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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended June 30, 1999
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number: 0-25023
FIRST CAPITAL, INC.
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(Name of small business issuer in its charter)
Indiana 35-2056949
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 Federal Way, N.W., Corydon, Indiana 47112
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (812) 738-2198
--------------------
Securities registered under 12(b) of the
Exchange Act: None
Securities registered under Section 12(g)
of the Exchange Act: Title of each class
---------------------------------------
Common Stock, par value $0.01 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
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The issuer's revenues for the most recent fiscal year were $7.8 million.
The aggregate market value of the voting common equity held by non-
affiliates as of June 30, 1999 was $12,930,000. This figure is based on the
closing price on the Nasdaq Stock Market for a share of the issuer's common
stock on June 30, 1999, which was $11.25. For purposes of this calculation, the
issuer is assuming that the issuer's directors and executive officers are
affiliates.
As of June 30, 1999, there were 1,292,752 shares of the Registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format: Yes [_] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders
are incorporated herein by reference in Part II of this Form 10-KSB
Portions of the Joint Proxy Statement-Prospectus, filed as part of the
Registrant's Registration Statement on Form S-4 (File No. 333-87203), are
incorporated herein by reference in Part III of this Form 10-KSB
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This report contains certain "forward-looking statements" concerning the
future operations of First Capital, Inc. Forward-looking statements are used to
describe future plans and strategies, including expectations of future financial
results. Management's ability to predict results or the effect of future plans
or strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the market area in
which First Capital, Inc. operates, as well as nationwide, First Capital, Inc.'s
ability to control costs and expenses, competitive products and pricing, loan
delinquency rates, changes in federal and state legislation and regulation, and
the impact of Year 2000 issues. These factors should be considered in evaluating
the forward-looking statements and undue reliance should not be placed on such
statements.
PART I
Item 1. Description of Business.
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General
First Capital, Inc. ("Company") was incorporated under Indiana law in
September 1998. The Company was organized for the purpose of becoming the
holding company for First Federal Bank, A Federal Savings Bank ("Bank") upon the
Bank's reorganization as a wholly owned subsidiary of the Company resulting from
the conversion of First Capital, Inc., M.H.C. ("MHC"), from a federal mutual
holding company to a stock holding company ("Conversion and Reorganization").
In connection with the Conversion and Reorganization, which was completed on
December 31, 1998, the Company sold 768,767 shares of its common stock to the
public at $10 per share in a public offering ("Offering") and issued 523,057
shares in exchange for the outstanding shares of the Bank held by the Bank's
stockholders other than the MHC.
The Company has no significant assets, other than all of the outstanding
shares of the Bank and the portion of the net proceeds from the Offering
retained by the Company, and no significant liabilities. Management of the
Company and the Bank are substantially similar and the Company neither owns nor
leases any property, but instead uses the premises, equipment and furniture of
the Bank. Accordingly, the information set forth in this report, including the
consolidated financial statements and related financial data, relates primarily
to the Bank.
The Bank is regulated by the OTS and the Federal Deposit Insurance
Corporation ("FDIC"). The Bank's deposits have been federally-insured by the
FDIC since 1961 and are currently insured by the FDIC under the Savings
Association Insurance Fund ("SAIF"). The Bank is a member of the Federal Home
Loan Bank System.
Proposed Merger
On July 19, 1999, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with HCB Bancorp ("HCB") pursuant to which the Company and
HCB will combine in a merger of equals. The Merger Agreement provides that FC
Acquisition Corp., a wholly-owned subsidiary of the Company, will be merged with
and into HCB, with HCB being the surviving entity ("Merger") and becoming a
wholly-owned subsidiary of the Company. Immediately following consummation of
the Merger, HCB will adopt a plan of liquidation pursuant to which it will merge
with and into the Company. Immediately following the combination of the Company
and HCB, Harrison County Bank, a bank organized under the laws of the State of
Indiana and a subsidiary of HCB ("HC Bank"), will merge with and into the Bank.
Pursuant to the terms of the Merger Agreement, each share of HCB common
stock, no par value per share, issued and outstanding at the effective time of
the Merger, shall become and be converted into the right to receive 15.5 shares
of common stock of the Company. Upon consummation of the Merger, the Company's
Board of Directors will be increased from seven to fourteen members and will
consist of the then-current members of the Boards of Directors of the Company
and HCB, and the Bank's Board of Directors also will be increased from seven to
fourteen members and will consist of the then-current members of the Boards of
Directors of the Bank and HC Bank.
Consummation of the Merger is subject to various conditions, including the
approval of the shareholders of the Company and HCB and the receipt of all
requisite regulatory approvals.
Market Area and Competition
The Bank considers Harrison County as its primary market area because
substantially all of the Bank's depositors live in the areas surrounding its
main office and branch office and most of the Bank's loans are made to persons
in Harrison County, Indiana. Corydon, the county seat of Harrison County, is
located approximately 35 miles west of Louisville, Kentucky. Major employers in
Harrison County include Keller Manufacturing Corporation, South Harrison
Community School District and the Harrison County Hospital. The Bank faces
intense competition in its
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primary market area for the attraction of deposits (its primary source of
lendable funds) and in the origination of loans. Its most direct competition for
deposits has historically come from the four commercial banks operating in
Corydon and, to a lesser extent, from other financial institutions, such as
brokerage firms and insurance companies. Three of the four commercial banks in
Corydon are affiliated with large, multi-state bank holding companies and,
therefore, have significantly greater resources than the Bank. Particularly in
times of high interest rates, the Bank has faced additional significant
competition for investors' funds from short-term money market securities and
other corporate and government securities. The Bank's competition for loans
comes primarily from the commercial banks operating in its primary market area.
Lending Activities
General. The principal lending activity of the Bank is the origination of
residential mortgage loans. To a lesser extent, the Bank also originates
consumer, commercial business, commercial real estate (including farm
properties) and residential construction loans.
Loan Portfolio Analysis. The following table sets forth the composition of
the Bank's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
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1999 1998
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Amount Percent Amount Percent
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(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage Loans:
Residential (1)...................... $63,531 71.71% $57,825 74.57%
Land................................. 1,018 1.15 218 0.28
Commercial real estate............... 3,678 4.15 4,371 5.64
Residential construction............. 8,346 9.42 3,787 4.88
------- ------ ------- ------
Total mortgage loans............... 76,573 86.43 66,201 85.37
------- ------ ------- ------
Consumer Loans:
Home equity and second mortgage
loans............................. 2,999 3.39 2,799 3.61
Automobile loans..................... 1,615 1.82 1,574 2.03
Loans secured by savings accounts.... 400 0.45 466 0.60
Mobile home loans.................... 193 0.22 223 0.29
Unsecured loans...................... 190 0.21 125 0.16
Other (2)............................ 1,015 1.15 1,110 1.43
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Total consumer loans............... 6,412 7.24 6,297 8.12
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Commercial business loans............ 5,607 6.33 5,048 6.51
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Total loans....................... 88,592 100.00% 77,546 100.00%
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Less:
Due to borrowers on loans in process. 4,019 1,932
Deferred loan fees net of direct 211
costs............................... 204
Allowance for loan losses............ 482 516
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Total loans receivable, net.......... $83,887 $74,887
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</TABLE>
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(1) Includes conventional one- to four-family and multi-family residential
loans.
(2) Includes loans secured by lawn and farm equipment, unimproved land, and
other personal property.
Residential Loans. The Bank's lending activities have concentrated on the
origination of residential mortgages, primarily for retention in the Bank's loan
portfolio. At June 30, 1999, residential mortgages constituted $57.8 million, or
74.6% of total loans. Residential mortgages secured by multi-family properties
are an immaterial portion of the residential loan portfolio. Substantially all
residential mortgages are collateralized by properties within the Bank's market
area.
The Bank offers both fixed-rate mortgage loans and ARM loans typically with
terms of 15 to 30 years. Although the Bank originates all residential mortgage
loans for investment, the Bank uses loan documents approved by the Federal
National Mortgage Corporation ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). ARM loans originated have interest rates that
adjust at regular intervals of one year, with 1.5% annual and 5% lifetime caps,
and at intervals of five years with 2% per adjustment period and 6% lifetime
caps, based upon changes in the prevailing interest rates on U.S. Treasury
Bills. The Bank does not use below market interest rates and other marketing
inducements to attract ARM loan borrowers. The majority of ARM loans provide
that the amount of any increase or decrease in the interest rate is limited to
two percentage points (upward or downward) per adjustment
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period and generally contain minimum and maximum interest rates. Borrower demand
for ARMs versus fixed-rate mortgage loans is a function of the level of interest
rates, the expectations of changes in the level of interest rates and the
difference between the interest rates and loan fees offered for fixed-rate
mortgage loans and interest rates and loan fees for ARM loans. The relative
amount of fixed-rate and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The Bank's lending policies generally limit the maximum loan-to-value ratio
on fixed-rate and ARM loans to 90% of the lesser of the appraised value or
purchase price of the underlying residential property unless private mortgage
insurance to cover the excess over 90% is obtained, in which case the mortgage
is limited to 95% (or 97% under a new Freddie Mac program) of the lesser of
appraised value or purchase price. The loan-to-value ratio, maturity and other
provisions of the loans made by the Bank are generally reflected in the policy
of making less than the maximum loan permissible under federal regulations, in
accordance with established lending practices, market conditions and
underwriting standards maintained by the Bank. The Bank requires title, fire
and extended insurance coverage on all mortgage loans originated. All of the
Bank's real estate loans contain due on sale clauses. The Bank obtains
appraisals on all its real estate loans from outside appraisers.
Construction Loans. At June 30, 1999, the Bank had $8.3 million, or 9.4%
of total loans, of construction loans for single-family residences. At June 30,
1999, speculative construction loans, for which there is not a commitment for
permanent financing in place at the time the construction loan was originated,
amounted to $1.6 million.
Although the Bank originates construction loans that are repaid with the
proceeds of a permanent mortgage loan obtained by the borrower from another
lender, the majority of the construction loans that the Bank originates are
construction/permanent loans, which are originated with one loan closing at
either a fixed or variable rate of interest and for terms up to 30 years.
Construction loans originated without a commitment by the Bank to provide
permanent financing are generally originated for a term of six to 12 months and
at a variable interest rate based on the prime rate. In the case of
construction/permanent loans, the construction loan is also generally for a term
of six to 12 months and the rate charged is the rate chosen by the borrower for
the permanent loan. Accordingly, if the borrower chooses a fixed interest rate
for the permanent loan, the construction loan rate is also fixed at the same
rate. At June 30, 1999, the largest non-speculative construction loan was in
the amount of $450,000 and with an outstanding balance of $374,000. This loan
was performing according to its terms at June 30, 1999.
The Bank originates speculative construction loans to approximately six
builders operating and based in the Bank's primary market area and with whom the
Bank has well-established business relationships. The Bank generally limits the
number of speculative construction loans outstanding at any one time to any one
builder to two loans. At June 30, 1999, the largest speculative construction
loan relationship with a builder consisted of four loans in the committed
aggregate amount of $470,000 with an aggregate outstanding balance of $181,000.
Such loans were performing according to their respective terms at that date.
All construction loans are originated with a loan-to-value ratio not to
exceed 90% of the appraised estimated value of the completed property. The
construction loan documents require the disbursement of the loan proceeds in
increments as construction progresses. Disbursements are based on periodic on-
site inspections by an independent appraiser and/or Bank personnel approved by
the Board of Directors.
Construction lending is inherently riskier than one- to four-family
mortgage lending. Construction loans, on average, generally have higher loan
balances than one- to four-family mortgage loans. In addition, the potential
for cost overruns because of the inherent difficulties in estimating
construction costs and, therefore, collateral values and the difficulties and
costs associated with monitoring construction progress, among other things, are
major contributing factors to this greater credit risk. Speculative
construction loans have the added risk that there is not an identified buyer for
the completed home when the loan is originated, with the risk that the builder
will have to service the construction loan debt and finance the other carrying
costs of the completed home for an extended time period until a buyer is
identified. Furthermore, the demand for construction loans and the ability of
construction loan borrowers to service their debt depends highly on the state of
the general economy, including market interest rate levels, and the state of the
economy of the Bank's primary market area. A material downturn in economic
conditions would be expected to have a material adverse effect on the credit
quality of the construction loan portfolio.
Commercial Real Estate Loans. The Bank had commercial real estate loans
outstanding of $3.7 million at June 30, 1999, or 4.2% of total loans.
Commercial real estate loans are generally secured by small retail stores,
professional office space and, in certain instances, farm properties.
Commercial real estate loans are generally originated with a loan-to-value
ratio not to exceed 80% of the appraised value of the property. Property
appraisals are performed by independent appraisers approved by the Bank's Board
of Directors. The Bank attempts to originate commercial real estate loans at
variable interest rates based on the U.S. Treasury Bill rate for terms not to
exceed five years. However, in the current low interest rate environment,
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borrower demand for variable rate loans is low and the Bank is generally
originating commercial real estate loans with fixed interest rates for terms
ranging between ten and 15 years over which principal and interest is fully
amortized.
At June 30, 1999, the largest commercial real estate loan was a
construction loan in the amount of $1.2 million and with an outstanding balance
of $636,000 and was secured by a commercial office and retail facility. This
loan was performing according to its terms at that date.
Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to four-family
residential lending. However, loans secured by such properties usually are
greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to four-family residential mortgage
loans. Because payments on loans secured by multi-family and commercial
properties are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. The Bank seeks to minimize these risks by
limiting the maximum loan-to-value ratio to 75% and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan. The Bank also obtains loan
guarantees from financially capable parties based on a review of personal
financial statements.
Commercial Business Loans. At June 30, 1999, the Bank's commercial business
loan portfolio amounted to $5.6 million, or 6.3% of total loans. Unsecured
commercial business loans are an immaterial amount of the portfolio. Commercial
business loans are generally secured by inventory, accounts receivable, and
business equipment such as trucks and tractors. Many commercial business loans
also have real estate as collateral. The Bank generally requires a personal
guaranty of payment by the principals of a corporate borrower, and reviews the
personal financial statements and income tax returns of the guarantors.
Commercial business loans are generally originated with loan-to-value ratios not
exceeding 75%.
Aside from lines of credit, commercial business loans are generally
originated for terms not to exceed seven years with variable interest rates
based on the Bank's cost of funds. Approved credit lines totalled $1.3 million
at June 30, 1999, of which $694,000 was outstanding. Lines of credit are
originated at fixed interest rates for one year renewable terms.
A director of the Bank is a shareholder of a farm implement dealership that
has contracted with the Bank to provide sales financing to the dealership's
customers. The Bank does not grant preferential credit under this arrangement.
All sales contracts are presented to the Bank on a 50% recourse basis, with the
dealership responsible for the sale and disposition of any repossessed
equipment. During the fiscal year ended June 30, 1999, the Bank granted
approximately $768,000 of credit to customers of the dealership and such loans
had an aggregate outstanding balance of $1.4 million at June 30, 1999. At June
30, 1999, none of these loans were delinquent 30 days or more.
