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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM JULY 1, 1999 TO DECEMBER 31, 1999
Commission File Number: 0-25023
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<CAPTION>
FIRST CAPITAL, INC.
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(Name of small business issuer in its charter)
<S> <C>
Indiana 35-2056949
------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 Federal Drive, N.W., Corydon, Indiana 47112
- -------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (812) 738-2198
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Securities registered under 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.01 per share
--------------------------------------
(Title of class)
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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 $4.7 million.
The aggregate market value of the voting common equity held by non-
affiliates as of March 1, 2000 was $23,120,000. This figure is based on the
average of the bid and asked price on the Nasdaq Stock Market for a share of the
issuer's common stock on March 1, 2000, which was $10.82 per share. For
purposes of this calculation, the issuer is assuming that the issuer's directors
and executive officers are affiliates.
As of March 1, 2000, there were 2,507,574 shares of the Registrant's common
stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
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 that could affect actual results
include interest rate trends, the general economic climate in the market area in
which First Capital operates, as well as nationwide, First Capital's ability to
control costs and expenses, competitive products and pricing, loan delinquency
rates, the ability to integrate successfully the operations of HCB Bancorp and
changes in federal and state legislation and regulation. These factors should
be considered in evaluating the forward-looking statements and undue reliance
should not be placed on such statements. First Capital assumes no obligation to
update any forward-looking 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 in accordance with applicable regulations. Accordingly, the
information set forth in this report, including the consolidated financial
statements and related financial data, relates primarily to the Bank, but does
not include the consolidated accounts of HCB Bancorp. The Company and HCB
Bancorp completed a merger of equals on January 12, 2000. See "Merger with HCB
Bancorp" below.
The Bank is regulated by the Office of Thrift Supervision ("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 ("FHLB") System.
Merger with HCB Bancorp
On January 12, 2000, the Company completed its merger of equals with HCB
Bancorp. As part of the agreement, Harrison County Bank merged into First
Federal Bank, which changed its name to First Harrison Bank. In accordance with
the terms of the merger agreement, each share of HCB Bancorp common stock was
converted into the right to receive 15.5 shares of First Capital common stock.
As a result of the merger, the offices of Harrison County Bank in Crandall,
Georgetown, Greenville, Hardinsburg, New Albany and Palmyra, Indiana became
offices of First Harrison Bank. For pro forma financial information regarding
the merger, see Note 21 to Notes to Consolidated Financial Statements.
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 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
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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,
At December 31, ----------------------------------
1999 1999 1998
---------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential (1)....................................... $68,428 71.05% $63,531 71.71% $57,825 74.57%
Land.................................................. 384 0.40 1,018 1.15 218 0.28
Commercial real estate................................ 6,250 6.49 3,678 4.15 4,371 5.64
Residential construction.............................. 5,756 5.98 8,346 9.42 3,787 4.88
------- ------ ------- ------ ------- ------
Total mortgage loans............................... 80,818 83.92 76,573 86.43 66,201 85.37
------- ------ ------- ------ ------- ------
Consumer Loans:
Home equity and second mortgage loans................. 4,803 4.99 2,999 3.39 2,799 3.61
Automobile loans...................................... 1,787 1.86 1,615 1.82 1,574 2.03
Loans secured by savings accounts..................... 411 0.43 400 0.45 466 0.60
Mobile home loans..................................... 163 0.17 193 0.22 223 0.29
Unsecured loans....................................... 454 0.47 190 0.21 125 0.16
Other (2)............................................. 1,180 1.23 1,015 1.15 1,110 1.43
------- ------ ------- ------ ------- ------
Total consumer loans............................... 8,798 9.15 6,412 7.24 6,297 8.12
------- ------ ------- ------ ------- ------
Commercial business loans............................ 6,676 6.93 5,607 6.33 5,048 6.51
------- ------ ------- ------ ------- ------
Total loans....................................... 96,292 100.00% 88,592 100.00% 77,546 100.00%
------- ====== ------- ====== ------- ======
Less:
Due to borrowers on loans in process................. 2,102 4,019 1,932
Deferred loan fees net of direct costs............... 206 204 211
Allowance for loan losses............................ 523 482 516
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Total loans receivable, net........................ $93,461 $83,887 $74,887
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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. Residential mortgages secured by multi-family properties are an
immaterial portion of the residential loan portfolio. Substantially all
residential mortgages are collateralized by properties within the Bank's market
area.
The Bank offers both fixed-rate mortgage loans and adjustable rate mortgage
("ARM") loans typically with terms of 15 to 30 years. 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 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
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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 December 31, 1999, the Bank had $5.8 million, or
6.0% of total loans, of construction loans for single-family residences. At
December 31, 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 $873,000.
Although the Bank originates construction loans that are repaid with the
proceeds of a limited number of 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 December 31, 1999, the largest non-speculative construction loan
amounted to $228,000 and had an outstanding balance of $185,000. This loan was
performing according to its terms at December 31, 1999.
The Bank originates speculative construction loans to a limited number of
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 December 31, 1999, the largest speculative
construction loan relationship with a builder consisted of two loans in the
committed aggregate amount of $266,000 with an aggregate outstanding balance of
$225,000. 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. 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, borrower demand for variable rate loans is low
and the Bank is generally
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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 December 31, 1999, the largest commercial real estate loan had an
outstanding balance of $1.2 million 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. 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%. At December 31, 1999,
the largest commercial business loan had an outstanding balance of $715,000 and
was unsecured. Such loan was performing according to its terms at that date.
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 totaled $2.1 million
at December 31, 1999, of which $1.2 million 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 period ended December 31, 1999, the Bank granted
approximately $366,000 of credit to customers of the dealership and such loans
had an aggregate outstanding balance of $1.3 million at December 31, 1999. At
December 31, 1999, none of these loans were delinquent 30 days or more.
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.
Consumer Loans. 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 ($4.8 million
at December 31, 1999) followed by automobile and truck loans ($1.8 million at
December 31, 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-
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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. At December 31, 1999, $66,000 of consumer loans were delinquent 30
days or more.
Loan Maturity and Repricing
The following table sets forth certain information at December 31, 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.
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<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
-------- ------- ------- -------- -------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential real estate................... $ 2,731 $ 5,774 $6,103 $16,230 $12,901 $24,689 $68,428
Commercial real estate.................... 567 955 934 2,539 1,502 137 6,634
Residential construction.................. 5,756 -- -- -- -- -- 5,756
Consumer loans............................... 4,474 2,423 1,242 535 107 17 8,798
Commercial business.......................... 2,752 2,068 1,121 702 8 25 6,676
------- ------- ------ ------- ------- ------- -------
Total gross loans...................... $16,280 $11,220 $9,400 $20,006 $14,518 $24,868 $96,292
======= ======= ====== ======= ======= ======= =======
</TABLE>
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The following table sets forth the dollar amount of all loans due after
December 31, 2000, which have fixed interest rates and have floating or
adjustable interest rates.
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<CAPTION>
Floating- or
Fixed Adjustable
Rates Rates
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(In thousands)
<S> <C> <C>
Mortgage loans:
Residential...................... $53,195 $12,502
Commercial real estate........... 4,153 1,915
Consumer loans...................... 4,323 --
Commercial business................. 3,924 --
------- -------
Total gross loans............. $65,595 $14,417
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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 requires that borrowers obtain certain types of insurance to
protect its interest in the collateral securing the loan. The Bank requires
either a title insurance policy insuring that the Bank has a valid first lien on
the mortgaged real estate or an opinion by an attorney regarding the validity of
title. Fire and casualty insurance is also required on collateral for loans.
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 $1.2 million at December 31, 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 December 31,
1999, the Bank had outstanding letters of credit of $272,000.
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
$206,000 of net deferred loan fees at December 31, 1999.
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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 15/th/ day of delinquency. A
delinquency notice is mailed to the borrower after the 30/th/ 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.
