, of the Trust with respect to any dividends paid
out on the shares related to the Stock Award.
(k) Voting of Stock Awards. After a Stock Award has been granted but for
----------------------
which the shares covered by such Stock Award have not yet been vested, earned
and distributed to the Participant pursuant to the Plan, the Participant shall
be entitled to vote or to direct the Trustee to vote, as the case may be, such
shares of Common Stock which the Stock Award covers subject to the rules and
procedures adopted by the Committee for this purpose and in a manner consistent
with the Trust agreement.
(l) Payment. Payment due to a Participant upon the redemption of a Stock
-------
Award shall be made in the form of shares of Common Stock.
9. DEFERRED PAYMENTS.
-----------------
The Committee, in its discretion, may permit a Participant to elect to
defer receipt of all or any part of any cash or stock payment under the Plan, or
the Committee may determine to defer receipt by some or all Participants, of all
or part of any such payment. The Committee shall determine the terms and
conditions of any such deferral, including the period of deferral, the manner of
deferral, and the method for measuring appreciation on deferred amounts until
their payout.
10. METHOD OF EXERCISE OF OPTIONS.
-----------------------------
Subject to any applicable Award Agreement, any Option may be exercised by
the Participant in whole or in part at such time or times, and the Participant
may make payment of the Exercise Price in such
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<PAGE>
form or forms permitted by the Committee, including, without limitation, payment
by delivery of cash, Common Stock or other consideration (including, where
permitted by law and the Committee, Awards) having a Fair Market Value on the
day immediately preceding the exercise date equal to the total Exercise Price,
or by any combination of cash, shares of Common Stock and other consideration,
including exercise by means of a cashless exercise arrangement with a qualifying
broker-dealer, as the Committee may specify in the applicable Award Agreement.
11. RIGHTS OF PARTICIPANTS.
----------------------
No Participant shall have any rights as a shareholder with respect to any
shares of Common Stock covered by an Option until the date of issuance of a
stock certificate for such Common Stock. Nothing contained herein or in any
Award Agreement confers on any person any right to continue in the employ or
service of the Holding Company or an Affiliate or interferes in any way with the
right of the Holding Company or an Affiliate to terminate a Participant's
services.
12. DESIGNATION OF BENEFICIARY.
--------------------------
A Participant may, with the consent of the Committee, designate a person or
persons to receive, in the event of death, any Award to which the Participant
would then be entitled. Such designation will be made upon forms supplied by
and delivered to the Holding Company and may be revoked in writing. If a
Participant fails effectively to designate a beneficiary, then the Participant's
estate will be deemed to be the beneficiary.
13. DILUTION AND OTHER ADJUSTMENTS.
------------------------------
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, recapitalization, merger, consolidation,
spin-off, reorganization, combination or exchange of shares, or other similar
corporate change, or other increase or decrease in such shares without receipt
or payment of consideration by the Holding Company, or in the event an
extraordinary capital distribution is made, the Committee may make such
adjustments to previously granted Awards, to prevent dilution, diminution, or
enlargement of the rights of the Participant, including any or all of the
following:
(a) adjustments in the aggregate number or kind of shares of Common Stock
or other securities that may underlie future Awards under the Plan;
(b) adjustments in the aggregate number or kind of shares of Common Stock
or other securities underlying Awards already made under the Plan;
(c) adjustments in the Exercise Price of outstanding Incentive and/or
Non-Statutory Stock Options.
No such adjustments may, however, materially change the value of benefits
available to a Participant under a previously granted Award. All Awards under
this Plan shall be binding upon any successors or assigns of the Holding
Company. Notwithstanding the above, in the event of an extraordinary capital
distribution, any adjustment under this Section 13 shall be subject to required
approval by the Office of Thrift Supervision.
14. TAXES.
-----
F-11
<PAGE>
(a) Whenever under this Plan, cash or shares of Common Stock are to be
delivered upon exercise or payment of an Award or any other event with respect
to rights and benefits hereunder, the Committee shall be entitled to require as
a condition of delivery (i) that the Participant remit an amount sufficient to
satisfy all federal, state, and local withholding tax requirements related
thereto, (ii) that the withholding of such sums come from compensation otherwise
due to the Participant or from any shares of Common Stock due to the Participant
under this Plan or (iii) any combination of the foregoing provided, however,
that no amount shall be withheld from any cash payment or shares of Common Stock
relating to an Award which was transferred by the Participant in accordance with
this Plan. Furthermore, Participants may direct the Committee to instruct the
Trustee to sell shares of Common Stock to be delivered upon the payment of an
Award to satisfy tax obligations.
(b) If any disqualifying disposition described in Section 7(k) is made with
respect to shares of Common Stock acquired under an Incentive Stock Option
granted pursuant to this Plan, or any transfer described in Section 6(c) is
made, or any election described in Section 15 is made, then the person making
such disqualifying disposition, transfer, or election shall remit to the Holding
Company or its Affiliates an amount sufficient to satisfy all federal, state,
and local withholding taxes thereby incurred; provided that, in lieu of or in
addition to the foregoing, the Holding Company or its Affiliates shall have the
right to withhold such sums from compensation otherwise due to the Participant,
or, except in the case of any transfer pursuant to Section 6(c), from any shares
of Common Stock due to the Participant under this Plan.