At June 30, 1999, the largest commercial business loan had an outstanding
balance of $788,000 and was unsecured. Such loan was performing according to its
terms at that date.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial real estate lending. Real estate
lending is generally considered to be collateral-based lending with loan amounts
based on predetermined loan-to-collateral values and liquidation of the
underlying real estate collateral is viewed as the primary source of repayment
in the event of borrower default. Although commercial business loans are often
collateralized by equipment, inventory, accounts receivable or other business
assets, the liquidation of collateral in the event of a borrower default is
often an insufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other things. Accordingly, the repayment of a commercial business loan
depends primarily on the creditworthiness of the borrower (and any guarantors),
while liquidation of collateral is a secondary and often insufficient source of
repayment.
In 1993, the Bank purchased, without recourse, lease obligations originated
by Bennett Funding Group, Inc., Syracuse, New York ("Bennett Funding"). During
the fiscal year ended June 30, 1996, Bennett Funding filed for Chapter 11
bankruptcy protection after securities fraud and other violations were alleged
against it by the U.S. Attorney's Office and the Securities and Exchange
Commission. The Bank entered into a settlement agreement with Bennett Funding on
March 18, 1997. The Bank chose an option which allows for a maximum recovery of
approximately $158,000 (77.5%) of the aggregate outstanding balance. As of June
30, 1998, the Bank had recovered approximately $124,000, net of fees charged by
the bankruptcy trustee. During the fiscal year ended June 30, 1999, the Bank
charged- off the balance of the asset totaling $78,000 as no additional recovery
is expected.
As an incident to its commercial business lending activities, the Bank
issues standby letters of credit or performance bonds as an accommodation to its
borrowers.
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Consumer Loans. Consumer loans totalled $6.4 million at June 30, 1999, or
7.2% of the Bank's total loan portfolio. The Bank views consumer lending as an
important component of its business because consumer loans generally have
shorter terms and higher yields, thus reducing exposure to changes in interest
rates. In addition, the Bank believes that offering consumer loans expands and
creates stronger ties to its customer base. Subject to market conditions, the
Bank intends to expand its consumer lending activities.
The Bank offers a variety of secured or guaranteed consumer loans,
including automobile and truck loans (both new and used), home equity loans,
home improvement loans, student loans, boat loans, mobile home loans, and loans
secured by savings deposits. In addition, the Bank offers unsecured consumer
loans. Consumer loans are generally originated at fixed interest rates and for
terms not to exceed seven years. The largest portion of the Bank's consumer
loan portfolio consists of home equity and second mortgage loans ($3.0 million
at June 30, 1999) followed by automobile and truck loans ($1.6 million at June
30, 1999). Automobile and truck loans are originated on both new and used
vehicles. Such loans are generally originated at fixed interest rates for terms
up to seven years and at loan-to-value ratios up to 90% of the blue book value
in the case of used vehicles and 90% of the purchase price in the case of new
vehicles. The Bank does not engage in indirect automobile and truck lending.
Home equity and second mortgage loans are generally originated for terms
not to exceed 15 years and at fixed rates of interest. The loan-to-value ratio
on such loans is limited to 95%, taking into account the outstanding balance on
the first mortgage loan.
The Bank employs strict underwriting standards for consumer loans. These
procedures include an assessment of the applicant's payment history on other
debts and ability to meet existing obligations and payments on the proposed
loans. Although the applicant's creditworthiness is a primary consideration,
the underwriting process also includes a comparison of the value of the
security, if any, to the proposed loan amount. The Bank underwrites and
originates the majority of its consumer loans internally, which management
believes limits exposure to credit risks relating to loans underwritten or
purchased from brokers or other outside sources.
Consumer loans generally entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by assets that depreciate rapidly, such as automobiles. In the latter case,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment for the outstanding loan and the remaining deficiency often
does not warrant further substantial collection efforts against the borrower.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Such loans may also give rise to claims and defenses by the
borrower against the Bank as the holder of the loan, and a borrower may be able
to assert claims and defenses which it has against the seller of the underlying
collateral. Of the Bank's consumer loan portfolio, $19,000 was delinquent 30
days or more at June 30, 1999.
Loan Maturity and Repricing
The following table sets forth certain information at June 30, 1999
regarding the dollar amount of loans maturing in the Bank's portfolio based on
their contractual terms to maturity, but does not include potential prepayments.
Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less. Loan balances
do not include undisbursed loan proceeds, unearned income and allowance for loan
losses.
<TABLE>
<CAPTION>
After After After After
One Year 3 Years 5 Years 10 Years
Within Through Through Through Through After
One Year 3 Years 5 Years 10 Years 15 Years 15 Years Total
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(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential real estate..... $ 2,933 $ 5,546 $5,829 $19,901 $11,891 $17,431 $63,531
Commercial real estate...... 457 682 612 1,575 1,263 107 4,696
Residential construction.... 8,346 -- -- -- -- -- 8,346
Consumer loans.............. 2,749 2,109 1,006 407 122 19 6,412
Commercial business............ 2,361 1,678 1,078 456 8 26 5,607
------- ------- ------ ------- ------- ------- -------
Total gross loans........ $16,846 $10,015 $8,525 $22,339 $13,284 $17,583 $88,592
======= ======= ====== ======= ======= ======= =======
</TABLE>
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The following table sets forth the dollar amount of all loans due after
June 30, 2000, which have fixed interest rates and have floating or adjustable
interest rates.
<TABLE>
<CAPTION>
Floating- or
Fixed- Adjustable-
Rates Rates
-------- -----------
(In thousands)
<S> <C> <C>
Mortgage loans:
Residential............................. 47,643 12,955
Commercial real estate.................. 2,939 1,300
Consumer loans.......................... 3,663 --
Commercial business........................ 3,246 --
------- -------
Total gross loans.................... $57,491 $14,255
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</TABLE>
Loan Solicitation and Processing. A majority of the loans originated by
the Bank are made to existing customers. Walk-ins and customer referrals are
also an important source of loans originations. Upon receipt of a loan
application, a credit report is ordered to verify specific information relating
to the loan applicant's employment, income and credit standing. A loan
applicant's income is verified through the applicant's employer or from the
applicant's tax returns. In the case of a real estate loan, an appraisal of the
real estate intended to secure the proposed loan is undertaken, generally by an
independent appraiser approved by the Bank. The mortgage loan documents used by
the Bank conform to secondary market standards.
Individual loan officers have individual lending limits commensurate with
their experience. All loans in excess of $150,000 or that are an exception to
lending policy are approved by the Loan Committee, consisting of the Bank's
President, Vice President, Treasurer and Operations Officer. All loans in
excess of $500,000 must be approved by the Bank's Board of Directors.
The Bank's policy is to require borrowers to obtain certain types of
insurance to protect its interest in the collateral securing the loan. The Bank
requires either a title insurance policy insuring that the Bank has a valid
first lien on the mortgaged real estate or an opinion by an attorney regarding
the validity of title. Fire and casualty insurance is also required on
collateral for loans. The Bank requires escrows for insurance on all loans with
a loan-to-value exceeding 90%.
The Bank's lending practices generally limit the maximum loan to value
ratio on conventional residential mortgage loans to 90% (or 97% under a new
Freddie Mac program) of the appraised value of the property as determined by an
independent appraisal or the purchase price, whichever is less, and 80% for
commercial real estate loans.
Loan Commitments and Letters of Credit. The Bank issues commitments for
fixed- and adjustable-rate single-family residential mortgage loans conditioned
upon the occurrence of certain events. Such commitments are made in writing on
specified terms and conditions and are honored for up to 60 days from the date
of application, depending on the type of transaction. The Bank had outstanding
net loan commitments of approximately $1.9 million at June 30, 1999.
As an accommodation to its commercial business loan borrowers, the Bank
issues standby letters of credit or performance bonds usually in favor of
municipalities for whom its borrowers are performing services. At June 30,
1999, the Bank had outstanding letters of credit of $224,000.
Loan Origination and Other Fees. The Bank, in most instances, receives
loan origination fees and discount "points." Loan fees and points are a
percentage of the principal amount of the mortgage loan that are charged to the
borrower for funding the loan. The Bank usually charges origination fees of
0.5% to 3.0% on one- to four-family residential real estate loans, long-term
commercial real estate loans and residential construction loans. Current
accounting standards require loan origination fees and certain direct costs of
underwriting and closing loans to be deferred and amortized into interest income
over the contractual life of the loan. Deferred fees and costs associated with
loans that are sold are recognized as income at the time of sale. The Bank had
$204,000 of net deferred loan fees at June 30, 1999.
Delinquencies. The Bank's collection procedures provide for a series of
contacts with delinquent borrowers. A late charge is assessed and a late charge
notice is sent to the borrower after the 15th day of delinquency. A delinquency
notice is mailed to the borrower after the 30th day of delinquency. When
payment becomes 60 days past due, the Loan Collection Committee of the Board of
Directors generally meets and issues a default letter to the borrower. If a
loan continues in a delinquent status for 90 days or more, the Bank generally
initiates foreclosure proceedings. In certain instances, however, the Loan
Collection Committee may decide to modify the loan or grant a limited moratorium
on loan payments to enable the borrower to reorganize his financial affairs.
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Nonperforming Assets. Loans are reviewed regularly and when loans become
90 days delinquent, the loan is placed in nonaccrual status and the previously
accrued interest income is reversed. Typically, payments received on a
nonaccrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan.
The following table sets forth information with respect to the Bank's
nonperforming assets for the periods indicated. At the dates indicated, the
Bank had no restructured loans within the meaning of SFAS No. 15 and no accruing
loans which were past due 90 days or more.
<TABLE>
<CAPTION>
At June 30,
------------------------------------
1999 1998
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(In thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Residential real estate................................. $ -- $ 117
Residential construction................................ -- --
Commercial real estate.................................. -- 25
Commercial business..................................... -- 80
Consumer................................................ -- --
------------ ------------
Total................................................. -- 222
------------ ------------
Foreclosed real estate, net............................... -- 104
------------ ------------
Total nonperforming assets................................ $ -- $ 326
============ ============
Total loans delinquent 90 days or more to net loans....... --% 0.30%
Total loans delinquent 90 days or more to total assets.... --% 0.24%
Total nonperforming assets to total assets................ --% 0.35%
</TABLE>
The Bank does not accrue interest on loans over 90 days past due. However,
if interest on nonaccrual loans had been accrued, interest income of
approximately $11,000 would have been recorded for the year ended June 30, 1999.
The Bank received and recorded approximately $6,000 of interest income on
nonaccrual loans for the year ended June 30, 1999.
Classified Assets. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. If an asset or portion thereof is classified as
loss, the insured institution establishes specific allowances for loan losses
for the full amount of the portion of the asset classified as loss. All or a
portion of general loan loss allowances established to cover possible losses
related to assets classified substandard or doubtful can be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
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 July 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
7
<PAGE>
not expose the Bank to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess some weaknesses, are required to be
designated "special mention" by management.
An insured institution is required to establish and maintain an allowance
for loan losses at a level that is adequate to absorb estimated credit losses
associated with the loan portfolio, including binding commitments to lend.
General allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities. When an insured
institution classifies problem assets as "loss," it is required either to
establish an allowance for losses equal to 100% of the amount of the assets, or
charge off the classified asset. The amount of its valuation allowance is
subject to review by the OTS which can order the establishment of additional
general loss allowances. The Bank regularly reviews the loan portfolio to
determine whether any loans require classification in accordance with applicable
regulations.
At June 30, 1999, 1998 and 1997 the aggregate amounts of the Bank's
classified assets, general loss allowances for the periods then ended, were as
follows:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------
1999 1998
-------------- -------------
(In thousands)
<S> <C> <C>
Classified assets:
Loss.................................................. $ -- $ --
Doubtful (impaired)................................... -- 79
Substandard........................................... 63 293
General loss allowances:
Impaired loans....................................... -- 55
Other................................................ 482 461
</TABLE>
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,
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 $482,000, or
0.54% of total loans outstanding, compared with $516,000 or 0.67% of total loans
outstanding, at June 30, 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, 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
the factors discussed above. Any material increase in the allowance for loan
losses may adversely affect the Bank's financial condition and results of
operations.
8
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------
1999 1998
-------------- --------------
(Dollars in thousands)
<S> <C> <C>
Allowance at beginning of period........................ $ 516 $ 519
Provision for loan losses............................... 44 --
----- -----
560 519
----- -----
Recoveries:
Residential real estate................................ -- --
Commercial business.................................... -- --
Consumer............................................... -- --
----- -----
Total recoveries.................................... -- --
----- -----
Charge-offs:
Residential real estate................................ -- 2
Commercial business.................................... 78 --
Consumer............................................... -- 1
----- -----
Total charge-offs................................... 78 3
----- -----
Net charge-offs......................................... (78) (3)
----- -----
Allowance at end of period.............................. $ 482 $ 516
===== =====
Ratio of allowance to total loans outstanding at the
end of the period...................................... 0.54% 0.67%
Ratio of net charge-offs to average loans outstanding
during the period...................................... 0.10% --%
</TABLE>
Allowance for Loan Losses Analysis
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------
1999 1998
--------------------------- ---------------------------
Percent of Percent of
Outstanding Outstanding
Loans in Loans in
Amount Category Amount Category
------ ------------ ------ ------------
(Dollars in thousands) <C>
<S> <C> <C> <C>
Residential real estate(1).................... $ 228 81.13% $ 215 82.44%
Commercial real estate and land loans......... 82 5.30 36 5.92
Commercial business........................... 98 6.33 117 4.52
Consumer...................................... 74 7.24 32 7.12
Unallocated................................... -- -- 116 --
----- ------ ----- ------
Total allowance for $ 482 100.00% $ 516 100.00%
loan losses................................. ===== ====== ===== ======
</TABLE>
__________________
(1) Includes residential construction loans.
Investment Activities
Federally chartered savings institutions have authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies and of state and municipal governments, deposits at
the applicable FHLB, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such savings institutions may also invest a portion of their assets in
commercial paper,
9
<PAGE>
corporate debt securities and mutual funds, the assets of which conform to the
investments that federally chartered savings institutions are otherwise
authorized to make directly. Savings institutions are also required to maintain
minimum levels of liquid assets which vary from time to time. The Bank may
decide to increase its liquidity above the required levels depending upon the
availability of funds and comparative yields on investments in relation to
return on loans.
The Bank is required under federal regulations to maintain a minimum amount
of liquid assets and is also permitted to make certain other securities
investments. The balance of the Bank's investments in short-term securities in
excess of regulatory requirements reflects management's response to the
significantly increasing percentage of deposits with short maturities. It is the
intention of management to hold securities with short maturities in the Bank's
investment portfolio in order to enable the Bank to match more closely the
interest-rate sensitivities of its assets and liabilities.
The Bank periodically invests in mortgage-backed securities, including
mortgage-backed securities guaranteed or insured by either Government National
Mortgage Association ("Ginnie Mae"), Fannie Mae or Freddie Mac. Mortgage-backed
securities generally increase the quality of the Bank's assets by virtue of the
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of the Bank. Of the
Bank's total mortgage-backed securities portfolio, securities with a book value
of $1.2 million have adjustable-rates as of June 30, 1999.
Investment decisions are made by the Investment Committee, consisting of
James G. Pendleton, Samuel E. Uhl and M. Chris Frederick. The Bank's investment
objectives are: (i) to provide and maintain liquidity within regulatory
guidelines; (ii) to maintain a balance of high quality, diversified investments
to minimize risk; (iii) to provide collateral for pledging requirements; (iv) to
serve as a balance to earnings; and (v) to maximize returns.