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 At June 30,
December 31, --------------------
1999 1999 1998
------------ ---------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Residential real estate.................................... $ 41 $ -- $ 117
Commercial real estate..................................... -- -- 25
Commercial business........................................ -- -- 80
Consumer................................................... -- -- --
----- ----- -----
Total................................................... 41 -- 222
----- ----- -----
Foreclosed real estate, net................................... 256 -- 104
----- ----- -----
Total nonperforming assets.................................... $ 297 $ -- $ 326
===== ===== =====
Total loans delinquent 90 days or more to net loans........... 0.04% --% 0.30%
Total loans delinquent 90 days or more to total assets........ 0.03% --% 0.24%
Total nonperforming assets to total assets.................... 0.22% --% 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 $5,700 would have been recorded for the six months ended December
31, 1999. The Bank recognized no interest income on nonaccrual loans for the
six months ended December 31, 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.
8
<PAGE>
Current accounting rules require that impaired loans be measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, or if expedient, at the loan's observable market price
or the fair value of collateral if the loan is collateral dependent. A loan is
classified as impaired by management when, based on current information and
events, it is probable that the Bank will be unable to collect all amounts due
in accordance with the terms of the loan agreement. If the fair value, as
measured by one of these methods, is less than the recorded investment in the
impaired loan, the Bank establishes a valuation allowance with a provision
charged to expense. Management reviews the valuation of impaired loans on a
quarterly basis to consider changes due to the passage of time or revised
estimates. Assets that do not expose the Bank to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management.
An insured institution is required to establish and maintain an allowance
for loan losses at a level that is adequate to absorb estimated credit losses
associated with the loan portfolio, including binding commitments to lend.
General allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities. When an insured
institution classifies problem assets as "loss," it is required either to
establish an allowance for losses equal to 100% of the amount of the assets, or
charge off the classified asset. The amount of its valuation allowance is
subject to review by the OTS which can order the establishment of additional
general loss allowances. The Bank regularly reviews the loan portfolio to
determine whether any loans require classification in accordance with applicable
regulations.
At December 31, 1999 and June 30, 1999 and 1998, the aggregate amounts of
the Bank's classified assets at those dates and the general loss allowances for
the periods then ended, were as follows:
<TABLE>
<CAPTION>
At At June 30,
December 31, ----------------
1999 1999 1998
------------ ------ -------
(In thousands)
<S> <C> <C> <C>
Classified assets:
Loss......................... $ -- $ -- $ --
Doubtful (impaired).......... -- -- 80
Substandard.................. 44 63 293
Special mention.............. 132 490 --
General loss allowances:
Impaired loans............... -- -- 55
Other........................ 523 482 461
</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 December 31,
1999, the Bank had foreclosed real estate consisting of two one- to four-family
residential properties totaling $256,000.
Allowance for Loan Losses. Management evaluates the adequacy of the
allowance for losses on loans each year based on estimated losses on specific
loans and other procedures, including a review of all loans for which full
collectibility may not be reasonably assured and considers, among other matters,
the estimated market value of the underlying collateral of problem loans, prior
loss experience, economic conditions and overall portfolio quality. These
provisions for losses are charged against earnings in the year they are
established. 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 December 31, 1999,
and June 30, 1999 and 1998 were adequate and represented a reasonable estimate
of the specific and inherent credit losses consistent with the composition of
the loan portfolio and credit quality trends.
9
<PAGE>
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.
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, -----------------------
1999 1999 1998
------------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Allowance at beginning of period........................ $ 482 $ 516 $ 519
Provision for loan losses............................... 45 44 --
----- ----- -----
527 560 519
----- ----- -----
Recoveries:
Residential real estate............................... -- -- --
Commercial business................................... -- -- --
Consumer.............................................. -- -- --
----- ----- -----
Total recoveries.................................... -- -- --
----- ----- -----
Charge-offs:
Residential real estate............................... -- -- 2
Commercial business................................... -- 78 --
Consumer.............................................. 4 -- 1
----- ----- -----
Total charge-offs................................... 4 78 3
----- ----- -----
Net charge-offs..................................... (4) (78) (3)
----- ----- -----
Allowance at end of period.............................. $ 523 $ 482 $ 516
===== ===== =====
Ratio of allowance to total loans outstanding at the
end of the period...................................... 0.54% 0.54% 0.67%
Ratio of net charge-offs to average loans outstanding
during the period...................................... --% 0.10% -- %
</TABLE>
10
<PAGE>
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,
At December 31, -----------------------------------------------
1999 1999 1998
-------------------- --------------------- ---------------------
Percent of Percent of Percent of
Outstanding Outstanding Outstanding
Loans Loans Loans
Amount in Category Amount in Category Amount in Category
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate (1).................... $270 77.04% $228 81.13% $215 79.45%
Commercial real estate and land loans.......... 33 6.89 82 5.30 36 5.92
Commercial business............................ 109 6.93 98 6.33 117 6.51
Consumer....................................... 111 9.14 74 7.24 32 8.12
Unallocated.................................... -- -- -- -- 116 --
---- ------ ---- ------ ---- ------
Total allowance for loan losses........... $523 100.00% $482 100.00% $516 100.00%
==== ====== ==== ====== ==== ======
</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, 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 $1.0 million have adjustable rates as of December 31, 1999.
Investment decisions are made by the Bank's Investment Committee. 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 December 31, 1999, neither the Company nor the Bank had 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.
11
<PAGE>
The following table sets forth the securities portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At December 31, At June 30,
-------------------------------------------
1999 1999
----------------------------------------- -------------------------------------------
Percent Weighted Percent Weighted
Fair Amortized of Average Fair Amortized of Average
Value Cost Portfolio Yield (2) Value Cost Portfolio Yield (2)
------- --------- --------- --------- -------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Held to Maturity (1)
Debt securities:
U.S. agency:
Due after one year
through five years.................... $ -- $ -- --% $ -- $ -- --%
Due after five years
through ten years..................... 8,603 8,984 29.89 6.54% 8,320 8,480 28.15 6.43%
Due after ten years
through fifteen years................. -- -- -- -- -- --
Municipal:
Due in one year or less................ -- -- -- -- -- --
Due after one year
through five years.................... -- -- -- -- -- --
Mortgage-backed securities (3)........... 603 627 2.09 5.75 743 767 2.55 6.51
------- ------- ----- ------- ------- -----
$ 9,206 $ 9,611 31.98% $ 9,063 $ 9,247 30.70%
======= ======= ===== ======= ======= =====
Securities Available for Sale
Debt securities:
U.S. agency:
Due after one year
through five years................... $ 1,923 $ 2,000 6.65 5.93 $ -- $ -- --%
Due after five years
through ten years.................... 8,453 9,000 29.94 6.36 10,655 11,000 36.51 6.17
Due after ten years
through fifteen years................ 2,751 3,000 9.98 6.69 2,864 3,000 9.96 6.70
Mortgage-backed securities (3)........... 3,953 4,113 13.69 6.54 4,487 4,583 15.21 6.06
Municipal:
Due after five years
through ten years.................... 610 655 2.18 6.29 618 655 2.17 6.29
Due after ten years.................... 565 639 2.13 7.06 596 638 2.12 6.97
Equity securities:
Mutual fund (4)........................ 1,001 1,036 3.45 N/A 985 1,003 3.33 N/A
------- ------- ----- ------- ------- -----
$19,256 $20,443 68.02% $20,205 $20,879 69.30%
======= ======= ===== ======= ======= =====
<CAPTION>
At June 30,
-----------------------------------------
1998
-----------------------------------------
Percent Weighted
Fair Amortized of Average
Value Cost Portfolio Yield (2)
------- --------- --------- ---------
(Dollars in thousands)
<S> <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 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................ 80 80 1.01 3.90
Due after one year
through five years.................... -- -- -- --
Mortgage-backed securities (3)........... 1,463 1,473 18.65 6.74
------ ------ -----
$3,036 $3,053 38.66%
====== ====== =====
Securities Available for Sale
Debt securities:
U.S. agency:
Due after one year
through five years................... $ -- $ -- --
Due after five years
through ten years.................... -- -- -- --
Due after ten years
through fifteen years................ 4,002 4,000 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)........................ 847 844 10.69 N/A
------ ------ -----
$4,849 $4,844 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.