15. NOTIFICATION UNDER SECTION 83(b).
--------------------------------
The Committee may, on the Date of Grant or any later date, prohibit a
Participant from making the election described below. If the Committee has not
prohibited such Participant from making such election, and the Participant
shall, in connection with the exercise of any Option, or the grant of any Stock
Award, make the election permitted under Section 83(b) of the Code, such
Participant shall notify the Committee of such election within 10 days of filing
notice of the election with the Internal Revenue Service, in addition to any
filing and notification required pursuant to regulations issued under the
authority of Section 83(b) of the Code.
16. AMENDMENT OF THE PLAN AND AWARDS.
--------------------------------
(a) Except as provided in paragraph (c) of this Section 16, the Board of
Directors may at any time, and from time to time, modify or amend the Plan in
any respect, prospectively or retroactively; provided however, that provisions
governing grants of Incentive Stock Options shall be submitted for shareholder
approval to the extent required by such law, regulation or otherwise. Failure
to ratify or approve amendments or modifications by shareholders shall be
effective only as to the specific amendment or modification requiring such
ratification. Other provisions of this Plan will remain in full force and
effect. No such termination, modification or amendment may adversely affect the
rights of a Participant under an outstanding Award without the written
permission of such Participant.
(b) Except as provided in paragraph (c) of this Section 16, the Committee
may amend any Award Agreement, prospectively or retroactively; provided,
however, that no such amendment shall adversely affect the rights of any
Participant under an outstanding Award without the written consent of such
Participant.
(c) In no event shall the Board of Directors amend the Plan or shall
the Committee amend an Award Agreement in any manner that has the effect of:
F-12
<PAGE>
(i) Allowing any Option to be granted with an exercise below the
Fair Market Value of the Common Stock on the Date of Grant.
(ii) Allowing the exercise price of any Option previously granted
under the Plan to be reduced subsequent to the Date of Award.
(d) Notwithstanding anything in this Plan or any Award Agreement to the
contrary, if any Award or
right under this Plan would, in the opinion of the Holding Company's
accountants, cause a transaction to be ineligible for pooling of interest
accounting that would, but for such Award or right, be eligible for such
accounting treatment, the Committee, at its discretion, may modify, adjust,
eliminate or terminate the Award or right so that pooling of interest accounting
is available.
17. EFFECTIVE DATE OF PLAN.
----------------------
The Plan shall become effective on January 1, 2000, but only if, prior to
such date, the Plan is approved by the Holding Company's stockholders. The Plan
will be so approved if at an annual or special meeting of stockholders held
prior to such date a quorum is present and the votes of the holders of a
majority of the Common Stock present or represented by proxy and entitled to
vote on such matter shall be cast in favor of its approval. If the Plan is not
approved by stockholders in accordance with IRS regulations, the Plan shall
remain in full force and effect, and any Incentive Stock Options granted under
the Plan shall be deemed to be Non-Statutory Stock Options.
18. TERMINATION OF THE PLAN.
-----------------------
The right to grant Awards under the Plan will terminate upon the earlier
of: (i) ten (10) years after the Effective Date; (ii) the issuance of a number
of shares of Common Stock pursuant to the exercise of Options or the
distribution of Stock Awards is equivalent to the maximum number of shares
reserved under the Plan as set forth in Section 4 hereof. The Board of
Directors has the right to suspend or terminate the Plan at any time, provided
that no such action will, without the consent of a Participant, adversely affect
a Participant's vested rights under a previously granted Award.
19. APPLICABLE LAW.
--------------
The Plan will be administered in accordance with the laws of the State of
Indiana to the extent not pre-empted by applicable federal law.
20. TREATMENT OF UNVESTED, UNEXERCISED, OR NON-EXERCISABLE AWARDS UPON A CHANGE
---------------------------------------------------------------------------
IN CONTROL.
- -----------
In the event of a Change in Control where the Holding Company or the Bank
is not the surviving entity, the Board of Directors of the Holding Company
and/or the Bank, as applicable, shall require that the successor entity take one
of the following actions with respect to all Awards held by Participants at the
date of the Change in Control:
(i) Assume the Awards with the same terms and conditions as granted
to the Participant under this Plan; or
F-13
<PAGE>
(ii) Replace the Awards with comparable Awards, subject to the same
or more favorable terms and conditions as the Award granted to the
Participant under this Plan, whereby the Participant will be granted
common stock or the option to purchase common stock of the successor
entity; or, only if the Committee determines that neither of the
alternatives set forth in clauses (i) or (ii) are legally available,
(iii) Replace the Awards with an immediate cash payment of equivalent
value.
The determination of comparability of Awards offered by a successor
entity under clause (ii) of above shall be made by the Committee, and the
Committee's determination shall be conclusive and binding.
F-14
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article VII of the Articles of Incorporation of First Capital, Inc.
requires indemnification of officers and directors as follows:
ARTICLE VII
INDEMNIFICATION
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 Act
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
II-1
<PAGE>
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.
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
II-2
<PAGE>
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 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
II-3
<PAGE>
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.
Item 21. Exhibits and Financial Statement, Schedules.
(a) Exhibits.