At June 30, 1999, neither the Company nor the Bank had no investment in
securities (other than U.S. Government and agency securities and mutual funds
that invest in such securities) which exceeded 10% of the Company's
stockholders' equity at that date.
10
<PAGE>
The following table sets forth the securities portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------
1999 1998
---------------------------------------------------- -------------------
Percent Weighted
Fair Amortized of Average Fair Amortized
Value Cost Portfolio Yield(2) Value Cost
------------ --------- ---------- --------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities Held to Maturity (1)
Debt securities:
U.S. agency:
Due after one year through five years........... $ -- $ -- -- $1,493 $1,500
Due after five years through ten years.......... 8,320 8,480 28.15% 6.43% -- --
Due after ten years through fifteen years....... -- -- -- -- --
Municipal:
Due in one year or less......................... -- -- -- 80 80
Due after one year through five years........... -- -- -- -- --
Mortgage-backed securities (3)..................... 743 767 2.55% 6.51% 1,463 1,473
------- ------- ----- ------ ------
$ 9,063 $ 9,247 30.70% $3,036 $3,053
======= ======= ===== ====== ======
Securities Available for Sale
Debt securities:
U.S. agency:
Due after five years through ten years......... $10,655 $11,000 36.51% 6.17% -- --
Due after ten years through fifteen years...... 2,864 3,000 9.96% 6.70% 4,002 4,000
Mortgage-backed securities (3)................. 4,487 4,583 15.21% 6.06% -- --
Municipal:
Due after five years through ten years......... 618 655 2.17% 4.15% -- --
Due after ten years............................ 596 638 2.12% 4.60% -- --
Equity securities:
Mutual fund (4)................................ 985 1,003 3.33% N/A 847 844
------- ------- ----- ------ ------
$20,205 $20,879 69.30% $4,849 $4,844
======= ======= ===== ====== ======
<CAPTION>
---------------------------------
Percent Weighted
of Average
Portfolio Yield(2)
-------------- ------------
<S> <C> <C>
Securities Held to Maturity (1)
Debt securities:
U.S. agency:
Due after one year through five years........... 19.00% 4.53%
Due after five years through ten years.......... -- --
Due after ten years through fifteen years....... -- --
Municipal:
Due in one year or less......................... 1.01 3.90
Due after one year through five years........... -- --
Mortgage-backed securities (3)..................... 18.65 6.74
-----
38.66%
=====
Securities Available for Sale
Debt securities:
U.S. agency:
Due after five years through ten years......... -- --
Due after ten years through fifteen years...... 50.65 7.01
Mortgage-backed securities (3)................. -- --
Municipal:
Due after five years through ten years......... -- --
Due after ten years............................ -- --
Equity securities:
Mutual fund (4)................................ 10.69 N/A
-----
61.34%
=====
</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%.
(3) The expected maturities of mortgage-backed securities may differ from
contractual maturities because the mortgages underlying the obligations may
be prepaid without penalty.
(4) The mutual fund invests primarily in U.S. Government agency securities.
11
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major source of the Bank's
funds for lending and other investment purposes. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and money
market conditions. Borrowing may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources or may also be used
on a longer term basis for general business purposes.
Deposit Accounts. Deposits are attracted from within the Bank's primary
market area through the offering of a broad selection of deposit instruments,
including negotiable order of withdrawal ("NOW") accounts, money market
accounts, regular savings accounts, certificates of deposit and retirement
savings plans. Deposit account terms vary, according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. In determining the terms of its deposit accounts, the
Bank considers the rates offered by its competition, profitability to the Bank,
matching deposit and loan products and its customer preferences and concerns.
The Bank generally reviews its deposit mix and pricing weekly.
The following table presents the maturity distributions of time deposits of
$100,000 or more as of June 30, 1999.
<TABLE>
<CAPTION>
Maturity Period Amount
--------------- ---------------
(In thousands)
<S> <C>
Three months or less................................. $ 2,107
Over three through six months........................ 2,075
Over six through 12 months........................... 2,633
Over twelve months................................... 5,974
-------
Total............................................. $12,789
=======
</TABLE>
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------
1999 1998
---------------------------------------- ----------------------------
Percent Percent
of Increase of
Amount Total (Decrease) Amount Total
-------- --------- ---------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-interest-bearing demand....................... $ 4,093 4.45% $ 997 $ 3,096 4.00%
NOW accounts...................................... 11,897 12.93 858 11,039 14.24
Cash management................................... 88 0.10 4 84 0.11
Regular savings accounts.......................... 5,867 6.38 1,062 4,805 6.20
Money market accounts............................. 20,574 22.36 10,127 10,447 13.49
90-day passbooks.................................. 242 0.26 24 218 0.28
Fixed rate time deposits which mature:
Within one year................................ 21,434 23.29 1,856 19,578 25.28
After one year, but
within three years............................ 18,910 20.55 (1,600) 20,510 26.48
After three years, but
within five years.............................. 7,717 8.39 1,080 6,637 8.57
After five years................................ 1,045 1.13 47 998 1.29
Club accounts..................................... 147 0.16 97 50 0.06
------- ------ ------- ------- ------
Total........................................ $92,014 100.00% $14,552 $77,462 100.00%
======= ====== ======= ======= ======
</TABLE>
12
<PAGE>
The following table sets forth the amount and maturities of time deposits
by rates at June 30, 1999.
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------------------
Percent
of Total
Less Than 1 - 3 3-5 After 5 Time
One Year Years Years Years Total Deposits
--------- ------- ------ ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Below 5.00%....................... $ 7,670 $ 5,689 $1,112 $ 188 $14,659 29.85%
5.00% -- 5.99%................... 6,653 8,172 3,892 95 18,812 38.31
6.00% -- 6.99%................... 4,988 3,441 2,535 415 11,380 23.18
7.00% -- 7.99%................... 1,853 185 138 347 2,523 5.14
8.00% -- 8.99%................... 90 837 40 -- 967 1.97
9.00% -- 9.99%................... 180 585 -- -- 764 1.55
------- ------- ------ ------ ------- ------
Total........................... $21,434 $18,910 $7,717 $1,045 $49,106 100.00%
======= ======= ====== ====== ======= ======
</TABLE>
The following table sets forth the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Beginning balance............................................................ $77,462 $70,756
------- -------
Net increase (decrease) before interest credited............................. 11,187 3,622
Interest credited............................................................ 3,365 3,084
------- -------
Net increase (decrease) in deposits.......................................... 14,552 6,706
------- -------
Ending balance............................................................... $92,014 $77,462
======= =======
</TABLE>
Borrowings. Deposits are the primary source of funds for the Bank's lending
and investment activities and for its general business purposes. The Bank has at
times relied upon advances from the FHLB of Indianapolis to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. Advances
from the FHLB of Indianapolis are secured by certain first mortgage loans and
investment and mortgage-backed securities. At June 30, 1999, the Bank had
advances from the FHLB of Indianapolis of $12.3 million.
The FHLB functions as a central reserve bank providing credit for savings
and loan associations and certain other member financial institutions. As a
member, the Bank is required to own capital stock in the FHLB and is authorized
to apply for advances on the security of such stock and certain of its mortgage
loans and other assets (principally securities which are obligations of, or
guaranteed by, the United States) provided certain standards related to
creditworthiness have been met. Advances are made pursuant to several different
programs. Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based either
on a fixed percentage of an institution's net worth or on the FHLB's assessment
of the institution's creditworthiness. Under its current credit policies, the
FHLB generally limits advances to 20% of a member's assets, and short-term
borrowing of less than one year may not exceed 10% of the institution's assets.
The FHLB determines specific lines of credit for each member institution.
13
<PAGE>
The following table sets forth certain information regarding borrowings by
the Bank at the end of and during the periods indicated:
<TABLE>
<CAPTION>
At or For the Year
Ended June 30,
---------------------------------
1999 1998
------- --------
(In thousands)
<S> <C> <C>
Maximum amount of FHLB advances
outstanding at any month end.................................................. $12,250 $6,250
Approximate average FHLB advances outstanding.................................. 7,528 4,874
Year end balance of FHLB advances outstanding.................................. 12,250 5,250
Approximate weighted average rate paid on
FHLB advances at end of year.................................................. 5.45% 5.54%
Approximate weighted average rate paid on
FHLB advances during year..................................................... 5.55% 6.24%
</TABLE>
Subsidiary Activities
As of June 30, 1999, the Bank was the Company's only subsidiary, and was
wholly-owned by the Company. The Bank has no subsidiaries.
Personnel
As of June 30, 1999, the Bank had 33 full-time employees and 8 part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank considers its relationship with its employees to be good.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the OTS. The Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency and the FDIC, as the deposit
insurer. The activities of federal savings institutions are governed by the Home
Owners' Loan Act, as amended ("HOLA") and, in certain respects, the Federal
Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and FDIC to
implement these statutes. The Bank 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 the FDIC
conduct periodic examinations to test the Bank's safety and soundness and
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in 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 the Company, the Bank and their operations. Certain of the
regulatory requirements applicable to the Bank and to the Company are referred
to below or elsewhere herein. The description of statutory provisions and
regulations applicable to savings institutions and their holding companies set
forth in this Form 10-KSB does not purport to be a complete description of such
statutes and regulations and their effects on the Bank and the Company.
14
<PAGE>
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company
within the meaning of federal law. As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that the Bank
continues to be a qualified thrift lender. See "Federal Savings Institution
Regulation--QTL Test." Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, the Company
would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally be limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the 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: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
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. The Bank must notify the
OTS 30 days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the 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 associations,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
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 1 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 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, 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 1) capital is defined as
common stockholders' equity (including retained earnings), certain non-
cumulative 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 and the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
15
<PAGE>
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, the Bank 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 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the 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 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 the Bank 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 1980's by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998,
FICO payments for SAIF members 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 Bank's assessment rate for fiscal 1999 ranged from 5.8 to 6.1 basis
points and total premiums paid for this period were $47,000. 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 the Bank. 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 the Bank 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. The Bank 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, the Bank's limit on loans to one borrower was $3.7 million, and the Bank's
largest aggregate outstanding balance of loans to one borrower was $939,000.
16
<PAGE>
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: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 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, the Bank maintained 71.5% of its portfolio
assets in qualified thrift investments and, therefore, met the qualified thrift
lender test. Recent legislation has expanded the extent to which education
loans, credit card loans and small business loans may be considered "qualified
thrift investments."
Limitation on Capital Distributions. 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 1 Association") 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, the Bank was a Tier 1 Association. 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,
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 the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank'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. The Bank 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. The Bank's
liquidity ratio for June 30, 1999 was 9.5%, which exceeded the applicable
requirements. The Bank 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 the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended June 30, 1999 totaled $29,000.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type 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.
The Bank'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
17
<PAGE>
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 the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
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
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, 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. The Bank was in compliance
with this requirement with an investment in FHLB stock at June 30, 1999, of
$______ million. 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.
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, the Bank's net interest income would likely also be
reduced.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily 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. The Bank complies with the foregoing requirements.
18
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank has not been audited by the IRS in the past five
years.
Bad Debt Reserve. For taxable years beginning after December 31, 1995, the
Bank is entitled to take a bad debt deduction for federal income tax purposes
which is based on its current or historic net charge-offs. For tax years
beginning prior to December 31, 1995, the Bank as a qualifying thrift had been
permitted to establish a reserve for bad debts and to make annual additions to
such reserve, which were deductible for federal income tax purposes. Under such
prior tax law, generally the Bank recognized a bad debt deduction equal to 8% of
taxable income.
Under the 1996 Tax Act, the Bank is required to recapture all or a portion
of its additions to its bad debt reserve made subsequent to the base year (which
is the Bank's last taxable year beginning before January 1, 1988). This
recapture is required to be made, after a deferral period based on certain
specified criteria, ratably over a six-year period commencing in the Bank's
calendar 1998 tax year. The Bank, in fiscal 1997, recorded a deferred tax
liability for this bad debt recapture. As a result, the recapture is not
anticipated to effect the Bank's future net income or federal income tax expense
for financial reporting purposes.
Potential Recapture of Base Year Bad Debt Revenue. The Bank's bad debt
reserve as of the base year is not subject to automatic recapture as long as the
Bank continues to carry on the business of banking. If the Bank no longer
qualifies as a bank, the balance of the pre-1988 reserves (the base year
reserves) are restored to income over a six-year period beginning in the tax
year the Bank no longer qualifies as a bank. Such base year bad debt reserve is
subject to recapture to the extent that the Bank makes "non-dividend
distributions" that are considered as made from the base year bad debt. To the
extent that such reserves exceed the amount that would have been allowed under
the experience method ("Excess Distributions"), then an amount based on the
amount distributed will be included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation. However, dividends paid out
of the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Bank's bad debt reserve. Thus, any dividends to the Company that would
reduce amounts appropriated to the Bank's bad debt reserve and deducted for
federal income tax purposes would create a tax liability for the Bank. The
amount of additional taxable income created from an Excess Distribution is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if, after the Conversion, the Bank makes a
"non-dividend distribution," then approximately one and one-half times the
amount so used would be includable in gross income for federal income tax
purposes, assuming a 34% corporate income tax rate (exclusive of state and local
taxes). The Bank does not intend to pay dividends that would result in a
recapture of any portion of its bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt
reserve deduction claimed by the Bank over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Bank currently has none. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). In addition, for taxable years beginning
after June 30, 1986 and before January 1, 1996, an environmental tax of 0.12% of
the excess of AMTI (with certain modifications) over $2.0 million is imposed on
corporations, including the Bank, whether or not an Alternative Minimum Tax
("AMT") is paid. The Bank does not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank own more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
Indiana Taxation
19
<PAGE>
Indiana imposes an 8.5% franchise tax based on a financial institution's
adjusted gross income as defined by statute. In computing adjusted gross
income, deductions for municipal interest, U.S. Government interest, the bad
debt deduction computed using the reserve method and pre-1990 net operating
losses are disallowed. The Bank's state income tax returns were audited for the
years ended June 30, 1993, 1994 and 1995 without amendment and without
additional tax liability. The Bank's state income tax returns have not been
audited for any subsequent period.
Item 2. Description of Property.
- ---------------------------------
The Bank conducts its business through three full-service banking offices.
The following table sets forth certain information regarding the Bank's offices
as of June 30, 1999.
<TABLE>
<CAPTION>
Approximate
Year Owned/ Square
Location Opened Net Book Value (1) Leased Footage
- ---------------------- -------- -------------------- --------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Main Office:
220 Federal Drive, N.W. 1997 $ 2,503 Owned 12,000
Corydon, Indiana 47112
Branch Offices:
391 Old Capitol Plaza, N.W. 1997 98 Leased(2) 425
Corydon, Indiana 47112
8095 State Highway 135, N.W. 1999 1,008 Owned 3,500
New Salisbury, Indiana 47161
</TABLE>
___________________________
(1) Represents the net value of land, buildings, furniture, fixtures and
equipment owned by the Bank.
(2) Lease expires on November 30, 2003.
Item 3. Legal Proceedings.