12
<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 December 31, 1999.
Amount at
Maturity Period December 31, 1999
--------------- -----------------
(In Thousands)
Three months or less................ $ 1,647
Over three through six months....... 1,539
Over six through 12 months.......... 2,435
Over twelve months.................. 6,618
-------
Total............................ $12,239
=======
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,
At December 31, --------------------------------------------------
1999 1999 1998
----------------------------- ------------------------------- -----------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
-------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand.................. $ 3,949 4.04% $ (144) $ 4,093 4.45% $ 997 $ 3,096 4.00%
NOW accounts................................. 12,133 12.44 236 11,897 12.93 858 11,039 14.24
Cash management.............................. 87 0.09 (1) 88 0.10 4 84 0.11
Regular savings accounts..................... 5,597 5.73 (270) 5,867 6.38 1,062 4,805 6.20
Money market accounts........................ 25,115 25.72 4,541 20,574 22.36 10,127 10,447 13.49
90-day passbooks............................. 222 0.23 (20) 242 0.26 24 218 0.28
Fixed rate time deposits which mature:
Within one year........................... 21,255 21.77 (179) 21,434 23.29 1,856 19,578 25.28
After one year, but within three years.... 11,456 11.73 (7,454) 18,910 20.55 (1,600) 20,510 26.48
After three years, but within five years.. 9,543 9.77 1,826 7,717 8.39 1,080 6,637 8.57
After five years.......................... 8,094 8.29 7,049 1,045 1.13 47 998 1.29
Club accounts................................ 184 0.19 37 147 0.16 97 50 0.06
------- ------ ------- ------- ------ ------- ------- ------
Total............................... $97,635 100.00% $ 5,621 $92,014 100.00% $14,552 $77,462 100.00%
======= ====== ======= ======= ====== ======= ======= ======
</TABLE>
13
<PAGE>
The following table sets forth the amount and maturities of time deposits
by rates at December 31, 1999.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------
Percent
of Total
Less Than 1 - 3 3-5 After 5 Time
One Year Years Years Years Total Deposits
------- ------- ------- ------- ------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Below 5.00%................ $ 6,696 $ 5,645 $ 1,029 $ 86 $13,456 26.73%
5.00% -- 5.99%............. 8,769 9,691 3,380 164 22,004 43.70
6.00% -- 6.99%............. 3,460 5,370 2,779 271 11,880 23.60
7.00% -- 7.99%............. 824 313 211 154 1,502 2.98
8.00% -- 8.99%............. 885 19 21 -- 925 1.84
9.00% -- 9.99%............. 553 28 -- -- 581 1.15
------- ------- ------- ------- ------- -------
Total................... $21,187 $21,066 $ 7,420 $ 675 $50,348 100.00%
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
Six Months Year Ended June 30,
Ended ------------------------
December 31,
1999 1999 1998
------------ -------- ---------
(In thousands)
<S> <C> <C> <C>
Beginning balance...................... $92,014 $ 77,462 $ 70,756
Net increase before interest credited.. 3,755 11,187 3,622
Interest credited...................... 1,866 3,365 3,084
------- -------- --------
Net increase in deposits............... 5,621 14,552 6,706
------- -------- --------
Ending balance......................... $97,635 $ 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 December
31, 1999, the Bank had advances from the FHLB of Indianapolis of $16.8 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.
14
<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 At or For the Year Ended
Six Months June 30,
Ended ------------------------
December 31,
1999 1999 1998
------------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of FHLB advances
outstanding at any month end.................. $18,250 $12,250 $ 6,250
Approximate average FHLB advances outstanding.... 16,043 7,528 4,874
Period end balance of FHLB advances outstanding.. 16,750 12,250 5,250
Approximate weighted average rate paid on
FHLB advances at end of period................ 5.73% 5.45% 5.54%
Approximate weighted average rate paid on
FHLB advances during period................... 5.71% 5.55% 6.24%
</TABLE>
Subsidiary Activities
As of December 31, 1999, the Bank was the Company's only subsidiary, and
was wholly owned by the Company. The Bank has no subsidiaries.
Personnel
As of December 31, 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 primary federal regulator, and the FDIC, as the
deposit insurer. The Bank is a member of the FHLB System and, with respect to
deposit insurance, of the Savings Association Insurance Fund ("SAIF") managed by
the FDIC. 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/or the FDIC conduct
periodic examinations to examine 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.
15
<PAGE>
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding
company within the meaning of federal law. Under prior law, a unitary savings
and loan holding company, such as the Company was not generally restricted as to
the types of business activities in which it may engage, provided that the Bank
continued to be a qualified thrift lender. See "Federal Savings Institution
Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings association after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that
grandfathered savings and loan holding companies may only engage in such
activities. The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted
authority for activities with respect to unitary savings and loan holding
companies existing prior to May 4, 1999, such as the Company, so long as the
Bank continues to comply with the 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
association, e.g., commercial, non-residential real property loans and consumer
loans, are limited to a specified percentage of the institution's capital or
assets.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS rating system) and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the 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
16
<PAGE>
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of risk-
weighted assets and up to 45% of unrealized gains on available-for-sale equity
securities with readily determinable fair market values. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The capital regulations also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. For the present time, the OTS has deferred
implementation of the interest rate risk capital charge. At December 31, 1999,
the Bank met each of its capital requirements.
The following table presents the Bank's capital position at December
31, 1999.
<TABLE>
<CAPTION>
Capital
----------------------
Excess
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
------- -------- ------------ -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible.................. $15,433 $2,000 $13,433 11.57% 1.50%
Core (Leverage)........... 15,433 4,001 11,432 11.57% 4.00%
Risk-based................ 15,956 6,394 9,562 19.96% 8.00%
</TABLE>
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. The Bank is a member of the SAIF. The
FDIC maintains a risk-based assessment system by which institutions are assigned
to one of three categories based on their capitalization and one of three
subcategories based on examination ratings and other supervisory information. An
institution's assessment rate depends upon the categories to which it is
assigned. Assessment rates for SAIF member institutions are determined
semiannually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999,
FICO payments for SAIF members approximated 6.1 basis points, while Bank
Insurance Fund ("BIF") members paid 1.2 basis points. By law, there is equal
sharing of FICO payments between SAIF and BIF members beginning on January 1,
2000.
17
<PAGE>
The Bank's FICO assessment rate for fiscal 1999 ranged from 5.8 to
5.92 basis points. Payments toward the FICO bonds amounted to $27,000. 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.
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
December 31, 1999, the Bank's limit on loans to one borrower was $3.9 million,
and the Bank's largest aggregate outstanding balance of loans to one borrower
was $1.2 million.
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 December 31, 1999, the Bank maintained 72.3% 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 the first
quarter of 1999 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 Bank")
and had not been advised by the OTS that it was in need of more than normal
supervision, could, after prior notice but without obtaining approval of the
OTS, make capital distributions during the calendar year equal to the greater of
(i) 100% of its net earnings to date during the calendar year plus the amount
that would reduce by one-half the excess capital over its capital requirements
at the beginning of the calendar year or (ii) 75% of its net income for the
previous four quarters. Any additional capital distributions required prior
regulatory approval. 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 is 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 if, like the Bank,
it is a subsidiary of a holding company. In the event the Bank's capital fell
below its regulatory requirements or the 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 at December 31, 1999 was 7.3%, which exceeded the
applicable requirements. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirements.