2.1 Agreement and Plan of Merger, dated as of July 19, 1999, by and
among First Capital, Inc., FC Acquisition Corp. and HCB Bancorp
is included as Exhibit A to the Joint Proxy Statement-Prospectus
which is part of this Registration Statement.
4.1 First Capital, Inc. Specimen Stock Certificate (incorporated by
reference to Exhibit 4.1 of Registration Statement on Form SB-2,
as amended, File No. 333-63515).
5.1 Opinion of Muldoon, Murphy & Faucette LLP regarding legality.
8.1 Form of Opinion of Muldoon, Murphy & Faucette LLP regarding tax
matters.
10.1 Employment Agreement with James G. Pendleton (incorporated by
reference to Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1998).
10.2 Employment Agreement with Samuel E. Uhl (incorporated by
reference to Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1998).
10.3 Employment Agreement with M. Chris Frederick (incorporated by
reference to Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1998).
10.4 Employment Agreement with Joel E. Voyles (incorporated by
reference to Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1998).
10.5 Employment Severance Compensation Plan (incorporated by reference
to Quarterly Report on Form 10-QSB for the quarter ended December
31, 1998).
10.6 First Federal Bank, A Federal Savings Bank 1994 Stock Option Plan
(incorporated by reference to Exhibit 4 of Registration Statement
on Form S-8, File No. 333-76543)
II-4
<PAGE>
13.0 1999 Annual Report to Stockholders (incorporated by reference to
Exhibit 13 to Annual Report on Form 10-KSB for the year ended
June 30, 1999).
23.1 Consent of Muldoon, Murphy & Faucette LLP (included in Exhibit
5.1 hereto).
23.2 Consent of Muldoon, Murphy & Faucette LLP.
23.3 Consent of Monroe Shine & Co., Inc., Independent Auditors for
First Capital, Inc.
23.4 Consent of Monroe Shine & Co., Inc., Independent Auditors for HCB
Bancorp.
23.5 Consent of Charles Webb & Company, a Division of Keefe, Bruyette
& Woods, Inc.
23.6 Consent of Young & Associates, Inc.
24.1 Powers of Attorney (see the signature page to this Form S-4
Registration Statement).
99.1 Opinion of Charles Webb & Company, a Division of Keefe, Bruyette
& Woods, Inc. (included as Appendix B to the Joint Proxy
Statement-Prospectus which is part of this Registration
Statement).
99.2 Opinion of Young & Associates, Inc. (Included as Appendix C to
the Joint Proxy Statement-Prospectus which is part of this
Registration Statement).
99.3 First Capital, Inc. Proxy Card.
99.4 HCB Bancorp Proxy Card.
99.5 Rule 438 Consents of Persons Named to Become Director
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
arising after the effective date of this
Registration Statement (or the most recent post-
effective amendment thereof) which, individually
or in the aggregate, represent a fundamental
change in the information set forth in this
II-5
<PAGE>
Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed 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) (17 C.F.R.
(S)230.424(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 material information with respect
to the plan of distribution not previously
disclosed in the Registration Statement or any
material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act, each
filing of the Registrant's annual report pursuant to section
13(a) or section 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan's annual
report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(c) The undersigned Registrant hereby undertakes to deliver or cause
to be delivered with the Joint Proxy Statement-Prospectus, to
each person to whom the Joint Proxy Statement-Prospectus is sent
or given, the latest annual report to security holders that is
incorporated by reference in the Joint Proxy Statement-Prospectus
and furnished pursuant to and meeting the requirements of Rule
14a-3 or Rule 14c-3 under the Exchange Act.
II-6
<PAGE>
(d)(1) The undersigned Registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered
hereunder, through use of a prospectus which is a part of this
Registration Statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c) of the
Securities Act, the issuer undertakes that such reoffering
prospectus will contain the information called for by the
applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(d)(2) The undersigned Registrant hereby undertakes: that every
prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act and is
used in connection with an offering of securities subject to Rule
415 (17 C.F.R. (S)230.415), will be filed as a part of an
amendment to the Registration Statement and will not be used
until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant 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
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant 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 Registrant 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.
(f) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into
the prospectus pursuant to Items 4, 10(b), 11, or 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.
(g) The undersigned Registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a
transaction, and the company being
II-7
<PAGE>
acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-8
<PAGE>
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 September 16, 1999.
First Capital, Inc.
By: /s/ J. Gordon Pendleton
-----------------------
J. Gordon Pendleton
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
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 September 16, 1999.
On September 16, 1999, we, the undersigned officers and directors of First
Capital, Inc., hereby, severally and individually, constitute and appoint J.
Gordon Pendleton and Samuel E. Uhl, the true and lawful attorney-in-fact and
agent (with full power of substitution in each case) of each of us to execute,
in the name, place and stead of each of us (individually and in any capacity
stated below), any and all amendments to this Registration Statement and all
instruments necessary or advisable in connection therewith, and to file the
same with the SEC, said attorney-in-fact and agent to have power to act and to
have full power and authority to do and perform, in the name and on behalf of
each of the undersigned, every act whatsoever necessary or advisable to be done
in the premises as fully and to all intents and purposes as any of the
undersigned might or could do in person and we hereby ratify and confirm our
signatures as they may be signed by or said attorney-in-fact and agent to any
and all such amendments and instruments.