- ---------------------------
At June 30, 1999, neither the Company not the Bank was involved in any
pending legal proceedings that are believed by management to be material to the
Company's financial condition or results of operations. In addition, from time
to time, the Bank is involved in legal proceeding occurring in the ordinary
course of business. Such routine legal proceedings, in the aggregate, are
believed by management to be immaterial to the Company's financial condition or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
- ------------------------------------------------------------------
The information required by this Item is incorporated herein by
reference to the Company's Annual Report to Stockholders under the heading
"Corporate Information--Common Shares."
Item 6. Management's Discussion and Analysis or Plan of Operation.
- -------------------------------------------------------------------
The information required by this Item is incorporated herein by
reference to the Company's Annual Report to Stockholders under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 7. Financial Statements.
- ------------------------------
The information required by this Item is incorporated herein by
reference to the Company's Annual Report to Stockholders.
20
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure.
--------------------
None.
PART III
--------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act.
--------------------------------------------------
The information required by this Item is incorporated herein by
reference to the Joint Proxy Statement-Prospectus, filed as part of the
Registrant's Registration Statement on Form S-4 (File No. 333-87203), under the
headings "Proposal 2 for First Capital Shareholders -- Election of Directors"
and "Proposal 2 for First Capital Shareholders -- Election of Directors --
Compliance With Section 16(a) of the Exchange Act."
Item 10. Executive Compensation.
- --------------------------------
The information required by this Item is incorporated herein by
reference to the Joint Proxy Statement-Prospectus, filed as part of the
Registrant's Registration Statement on Form S-4 (File No. 333-87203), under the
heading "Proposal 2 for First Capital Shareholders -- Election of Directors --
Executive Compensation."
Item 11. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
The information required by this Item is incorporated herein by
reference to the Joint Proxy Statement-Prospectus, filed as part of the
Registrant's Registration Statement on Form S-4 (File No. 333-87203), under the
heading "Ownership of First Capital Common Stock."
Item 12. Certain Relationships and Related Transactions.
- --------------------------------------------------------
The information required by this Item is incorporated herein by
reference to the Joint Proxy Statement-Prospectus, filed as part of the
Registrant's Registration Statement on Form S-4 (File No. 333-87203), under the
heading "Proposal 2 for First Capital Shareholders -- Election of Directors --
Transactions With Management."
PART IV
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- --------------------------------------------------------------------------
(a) Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries are filed as part of this document under Item 7:
. Independent Auditors' Report
. Balance Sheets as of June 30, 1999 and 1998
. Consolidated Statements of Income for the Years Ended June 30,
1999 and 1998
. Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1999 and 1998
. Consolidated Statements of Cash Flows for the Years Ended June
30, 1999 and 1998
. Notes to Consolidated Financial Statements
Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or notes thereto.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the last quarter of 1999.
21
<PAGE>
(c) Exhibits
Exhibit
Number
------
2.0 Agreement and Plan of Merger, dated as of July 19, 1999, by and Among
First Capital, Inc., FC Acquisition Corp. and HCB Bancorp (1)
3.1 Articles of Incorporation of First Capital, Inc. (2)
3.2 Bylaws of First Capital, Inc. (2)
10.1 Employment Agreement with James G. Pendleton (3)
10.2 Employment Agreement with Samuel E. Uhl (3)
10.3 Employment Agreement with M. Chris Frederick (3)
10.4 Employment Agreement with Joel E. Voyles (3)
10.5 Employee Severance Compensation Plan (3)
10.6 First Federal Bank, A Federal Savings Bank 1994 Stock Option Plan (as
assumed by First Capital, Inc. effective December 31, 1998) (4)
13.0 Annual Report to Stockholders
21.0 Subsidiaries of the Registrant (Incorporated Herein by Reference to
Part I - Subsidiary Activity)
23.0 Consent of Monroe Shine and Co., Inc.
27.0 Financial Data Schedule
_________________________
(1) Incorporated by reference from the Exhibits filed with the Current
Report on Form 8-K dated July 19, 1999.
(2) Incorporated by reference from the Exhibits filed with the Registration
Statement on Form SB-2, and any amendments thereto, Registration No.
333-63515.
(3) Incorporated by reference to the Quarterly Report on Form 10-QSB for
the quarter ended December 31, 1998.
(4) Incorporated by reference from the Exhibits filed with the Registration
Statement on Form S-8, and any amendments thereto, Registration
Statement No. 333-76543.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST CAPITAL, INC.
/s/ James G. Pendleton
--------------------------------------------
James G. Pendleton
Chairman and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ James G. Pendleton Chairman and Chief Executive September 16, 1999
- ------------------------------ Officer
James G. Pendleton (principal executive officer)
/s/ Michael C. Frederick Senior Vice President, Chief Financial September 16, 1999
- ------------------------------ Officer and Treasurer (principal accounting
Michael C. Frederick and financial officer)
/s/ Samuel E. Uhl President, Chief Operating Officer September 16, 1999
- ------------------------------ and Director
Samuel E. Uhl
/s/ Mark D. Shireman Director September 16, 1999
- ------------------------------
Mark D. Shireman
/s/ Dennis L. Huber Director September 16, 1999
- ------------------------------
Dennis L. Huber
/s/ Kenneth R. Saulman Director September 16, 1999
- ------------------------------
Kenneth R. Saulman
/s/ John W. Buschemeyer Director September 16, 1999
- ------------------------------
John W. Buschemeyer
/s/ Gerald L. Uhl Director September 16, 1999
- ------------------------------
Gerald L. Uhl
</TABLE>
23
<PAGE>
EXHIBIT 13
- --------------------------------------------------------------------------------
FIRST CAPITAL, INC.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Letter to Stockholders................................................. 2
Selected Financial and Other Data...................................... 3-4
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 5-12
Independent Auditor's Report........................................... 13
Consolidated Financial Statements...................................... 14-17
Notes to Consolidated Financial Statements............................. 18-37
Board of Directors..................................................... 38
Corporate Information.................................................. 39-40
</TABLE>
BUSINESS OF THE COMPANY
First Capital, Inc. (the Company) is the holding company of First Federal
Bank, a Federal Savings Bank (the Bank). The Company became the holding company
for the Bank on December 31, 1999 in connection with the conversion of the
Bank's former mutual holding company, First Capital, Inc., MHC (the MHC) from
the mutual to stock form of organization and the simultaneous reorganization of
the Bank as a wholly-owned subsidiary of the Company (the Conversion and
Reorganization).
The Bank's deposit accounts are insured up to applicable legal limits by
the Federal Deposit Insurance Corporation through the Savings Association
Insurance Fund. The Bank is a member of the Federal Home Loan Bank System. The
Bank conducts its operations through its three offices in Harrison County,
Indiana. The Bank's main office is located at 220 Federal Drive, N.W., Corydon,
Indiana. The telephone number is (812) 738-2198.
The Bank is a community-oriented financial institution offering traditional
financial services primarily to residents of Harrison County, Indiana, and
contiguous counties. The Bank's primary business is attracting deposits from the
general public and using those funds to originate one-to-four family residential
mortgage loans. The Bank also originates multi-family and commercial real estate
loans secured by properties located in southern Indiana. To a lesser extent, the
Bank originates commercial and consumer loans.
1
<PAGE>
FIRST CAPITAL, INC.
220 Federal Drive, N.W.
Corydon, Indiana 47112
September 23, 1999
Fellow shareholders of First Capital, Inc.
By any measure, this past year was exciting and rewarding for First Capital,
Inc. The most obvious measurement of our success was our ability to exceed our
financial objectives established at the beginning of our fiscal year. On
December 31, 1998, we completed a conversion from the mutual holding company to
the stock holding company form of organization and issued common stock in a
subscription offering which provided us with additional capital to support our
growth and the expansion of our banking services. From a strategic point of
view, a more important accomplishment was the announcement of the proposed
merger of First Capital, Inc. and HCB Bancorp of Palmyra, Indiana. We feel this
merger of equals, which we anticipate completing in early 2000, will enhance the
long-term performance of the Company.
Solid Earnings. Net income before taxes increased during the 1999 fiscal year
to $1.6 million from $1.5 million in 1998. Income after taxes rose by
approximately 4.6%. Fully diluted earnings per share increased to 77 cents per
share, a gain of 3 cents per share.
Outstanding Growth. First Capital, Inc. achieved asset growth of over 30%
during the past year. Net loans and securities grew during the year by over $30
million, deposits by almost $15 million and stockholders' equity by
approximately $7 million.
High Asset Quality. One of the most important aspects of a successful bank is
maintaining high-quality assets. As of June 30, 1999, First Capital, Inc. had no
non-performing assets. Clearly this level of non-performing assets cannot last
forever, particularly if economic conditions decline or weaken. However, we
believe we have policies and procedures in place designed to help maintain
delinquencies and loan losses to a minimum.
Local Advantage. As many large banks continue to buy and sell each other, we
have directed our efforts to expansion in our local market. The opening of our
new banking center in New Salisbury brings local banking back to that area.
Also, the proposed merger with HCB Bancorp will help consolidate these efforts.
The two banks currently have nine offices located within 25 miles of each other.
We believe the shareholders, customers and employees of both organizations will
benefit from this new partnership.
A Promising Outlook. The past year provided moderate levels of inflation,
nearly full employment and soaring consumer confidence. However, many economists
are viewing the coming year with caution. The Federal Reserve has already
responded to threats of inflation by raising interest rates. We believe First
Capital is in a strong position to withstand higher interest rates and increases
in unemployment should they occur.
On behalf of the Board of Directors and our entire staff, thank you for your
trust and confidence in our efforts. We will strive to earn your continued
support.
Sincerely,
J. Gordon Pendleton
Chairman and CEO
2
<PAGE>
- --------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
The financial data presented below is qualified in its entirety by the more
detailed financial data appearing elsewhere herein, including the Bank's audited
financial statements. The following tables set forth certain information
concerning the financial position and results of operations of the Bank at the
dates indicated.
<TABLE>
<CAPTION>
FINANCIAL CONDITION DATA: At June 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
-------------- ---------- ---------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
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 Federal Home Loan Bank 12,250 5,250 8,250 3,750 2,750
Stockholders' equity, substantially restricted 17,340 10,341 9,493 8,805 8,087
OPERATING DATA: Year Ended June 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
-------------- ---------- ---------- -------- ---------
(In thousands)
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 tax expense 632 589 131 501 526
-----------------------------------------------------------
NET INCOME $ 1,002 $ 958 $ 806 $ 850 $ 903
===========================================================
PER SHARE DATA:
Net income - basic $ 0.78 $ 0.74 $ 0.63 $ 0.66 $ 0.71
Net income - diluted 0.77 0.74 0.62 0.65 0.70
Dividends to minority stockholders prior to conversion 0.14 0.27 0.27 0.27 0.27
Dividends following conversion 0.15 N/A N/A N/A N/A
</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 insurance assessment of $403,000 in 1997.
3
<PAGE>
- --------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA - CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------
1999 1998 1997 1996 1995
-------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
SELECTED OTHER DATA:
Number of:
Mortgage loans outstanding 1,270 1,242 1,270 1,229 1241
Deposit accounts 8,688 7,783 7,181 6,744 6968
Offices 3 2 2 1 1
</TABLE>
<TABLE>
<CAPTION>
At and For Year Ended June 30,
-------------------------------------------------
1999 1998 1997 1996 1995
-------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
Performance Ratios:
Return on 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%
Dividend payout ratio (3) 40.85% 36.74% 43.77% 41.19% 38.78%
Average equity to average assets 14.48% 11.30% 10.94% 11.02% 10.72%
Interest rate spread (4) 2.71% 2.72% 2.70% 2.59% 2.97%
Net interest margin (5) 3.37% 3.27% 3.27% 3.22% 3.51%
Non-interest expense to average assets 1.89% 1.82% 2.22% 1.56% 1.58%
Average interest earning assets to
average interest bearing liabilities 114.84% 111.29% 111.74% 113.10% 111.91%
Regulatory Capital Ratios:
Tier I - adjusted total assets 14.09% 11.01% 10.62% 10.83% 11.09%
Tier I - risk based 26.08% 18.33% 17.74% 19.55% 17.49%
Total risk-based 26.81% 19.15% 18.60% 20.71% 18.65%
Asset Quality Ratios:
Nonperforming loans as a percent of
loans receivable, net (6) - 0.17% 0.29% 0.16% 0.21%
Nonperforming assets as a
percent of total assets (7) - 0.14% 0.28% 0.12% 0.25%
Allowance for loan losses as a percent
of gross loans receivable 0.54% 0.67% 0.71% 0.79% 0.88%
Net charge-offs as a percent of
average outstanding loans 0.10% - - 0.02% 0.04%
Ratio of nonperforming assets to
total assets - 0.35% 0.14% 0.31% 0.14%
</TABLE>
- --------------------------------------------------------------------------------
(1) Net income divided by average assets.
(2) Net income divided by average equity.
(3) Dividend payout ratio is computed considering only the minority
shareholders' proportionate share of net income prior to conversion. Prior
to conversion on December 31, 1998, the majority shareholder, First
Capital, Inc., M.H.C., with the approval of the OTS, elected to waive the
receipt of dividends.
(4) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Nonperforming loans consist of loans accounted for on a nonaccrual basis
and accruing loans 90 days or more past due.
(7) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans, but exclude restructured loans.
4
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
General
First Capital, Inc. (the Company) is the parent to its wholly owned subsidiary,
First Federal Bank, a Federal Savings Bank (the Bank), a community-oriented
financial institution offering traditional financial services primarily to
residents of Harrison County, Indiana, and contiguous counties. 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 one-to-four family residential mortgage loans. The Bank's
lending activity also includes multi-family residential loans, commercial real
estate and business loans and consumer loans. The Bank invests excess liquidity
primarily in interest bearing deposits with the Federal Home Loan Bank of
Indianapolis, U.S. government and agency securities, local municipal obligations
and, to a lesser extent, mortgage-backed securities.
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 and, if utilized, borrowings from the Federal Home Loan
Bank of Indianapolis. The Bank's net income is also affected by, among other
things, fee income, provisions for loan losses, operating expenses and income
tax provisions. The Bank's results of operations are also significantly affected
by general economic and competitive conditions, particularly changes in market
interest rates, government legislation and policies concerning monetary and
fiscal affairs, housing and financial institutions and the intended actions of
the regulatory authorities.
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; the Company's ability to remedy any computer malfunctions that may
result from the advent of the Year 2000; and other factors disclosed
periodically in the Company's filings with the Securities and Exchange
Commission.
5
<PAGE>
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.
Pending Merger
On July 19, 1999, the Company entered into an agreement and plan of merger with
HCB Bancorp (HCB), a bank holding company located in Palmyra, Indiana. HCB is
the parent company of Harrison County Bank, a state-chartered commercial bank.
Terms of the agreement provide for an exchange of 15.5 shares of the Company's
common stock for each share of HCB common stock. At June 30, 1999, HCB had total
assets of $88.1 million and stockholders' equity of $12.1 million. The combined
company will have the leading market share in Harrison County, Indiana, as
measured by total deposits. Management believes that the combined company will
be an effective competitor in its market area and will be well positioned to
offer superior community banking services. The merger is subject to regulatory
and stockholder approvals. See the accompanying notes to consolidated financial
statements for additional information.