18
<PAGE>
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 six months
ended December 31, 1999 totaled $17,000.
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
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
Federal Home Loan Banks. 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 complied
with this requirement with an investment in FHLB stock at December 31, 1999 of
$938,000.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts in the late 1980s and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future FHLB
advances increased, The Bank's net interest income would likely also be reduced.
Recent legislation has changed the structure of the Federal Home Loan Banks
funding obligations for insolvent thrifts, revised the capital structure of the
Federal Home Loan Banks and implemented entirely voluntary membership for
Federal Home Loan Banks. Management cannot predict the effect that these changes
may have with respect to its FHLB membership.
19
<PAGE>
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 $44.3 million or less (subject to adjustment by the
Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $44.3 million, the reserve requirement is $1.329
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 $44.3
million. The first $5.0 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.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank has not been audited by the Internal Revenue
Service ("IRS") in the past five years.
Bad Debt Reserve. For taxable years beginning after December 31, 1995,
the Bank is entitled to take a bad debt deduction for federal income tax
purposes which is based on its current or historic net charge-offs. 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. The Bank makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 34% corporate income
tax rate (exclusive of state and local taxes). The Bank does not intend to pay
dividends that would result in a recapture of any portion of its bad debt
reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code imposes a
tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess
of the bad debt reserve deduction claimed by the Bank over the deduction that
would have been allowable under the experience method is treated as a preference
item for purposes of computing the AMTI. Only 90% of AMTI can be offset by net
operating loss 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
20
<PAGE>
addition, for taxable years beginning after June 30, 1986 and before January 1,
1996, an environmental tax of 0.12% of the excess of AMTI (with certain
modifications) over $2.0 million is imposed on corporations, including the Bank,
whether or not an Alternative Minimum Tax ("AMT") is paid. The Bank does not
expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank own more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.
Indiana Taxation
Indiana imposes an 8.5% franchise tax based on a financial
institution's adjusted gross income as defined by statute. In computing adjusted
gross income, deductions for municipal interest, 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 December 31, 1993, 1994 and 1995 without amendment and without
additional tax liability. The Bank's state income tax returns have not been
audited for any subsequent period.
Item 2. Description of Property.
- ---------------------------------
The following table sets forth certain information regarding the Bank's
offices as of December 31, 1999.
<TABLE>
<CAPTION>
Approximate
Year Net Book Owned/ Square
Location Opened Value (1) Leased Footage
- -------- ------ --------- ------ -----------
(In thousands)
<S> <C> <C> <C> <C>
Main Office:
220 Federal Drive, N.W
Corydon, Indiana 47112..................... 1997 $2,401 Owned 12,000
Branch Offices:
391 Old Capitol Plaza, N.W
Corydon, Indiana 47112..................... 1997 65 Leased/(2)/ 425
8095 State Highway 135, N.W
New Salisbury, Indiana 47161............... 1999 1,027 Owned 3,500
</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 December 31, 1999, neither the Company nor 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.
21
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
On November 17, 1999, the Company held its annual meeting of
shareholders. At the meeting shareholders were asked to approve and adopt the
Agreement and Plan of Merger, dated as of July 19, 1999, between First Capital,
Inc., FC Acquisition Corp. and HCB Bancorp, pursuant to which, among other
things, FC Acquisition Corp. merged with and into HCB Bancorp and each share of
HCB Bancorp common stock was converted into 15.5 shares of First Capital, Inc.
common stock. The number of votes cast at the meeting with respect to the
Agreement and Plan of Merger was:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
------- ------- ------- ---------
945,015 5,104 200 144,851
In addition, at the Company's annual meeting of shareholders shareholders
were asked to elect two directors to serve for a term of one year, two directors
to serve for a term of two years and three directors to serve for a term of
three years; to approve the First Capital, Inc. 1999 Stock-Based Incentive Plan;
and to ratify the appointment of Monroe Shine & Co., Inc. as the Company's
independent auditors. The number of votes cast at the meeting as to each matter
acted upon was as follows:
<TABLE>
<CAPTION>
Number of Votes Number of Votes
For Withheld
--------------- ---------------
<S> <C> <C>
Election of Directors:
J. Gordon Pendleton..... 1,072,184 22,986
Samuel E. Uhl........... 1,063,920 31,250
Mark D. Shireman........ 1,063,119 32,051
Kenneth R. Saulman...... 1,066,072 28,838
Dennis L. Huber......... 1,063,224 31,946
John W. Buschmeyer...... 1,068,082 27,088
Gerald L. Uhl........... 1,066,280 28,890
</TABLE>
The year each Director's term expires is as follows:
John W. Buschmeyer (2000); Kenneth R. Saulman (2000); Samuel E. Uhl
(2001); Mark D. Shireman (2001); J. Gordon Pendleton (2002); Gerald L. Uhl
(2002); and Dennis L. Huber (2002).
<TABLE>
<CAPTION>
Number of Votes Number of Votes Number of Votes
For Against Abstaining
--------------- --------------- ---------------
<S> <C> <C> <C>
First Capital, Inc. 1999 Stock-
Based Incentive Plan....................... 891,182 50,581 8,556
Ratification of Monroe Shine &
Co., Inc. as the Company's
independent auditors for the
fiscal year ending June 30, 2000........... 1,090,150 3,620 1,400
</TABLE>
22
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
- ------------------------------------------------------------------
Common Shares
The common shares of the Company trade on the Nasdaq SmallCap Market
under the symbol "FCAP." As of March 1, 2000, the Company had 1,206 stockholders
of record. This number 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 quarters ended September 30, 1999 and
December 31, 1999, and 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 the Bank's common stock divided by 2.5638, the exchange ratio in
connection with the Conversion and Reorganization completed on December 31,
1998. Because the Bank's 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 at
End of
High Low Dividends 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, 1998............ 10.94 8.50 0.070 8.88
Quarter ended June 30, 1999............. 11.81 8.88 0.080 8.75
Six Months Ended December 31, 1999:
Quarter ended September 30, 1999........ 12.39 10.87 0.10 11.64
Quarter ended December 31, 1999......... 12.25 11.00 0.10 12.00
</TABLE>
Item 6. Management's Discussion and Analysis or Plan of Operation.
- -------------------------------------------------------------------
General
The Company is the parent to its wholly owned subsidiary, First
Harrison Bank (formerly, First Federal Bank, a Federal Savings 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 Form 10-KSB.
23
<PAGE>
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 FHLB 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.
24
<PAGE>
Selected Financial and other Data
The financial data presented below is qualified in its entirety by the more
detailed financial data appearing elsewhere in this Form 10-KSB, including the
Company's audited consolidated financial statements. The following tables set
forth certain information concerning the financial position and results of
operations of the Company at the dates indicated. The Company changed its
fiscal year end from June 30 to December 31 in November 1999.