Name Title
---- -----
/s/ J. Gordon Pendleton Chairman of the Board and
- --------------------------------
J. Gordon Pendleton Chief Executive Officer (principal
executive officer)
/s/ Samuel E. Uhl President and Director
- ---------------------------------
Samuel E. Uhl
II-9
<PAGE>
/s/ M. Chris Frederick Senior Vice President, Chief Financial
- ---------------------------------
M. Chris Frederick Officer and Treasurer
(principal financial and accounting
officer)
/s/ Mark D. Shireman Director
- ---------------------------------
Mark D. Shireman
/s/ Dennis L. Huber Director
- ---------------------------------
Dennis L. Huber
/s/ Kenneth R. Saulman Director
- ---------------------------------
Kenneth R. Saulman
/s/ John W. Buschemeyer Director
- ---------------------------------
John W. Buschemeyer
/s/ Gerald L. Uhl Director
- ---------------------------------
Gerald L. Uhl
II-10
<PAGE>
EXHIBIT INDEX
2.1 Agreement and Plan of Merger, dated as of July 19, 1999, by and
among First Capital, Inc., FC Acquisition Corp. and HCB Bancorp
is included as Exhibit A to the Joint Proxy Statement-Prospectus
which is part of this Registration Statement.
4.1 First Capital, Inc. Specimen Stock Certificate (incorporated by
reference to Exhibit 4.1 of Registration Statement on Form SB-2,
as amended, File No. 333-63515).
5.1 Opinion of Muldoon, Murphy & Faucette LLP regarding legality.
8.1 Form of Opinion of Muldoon, Murphy & Faucette LLP regarding tax
matters.
10.1 Employment Agreement with James G. Pendleton (incorporated by
reference to Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1998).
10.2 Employment Agreement with Samuel E. Uhl (incorporated by
reference to Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1998).
10.3 Employment Agreement with M. Chris Frederick (incorporated by
reference to Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1998).
10.4 Employment Agreement with Joel E. Voyles (incorporated by
reference to Quarterly Report on Form 10-QSB for the quarter
ended December 31, 1998).
10.5 Employment Severance Compensation Plan (incorporated by reference
to Quarterly Report on Form 10-QSB for the quarter ended December
31, 1998).
10.6 First Federal Bank, A Federal Savings Bank 1994 Stock Option Plan
(incorporated by reference to Exhibit 4 of Registration Statement
on Form S-8, File No. 333-76543)
13.0 1999 Annual Report to Stockholders (incorporated by reference to
Exhibit 13 to Annual Report on Form 10-KSB for the year ended
June 30, 1999).
23.1 Consent of Muldoon, Murphy & Faucette LLP (included in Exhibit
5.1 hereto).
23.2 Consent of Muldoon, Murphy & Faucette LLP.
23.3 Consent of Monroe Shine & Co., Inc., Independent Auditors for
First Capital, Inc.
23.4 Consent of Monroe Shine & Co., Inc., Independent Auditors for HCB
Bancorp.
23.5 Consent of Charles Webb & Company, a Division of Keefe, Bruyette
& Woods, Inc.
23.6 Consent of Young & Associates, Inc.
II-11
<PAGE>
24.1 Powers of Attorney (see the signature page to this Form S-4
Registration Statement).
99.1 Opinion of Charles Webb & Company, a Division of Keefe, Bruyette
& Woods, Inc. (included as Appendix B to the Joint Proxy
Statement-Prospectus which is part of this Registration
Statement).
99.2 Opinion of Young & Associates, Inc. (Included as Appendix C to
the Joint Proxy Statement-Prospectus which is part of this
Registration Statement).
99.3 First Capital, Inc. Proxy Card.
99.4 HCB Bancorp Proxy Card.
99.5 Rule 438 Consents of Persons Named to Become Director
II-12
<PAGE>
EXHIBIT 5.1
September 15, 1999
Board of Directors
First Capital, Inc.
220 Federal Drive, N.W.
Corydon, Indiana 47112
Re: First Capital, Inc.
Registration Statement on Form S-4
Gentlemen:
We have acted as special counsel for First Capital, Inc., an Indiana
corporation ("First Capital") and, at the request of First Capital, have
examined the registration statement on Form S-4 (the "Registration Statement"),
to be filed on September 16, 1999 by First Capital with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act") and the regulations promulgated thereunder.
The Registration Statement relates to, among other things, the registration
under the Act of 1,245,812 shares (the "Shares") of common stock, $0.01 par
value per share, of First Capital ("First Capital Common Stock"), into which
certain shares of common stock, no par value per share, of HCB Bancorp, an
Indiana corporation ("HCB Bancorp Common Stock"), will be converted pursuant to
an Agreement and Plan of Merger dated as of July 19, 1999 (the "Merger
Agreement") by and among First Capital, FC Acquisition Corp. and HCB Bancorp.
In the preparation of this opinion, we have examined originals or copies
identified to our satisfaction of (i) the Articles of Incorporation of First
Capital, as filed with the State of Indiana; (ii) the Bylaws of First Capital;
(iii) all minutes of First Capital relating to the issuance of First Capital
Common Stock being registered under the Registration Statement; (iv) the Merger
Agreement; and (v) the Registration Statement, including the exhibits thereto.