Conversion and Stock Offering
On December 31, 1998, the MHC and Bank completed a conversion and stock offering
whereby the MHC was merged with and into the Bank with the Bank becoming a
wholly-owned subsidiary of the Company which offered common stock to certain
current and former depositor and borrower customers of the Bank in a
subscription offering. The Company issued 768,551 shares of common stock for
gross proceeds of $7,685,510 as a result of the offering. Total expenses in
connection with the conversion and offering amounted to $449,382 and were
charged against the proceeds from the offering.
The Company also issued 523,057 common shares in exchange for the 204,015 common
shares held by the public stockholders of the Bank pursuant to an exchange ratio
resulting in the public stockholders of the Bank owning in the aggregate
approximately 40.5% of First Capital, Inc. after the conversion and offering.
The conversion was accounted for as a pooling of interests and accordingly, the
June 30, 1998 balance sheet has been restated.
In connection with the conversion, the Bank has established a leveraged employee
stock ownership plan (ESOP) which acquired 8% of the common stock issued in the
offering (61,501 common shares) funded by a term loan from the Company. The Bank
will make annual contributions to the ESOP equal to the debt service
requirements of the term loan. The ESOP shares are pledged as collateral for the
loan and as the debt is repaid shares are released from collateral and allocated
to participants. The ESOP shares pledged as collateral are reported as unearned
ESOP shares in the balance sheet and the Company reports compensation cost equal
to the current fair value of the ESOP shares released from collateral. Dividends
on allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are not considered dividends for financial
reporting purposes.
Comparison of Financial Condition at June 30, 1999 and 1998
Total assets increased 30.6% from $94.0 million at June 30, 1998 to $122.7
million at June 30, 1999, primarily as a result of increases in investment
securities and loans receivable, net, which was funded primarily by the net
proceeds from the issuance of common stock in the conversion, growth in deposits
and an increase in advances from the Federal Home Loan Bank of Indianapolis.
Loans receivable, net, were $83.9 million at June 30, 1999, compared to $74.9
million at June 30, 1998, a 12.0% increase. The loan growth is attributable to a
16.7% growth in residential mortgage loans (includes residential construction
loans). Residential mortgage loans were $61.6 million at June 30, 1998, compared
to $71.9 million at June 30, 1999.
6
<PAGE>
The investment in mortgage-backed securities held-to-maturity decreased from
$1.5 million at June 30, 1998 to $767,000 at June 30, 1999 as a result of
repayments of $702,000.
Other debt securities held to maturity, consisting of federal agency notes and
bonds, increased from $1.6 million at June 30, 1998 to $8.5 million at June 30,
1999. During the year ended June 30, 1999, the Company purchased other debt
securities of $8.5 million and had maturities of other debt securities with a
carrying value of $1.6 million.
Securities available for sale, consisting primarily of federal agency mortgage-
backed certificates, notes and bonds, increased $15.4 million from $4.8 million
at June 30, 1998 to $20.2 million at June 30, 1999 as a result of purchases of
$22.6 million and maturities and repayments of $6.5 million.
Cash and interest bearing deposits with banks decreased from $6.1 million at
June 30, 1998 to $2.6 million at June 30, 1999 as a result of the investment in
loans and investment securities.
Total deposits increased from $77.5 million at June 30, 1998 to $92.0 million at
June 30, 1999. The increase in deposits resulted primarily from growth in demand
and savings deposit accounts, which management attributes primarily to its
promotional efforts to attract lower cost accounts.
Total stockholders' equity increased from $10.3 million at June 30, 1998 to
$17.3 million at June 30, 1999 as a result of retained net income of $746,000
and net proceeds from issuance of common stock of $6.6 million.
Comparison of Operating Results for the Years Ended June 30, 1999 and 1998
Net Income. Net income was $1.0 million ($.77 per share diluted) for the year
ended June 30, 1999 compared to $958,000 ($.73 per share diluted) for the year
ended June 30, 1998. The results for 1998 included a one-time gain of $105,000,
net of tax, associated with the sale of the Bank's old main office property.
Excluding this one-time gain, net income increased $148,000 for 1999 compared to
1998 primarily from an increase in net interest income offset by an increase in
non-interest expenses.
Net Interest Income. Net interest income increased 22.4% from $2.7 million in
1998 to $3.4 million in 1999 as a result of the increase in interest-earning
assets during 1999 and a decrease in the average cost of funds in 1999 compared
to the same period in 1998.
Total interest income increased $938,000, or 13.7%, to $7.8 million for the year
ended June 30, 1999 compared to $6.9 million in the prior year as a result of a
higher balance of interest-earning assets. Interest on loans receivable
increased $286,000 and interest on investment securities increased $646,000 as a
result of a higher average balance in 1999. The average yield on interest-
earnings assets decreased from 8.16% in 1998 to 7.82% in 1999 primarily because
of lower market rates.
Total interest expense increased $323,000, or 7.8%, to $4.4 million for the year
ended June 30, 1999 compared to $4.1 million for the year ended June 30, 1998 as
a result of the growth in deposits and an increase in average borrowings from
the Federal Home Loan Bank. Both the average cost of deposits and borrowings
decreased during 1999 compared to 1998 as the average cost of interest bearing
liabilities decreased from 5.44% in 1998 to 5.11% in 1999. The decrease in the
average cost of deposits results from the growth in lower cost checking and
savings accounts.
7
<PAGE>
Provision for Loan Losses. The provision for loan losses was $44,000 for the
year ending June 30, 1999. There was no provision for loan losses for the
comparable period in 1998 because the allowance for loan losses was considered
adequate based upon management's evaluation. Provisions for loan losses are
charges to earnings to maintain the total allowance for loan losses at a level
considered reasonable by management to provide for probable known and inherent
loan losses based on management's evaluation of the collectibility of the loan
portfolio, including the nature of the portfolio, credit concentrations, trends
in historical loss experience, specified impaired loans, and economic
conditions. The Bank made provisions of $44,000 for the year ended June 30, 1999
to increase the allowance for loan losses to an amount considered reasonable by
management based on quarterly evaluations. The Bank made provisions for loan
losses in 1999 due to an increase in commercial business and unsecured personal
loans, which possess a higher inherent risk of loss than one-to-four family
residential mortgage loans, and the net charge-offs of $78,000 during the year.
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 decreased 26.7% to $301,000 for the
year ended June 30, 1999 compared to $411,000 for the year ended June 30, 1998.
The decrease is primarily the result of a one-time gain of $169,000 in 1998 from
the sale of the Bank's old main office property. Service charges on deposit
accounts increased $47,000 for 1999 compared to 1998 due to the growth in
transaction accounts during 1999.
Non-interest expense. Non-interest expense increased $376,000 for 1999 compared
to 1998. The increase results primarily from increases in compensation and
benefits and occupancy and equipment expenses. Compensation and benefits expense
increased $174,000 due to normal compensation increases and additional staff in
the loan department in 1999. Occupancy and equipment costs have increased in
1999 compared to 1998 as a result of increased depreciation charges on the new
main office facility and equipment and expenses related to the Year 2000 issue.
The Bank also experienced higher costs due to the opening of a new branch office
in New Salisbury, Indiana in March 1999. The Bank had been operating a temporary
facility in New Salisbury since November 1998.
Income tax expense. Income tax expense for the year ended June 30, 1999 was
$632,000, compared to $589,000 for the same period in 1998. The effective tax
rate for 1999 was 38.7% compared to 38.1% 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 the Federal Home Loan Bank of Indianapolis. While loan
repayments and maturities and sales of securities are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by market
interest rates, general economic conditions and competition. At June 30, 1999,
the Bank had cash and interest-bearing deposits with banks of $2.6 million and
securities available for sale with a fair value of $20.2 million. If the Bank
requires funds beyond its ability to generate them internally, it has additional
borrowing capacity with the FHLB of Indianapolis and collateral eligible for
repurchase agreements.
The Bank's primary investing activity is the origination of one-to-four family
mortgage loans and, to a lesser extent, consumer, multi-family, commercial real
estate and residential construction loans. The Bank also invests in U.S.
government and agency securities and mortgage-backed securities issued by U.S.
government agencies.
The Bank must maintain an adequate level of liquidity to ensure the availability
of sufficient funds to support loan growth and deposit withdrawals, to satisfy
financial commitments and to take advantage of investment opportunities. At June
30, 1999, the Bank had total commitments to extend credit of $10.4 million. See
Note 13 of Notes to Consolidated Financial Statements. At June 30, 1999, the
Bank had certificates of deposit scheduled to mature within one year of $21.4
million. Historically, the Bank has been able to retain a significant amount of
its deposits as they mature.
8
<PAGE>
Current Office of Thrift Supervision (OTS) regulations require the Bank to
maintain an average daily balance of liquid assets (cash and eligible
investments) equal to at least 4.0% of the average daily balance of its net
withdrawable deposits and short-term borrowings. Historically, the Bank has
maintained liquidity levels in excess of regulatory requirements. At June 30,
1999, the Bank's liquidity was 9.5%.
The Bank is required to maintain specific amounts of capital pursuant to OTS
requirements. As of June 30, 1999, the Bank was in compliance with all
regulatory capital requirements which were effective as of such date with
tangible, core and risk-based capital ratios of 12.1%, 12.1% and 23.2%,
respectively.
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. Using data compiled
by the OTS, the Bank receives a report which measures interest rate risk by
modeling the change in NPV (net portfolio value) over a variety of interest rate
scenarios. This procedure for measuring interest rate risk was developed by the
OTS to replace the "gap" analysis (the difference between interest-earning
assets and interest-bearing liabilities that mature or reprice within a specific
time period).
9
<PAGE>
The following table is provided by the OTS and sets forth the change in the
Bank's NPV at June 30, 1999, based on OTS assumptions, that would occur in the
event of an immediate change in interest rates, with no effect given to any
steps that management might take to counteract that change.
<TABLE>
<CAPTION>
At June 30, 1999
--------------------------------------------------------
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 $11,496 $(7,274) (38)% 10.09% (491)bp
200bp 14,271 (4,699) (25) 11.94 (306)bp
100bp 16,796 (2,174) (11) 13.64 (136)bp
--bp 18,970 - - 15.00 --bp
(100)bp 20,595 1625 9 15.93 93bp
(200)bp 22,250 3,280 17 16.83 183bp
(300)bp 24,329 5,359 28 17.94 294bp
</TABLE>
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 the OTS in assessing the interest rate risk of
savings associations within its region were utilized in preparing the preceding
table. These assumptions relate to interest rates, loan prepayment rates,
deposit decay rates, and the market values of certain assets under differing
interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates
could deviate significantly from those assumed in calculating the table.
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.
10
<PAGE>
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 November 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 1997, 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 and third-party
service bureau 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.
The Bank has identified major commercial borrowers to assess their Y2K readiness
and has requested information from those borrowers. As of June 30, 1999, the
Bank has received responses and evaluated those borrowers. All major commercial
borrowers identified have indicated that their Y2K preparedness is on schedule
or has been completed. Information necessary to assess Y2K readiness of new
commercial borrowers is obtained at the time of the loan application.
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 is considering the purchase or lease of an electrical power
generator with sufficient capacity to allow the Bank to maintain critical
functions in the event power from the electric utility is interrupted.
The Bank, as a federally chartered thrift institution, is regulated by the
Office of Thrift Supervision. The federal 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.
11
<PAGE>
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 $65,000. As of June 30, 1999, approximately $42,000 has been
incurred. 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.
12
<PAGE>
Independent Auditor's Report
The Board of Directors
First Capital, Inc.
Corydon, Indiana
We have audited the accompanying consolidated balance sheets of First Capital,
Inc. and Subsidiary as of June 30, 1999 and 1998, and the related consolidated
statements of income, 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Capital, Inc.
and Subsidiary as of June 30, 1999 and 1998, 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.
New Albany, Indiana
July 22, 1999
13
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 929,524 $ 894,657
Interest bearing deposits with banks 1,681,356 5,239,904
Securities available for sale, at fair value 20,204,556 4,848,534
Securities held to maturity:
Mortgage-backed securities (fair value $742,635;
1998 $1,462,917) 766,819 1,472,972
Other debt securities (fair value $8,320,025; 1998 $1,573,450) 8,479,648 1,580,000
Loans receivable, net of allowance for loan losses of $481,619
in 1999 and $515,959 in 1998 83,886,960 74,887,358
Federal Home Loan Bank stock, at cost 662,500 588,800
Foreclosed real estate - 103,874
Premises and equipment 3,688,258 2,600,772
Accrued interest receivable:
Loans 430,707 432,274
Mortgage-backed securities 33,661 11,681
Other debt securities 452,806 88,244
Cash value of life insurance 1,085,824 1,038,340
Other assets 394,932 170,653
------------ -----------
Total Assets $122,697,551 $93,958,063
============ ===========
LIABILITIES
Deposits:
Non-interest bearing demand deposits $ 4,093,621 $ 3,146,552
Savings and interest bearing demand deposits 38,814,682 26,593,058
Time deposits 49,105,953 47,722,424
------------ -----------
Total deposits 92,014,256 77,462,034
Advances from Federal Home Loan Bank 12,250,000 5,250,000
Advance payments by borrowers for taxes and insurance 37,073 33,722
Accrued interest payable on deposits 470,352 372,845
Accrued expenses and other liabilities 586,206 498,527
------------ -----------
Total Liabilities 105,357,887 83,617,128
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock of $.01 par value per share
Authorized 1,000,000 shares; none issued - -
Common stock of $.01 par value per share
Authorized 5,000,000 shares; issued 1,292,752 shares in 1999
(1,292,748 shares in 1998) 12,927 12,927
Additional paid-in capital 9,401,787 2,154,369
Retained earnings-substantially restricted 8,916,432 8,170,645
Accumulated other comprehensive income-net unrealized gain
(loss) on securities available for sale (407,222) 2,994
Unearned ESOP shares (584,260) -
------------ -----------
Total Stockholders' Equity 17,339,664 10,340,935
------------ -----------
Total Liabilities and Stockholders' Equity $122,697,551 $93,958,063
============ ===========
</TABLE>
See notes to consolidated financial statements.
14
<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); (iii) effects attributable to
changes in rate and volume (change in rate multiplied by changes in volume); and
(iv) the net change (the sum of the prior columns).
<TABLE>
<CAPTION>
1999 Compared to 1998
Increase (Decrease) Due to
-----------------------------------------------------------------------
Rate/
Rate Volume Volume Net
----------------- --------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans (1) ($131) $ 394 ($10) $253
Consumer loans (1) (7) (18) - (25)
Commercial business loans (1) 1 57 - 58
-----------------------------------------------------------------------
Total loans (137) 433 (10) 286
-----------------------------------------------------------------------
Investment securities (2) 5 635 6 646
Interest bearing deposits with banks (14) 23 (2) 7
-----------------------------------------------------------------------
Total net change in income
on interest earning assets (146) 1,091 (6) 939
-----------------------------------------------------------------------
Interest bearing liabilities:
Interest bearing deposits (226) 463 (28) 209
FHLB advances (34) 166 (18) 114
-----------------------------------------------------------------------
Total net change in expense
on interest bearing
liabilities (260) 629 (46) 323
-----------------------------------------------------------------------
Net change in net interest income $ 114 $ 462 $ 40 $616
=======================================================================
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include interest on loans 90 days or more past due.
(2) Includes mortgage-backed and other debt securities, securities classified as
available for sale and Federal Home Loan Bank stock.