<TABLE>
<CAPTION>
At
December 31, At June 30,
----------------- ---------------------------------------------
1999 1998 1999 1998 1997 1996 1995
-------- ------- -------- ------- ------- ------- -------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets.............................. $132,680 $105,195 $122,698 $93,958 $89,372 $81,317 $72,989
Loans receivable, net..................... 93,461 77,343 83,887 74,887 69,909 63,365 59,174
Mortgage-backed securities,
held to maturity....................... 627 1,994 767 1,473 2,045 2,547 3,023
Other debt securities, held to maturity... 8,984 500 8,480 1,580 4,023 5,267 4,403
Securities available for sale............. 19,256 10,010 20,205 4,849 3,684 2,135 603
Cash and interest bearing deposits (1).... 2,885 9,819 2,611 6,135 5,039 5,385 3,485
Deposits.................................. 97,635 81,417 92,014 77,462 70,756 68,232 61,722
Advances from FHLB........................ 16,750 5,250 12,250 5,250 8,250 3,750 2,750
Stockholders' equity,
substantially restricted .............. 17,123 17,444 17,340 10,341 9,493 8,805 8,087
</TABLE>
<TABLE>
<CAPTION>
For the
Six Months
Ended
December 31, Year Ended June 30,
-------------- ----------------------------------------
1999 1998 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income........................ $4,658 $3,677 $7,799 $6,860 $6,500 $5,997 $5,637
Interest expense....................... 2,708 2,145 4,435 4,112 3,885 3,605 3,176
------ ------ ------ ------ ------ ------ ------
Net interest income.................... 1,950 1,532 3,364 2,748 2,615 2,392 2,461
Provision for loan losses.............. 45 18 44 -- -- -- 17
------ ------ ------ ------ ------ ------ ------
Net interest income after provision
for loan losses..................... 1,905 1,514 3,320 2,748 2,615 2,392 2,444
Non-interest income (2)................ 196 145 301 411 176 159 125
Non-interest expense (3)(4)............ 1,529 898 1,987 1,612 1,854 1,200 1,140
------ ------ ------ ------ ------ ------ ------
Income before income taxes............. 572 761 1,634 1,547 937 1,351 1,429
Income tax expense..................... 257 292 632 589 131 501 526
------ ------ ------ ------ ------ ------ ------
Net income.......................... $ 315 $ 469 $1,002 $ 958 $ 806 $ 850 $ 903
====== ====== ====== ====== ====== ====== ======
Per Share Data:
Net income (basic).................. $ 0.26 $ 0.36 $ 0.78 $ 0.74 $ 0.63 $ 0.66 $ 0.71
Net income (diluted)................ 0.25 0.36 0.77 0.74 0.62 0.65 0.70
Dividends to minority stockholders
prior to conversion.............. N/A 0.14 0.14 0.27 0.27 0.27 0.27
Dividends following Conversion
and Reorganization............... 0.20 N/A 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.
(4) Includes merger related expenses of $331,000 in the six months ended
December 31, 1999.
25
<PAGE>
<TABLE>
<CAPTION>
At
December 31, At June 30,
-------------- --------------------------------------
1999 1998 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Other Data:
Number of:
Mortgage loans outstanding ............ 1,304 1,252 1,270 1,242 1,270 1,229 1,241
Deposit accounts ...................... 9,009 8,079 8,688 7,783 7,181 6,744 6,968
Offices ............................... 3 2 3 2 2 1 1
</TABLE>
<TABLE>
<CAPTION>
At and For
the Six
Months Ended
December 31, At and For the Year Ended June 30,
--------------- -----------------------------------------
1999 1998 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios:
Performance Ratios:
Return on assets (1)........................ 0.49% 0.97% 0.95% 1.08% 0.96% 1.10% 1.25%
Return on average equity (2)................ 3.65 8.81 6.56 9.56 8.81 10.00 11.64
Dividend payout ratio (3)................... 78.33 37.61 40.85 36.74 43.77 41.19 38.78
Average equity to average assets............ 13.39 11.03 14.48 11.30 10.94 11.02 10.72
Interest rate spread (4).................... 2.47 2.81 2.71 2.72 2.70 2.59 2.97
Net interest margin (5)..................... 3.16 3.34 3.37 3.27 3.27 3.22 3.51
Non-interest expense to average assets...... 2.37 1.86 1.89 1.82 2.22 1.56 1.58
Average interest-earning assets to
average interest bearing liabilities .... 115.84 111.50 114.84 111.29 111.74 113.10 111.91
Regulatory Capital Ratios:
Tier 1 - adjusted total assets.............. 13.37 13.68 14.09 11.01 10.62 10.83 11.09
Tier 1 - risk based......................... 22.31 24.33 26.08 18.33 17.74 19.55 17.49
Total risk-based............................ 22.96 25.13 26.81 19.15 18.60 20.71 18.65
Asset Quality Ratios:
Nonperforming loans as a percent of
loans receivable, net (6)................ 0.04 0.29 -- 0.17 0.29 0.16 0.21
Nonperforming assets as a percent of
total assets (7) ........................ 0.22 0.21 -- 0.35 0.14 0.31 0.14
Allowance for loan losses as a percent of
gross loans receivable .................. 0.54 0.68 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
</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 the completion of the Conversion and Reorganization 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.
26
<PAGE>
Average Balance Sheet
The following table sets forth for the periods indicated information
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities and average yields and costs.
Such yields and costs for the periods indicated are derived by dividing income
or expense by the average balances of assets or liabilities, respectively, for
the periods presented. Average balances were derived from daily balances.
<TABLE>
<CAPTION>
Six Months Ended December 31,
----------------------------------------------------------
1999 1998
----------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- -------- ------ ---------- ---------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets (1):
Mortgage loans............................. $ 78,765 $3,113 7.90% $65,828 $2,776 8.43%
Consumer loans............................. 6,541 292 8.93 7,552 278 7.36
Commercial business loans.................. 4,919 209 8.50 3,926 175 8.91
-------- ------ ------- ------
Total loans............................. 90,225 3,614 8.01 77,306 3,229 8.35
-------- ------ ------- ------
Investment securities (2)..................... 31,073 985 6.34 10,915 352 6.45
Interest bearing deposits with banks.......... 1,948 59 6.06 3,472 96 5.53
-------- ------ ------- ------
Total interest earning assets........... 123,246 4,658 7.56 91,693 3,677 8.02
Non-interest earning assets................... 5,549 4,840
-------- -------
Total assets............................ $128,795 $96,533
======== =======
Interest bearing liabilities:
Regular savings............................ $ 5,976 $ 87 2.91% $ 5,247 $ 90 3.43%
Interest bearing demand deposits........... 34,280 749 4.37 22,949 461 4.02
Time deposits........................... 50,090 1,414 5.65 48,694 1,442 5.92
-------- ------ ------- ------
Total deposits.......................... 90,346 2,250 4.98 76,890 1,993 5.18
-------- ------ ------- ------
FHLB advances................................. 16,043 458 5.71 5,348 151 5.65
-------- ------ ------- ------
Total interest bearing liabilities......... 106,389 2,708 5.09 82,238 2,144 5.21
-------- ------ ------- ------
Non-interest bearing liabilities:
Non-interest bearing deposits.............. 3,982 2,716
Other liabilities.......................... 1,173 935
-------- -------
Total liabilities....................... 111,544 85,889
Stockholders' equity.......................... 17,251 10,644
-------- -------
Total liabilities and stockholders'
equity............................... $128,795 $96,533
======== =======
Net interest income........................... $1,950 $1,533
====== ======
Interest rate spread.......................... 2.47% 2.81%
====== ======
Net interest margin........................... 3.16% 3.34%
====== ======
Ratio of average interest earning assets to
average interest bearing liabilities....... 115.84% 111.50%
====== ======
</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.