We have also examined originals or copies of such documents, corporate records,
certificates of public officials and other instruments, and have conducted such
other investigations of law and fact, as we have deemed necessary or advisable
for purposes of our opinion.
<PAGE>
First Capital, Inc.
September 15, 1999
Page 2
In our examinations, we have assumed, without investigation, the
genuineness of all signatures, the authenticity of all documents and instruments
submitted to us as originals, the conformity to the originals of all documents
and instruments submitted to us as certified or conformed copies and the
authenticity of the originals of such copies, the correctness of all
certificates, and the accuracy and completeness of all records, documents,
instruments and materials made available to us by First Capital.
Our opinion is limited to the matters set forth herein and we express no
opinion other than as expressly set forth herein. In rendering the opinion set
forth below, we do not express any opinion concerning law other than the federal
law of the United States and the corporate law of the State of Indiana. Our
opinion is expressed as of the date hereof and is based on laws currently in
effect. Accordingly, the conclusions set forth in this opinion are subject to
change in the event that any laws should change or be enacted in the future. We
are under no obligation to update this opinion or to otherwise communicate with
you in the event of any such change.
Based upon and subject to the foregoing, it is our opinion that, subject to
approval of the Merger Agreement by First Capital shareholders, the Shares, when
issued in accordance with the terms of the Merger Agreement upon consummation of
the merger contemplated therein, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our Firm under the caption "Legal
Matters" in the Joint Proxy Statement-Prospectus forming a part of the
Registration Statement. In giving such consent we do not hereby admit that we
are experts or otherwise within the category of persons whose consent is
required under Section 7 of the Act or the rules or regulations of the
Securities and Exchange Commission thereunder.
Sincerely,
/s/ Muldoon, Murphy & Faucette LLP
MULDOON, MURPHY & FAUCETTE LLP
<PAGE>
EXHIBIT 8.1
FORM OF FEDERAL TAX OPINION
_____________, 1999
Board of Directors
First Capital, Inc.
210 Federal Drive, N.W.
Corydon, Indiana 47112
Board of Directors
HCB Bancorp, Inc.
710 Main Street, N.E.
Palmyra, Indiana 47164
Dear Board Members:
You have requested an opinion regarding the material federal tax
consequences of a proposed transaction involving the merger of FC Acquisition
Corp. ("FC"), a wholly owned subsidiary of First Capital, Inc. ("First
Capital"), an Indiana corporation ("First Capital") with and into HCB Bancorp
("HCB"), an Indiana corporation (the "First Merger") to be followed immediately
after the First Merger by the merger of HCB with and into First Capital (the
"Second Merger") (referred to collectively herein as the "Merger"). The Merger
will be effected pursuant to the Agreement and Plan of Merger dated as of July
19, 1999 by and between First Capital, FC and HCB (the "Merger Agreement"). The
Merger and related transactions are described in the Merger Agreement and in the
Joint Proxy Statement/Prospectus (the "Proxy Statement") included in First
Capital's Registration Statement on Form S-4 filed with the Securities and
Exchange Commission in connection with the Merger (the "Registration
Statement"). All capitalized terms used but not defined in this opinion shall
have the meanings set forth in the Merger Agreement or the Proxy Statement.
Under the Merger Agreement, at the Effective Time, FC will be merged with
and into HCB and the separate existence of FC will cease. Immediately
thereafter, HCB will be merged with and into First Capital and First Capital
will be the surviving corporation and continue its corporate existence under the
laws of Indiana. By virtue of the Merger, automatically and without any action
on the part of the holder thereof, each share of HCB's common stock (the "HCB
Common Stock") issued and outstanding immediately prior to the Effective Time
shall be converted into the right to receive 15.5 shares of the common stock of
First Capital (the "First Capital Common Stock"), subject to the payment of cash
in lieu of fractional shares.
<PAGE>
_____________, 1999
Page 2
Our opinion is provided solely with respect to the material federal income
tax consequences of the Merger. This opinion is being delivered at your request
and pursuant to Section 5.1(f) of the Merger Agreement.
In connection with the opinions expressed herein, we have examined and
relied upon originals, or copies certified or otherwise identified to our
satisfaction, of the Merger Agreement and the Proxy Statement, and of such
corporate records of the parties to the Merger as we have deemed appropriate. We
have also received and relied upon, without independent verification, certain
factual representations of HCB concerning HCB itself as well as the transaction
("Representations"); we have received and relied upon, without independent
verification, certain factual representations of First Capital concerning the
transaction and certain post-Merger plans ("Representations"). We have assumed
that such Representations are true and that the parties to the Merger will act
in accordance with the Merger Agreement. We have assumed that all daily
operations of First Capital will be conducted in a manner wholly consistent with
all Representations provided by First Capital. In addition, we have made such
investigations of law as we have deemed appropriate to form a basis for the
opinions expressed below.
We will rely upon the accuracy of the Representations and the statements of
facts contained in the examined documents, particularly the Merger Agreement. We
have also assumed the authenticity of all signatures, the legal capacity of all
natural persons and the conformity to the originals of all documents submitted
to us as copies. Each capitalized term used herein, unless otherwise defined,
has the meaning set forth in the Merger Agreement. We have assumed that the
Merger will be consummated strictly in accordance with the terms of the Merger
Agreement and that the Merger will qualify as a merger under applicable law.