15
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 929,524 $ 894,657
Interest bearing deposits with banks 1,681,356 5,239,904
Securities available for sale, at fair value 20,204,556 4,848,534
Securities held to maturity:
Mortgage-backed securities (fair value $742,635;
1998 $1,462,917) 766,819 1,472,972
Other debt securities (fair value $8,320,025; 1998 $1,573,450) 8,479,648 1,580,000
Loans receivable, net of allowance for loan losses of $481,619
in 1999 and $515,959 in 1998 83,886,960 74,887,358
Federal Home Loan Bank stock, at cost 662,500 588,800
Foreclosed real estate - 103,874
Premises and equipment 3,688,258 2,600,772
Accrued interest receivable:
Loans 430,707 432,274
Mortgage-backed securities 33,661 11,681
Other debt securities 452,806 88,244
Cash value of life insurance 1,085,824 1,038,340
Other assets 394,932 170,653
------------ -----------
Total Assets $122,697,551 $93,958,063
============ ===========
LIABILITIES
Deposits:
Non-interest bearing demand deposits $ 4,093,621 $ 3,146,552
Savings and interest bearing demand deposits 38,814,682 26,593,058
Time deposits 49,105,953 47,722,424
------------ -----------
Total deposits 92,014,256 77,462,034
Advances from Federal Home Loan Bank 12,250,000 5,250,000
Advance payments by borrowers for taxes and insurance 37,073 33,722
Accrued interest payable on deposits 470,352 372,845
Accrued expenses and other liabilities 586,206 498,527
------------ -----------
Total Liabilities 105,357,887 83,617,128
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock of $.01 par value per share
Authorized 1,000,000 shares; none issued - -
Common stock of $.01 par value per share
Authorized 5,000,000 shares; issued 1,292,752 shares in 1999
(1,292,748 shares in 1998) 12,927 12,927
Additional paid-in capital 9,401,787 2,154,369
Retained earnings-substantially restricted 8,916,432 8,170,645
Accumulated other comprehensive income-net unrealized gain
(loss) on securities available for sale (407,222) 2,994
Unearned ESOP shares (584,260) -
------------ -----------
Total Stockholders' Equity 17,339,664 10,340,935
------------ -----------
Total Liabilities and Stockholders' Equity $122,697,551 $93,958,063
============ ===========
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned
Common Paid-in Retained Comprehensive ESOP
Stock Capital Earnings Income (Loss) Shares Total
<S> <C> <C> <C> <C> <C> <C>
Balances at July 1, 1997 $12,888 $ 2,132,648 $ 7,354,737 $ (7,761) $ - $ 9,492,512
COMPREHENSIVE INCOME
Net income - - 958,452 - - 958,452
Other comprehensive income:
Change in unrealized loss on
securities available for sale,
net of deferred income tax
expense of $7,054 - - - 10,755 - 10,755
Less: reclassification adjustment - - - - - -
------------
Total comprehensive income 969,207
------------
Cash dividends to minority stockholders
of Bank - - (142,544) - - (142,544)
Exercise of stock options 39 21,721 - - - 21,760
-----------------------------------------------------------------------------------
Balances at June 30, 1998 12,927 2,154,369 8,170,645 2,994 - 10,340,935
COMPREHENSIVE INCOME
Net income - - 1,002,051 - - 1,002,051
Other comprehensive income:
Change in unrealized gain (loss)
on securities available for sale,
net of deferred income tax
benefit of $269,137 - - - (410,216) - (410,216)
Less: reclassification adjustment - - - - - -
------------
Total comprehensive income 591,835
------------
Cash dividends to minority stockholders
of Bank - - (71,405) - - (71,405)
Cash dividends ($0.15 per share) - - (184,859) - - (184,859)
Changes pursuant to conversion and
reorganization:
Cancellation of 769,470 shares held by
First Capital, Inc. , MHC and
merger with Bank (7,695) 12,877 - - - 5,182
Issuance of 707,050 common shares 7,071 6,614,047 - - - 6,621,118
Issuance of 61,501 common shares to
ESOP trust 615 614,395 - - (615,010) -
Exercise of stock options 9 5,750 - - - 5,759
Shares released by ESOP trust - 349 - - 30,750 31,099
-----------------------------------------------------------------------------------
Balances at June 30, 1999 $12,927 $ 9,401,787 $ 8,916,432 $(407,222) $(584,260) $17,339,664
===================================================================================
</TABLE>
See notes to financial statements.
17
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
INTEREST INCOME
Loans receivable:
Mortgage loans $5,467,632 $5,213,556
Consumer and other loans 1,027,820 995,710
Mortgage-backed securities 184,643 111,751
Other securities:
Federal agency 811,098 264,847
Municipal 19,966 9,363
Other 59,095 46,245
Federal Home Loan Bank dividends 48,509 45,653
Interest bearing deposits with banks 179,946 173,192
-----------------------
Total interest income 7,798,709 6,860,317
-----------------------
INTEREST EXPENSE
Deposits 4,016,573 3,808,317
Advances from Federal Home Loan Bank 417,995 303,551
-----------------------
Total interest expense 4,434,568 4,111,868
-----------------------
Net interest income 3,364,141 2,748,449
Provision for loan losses 44,000 -
-----------------------
Net interest income after provision for loan losses 3,320,141 2,748,449
NON-INTEREST INCOME
Loan fees and service charges 48,284 38,684
Gain on sale of premises and equipment - 169,087
Service charges on deposit accounts 170,620 123,806
Other income 82,304 79,205
-----------------------
Total non-interest income 301,208 410,782
-----------------------
NON-INTEREST EXPENSES
Compensation and benefits 1,032,773 858,303
Occupancy and equipment 398,177 309,943
Deposit insurance premiums 46,729 44,198
Other expenses 509,850 399,120
-----------------------
Total non-interest expenses 1,987,529 1,611,564
-----------------------
Income before income taxes 1,633,820 1,547,667
Income tax expense 631,769 589,215
-----------------------
Net Income $1,002,051 $ 958,452
=======================
Net income per common share, basic $ .78 $ .74
=======================
Net income per common share, diluted $ .77 $ .74
=======================
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,002,051 $ 958,452
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of premises and equipment - (169,087)
Amortization of premiums and accretion of discounts
on securities, net 6,320 12,228
Depreciation expense 200,929 174,935
Deferred income taxes 8,120 (9,321)
ESOP compensation expense 31,099 -
Increase in cash value of life insurance (47,484) (46,144)
Provision for loan losses 44,000 -
(Increase) decrease in accrued interest receivable (384,975) 7,506
Increase in accrued interest payable 97,507 165,352
Net change in other assets/liabilities 127,693 (162,280)
------------ ------------
Net Cash Provided By Operating Activities 1,085,260 931,641
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits in banks 3,558,548 (1,445,357)
Purchase of securities available for sale (22,556,441) (4,146,245)
Proceeds from maturities of securities available for sale 6,514,216 3,000,000
Purchase of securities held to maturity (8,475,000) -
Proceeds from maturities of securities held to maturity 1,580,000 2,440,000
Principal collected on mortgage-backed securities 702,110 562,574
Net increase in loans receivable (8,939,728) (5,082,056)
Purchase of Federal Home Loan Bank stock (73,700) (29,700)
Proceeds from sale of premises and equipment - 425,000
Purchase of premises and equipment (1,288,415) (590,828)
------------ ------------
Net Cash Used in Investing Activities (28,978,410) (4,866,612)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 13,168,693 6,739,502
Net increase (decrease) in time deposits 1,383,529 (33,777)
Advances from Federal Home Loan Bank 10,000,000 8,500,000
Repayment of advances from Federal Home Loan Bank (3,000,000) (11,500,000)
Net proceeds from issuance of common stock 6,621,118 -
Exercise of stock options 5,759 21,760
Cash received from merger with First Capital, Inc. MHC 5,182 -
Cash dividends paid (256,264) (142,544)
------------ ------------
Net Cash Provided By Financing Activities 27,928,017 3,584,941
------------ ------------
Net Increase (Decrease) in Cash and Due From Banks 34,867 (350,030)
Cash and due from banks at beginning of year 894,657 1,244,687
------------ ------------
Cash and Due From Banks at End of Year $ 929,524 $ 894,657
============ ============
</TABLE>
See notes on consolidated financial statements.
19
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
First Capital, Inc. ("Company") was incorporated by First Federal Bank, a
Federal Savings Bank ("Bank") in September 1998 in connection with the
conversion from the mutual holding company form of organization to the
stock holding company form of organization. Upon consummation of the
conversion on December 31, 1998, the Company became the holding company for
the Bank and the former mutual holding company, First Capital, Inc., M.H.C.
("MHC"), was merged with and into the Bank. The conversion was accounted
for as a pooling of interests and, therefore, the 1999 consolidated
financial statements are based on the assumption the companies were
combined for the full year and the prior year financial statements have
been restated to give effect to the combination.
The Bank provides a variety of banking services to individuals and business
customers through three offices in southern Indiana. The Bank's primary
source of revenue is single-family residential loans.
Consolidation
The consolidated financial statements include the accounts of the Company
and the Bank. All material intercompany balances and transactions have been
eliminated in consolidation.
Statements of Cash Flows
For purposes of the statements of cash flows, the Bank has defined cash and
cash equivalents as those amounts included in the balance sheet caption
"Cash and due from banks."
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of foreclosed real estate. In connection with the determination
of estimated losses on loan and foreclosed real estate, management obtains
appraisals for significant properties.
Securities Available for Sale
Securities available for sale consist of debt and equity securities and are
stated at fair value. Amortization of premium and accretion of discount are
recognized in interest income using the interest method over the remaining
period to maturity, adjusted for anticipated prepayments. Unrealized gains
and losses, net of tax, on securities available for sale are reported as a
separate component of stockholders' equity until realized. Realized gains
and losses on the sale of securities available for sale are determined
using the specific identification method.
20
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(1 - continued)
Securities Held to Maturity
Debt securities for which the Bank has the positive intent and ability to
hold to maturity are carried at cost, adjusted for amortization of premium
and accretion of discount using the interest method over the remaining
period to maturity, adjusted for anticipated prepayments. Mortgage-backed
securities represent participating interests in pools of long-term first
mortgage loans originated and serviced by issuers of the securities.
Loans
Loans receivable are stated at unpaid principal balances, less net deferred
loan fees and the allowance for loan losses. The Bank's real estate loan
portfolio consists primarily of long-term loans, collateralized by first
mortgages on single-family residences and multi-family residential
properties located in the southern Indiana area and commercial real estate
loans. In addition to real estate loans, the Bank makes commercial loans
and consumer loans.
Loan origination fees and certain direct costs of underwriting and closing
loans are deferred and the net fee or cost is recognized as an adjustment
to interest income over the contractual life of the loans using the
interest method.
The accrual of interest is discontinued on a loan when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. The Bank does not accrue interest
on loans past due 90 days or more except when the estimated value of
collateral and collection efforts are deemed sufficient to ensure full
recovery. When a loan is placed on non accrual status, previously accrued
but unpaid interest is deducted from interest income.
Subsequent receipts on nonaccrual loans, including specific impaired loans
are recorded as a reduction of principal, and interest income is only
recorded once principal recovery is reasonably assured.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specified impaired loans, and economic conditions. 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.
21
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(1 - continued)
Foreclosed Real Estate
Foreclosed real estate is carried at the lower of fair value minus
estimated costs to sell or cost. Costs of holding foreclosed real estate
are charged to expense in the current period, except for significant
property improvements, which are capitalized. Valuations are periodically
performed by management and an allowance is established by a charge to non-
interest expense if the carrying value exceeds the fair value minus
estimated costs to sell. The net expense from operations of foreclosed real
estate held for sale is reported in non-interest expense.
Premises and Equipment
The Bank uses the straight line and accelerated methods of computing
depreciation at rates adequate to amortize the cost of the applicable
assets over their useful lives. Items capitalized as part of premises and
equipment are valued at cost. Maintenance and repairs are expensed as
incurred. The cost and related accumulated depreciation of assets sold, or
otherwise disposed of, are removed from the related accounts and any gain
or loss is included in earnings.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of
available for sale securities, allowance for loan losses, accumulated
depreciation and accrued income and expenses for financial and income tax
reporting. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Stock-Based Compensation
Under the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company will measure and recognize compensation cost
related to stock-based compensation plans using the intrinsic value method
and disclose the pro forma effect of applying the fair value method
contained in SFAS No. 123. Accordingly, no compensation costs will be
charged against earnings for stock options granted under the Company's
stock-based compensation plans.
Advertising
Advertising costs are charged to operations when incurred.
Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes standards for reporting and presentation of comprehensive
income and its components in a full set of financial statements.
Comprehensive income consists of net income and net unrealized gains
(losses) on securities and is presented in the consolidated statements of
changes in stockholders' equity and comprehensive income. The statement
requires only additional disclosures in the consolidated financial
statements; it does not affect the Company's financial position, results of
operations or cash flows. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
22
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(2) PENDING MERGER
On July 19, 1999, the Company entered into an agreement and plan of merger
with HCB Bancorp (HCB), a bank holding company located in Palmyra, Indiana.
HCB is the parent company of Harrison County Bank, a state-chartered
commercial bank. Terms of the agreement provide for an exchange of 15.5
shares of the Company's common stock for each share of HCB common stock.
The merger is subject to regulatory and stockholder approvals. At June 30,
1999, HCB had total assets of $88.1 million and stockholders' equity of
$12.1 million. HCB had net income of $491,000 for the six months ended June
30, 1999. HCB reported net income of $1,085,000 and $1,132,000 for the
years ended December 31, 1998 and 1997, respectively.
The following summarized operating data gives effect to the merger had it
occurred on July 1, 1997:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1999 1998
------- -------
<S> <C> <C>
Net interest income $7,052 $6,399
====== ======
Net income $2,018 $2,096
====== ======
Net income per common share, basic $ .80 $ .83
====== ======
Net income per common share, diluted $ .79 $ .82
====== ======
</TABLE>
(3) DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the balance sheets
according to management's intent. The Bank's investment in securities at
June 30, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
June 30, 1999:
Securities available for sale:
Securities:
FHLMC certificates $ 842,413 $ - $ 7,983 $ 834,430
GNMA certificates 3,740,569 - 88,582 3,651,987
-------------------------------------------------
4,582,982 - 96,565 4,486,417
-------------------------------------------------
Other debt securities:
Federal agency 14,000,000 - 481,113 13,518,887
Municipal 1,293,226 - 78,777 1,214,449
-------------------------------------------------
15,293,226 - 559,890 14,733,336
-------------------------------------------------
Mutual funds 1,002,670 - 17,867 984,803
-------------------------------------------------
Total securities available
for sale $20,878,878 $ - $674,322 $20,204,556
=================================================
Securities held to maturity:
Mortgage-backed securities:
FHLMC certificates $ 109,689 $ 590 $ 108 $ 110,171
GNMA certificates 286,140 - 12,142 273,998
FNMA certificates 370,990 1,267 13,791 358,466
-------------------------------------------------
766,819 1,857 26,041 742,635
-------------------------------------------------
Other debt securities:
Federal agency 8,479,648 - 159,623 8,320,025
-------------------------------------------------
Total securities held to
maturity $ 9,246,467 $1,857 $185,664 $ 9,062,660
=================================================
</TABLE>
23
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(3 - continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
June 30, 1998:
Securities available for sale:
Mutual fund $ 843,576 $3,395 $ - $ 846,971
Federal agency debt securities 4,000,000 1,563 - 4,001,563
-----------------------------------------------
Total securities available
for sale $4,843,576 $4,958 $ - $4,848,534
===============================================
Securities held to maturity:
Mortgage-backed securities:
FHLMC certificates $ 683,762 $6,378 $ 2,012 $ 688,128
GNMA certificates 371,297 - 7,068 364,229
FNMA certificates 417,913 2,273 9,626 410,560
-----------------------------------------------
1,472,972 8,651 18,706 1,462,917
-----------------------------------------------
Other debt securities:
Federal agency 1,500,000 - 6,562 1,493,438
Municipal 80,000 12 - 80,012
-----------------------------------------------
1,580,000 12 6,562 1,573,450
-----------------------------------------------
Total securities held to
maturity $3,052,972 $8,663 $25,268 $3,036,367
===============================================
</TABLE>
The amortized cost and fair value of debt securities as of June 30, 1999,
by contractual maturity, are shown below. Expected maturities of mortgage-
backed securities may differ from contractual maturities because the
mortgages underlying the obligations may be prepaid without penalty.