27
<PAGE>
Average Balance Sheet (cont'd.)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------
1999 1998
----------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- --------- --------- --------- --------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets (1):
Mortgage loans............................ $ 67,004 $5,467 8.16% $62,311 $5,214 8.37%
Consumer loans............................ 7,352 662 9.00 7,558 687 9.09
Commercial business loans................. 4,204 366 8.71 3,545 308 8.69
-------- ------ ------- ------
Total loans............................ 78,560 6,495 8.27 73,414 6,209 8.46
-------- ------ ------- ------
Investment securities (2).................... 17,667 1,124 6.36 7,589 478 6.30
Interest bearing deposits with banks......... 3,464 180 5.20 3,057 173 5.66
-------- ------ ------- ------
Total interest earning assets.......... 99,691 7,799 7.82 84,060 6,860 8.16
-------- ------ ------- ------
Non-interest earning assets.................. 5,697 4,621
-------- -------
Total assets........................... $105,388 $88,681
======== =======
Interest bearing liabilities:
Regular savings........................... $ 5,560 $ 178 3.20 $ 4,678 $ 166 3.55
Interest bearing demand deposits.......... 25,021 1,015 4.06 18,078 778 4.30
Time deposits.......................... 48,696 2,824 5.80 47,904 2,864 5.98
-------- ------ ------- ------
Total deposits......................... 79,277 4,017 5.07 70,660 3,808 5.39
-------- ------ ------- ------
FHLB advances................................ 7,528 418 5.55 4,874 304 6.24
-------- ------ ------- ------
Total interest bearing liabilities........ 86,805 4,435 5.11 75,534 4,112 5.44
-------- ------ ------- ------
Non-interest bearing liabilities:
Non-interest bearing deposits............. 2,950 1,883
Other liabilities......................... 370 1,247
-------- -------
Total liabilities...................... 90,125 78,664
Stockholders' equity......................... 15,263 10,017
-------- -------
Total liabilities and stockholders'
equity.............................. $105,388 $88,681
======== =======
Net interest income.......................... $3,364 $2,748
====== ======
Interest rate spread......................... 2.71% 2.72%
====== ======
Net interest margin.......................... 3.37% 3.27%
====== ======
Ratio of average interest earning assets to
average interest bearing liabilities...... 114.84% 111.29%
====== ======
</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.
28
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
net interest income of the Bank. 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 on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); (iii) changes in
rate/volume (change in rate multiplied by change in volume); and (iv) the net
change (the sum of the prior columns).
<TABLE>
<CAPTION>
Six Months Ended December 31, Year Ended June 30,
1999 Compared to 1998 1999 Compared to 1998
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------------------------- ----------------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
-------- --------- -------- ------- --------- -------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Mortgage loans(1)..................... $(174) $ 545 $(34) $337 $(131) $ 394 $(10) $253
Consumer loans(1)..................... 59 (37) (8) 14 (7) (18) -- (25)
Commercial business loans(1).......... (8) 44 (2) 34 1 57 -- 58
----- ------ ---- ---- ----- ------ ---- ----
Total loans.......................... (123) 552 (44) 385 (137) 433 (10) 286
Investment securities (2)................ (6) 650 (11) 633 5 635 6 646
Interest bearing deposits with banks..... 9 (42) (4) (37) (14) 23 (2) 7
----- ------ ---- ---- ----- ------ ---- ----
Total net change in income on
interest-earning assets............ (120) 1,160 (59) 981 (146) 1,091 (6) 939
----- ------ ---- ---- ----- ------ ---- ----
Interest bearing liabilities:
Interest bearing deposits............. (78) 348 (13) 257 (226) 463 (28) 209
FHLB advances......................... 2 302 3 307 (34) 166 (18) 114
----- ------ ---- ---- ----- ------ ---- ----
Total net change in expense on
interest bearing liabilities.... (76) 650 (10) 564 (260) 629 (46) 323
----- ------ ---- ---- ----- ------ ---- ----
Net change in net interest income........ $ (44) $ 510 $(49) $417 $ 114 $ 462 $(40) $616
===== ====== ==== ==== ===== ====== ==== ====
</TABLE>
_______________________________
(1) The Bank 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 FHLB stock.
Comparison of Financial Condition at December 31, 1999 and June 30, 1999
Total assets increased 8.1% from $122.7 million at June 30, 1999 to $132.7
million at December 31, 1999, primarily as a result of an increase in loans
receivable, net, which was funded primarily by growth in deposits and an
increase in advances from the FHLB of Indianapolis.
Loans receivable, net, were $83.9 million at June 30, 1999, compared to
$93.5 million at December 31,1999, a 11.4% increase. The loan growth is
attributable to a 3.2% growth in residential mortgage loans (including
residential construction loans), a 69.9% growth in commercial real estate loans
and a 37.2% growth in consumer loans. Commercial real estate loans were $3.7
million at June 30, 1999, compared to $6.3 million at December 31, 1999.
Consumer loans were $6.4 million at June 30, 1999, compared to $8.8 million at
December 31, 1999. The growth in consumer loans results primarily from a $1.8
million increase in home equity and second mortgage loans.
The investment in mortgage-backed securities held-to-maturity decreased
from $767,000 at June 30, 1999 to $627,000 at December 31,1999 as a result of
repayments of $139,000.
Securities available for sale, consisting of federal agency mortgage-backed
certificates, federal agency notes and bonds, municipal bonds and mutual funds
decreased by $948,000 from $20.2 million at June 30, 1999 to $19.3 million at
December 31, 1999 primarily as a result of maturities and repayments of $452,000
and unrealized depreciation of $512,000.
Other debt securities held to maturity, consisting of federal agency notes
and bonds, increased from $8.5 million at June 30, 1999 to $9.0 million at
December 31, 1999. During the six month period ended December 31, 1999, the
Company purchased federal agency debt securities of $500,000.
29
<PAGE>
Securities available for sale, consisting of federal agency mortgage-backed
certificates, federal agency notes and bonds, municipal bonds and mutual funds
decreased $948,000 from $20.2 million at June 30, 1999 to $19.3 million at
December 31, 1999 primarily as a result of maturities and repayments of $452,000
and unrealized depreciation of $512,000.
Cash and interest bearing deposits with banks increased from $2.6 million
at June 30, 1999 to $2.9 million at December 31, 1999. The Bank increased the
levels of working cash in connection with contingency planning for the Year 2000
date change.
Total deposits increased from $92.0 million at June 30, 1999 to $97.6
million at December 31, 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 decreased from $17.3 million at June 30, 1999 to
$17.1 million at December 31, 1999 primarily as a result of an increase in the
net unrealized loss on available for sale securities of $309,000 net of retained
net income of $68,000.
Comparison of Operating Results for the Six Month Periods Ended December 31,
1999 and 1998
Net Income. Net income was $315,000 ($0.25 per share diluted) for the six
months ended December 31, 1999 compared to $469,000 ($0.36 per share diluted)
for the six months ended December 31, 1998. The results for 1999 include non-
recurring merger related expenses of $280,000, net of tax. Excluding these non-
recurring expenses, net income increased $127,000 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 27.2% from $1.5 million
in 1998 to $1.9 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 $981,000, or 26.7%, to $4.7 million for the
six months ended December 31, 1999 compared to $3.7 million for the same period
in 1998 as a result of a higher balance of interest-earning assets. Interest on
loans receivable increased $385,000 and interest on investment securities
increased $633,000 as a result of a higher average balance in 1999. The average
yield on interest-earning assets decreased from 8.02% in 1998 to 7.56% in 1999
primarily because of lower yields on mortgage loans. The yield on short-term
investments, including interest bearing deposits with banks, increased in 1999
compared to 1998 because of higher market interest rates.
Total interest expense increased $563,000, or 26.3%, to $2.7 million for
the six months ended December 31, 1999 compared to $2.1 million for the six
months ended December 31, 1998 as a result of the growth in deposits and an
increase in average borrowings from the FHLB. The average cost of deposits
decreased during 1999 compared to 1998 as the average cost of interest bearing
deposits decreased from 5.18% in 1998 to 4.98% in 1999. The decrease in the
average cost of deposits results from the growth in lower cost checking and
savings accounts. The average balance of non-interest bearing deposits
increased from $2.7 million in 1998 to $4.0 million in 1999 as a result of the
bank's efforts to attract business transaction accounts.
Provision for Loan Losses. The provision for loan losses was $45,000 for
the six months ended December 31, 1999. The provision for loan losses for the
comparable period in 1998 was $18,000. 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 for the periods ended December 31, 1999
and 1998 to increase the allowance for loan losses to an amount considered
reasonable by management based on quarterly evaluations. The Bank increased the
provisions for loan losses in 1999 due to an increase in commercial business and
consumer loans, which possess a higher inherent risk of loss than one- to four-
family residential mortgage loans. 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 considered 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.