The Merger Agreement and the Proxy Statement contain a detailed description
of the Merger. These documents as well as the Representations to be provided by
HCB and First Capital are incorporated in this letter as part of the statement
of the facts.
LIMITATIONS ON OPINION
The opinions expressed herein are rendered only with respect to the issues
specified herein. We express no opinion with respect to any other federal, state
or local tax or other legal aspect of the transaction. If any of the above
referenced facts or Representations are not true, correct and complete in all
material respects, our opinion could be subject to change. In issuing our
opinion, we are relying on the provisions of the Internal Revenue Code of 1986,
as amended (the "Code") and regulations issued thereunder which are cited
herein. All such provisions are subject to change, which change can be
retroactive in effect. Any such change could have an effect on the validity of
our opinions. We assume no obligation to revise or supplement this opinion if
any subsequent change were to occur.
<PAGE>
_____________, 1999
Page 3
The opinions contained herein are not binding on the Internal Revenue
Service ("IRS") or any court. No assurance can be given that the IRS will not
take a different view of these transactions and that view may be ultimately
sustained by a court. It is our understanding that neither party to the Merger
intends to request a ruling from the IRS concerning the Merger.
FEDERAL TAX OPINION
Based on and subject to the foregoing, the facts referenced in this
opinion, the Representations referred to in this opinion, and subject to the
limitations referenced herein, it is our opinion that for federal income tax
purposes, under the current law:
(1) The Merger will constitute a tax-free reorganization under Section
368(a)(1)(A) and Section 368(a)(2)(E) of the Code and First Capital,
FC and HCB will each be a party to the reorganization.
(2) No gain or loss will be recognized by First Capital, First Federal
Bank, A Federal Savings Bank, HCB or Harrision County Bank as a result
of the Merger.
(3) No gain or loss will be recognized by the stockholders of HCB who
exchange all of their HCB Common Stock solely for First Capital Common
Stock pursuant to the Merger, except to the extent of any cash
received in lieu of a fractional share interest in First Capital
Common Stock.
(4) The tax basis of the First Capital Common Stock received by
shareholders who exchange their HCB Common Stock for First Capital
Common Stock pursuant to the Merger will be the same as the tax basis
of the HCB Common Stock surrendered in exchange therefor, reduced by
any amount allocable to a fractional share interest for which cash is
received and increased by any gain recognized on the exchange.
(5) The holding period of First Capital Common Stock received by each
stockholder in the Merger will include the holding period of HCB
Common Stock exchanged therefor, provided that such stockholder held
such HCB Common Stock as a capital asset on the Effective Date.
Sincerely,
MULDOON, MURPHY & FAUCETTE LLP
<PAGE>
EXHIBIT 23.2
CONSENT OF MULDOON, MURPHY & FAUCETTE LLP
We hereby consent to the filing of the form of our opinion with respect to
the federal income tax consequences of the merger as an exhibit to the
Registration Statement on Form S-4 of First Capital and to the references to us
under the headings "SUMMARY -- Tax-Free Transaction for HCB Stockholders" and
"THE MERGER -- Tax-Free Transaction for HCB Stockholders" in the Joint Proxy
Statement-Prospectus forming a part of the Registration Statement. In giving
such consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section of the Securities Act of 1933.
Sincerely,
/s/ Muldoon, Murphy & Faucette LLP
MULDOON, MURPHY & FAUCETTE LLP
Dated: September 15, 1999
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
First Capital, Inc. on Form S-4 of our report dated July 22, 1999, included and
incorporated by reference in the Annual Report on Form 10-KSB of First Capital,
Inc. for the year ended June 30, 1999, and to the use of our report dated
July 22, 1999, appearing in the Joint Proxy Statement-Prospectus, which is
part of this Registration Statement. We also consent to the reference to us
under the heading "Experts" in the Joint Proxy Statement-Prospectus.
/s/ Monroe Shine & Co., Inc.
------------------------
New Albany, Indiana
September 15, 1999
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of First Capital, Inc. on
Form S-4 of our report dated January 15, 1999 relating to the consolidated
financial statements of HCB Bancorp and Subsidiary appearing in the Joint Proxy
Statement-Prospectus, which is part of this Registration Statement. We also
consent to the reference to us under the heading "Experts" in the Joint Proxy
Statement-Prospectus.
/s/ Monroe Shine & Co., Inc.
------------------------
New Albany, Indiana
September 15, 1999
<PAGE>
EXHIBIT 23.5
CONSENT OF CHARLES WEBB & COMPANY,
A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
We hereby consent to the use of the form of our opinion letter to the Board
of Directors of First Capital, Inc., included as Appendix B to the Joint Proxy
Statement/Prospectus relating to the proposed merger of First Capital, Inc. and
HCB Bancorp and to the references to our firm and such opinion in such Joint
Proxy Statement/Prospectus. In giving such consent, we do not admit that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder, nor do we thereby admit that we
are experts with respect to any part of such Registration Statement within the
meaning of the term "experts" as used in the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
/s/ Charles Webb & Company, a Division
of Keefe, Bruyette & Woods, Inc.