<TABLE>
<CAPTION>
Securities Available for Sale Securities Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due after five years through
ten years $11,655,000 $11,272,643 $8,479,648 $8,320,025
Due after ten years 3,638,226 3,460,693 - -
-------------------------------------------------------
15,293,226 14,733,336 8,479,648 8,320,025
Mortgage-backed securities 4,582,982 4,486,417 766,819 742,635
-------------------------------------------------------
$19,876,208 $19,219,753 $9,246,467 $9,062,660
=======================================================
</TABLE>
Certain debt securities were pledged to secure advances from the Federal
Home Loan Bank at June 30, 1999. (See Note 7)
24
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(4) LOANS
Loans receivable at June 30, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Real estate mortgage loans:
Residential $63,530,746 $57,825,501
Land 1,018,276 217,720
Residential construction 8,346,117 3,786,787
Commercial real estate 3,678,160 4,370,446
Commercial business loans 5,607,319 5,048,291
Consumer loans:
Home equity and second mortgage loans 964,382 777,649
Automobile loans 1,615,081 1,574,208
Loans secured by savings accounts 399,778 465,613
Other consumer loans 3,432,529 3,479,984
--------------------------
Gross loans receivable 88,592,388 77,546,199
--------------------------
Less:
Deferred loan origination fees, net 204,499 210,572
Undisbursed portion of loans in process 4,019,310 1,932,310
Allowance for loan losses 481,619 515,959
--------------------------
4,705,428 2,658,841
--------------------------
Loans receivable, net $83,886,960 $74,887,358
==========================
</TABLE>
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Beginning balances $ 515,959 $ 518,645
Provision 44,000 -
Recoveries 156 -
Loans charged-off (78,496) (2,686)
--------------------------
Ending balances $ 481,619 $ 515,959
==========================
</TABLE>
The Bank had no loans specifically classified as impaired at June 30, 1999.
At June 30, 1998, the Bank had loans amounting to $79,343 that were
specifically classified as impaired. The average recorded investment in
impaired loans amounted to $52,171 and $92,291 for 1999 and 1998,
respectively. The allowance for loan losses related to impaired loans
amounted to $54,566 at June 30, 1998. There was no interest income
recognized on impaired loans during 1999 and 1998, respectively.
The Bank has entered into loan transactions with certain directors,
officers and their affiliates (related parties). In the opinion of
management, such indebtedness was incurred in the ordinary course of
business on substantially the same terms as those prevailing at the time
for comparable transactions with other persons and does not involve more
than normal risk of collectibility or present other unfavorable features.
25
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(4 - continued)
The following table represents the aggregate activity for related party
loans which exceeded $60,000 in total:
Balance-July 1, 1998 $3,062,707
New loans 2,723,901
Payments (258,714)
----------
Balance-June 30, 1999 $5,527,894
==========
The Bank has purchased commercial paper from a corporation where a director
is considered a related party. In the opinion of management, these
transactions were made in the ordinary course of business on substantially
the same terms, including interest rate and collateral, as those prevailing
at the time for comparable transactions with unrelated parties. During the
fiscal years ended June 30, 1999 and 1998, the Bank granted approximately
$768,000 and $612,000, respectively, to customers of the dealership and
such loans had an aggregate outstanding balance of approximately $1.4
million and $1.6 million at June 30, 1999 and 1998, respectively.
(5) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
1999 1998
---- ----
Land and land improvements $ 509,547 $ 379,547
Leasehold improvements 46,847 46,847
Office building 2,611,748 1,729,512
Furniture, fixtures and equipment 1,236,618 960,438
-----------------------
4,404,760 3,116,344
Less accumulated depreciation 716,502 515,572
-----------------------
Totals $3,688,258 $2,600,772
=======================
(6) DEPOSITS
The aggregate amount of time deposit accounts with balances of $100,000 or
more was approximately $12,789,000 and $11,002,000 at June 30, 1999 and
1998, respectively.
At June 30, 1999, scheduled maturities of time deposits were as follows:
Year ending June 30:
2000 $21,434,042
2001 12,871,571
2002 6,038,481
2003 4,845,618
2004 and thereafter 3,916,241
-----------
Total $49,105,953
===========
26
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(6 - continued)
The Bank held deposits of approximately $1,526,000 and $1,469,000 for
related parties at June 30, 1999 and 1998, respectively.
Deposit account balances in excess of $100,000 are not federally insured.
Interest expense on deposits is summarized as follows:
1999 1998
---- ----
Savings and demand deposits $1,192,648 $ 944,007
Time deposits 2,823,925 2,864,310
--------- ---------
$4,016,573 $3,808,317
========== ==========
(7) ADVANCES FROM FEDERAL HOME LOAN BANK
At June 30, 1999 and 1998, advances from the Federal Home Loan Bank were as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Weighted Weighted
Average Average
Rate Amount Rate Amount
<S> <C> <C> <C> <C>
Advances maturing during the
year ending June 30:
Fixed rate advances:
1999 $ - 5.17% $4,500,000
2000 5.29% 1,000,000 -
2001 5.50% 1,000,000 -
2002 7.75% 750,000 7.75% 750,000
2004 5.55% 3,000,000 -
2008 5.17% 4,500,000 -
----------- ----------
10,250,000 5,250,000
----------- ----------
Adjustable rate advances:
2000 5.15% 2,000,000 -
----------- ----------
$12,250,000 $5,250,000
=========== ==========
</TABLE>
The advances are secured under a blanket collateral agreement. At June 30,
1999, eligible collateral included conventional mortgage loans with a
carrying value of $54,101,269 and debt securities with a carrying value of
$27,251,772 which were pledged as security for the advances.
(8) LEASE COMMITMENT
On April 1, 1997, the Bank entered into a noncancellable sub-lease
agreement for a branch office for an initial lease term of eight years.
The sub-lessor has a fixed term lease with the owner with an initial term
expiring November 30, 2003.
27
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(8 - continued)
The following is a schedule by years of future minimum rental payments
required under this operating lease:
Year ending June 30:
2000 $12,690
2001 12,690
2002 12,690
2003 12,690
-------
Total minimum payments required $50,760
=======
Total minimum rental expense for all operating leases for eash of the years
ended June 30, 1999 and 1998 amounted to $12,690.
(9) INCOME TAXES
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current $ 623,649 $ 598,536
Deferred 8,120 (9,321)
---------------------------
Totals $ 631,769 $ 589,215
===========================
</TABLE>
Significant components of the Bank's deferred tax assets and liabilities as
of June 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax (assets) liabilities:
Depreciation $ 77,952 $ 65,634
Deferred loan fees 44,468 26,446
Deferred compensation plans (134,359) (127,170)
Allowance for loan losses (190,769) (204,371)
Post-1987 bad debt deduction 143,164 171,797
Unrealized gain (loss) on securities available for sale (267,098) 1,964
---------------------------
Net deferred tax asset $(326,642) $ (65,700)
===========================
</TABLE>
The reconciliation of income tax expense with the amount which would have
been provided at the federal statutory rate of 34 percent follows:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Provision at federal statutory tax rate $555,499 $526,207
State income tax-net of federal tax benefit 91,696 83,515
Tax exempt interest income (8,345) (8,813)
Increase in cash value of life insurance (16,145) (15,689)
Other 9,064 3,995
--------------------------
Totals $631,769 $589,215
==========================
Effective tax rate 38.7% 38.1%
==========================
</TABLE>
28
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(9 - continued)
Prior to July 1, 1996, the Bank was permitted by the Internal Revenue Code
to deduct from taxable income an annual addition to a statutory bad debt
reserve subject to certain limitations. Retained earnings at June 30, 1999
includes approximately $909,000 of cumulative deductions for which no
deferred federal income tax liability has been recorded. Reduction of these
reserves for purposes other than tax bad debt losses or adjustments arising
from carryback of net operating losses would create income for tax purposes
subject to the then current corporate income tax rate. The unrecorded
deferred liability on these amounts was approximately $309,000 at June 30,
1999.
Federal legislation repealed the reserve method of accounting for bad debts
by qualified thrift institutions for tax years beginning after December 31,
1995. As a result, the Bank cannot use the percentage-of taxable-income
method to calculate the annual addition to the statutory bad debt reserve.
Instead, the Bank is required to compute its federal tax bad debt deduction
based on actual loss experience over a period of years. The legislation
required the Bank to recapture into taxable income over a six-year period
its post-1987 additions to the statutory bad debt reserve, thereby
generating additional tax liability. At June 30, 1999, the remaining
unamortized balance of the post-1987 reserves totaled $421,070 for which a
deferred tax liability of $143,164 has been recorded.
The legislation also provided that the Bank will not be required to
recapture its pre-1988 statutory bad debt reserves if it ceases to meet the
qualifying thrift definitional tests and if the Bank continues to qualify
as a "bank" under existing provisions of the Internal Revenue Code.
(10) EMPLOYEE BENEFIT PLANS
Defined Contribution Plan:
The Bank has a qualified contributory defined contribution plan available
to all eligible employees. The plan allows participating employees to make
tax-deferred contributions under Internal Revenue Code Section 401(k). The
Bank contributed $27,228 and $24,991 to the plan for 1999 and 1998,
respectively.
Employee Stock Ownership Plan:
On December 31, 1998, the Company established a leveraged employee stock
ownership plan (ESOP) covering substantially all employees. The ESOP trust
acquired 61,501 shares of Company common stock financed by a term loan with
the Company. The employer loan and the related interest income are not
recognized in the consolidated financial statements as the debt is serviced
from Company contributions. Dividends payable on allocated shares are
charged to retained earnings and are satisfied by the allocation of cash
dividends to participant accounts. Dividends payable on unallocated shares
are not considered dividends for financial reporting purposes. Shares held
by the ESOP trust are allocated to participant accounts based on the ratio
of the current year principal and interest payments to the total of the
current year and future years principal and interest to be paid on the
employer loan.
Compensation expense is recognized based on the average fair value of
shares released for allocation to participant accounts during the year with
a corresponding credit to stockholders' equity. Compensation expense
recognized for 1998 amounted to $31,099.
29
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(10 - continued)
Company common stock held by the ESOP trust at June 30, 1999 was as
follows:
<TABLE>
<S> <C>
Allocated shares 1,025
Shares committed to be released 2,050
Unearned shares 58,426
--------
Total ESOP shares 61,501
========
Fair value of unearned shares $657,293
========
</TABLE>
(11) DEFERRED COMPENSATION PLANS
The Bank has a deferred compensation plan whereby certain officers will be
provided specific amounts of income for a period of fifteen years following
normal retirement. The benefits under the agreements become fully vested
after four years of service beginning with the effective date of the
agreements. The Bank accrues the present value of the benefits so the
amounts required will be provided at the normal retirement dates and
thereafter.
Assuming normal retirement, the benefits under the plan will be paid in
varying amounts between 1998 and 2022. The Bank is the owner and
beneficiary of insurance policies on the lives of these officers which may
provide funds for a portion of the required payments. The agreements also
provide for payment of benefits in the event of disability, early
retirement, termination of employment or death. At June 30, 1999 and 1998,
the accrued deferred compensation liability amounted to $218,821 and
$206,209, respectively. Deferred compensation expense for this plan was
$17,440 and $33,866 for 1999 and 1998, respectively.
The Bank also has a directors' deferred compensation plan whereby a
director defers into a retirement account a portion of his monthly director
fees for a specified period to provide a specified amount of income for a
period of fifteen years following normal retirement. The Bank also accrues
the interest cost on the deferred obligation so the amounts required will
be provided at the normal retirement dates and thereafter.
Assuming normal retirement, the benefits under the plan will be paid in
varying amounts between 1995 and 2037. The agreements also provide for
payment of benefits in the event of disability, early retirement,
termination of service or death. At June 30, 1999 and 1998, the accrued
deferred compensation liability for this plan amounted to $100,384 and
$94,845, respectively. Deferred compensation expense for this plan was
$10,571 and $16,633 for 1999 and 1998, respectively.
(12) STOCK-BASED COMPENSATION PLAN
The Company applies APB No. 25 and related interpretations in accounting
for its stock-based compensation plans. In accordance with SFAS No. 123,
the Company elected to continue to apply the provisions of APB No. 25.
However, pro forma disclosures as if the Company adopted the compensation
cost recognition provisions of SFAS No. 123, are presented along with a
summary of the plans and awards.
30
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(12 - continued)
The Company has an incentive stock option plan that provides for issuance
of up to 51,298 shares of the Company's authorized but unissued common
stock to all employees, including any officer or employee-director. Under
the plan, the Company may grant both non-qualified and incentive stock
options. In the case of incentive stock options, the aggregate fair value
of the stock (determined at the time the incentive stock option is granted)
for which any optionee may be granted incentive options which are first
exercisable during any calendar year shall not exceed $100,000. Option
prices may not be less than the fair market value at the date of the grant.
Options granted vest ratably over five years and are exercisable in whole
or in part for a period up to ten years from the date of the grant. As of
June 30, 1999, only incentive stock options have been granted under the
plan.
The following is a summary of the Company's stock options as of June 30,
1999 and 1998, and the changes for the years then ended:
1999 1998
------------------- -------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
Outstanding at beginning
of year 18,582 $6.07 19,775 $5.78
Granted 10,131 7.80 4,873 7.41
Exercised 923 6.24 3,911 5.56
Forfeited 4,376 7.02 2,155 6.24
------ ------
Outstanding at end of year 23,414 $6.69 18,582 $6.14
====== ======
Exercisable at end of year 5,216 $5.78 1,565 $6.24
====== ======
For options outstanding at June 30, 1999, the option price per share ranged
from $5.07 to $7.80 and the weighted average remaining contractual life of
the options was 2.4 years.
For purposes of providing the pro forma disclosures required under SFAS No.
123, the fair market value of stock options granted in fiscal year ended
June 30, 1999, 1998, 1997 and 1995 was estimated at the date of grant using
the Black-Scholes option pricing model. The Black-Scholes option pricing
model was originally developed for use in estimating the fair value of
traded options which have different characteristics from the Company's
employee stock options and require the use of highly subjective assumptions
which can materially affect the fair value estimate. As a result,
management believes that the Black-Scholes model may not necessarily
provide a reliable measure of the fair value of employee stock options.