30
<PAGE>
Non-interest income. Non-interest income increased 35.1% to $196,000 for
the six months ended December 31, 1999 compared to $145,000 for the six months
ended December 31, 1998. Service charges on deposit accounts increased by
$42,000 for 1999 compared to 1998 due to the growth in transaction accounts
during 1999.
Non-interest expense. Non-interest expense, excluding non-recurring merger
related expenses of $331,000, increased $299,000 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
$151,000 due to normal compensation increases, the compensation cost associated
with the employee stock ownership plan adopted at December 31, 1998, and
additional staff for the new branch office in New Salisbury, Indiana, which
opened in March 1999. Occupancy and equipment costs have increased in 1999
compared to 1998 as a result of increased occupancy charges for the new branch
office facility and equipment and expenses related to the Year 2000 issue. Other
non-interest expenses increased $122,000 in 1999 compared to 1998 primarily due
to increases in advertising costs, professional fees and other expenses of
operating as a public company.
Income tax. Income tax expense for the six months ended December 31, 1999
was $257,000, compared to $292,000 for the same period in 1998. The effective
tax rate for 1999 was 44.9% compared to 38.4% for 1998. Non-recurring merger
expenses in 1999 reduced net income before taxes by $331,000 as compared to
1998, resulting in lower income tax expense in 1999. Certain of these merger
expenses are not deductible for federal and state income tax purposes, resulting
in a higher effective tax rate for 1999.
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 FHLB 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.
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 in connection
with the Conversion and Reorganization.
Comparison of Operating Results for the Years Ended June 30, 1999 and 1998
Net Income. Net income was $1.0 million ($0.77 per share diluted) for the
year ended June 30, 1999 compared to $958,000 ($0.73 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,
31
<PAGE>
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 FHLB. 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.
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. 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.
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.
Year 2000 Issues
The year 2000 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 recognize the year 2000 as 1900, or not at
all. This inability to recognize or properly treat the year 2000 may cause
erroneous results, ranging from system malfunctions to incorrect or incomplete
processing. As a user of computers, computer software and equipment utilizing
embedded microprocessors, failure to resolve year 2000 issues could cause
substantial disruption of the Bank's business and could have a material adverse
effect on the Bank's business, financial condition or results of operations.
The Bank established a year 2000 committee in 1997, headed by the Chief
Operating Officer and included all department heads. The committee developed
and implemented a comprehensive plan to make all information and non-information
technology assets year 2000 compliant. The committee provided periodic reports
to the Board of Directors in order to assist the directors in their year 2000
readiness oversight role.
32
<PAGE>
While there can be no assurances that the Bank's year 2000 plan has
effectively addressed the year 2000 issue, the Bank has not been notified, and
is unaware of, any vendor or service provider problems related to year 2000 and
all systems have performed properly since January 1, 2000. Likewise, the Bank
is unaware of any year 2000 issues that have impaired the ability of the Bank's
borrowers to repay their debt.
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 FHLB of Indianapolis. While loan repayments and
maturities and sales of securities are predictable sources of funds, deposit
flows and mortgage prepayments are greatly influenced by market interest rates,
general economic conditions and competition. At December 31, 1999, the Bank had
cash and interest-bearing deposits with banks of $2.9 million and securities
available for sale with a fair value of $19.3 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 December 31, 1999, the Bank had total commitments to extend
credit of $8.3 million. See Note 13 of Notes to Consolidated Financial
Statements. At December 31, 1999, the Bank had certificates of deposit scheduled
to mature within one year of $21.3 million. Historically, the Bank has been able
to retain a significant amount of its deposits as they mature.
Current 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 December 31, 1999, the Bank's liquidity was 7.3%.
The Bank is required to maintain specific amounts of capital pursuant to
OTS requirements. As of December 31, 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 11.6%, 11.6% and 20.0%,
respectively.
Effect of Inflation and Changing Prices
The financial statements and related financial data presented in this Form
10-KSB 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.
33
<PAGE>
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).
The following table is provided by the OTS and sets forth the change in the
Bank's NPV at December 31, 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 December 31, 1999
-----------------------------------------------------------------
NPV As % Of
Net Portfolio Value Present Value Of Assets
Change in ------------------------------- --------------------------
Interest NPV Change
in Basis Points Amount $ Change % Change Ratio (bp)
--------------- ------ -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
300 $ 9,127 $(8,324) (48)% 7.45% (556)
200 11,930 (5,522) (32) 9.44 (357)
100 14,766 (2,686) (15) 11.33 (168)
Static 17,452 -- -- 13.01 --
(100) 19,605 2,153 12 14.26 125
(200) 21,439 3,987 23 15.25 224
(300) 23,526 6,074 35 16.34 333
</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.
Item 7. Financial Statements.
- ------------------------------
The financial statements listed in the index to Consolidated Financial
Statements at Item 13 of this report are incorporated by reference into this
Item 7.
34
<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 with respect to Directors is
incorporated herein by reference to the Proxy Statement under the heading
"Proposal 1--Election of Directors."
Executive Officers Who Are Not Directors
<TABLE>
<CAPTION>
Name Age(1) Position
- ---- ------ --------
<S> <C> <C>
M. Chris Frederick........... 32 Senior Vice President, Chief Financial Officer and Treasurer
Joel E. Voyles............... 47 Senior Vice President - Retail and Corporate Secretary
Sheri L. McGill.............. 36 Vice President - Regional Manager
Dennis L. Thomas............. 43 Senior Vice President - Lending
Bradley B. Backherms......... 49 Senior Vice President - Operations
</TABLE>
______________________________
(1) As of December 31, 1999.
Biographical Information
M. Chris Frederick has been affiliated with the Bank since 1990 and has
served in his present position since 1997. He is a member of Leadership
Harrison County and the Parish Relations Board of the Corydon United Methodist
Church.
Joel E. Voyles has been affiliated with the Bank since December 1996 and
has served in his present position since 1997. From November 1975 to December
1996, he served as Vice President - Deposit Operations Manager of Cumberland
Savings Bank in Louisville, Kentucky.
Sheri L. McGill has been affiliated with the Bank since January 1988 and
has held her present position since 1992. She is a member of Leadership
Harrison County.
Dennis L. Thomas has been affiliated with the Bank since January 2000. He
was employed by Harrison County Bank from 1981 until the merger with the Bank.
He is active in the North Harrison Babe Ruth Baseball League.
Bradley B. Backherms has been affiliated with the Bank since January 2000.
He was employed by Harrison County Bank from 1982 until the merger with the
Bank. He is a member of the Crandall United Methodist Church.
Item 10. Executive Compensation.
- --------------------------------
The information required by this Item is incorporated herein by reference
to the Proxy Statement under the heading "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 Proxy Statement under the heading "Stock Ownership."
35
<PAGE>
Item 12. Certain Relationships and Related Transactions.
- --------------------------------------------------------
The information required by this Item is incorporated herein by reference
to the Proxy Statement under the heading "Transactions with Management."
Item 13. Exhibits, Financial Statement Schedules and List and Reports on Form
- ------------------------------------------------------------------------------
8-K.
- ---
(a) Financial Statements
The following consolidated financial statements of the Company and its
subsidiary are filed as part of this document under Item 7.
. Independent Auditors' Report
. Consolidated Balance Sheets as of December 31, 1999 and June 30, 1999
and 1998
. Consolidated Statements of Stockholders Equity for the Six Months
Ended December 31, 1999 and the Years Ended June 30, 1999 and 1998
. Consolidated Statements of Income for the Six Months Ended December
31, 1999 and 1998 and the Years Ended June 30, 1999 and 1998
. Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 1999 and 1998 and the Years Ended June 30, 1999 and 1998
. Notes to Consolidated Financial Statements
Financial Statement Schedules
Financial Statements Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or notes thereto.