September 10, 1999
<PAGE>
EXHIBIT 23.6
CONSENT OF FINANCIAL ADVISOR
We hereby consent to the discussion relative to our opinion delivered to the
Board of Directors of HCB Bancorp in connection with its proposed merger with
First Capital, Inc. in the Joint Proxy Statement-Prospectus included under the
heading "Opinion of HCB Bancorp's Financial Advisor," to the references to our
firm in such Proxy Statement-Prospectus and to the inclusion of such opinion as
an appendix to the Proxy Statement and Prospectus.
/s/ Tom P. Smith
Tom P. Smith
Consultant
Young & Associates, Inc.
Kent, Ohio
September 9, 1999
<PAGE>
EXHIBIT 99.3
FIRST CAPITAL, INC.
ANNUAL MEETING OF SHAREHOLDERS
____________, 1999
______________________________
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints_______________________________, each with
full power of substitution, to act as proxy for the undersigned, and to vote all
shares of common stock of First Capital, Inc. ("First Capital") owned of record
by the undersigned at the Annual Meeting of Shareholders, to be held on
____________, 1999, at __:00 p.m. local time, at ___________Corydon, Indiana,
and at any and all adjournments and postponements thereof, as designated below
with respect to the matters set forth below and described in the accompanying
Joint Proxy Statement-Prospectus and, in their discretion, for the election of a
person to the Board of Directors if any nominee named herein becomes unable to
serve or for good cause will not serve and with respect to any other business
that may properly come before the meeting. Any prior proxy or voting
instructions are hereby revoked.
This proxy card will also be used to provide voting instructions to the
trustees for any shares of common stock of First Capital allocated to
participants under the First Federal Bank Employee Stock Ownership Plan.
1. Approval and adoption of the Agreement and Plan of Merger, dated as of
July 19, 1999, by and among First Capital, FC Acquisition Corp. and
HCB Bancorp, pursuant to which FC Acquisition Corp. will merge with
and into HCB Bancorp and each share of common stock, no par value per
share, of HCB Bancorp will be converted into the right to receive 15.5
shares of common stock, par value $.01 per share, of First Capital,
all on and subject to the terms and conditions contained therein
FOR AGAINST ABSTAIN
--- ------- -------
[_] [_] [_]
_____________________________________________________________________________
2. The election as directors of all nominees listed (except as marked to
the contrary below) .
<TABLE>
<S> <C> <C> <C>
J. Gordon Pendleton Mark D. Shireman Dennis L. Huber Gerald L. Uhl
Samuel E. Uhl Kenneth R. Saulman John W. Buschmeyer
</TABLE>
FOR ALL
FOR VOTE WITHHELD EXCEPT
--- ------------- ------
[_] [_] [_]
INSTRUCTION: To withhold your vote for any individual nominee, mark "FOR ALL
EXCEPT" and write that nominee's name in the space provided below.
____________________________________________________________________________
<PAGE>
3. The approval of the First Capital, Inc. 1999 Stock-Based Incentive
Plan.
FOR AGAINST ABSTAIN
--- ------- -------
[_] [_] [_]
_____________________________________________________________________________
4. The ratification of the appointment of Monroe Shine & Co., Inc. as
independent auditors for First Capital for the fiscal year ending June 30, 2000.
FOR AGAINST ABSTAIN
--- ------- -------
[_] [_] [_]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
EACH OF THE LISTED PROPOSALS.
<PAGE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
This proxy will be voted as directed, but if no instructions are specified,
this proxy will be voted "FOR" each of the proposals listed. If any other
business is presented at the meeting, including whether or not to adjourn the
meeting, this proxy will be voted by the proxies in their best judgment. At the
present time, the Board of Directors knows of no other business to be presented
at the meeting.
The undersigned acknowledges receipt from First Capital prior to the
execution of this proxy of a Notice of Annual Meeting of Shareholders, a Joint
Proxy Statement-Prospectus dated __________, 1999 and the Annual Report to
Shareholders.
Please sign exactly as your name appears on this card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder may sign but only one signature
is required.
Dated:_______________________
_____________________________
SHAREHOLDER SIGN ABOVE
_____________________________
CO-HOLDER (IF ANY) SIGN ABOVE
__________________________
PLEASE COMPLETE, DATE, SIGN AND PROMPTLY MAIL THIS PROXY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
<PAGE>
EXHIBIT 99.4
HCB BANCORP
SPECIAL MEETING OF SHAREHOLDERS
____________, 1999
_______________________________
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints_________________________________________,
or either of them, as proxies of the undersigned, each with full power of
substitution and resubstitution, to represent and to vote all shares of common
stock of HCB Bancorp which the undersigned beneficially owns of record as of
October ___, 1999 and would be entitled to vote at the HCB Bancorp Special
Meeting of Shareholders, to be held on ____________, 1999, at __:00 p.m. local
time, at ___________, Palmyra, Indiana, and at any and all adjournments and
postponements thereof, as designated below with respect to the matters set forth
below and described in the accompanying Joint Proxy Statement-Prospectus and, in
their discretion, with respect to any other business that may properly come
before the meeting. Any prior proxy or voting instructions are hereby revoked.