The following assumptions were used for grants in fiscal year ended June
30, 1999 and 1998:
1999 1998
---- ----
Expected dividend yields 3.20% 3.78%
Risk-free interest rates 5.50% 5.50%
Expected volatility 10.09% 10.09%
Expected life of options 5 years 5 years
Weighted average fair value at grant date $ 1.00 $ 0.82
31
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(12 - continued)
Had compensation cost for the Company's stock-based compensation plans been
determined in accordance with the fair value based accounting method
provided by SFAS No. 123, the net income and net income per common share
for the years ended June 30, 1999 and 1998 would have been as follows:
(In thousands, except per share amounts) 1999 1998
---- ----
Pro forma net income $1,007 $ 958
Pro forma net income per share:
Basic $ 0.78 $0.74
Diluted $ 0.77 $0.73
(13) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding various commitments
and contingent liabilities, such as commitments to extend credit and legal
claims, which are not reflected in the financial statements.
Commitments under outstanding standby letters of credit totaled $224,000 at
June 30, 1999 and 1998.
The following is a summary of the commitments to extend credit at June 30,
1999:
1999 1998
---- ----
Loan commitments:
Fixed rate $ 685,125 $1,585,597
Adjustable rate 1,183,000 -
Undisbursed commercial and personal
lines of credit 4,393,796 1,628,128
Undisbursed portion of construction
loans in process 4,019,310 1,932,310
Other loans in process 159,603 249,893
----------- ----------
Total commitments to extend credit $10,440,834 $5,395,928
=========== ==========
(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.
32
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(14 - continued)
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 its
commitments in either 1999 or 1998.
(15) STOCKHOLDERS' EQUITY
Capital Stock
On December 31, 1998, the MHC and Bank completed a conversion and stock
offering whereby the MHC was merged with and into the Bank with the Bank
becoming a wholly-owned subsidiary of the Company which offered common
stock to certain current and former depositor and borrower customers of the
Bank in a subscription offering. The Company issued 768,551 shares of
common stock (including 61,501 shares issued to the ESOP trust) for gross
proceeds of $7,685,510 as a result of the offering. Total expenses in
connection with the conversion and offering amounted to $449,382 and were
charged against the proceeds from the offering.
The Company also issued 532,057 common shares in exchange for the 204,015
common shares held by the public stockholders of the Bank pursuant to an
exchange ratio resulting in the public stockholders of the Bank owning in
the aggregate approximately 40.5% of First Capital, Inc. after the
conversion and offering.
Dividends
The payment of dividends by the Bank is subject to regulation by the Office
of Thrift Supervision (OTS). The Bank may not declare or pay a cash
dividend or repurchase any of its capital stock if the effect thereof would
cause the regulatory capital of the Bank to be reduced below regulatory
capital requirements imposed by the OTS or below the amount of the
liquidation account.
Liquidation Account
Upon completion of the conversion, the Bank established a liquidation
account in an amount equal to the amount of the cumulative dividends with
respect to the Bank's common stock waived by First Capital, Inc. MHC plus
59.5% of the Bank's stockholders' equity as of September 30, 1998 totaling
$7.5 million. The liquidation account is maintained for the benefit of
depositors as of the March 31, 1997 eligibility record date (or the
September 30, 1998 supplemental eligibility record date) who maintain their
deposits in the Bank after conversion.
33
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(15 - continued)
In the event of complete liquidation, and only in such an event, each
eligible depositor will be entitled to receive a liquidation distribution
from the liquidation account in the proportionate amount of the then
current adjusted balance for deposits held, before any liquidation
distribution may be made with respect to the stockholders. Except for the
repurchase of stock and payment of dividends by the Bank, the existence of
the liquidation account does not restrict the use or application of
retained earnings of the Bank.
(16) 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 disrectionary-actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and its subsidiary must meet specific
capital guidelines that involved quantitative measures of the assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are
also subject to quantitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the 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 Tier
I capital (as defined) to average assets (as defined). Management believes,
as of June 30, 1999, that the Company and its subsidiary meet all capital
adequacy requirements to which they are subject.
As of June 30, 1999, the most recent notification from the OTS categorized
the subsidiary bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the
subsidiary bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the institutions' categories.
The actual capital amounts and ratios are also presented in the table. No
amounts were deducted from capital for interest-rate risk in either year.
34
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(16 - continued)
<TABLE>
<CAPTION>
Minimum To Be Well
Capitalized Under
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
As of June 30, 1999:
Total capital (to risk
weighted assets):
Consolidated $17,822 26.81% $5,318 8.00% N/A
Bank $15,406 23.17% $5,318 8.00% $6,648 10.00%
Tier I capital (to risk
weighted assets):
Consolidated $17,340 26.08% $2,659 4.00% N/A
Bank $14,924 22.45% $2,659 4.00% $3,989 6.00%
Tier I capital (to adjusted
total assets):
Consolidated $17,340 14.09% $4,924 4.00% N/A
Bank $14,924 12.12% $3,693 3.00% $6,155 5.00%
Tangible capital (to adjusted
total assets):
Bank $14,924 12.12% $1,847 1.50% N/A
As of June 30, 1998:
Total capital (to risk
weighted assets):
Consolidated $10,802 19.15% $4,513 8.00% N/A
Bank $10,799 19.14% $4,513 8.00% $5,642 10.00%
Tier I capital (to risk
weighted assets):
Consolidated $10,341 18.33% $2,257 4.00% N/A
Bank $10,338 18.32% $2,257 4.00% $3,385 6.00%
Tier I capital (to adjusted
total assets):
Consolidated $10,341 11.01% $3,758 4.00% N/A
Bank $10,338 11.00% $2,819 3.00% $4,698 5.00%
Tangible capital (to adjusted
total assets):
Bank $10,338 11.00% $1,409 1.50% N/A
</TABLE>
35
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of financial instruments at
June 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
(In thousands)
Financial assets:
Cash and due from banks $ 930 $ 930 $ 895 $ 895
Interest bearing deposits in banks 1,681 1,681 5,240 5,240
Securities available for sale 20,205 20,205 4,849 4,849
Securities held to maturity 9,246 9,063 3,053 3,036
Loans receivable 84,369 88,388 75,403 75,789
Less: allowance for loan losses 482 482 516 516
------- ------- ------- -------
Loans receivable, net 83,877 87,906 74,887 75,273
------- ------- ------- -------
Federal Home Loan Bank stock 663 663 589 589
Financial liabilities:
Deposits 92,058 91,832 77,462 77,798
Advances from Federal Home
Loan Bank 12,250 11,708 5,250 4,960
Unrecognized financial instruments:
Commitments to extend credit - - - 24
</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 and interest
bearing deposits with banks, the carrying amount is a reasonable estimate
of fair value.
Debt and Equity Securities
For debt securities, including mortgage-backed securities, the fair values
are based on quoted market prices. For restricted equity securities held
for investment, the carrying amount is a reasonable estimate of fair value.
Loans Receivable
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
36
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(17 - 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.
Borrowed Funds
The fair value of advances from Federal Home Loan Bank is estimated by
discounting the future cash flows using the current rates at which similar
loans with the same remaining maturities could be obtained.
Commitments to Extend Credit
The majority of commitments to extend credit would result in loans with a
market rate of interest if funded. The fair value of these commitments are
the fees that would be charged to customers to enter into similar
agreements. For fixed rate loan commitments, the fair value also considers
the difference between current levels of interest rates and the committed
rates.
(18) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information for First Capital, Inc. (parent company
only) for the year ended June 30, 1999 follows:
<TABLE>
<CAPTION>
Balance Sheet
(In thousands)
<S> <C>
Assets:
Cash and interest bearing deposits $ 2,818
Other assets 24
Investment in bank subsidiary 14,517
-------
$17,359
=======
Liabilities and Stockholders' Equity:
Other liabilities $ 19
Stockholders' equity 17,340
-------
$17,359
=======
</TABLE>
37
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(18 - continued)
<TABLE>
<CAPTION>
Statement of Income
(In thousands)
<S> <C>
Interest income $ 48
Other operating expenses 80
------
Loss before income taxes and equity in
undistributed net income of subsidiary (32)
Income tax expense 2
------
Loss before equity in undistributed net
income of subsidiary (34)
Equity in undistributed net income of subsidiary 1,036
------
Net income $1,002
======
</TABLE>
<TABLE>
<CAPTION>
Statement of Cash Flows
(In thousands)
<S> <C>
Operating Activities:
Net income $ 1,002
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed net income of subsidiary (1,036)
ESOP compensation expense 31
Net change in other assets/liabilities (5)
-------
Net cash used by operating activities (8)
-------
Investing Activities:
Investment in bank subsidiary (3,616)
Financing Activities:
Proceeds from issuance of common stock 6,621
Exercise of stock options 6
Cash dividends paid (185)
-------
Net cash provided by financing activities 6,442
-------
Net increase in cash 2,818
Cash at beginning of year -
-------
Cash at end of year $ 2,818
=======
</TABLE>
38
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1999 AND 1998
(19) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Basic:
Earnings:
Net income $1,002,051 $ 958,452
========== ==========
Shares:
Weighted average common shares outstanding 1,291,900 1,291,063
========== ==========
Net income per common share, basic $ 0.78 $ 0.74
========== ==========
Diluted:
Earnings:
Net income $1,002,051 $ 958,452
========== ==========
Shares:
Weighted average common shares outstanding 1,291,900 1,291,063
Add: Dilutive effect of outstanding options 8,710 3,619
---------- ----------
Weighted average common shares outstanding, as adjusted 1,300,610 1,294,682
========== ==========
Net income per common share, diluted $ 0.77 $ 0.74
========== ==========
</TABLE>
(20) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash payments for:
Interest $4,508,544 $3,946,516
Income taxes 673,045 486,206
Noncash investing activities:
Transfers from loans to real estate
acquired through foreclosure $ - $ 105,734
Proceeds from sales of foreclosed
real estate financed through loans 98,600 -
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
BOARD OF DIRECTORS/OFFICERS
- -------------------------------------------------------------------------------------------------------
<S> <C>
Directors
James G. Pendleton Mark D. Shireman
Chairman of the Board and Chief Executive Officer President of James L. Shireman Construction
Co., Inc. (a construction contractor)
Dennis L. Huber Samuel E. Uhl
President and Publisher of O'Bannon Publishing President and Chief Operating Officer
Company, Inc. (a newspaper publisher)
Kenneth R. Saulman John W. Buschemeyer
Right-of-way Supervisor for Clark County REMC President and Sole Owner of Hurst Lumber Co.
(a rural electric utility) (a lumber retailer)
Gerald L. Uhl
Business Manager for Jacobi Sales, Inc.
(a farm implement dealership)
Executive Officers
James G. Pendleton M. Chris Frederick
Chairman of the Board and Chief Executive Officer Senior Vice President, Chief Financial Officer
and Treasurer
Samuel E. Uhl Joel E. Voyles
President and Chief Operating Officer Vice President of Operation and Secretary
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
CORPORATE INFORMATION
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
General Counsel Independent Auditors
Simpson & Thompson Monroe Shine & Co., Inc.
303 N. Capitol Avenue 222 East Market Street
Corydon, Indiana 47112 New Albany, Indiana 47150
Special Counsel Transfer Agent
Muldoon, Murphy & Faucette LLP Registrar and Transfer Company
5101 Wisconsin Ave., N.W. 10 Commerce Drive
Washington, D.C. 20016 Crawford, New Jersey 07016
</TABLE>
Common Shares
The common shares of the Company are traded on the Nasdaq SmallCap Market under
the symbol "FCAP." As of June 30, 1999, the Company has 1,063 stockholders of
record and 1,292,752 common shares outstanding. This does not reflect the number
of persons whose shares are in nominee or "street" name accounts through
brokers.
The following table lists quarterly market price and dividend information per
common share for the years ended June 30, 1999 and 1998. For periods before
December 31, 1998, the table reflects the price per share and dividend
information for First Federal Bank common stock divided by 2.5638, the exchange
ratio in connection with the Conversion and Reorganization on December 31, 1998.
As First Federal Bank 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>
Market price
High Low Dividends End of period
<S> <C> <C> <C> <C>
Fiscal 1998:
Quarter ended September 30, 1997 $ 7.80 $7.80 $0.068 $7.80
Quarter ended December 31, 1997 7.80 7.80 0.068 7.80
Quarter ended March 31, 1998 7.80 7.80 0.068 7.80
Quarter ended June 30, 1998 7.80 7.80 0.068 7.80
Fiscal 1999:
Quarter ended September 30, 1998 8.60 7.80 0.068 8.60
Quarter ended December 31, 1998 8.60 7.80 0.068 8.60
Quarter ended March 31, 1999 10.94 8.50 0.070 8.88
Quarter ended June 30, 1999 11.81 8.88 0.080 8.75
</TABLE>
Annual Meeting
The Annual Meeting of Stockholders will be held at 12:00 p.m., Wednesday,
November 17, 1999, at the office of the Bank, 220 Federal Drive, N.W., Corydon,
Indiana 47112.
41
<PAGE>
General Inquiries and Reports
The Company is required to file an Annual Report on Form 10-KSB for its fiscal
year ended June 30, 1999 with the Securities and Exchange Commission. Copies of
this annual report and the Company's quarterly reports on Form 10-QSB may be
obtained without charge by contacting:
James G. Pendleton
Chairman of the Board and Chief Executive Officer
First Capital, Inc.
220 Federal Drive, N.W.
Corydon, Indiana 47112
(812) 738-2198
42
<PAGE>
EXHIBIT 23.0
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-76543 on Form S-8 of our report dated July 22, 1999 appearing in the Annual
Report to Stockholders of First Capital, Inc. for the year ended June 30, 1999
incorporated by reference in this Form 10-KSB.
/s/ MONROE, SHINE & CO., INC.
New Albany, Indiana
September 15, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF FIRST CAPITAL, INC. FOR THE YEAR ENDED JUNE 30,1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS (DOLLARS
IN THOUSANDS, EXCEPT PER SHARE DATA).
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 930
<INT-BEARING-DEPOSITS> 1,681
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,205
<INVESTMENTS-CARRYING> 9,246
<INVESTMENTS-MARKET> 9,063
<LOANS> 83,876
<ALLOWANCE> 482
<TOTAL-ASSETS> 122,698
<DEPOSITS> 92,014
<SHORT-TERM> 12,250
<LIABILITIES-OTHER> 1,094
<LONG-TERM> 0
0
0
<COMMON> 9,415
<OTHER-SE> 17,340
<TOTAL-LIABILITIES-AND-EQUITY> 122,698
<INTEREST-LOAN> 6,495
<INTEREST-INVEST> 1,123
<INTEREST-OTHER> 180
<INTEREST-TOTAL> 7,799
<INTEREST-DEPOSIT> 4,017
<INTEREST-EXPENSE> 4,435
<INTEREST-INCOME-NET> 3,364
<LOAN-LOSSES> 44
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,988
<INCOME-PRETAX> 1,634
<INCOME-PRE-EXTRAORDINARY> 1,634
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,002
<EPS-BASIC> 0.78
<EPS-DILUTED> 0.77
<YIELD-ACTUAL> 7.82
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 516
<CHARGE-OFFS> 78
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 482
<ALLOWANCE-DOMESTIC> 482
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