1. Approval and adoption of the Agreement and Plan of Merger, dated July
19, 1999, by and among First Capital, FC Acquisition Corp. and HCB
Bancorp, pursuant to which FC Acquisition Corp. will merge with and
into HCB Bancorp and each share of common stock, no par value per
share, of HCB Bancorp will be converted into the right to receive 15.5
shares of common stock, par value $.01 per share, of First Capital, all
on and subject to the terms and conditions set forth in the Agreement.
FOR AGAINST ABSTAIN
--- ------- -------
[_] [_] [_]
________________________________________________________________________________
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE ABOVE PROPOSAL.
<PAGE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
This proxy when properly executed will be voted as directed, but if no
instructions are specified, this proxy will be voted "FOR" the proposal listed.
If any other business is presented at the special meeting, including whether or
not to adjourn the meeting, this proxy will be voted by the proxies in their
best judgment. At the present time, the Board of Directors knows of no other
business to be presented at the special meeting.
The undersigned acknowledges receipt from HCB Bancorp prior to the
execution of this proxy of a Notice of Special Meeting of Shareholders and a
Joint Proxy Statement-Prospectus dated __________, 1999.
Please sign exactly as your name appears on this card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder may sign but only one signature
is required.
Dated:___________________________
________________________________
SHAREHOLDER SIGN ABOVE
________________________________
CO-HOLDER (IF ANY) SIGN ABOVE
_____________________________
PLEASE COMPLETE, DATE, SIGN AND PROMPTLY MAIL THIS PROXY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
<PAGE>
Exhibit 99.5
CONSENT OF PERSON DESIGNATED
TO SERVE ON THE BOARD OF DIRECTORS OF
FIRST CAPITAL, INC.
The undersigned hereby consents, pursuant to Rule 438 under the Securities
Act of 1933, as amended, to being named in the Joint Proxy Statement-Prospectus
constituting part of First Capital Inc.'s Registration Statement on Form S-4 as
a person to become a director of First Capital, Inc.
/s/ Earl Book
---------------------------------
Earl Book
Dated: July 30, 1999
<PAGE>
CONSENT OF PERSON DESIGNATED
TO SERVE ON THE BOARD OF DIRECTORS OF
FIRST CAPITAL, INC.
The undersigned hereby consents, pursuant to Rule 438 under the Securities
Act of 1933, as amended, to being named in the Joint Proxy Statement-Prospectus
constituting part of First Capital Inc.'s Registration Statement on Form S-4 as
a person to become a director of First Capital, Inc.
/s/ William W. Harrod
-------------------------------
William W. Harrod
Dated: July 31, 1999
-------
<PAGE>
CONSENT OF PERSON DESIGNATED
TO SERVE ON THE BOARD OF DIRECTORS OF
FIRST CAPITAL, INC.
The undersigned hereby consents, pursuant to Rule 438 under the Securities
Act of 1933, as amended, to being named in the Joint Proxy Statement-Prospectus
constituting part of First Capital Inc.'s Registration Statement on Form S-4 as
a person to become a director of First Capital, Inc.
/s/ James S. Burden
------------------------------
James S. Burden
Dated: August 2, 1999
--------
<PAGE>
CONSENT OF PERSON DESIGNATED
TO SERVE ON THE BOARD OF DIRECTORS OF
FIRST CAPITAL, INC.
The undersigned hereby consents, pursuant to Rule 438 under the Securities
Act of 1933, as amended, to being named in the Joint Proxy Statement-Prospectus
constituting part of First Capital Inc.'s Registration Statement on Form S-4 as
a person to become a director of First Capital, Inc.
/s/ Marvin E. Kiesler
--------------------------------
Marvin E. Kiesler
Dated: August 2, 1999
--------
<PAGE>
CONSENT OF PERSON DESIGNATED
TO SERVE ON THE BOARD OF DIRECTORS OF
FIRST CAPITAL, INC.
The undersigned hereby consents, pursuant to Rule 438 under the Securities
Act of 1933, as amended, to being named in the Joint Proxy Statement-Prospectus
constituting part of First Capital Inc.'s Registration Statement on Form S-4 as
a person to become a director of First Capital, Inc.
/s/ Michael L. Shireman
------------------------------------
Michael L. Shireman
Dated: July 30, 1999
-------
<PAGE>
CONSENT OF PERSON DESIGNATED
TO SERVE ON THE BOARD OF DIRECTORS OF
FIRST CAPITAL, INC.
The undersigned hereby consents, pursuant to Rule 438 under the Securities
Act of 1933, as amended, to being named in the Joint Proxy Statement-Prospectus
constituting part of First Capital Inc.'s Registration Statement on Form S-4 as
a person to become a director of First Capital, Inc.
/s/ Loren E. Voyles
__________________________________
Loren E. Voyles
Dated: September 14, 1999
<PAGE>
CONSENT OF PERSON DESIGNATED
TO SERVE ON THE BOARD OF DIRECTORS OF
FIRST CAPITAL, INC.
The undersigned hereby consents, pursuant to Rule 438 under the Securities
Act of 1933, as amended, to being named in the Joint Proxy Statement-Prospectus
constituting part of First Capital Inc.'s Registration Statement on Form S-4 as
a person to become a director of First Capital, Inc.
/s/ James E. Nett
------------------------------
James E. Nett
Dated: July 31, 1999
-------