(a) Exhibits
Exhibit
Number
------
3.1 Articles of Incorporation of First Capital, Inc. (1)
3.2 Bylaws of First Capital, Inc.
10.1 Employment Agreement with James G. Pendleton (2)
10.2 Employment Agreement with Samuel E. Uhl
10.3 Employment Agreement with M. Chris Frederick
10.4 Employment Agreement with Joel E. Voyles
10.5 Employee Severance Compensation Plan (2)
10.6 First Federal Bank, A Federal Savings Bank 1994 Stock Option Plan
(as assumed by First Capital, Inc. effective December 31, 1998) (3)
10.7 First Capital, Inc. 1999 Stock-Based Incentive Plan (4)
10.8 1998 Officers' and Key Employees' Stock Option Plan for HCB
Bancorp(4)
10.9 Employment Agreement with William W. Harrod
21.0 Subsidiaries of the Registrant (incorporated by reference to Part
I, "Business--Subsidiary Activities" of this Form 10-KSB).
23.0 Consent of Monroe Shine and Co., Inc.
27.0 Financial Data Schedule
(1) Incorporated by reference from the Exhibits filed with the
Registration Statement on Form SB-2, and any amendments thereto,
Registration No. 333-63515.
(2) Incorporated by reference to the Quarterly Report on Form 10-QSB for
the quarter ended December 31, 1998.
(3) Incorporated by reference from the Exhibits filed with the Registration
Statement on Form S-8, and any amendments thereto, Registration
Statement No. 333-76543.
(4) Incorporated by reference from the Exhibits filed with the
Registration Statement on Form S-8, and any amendments thereto,
Registration Statement No. 333-95987.
(b) Reports on Form 8-K
(1) On November 18, 1999, the Company filed a Form 8-K announcing that the
Board of the Company voted to change the Company's fiscal year end from
June 30 to December 31.
36
<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/ William W. Harrod
-----------------------------------------------
William W. Harrod
President, Chief Executive Officer and Director
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.
Name Title Date
- ---- ----- ----
/s/ William W. Harrod President, Chief Executive March 17, 2000
- --------------------------
William W. Harrod Officer and Director
(principal executive officer)
/s/ J. Gordon Pendleton Chairman March 17, 2000
- --------------------------
J. Gordon Pendleton
/s/ Michael C. Frederick Chief Financial Officer and March 17, 2000
- --------------------------
Michael C. Frederick Treasurer
(principal accounting
and financial officer)
/s/ Samuel E. Uhl Director March 17, 2000
- --------------------------
Samuel E. Uhl
/s/ Mark D. Shireman Director March 17, 2000
- --------------------------
Mark D. Shireman
/s/ Dennis L. Huber Director March 17, 2000
- --------------------------
Dennis L. Huber
/s/ Kenneth R. Saulman Director March 17, 2000
- --------------------------
Kenneth R. Saulman
/s/ John W. Buschemeyer Director March 17, 2000
- --------------------------
John W. Buschemeyer
/s/ Gerald L. Uhl Director March 17, 2000
- --------------------------
Gerald L. Uhl
37
<PAGE>
/s/ Earl H. Book Director March 17, 2000
- --------------------------
Earl H. Book
/s/ James S. Burden Director March 17, 2000
- --------------------------
James S. Burden
/s/ Marvin E. Kiesler Director March 17, 2000
- --------------------------
Marvin E. Kiesler
/s/ James E. Nett Director March 17, 2000
- --------------------------
James E. Nett
/s/ Michael L. Shireman Director March 17, 2000
- --------------------------
Michael L. Shireman
/s/ Loren E. Voyles Director March 17, 2000
- --------------------
Loren E. Voyles
38
<PAGE>
[LETTERHEAD OF MONROE SHINE]
Independent Auditor's Report
The Board of Directors
First Capital, Inc.
Corydon, Indiana
We have audited the accompanying consolidated balance sheets of First Capital,
Inc. and Subsidiary as of December 31, 1999 and June 30, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for the periods ended December 31, 1999 and 1998 and June 30, 1999 and 1998.
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 December 31, 1999 and June 30, 1999 and 1998, and the
results of their operations and their cash flows for the periods ended December
31, 1999 and 1998 and June 30, 1999 and 1998 in conformity with generally
accepted accounting principles.
/s/ Monroe Shine
January 13, 2000
F-1
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1999 1999 1998
---- ---- ----
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,555,407 $ 929,524 $ 894,657
Interest bearing deposits with banks 1,329,653 1,681,356 5,239,904
Securities available for sale, at fair value 19,256,393 20,204,556 4,848,534
Securities held to maturity:
Mortgage-backed securities (fair value December 31, 1999
$602,748; June 30, 1999 $742,635; June 30, 1998 $1,462,917) 626,945 766,819 1,472,972
Other debt securities (fair value December 31, 1999 $8,603,048;
June 30, 1999 $8,320,025; June 30, 1998 $1,573,450) 8,983,936 8,479,648 1,580,000
Loans receivable, net 93,460,511 83,886,960 74,887,358
Federal Home Loan Bank stock, at cost 937,500 662,500 588,800
Foreclosed real estate 255,757 - 103,874
Premises and equipment 3,493,447 3,688,258 2,600,772
Accrued interest receivable:
Loans 429,508 430,707 432,274
Mortgage-backed securities 31,352 33,661 11,681
Other debt securities 472,108 452,806 88,244
Cash value of life insurance 1,110,587 1,085,824 1,038,340
Other assets 736,865 394,932 170,653
-------------------------------------------
Total Assets $132,679,969 $122,697,551 $93,958,063
===========================================
LIABILITIES
Deposits:
Non-interest bearing demand deposits $ 3,943,581 $ 4,093,621 $ 3,146,552
Savings and interest bearing demand deposits 43,342,752 38,814,682 26,593,058
Time deposits 50,348,444 49,105,953 47,722,424
-------------------------------------------
Total deposits 97,634,777 92,014,256 77,462,034
Advances from Federal Home Loan Bank 16,750,000 12,250,000 5,250,000
Advance payments by borrowers for taxes
and insurance 45,146 37,073 33,722
Accrued interest payable on deposits 542,979 470,352 372,845
Accrued expenses and other liabilities 584,470 586,206 498,527
-------------------------------------------
Total Liabilities 115,557,372 105,357,887 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 at December 31 and June 30, 1999
(1,292,748 shares in 1998) 12,927 12,927 12,927
Additional paid-in capital 9,405,265 9,401,787 2,154,369
Retained earnings-substantially restricted 8,984,740 8,916,432 8,170,645
Accumulated other comprehensive income-
net unrealized gain (loss) on securities
available for sale (716,575) (407,222) 2,994
Unearned ESOP shares (563,760) (584,260) -
-------------------------------------------
Total Stockholders' Equity 17,122,597 17,339,664 10,340,935
-------------------------------------------
Total Liabilities and Stockholders' Equity $132,679,969 $122,697,551 $93,958,063
===========================================
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIODS 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 consolidated financial statements.
F-3
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned
Common Paid-in Retained Comprehensive ESOP
Stock Capital Earnings Loss Shares Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1999 $12,927 $ 9,401,787 $ 8,916,432 $ (407,222) $ (584,260) $17,339,664
COMPREHENSIVE INCOME
Net income - - 315,174 - - 315,174
Other comprehensive income:
Change in unrealized loss
on securities available for sale,
net of deferred income tax
benefit of $202,906 - - - (309,353) - (309,353)
Less: reclassification adjustment - - - - - -
----------
Total comprehensive income 5,821
----------
Cash dividends ($0.10 per share) - - (246,866) - - (246,866)
Shares released by ESOP trust - 3,478 - - 20,500 23,978
------------------------------------------------------------------------------------
Balances at December 31, 1999 $12,927 $ 9,405,265 $ 8,984,740 $ (716,575) $ (563,760) $17,122,597
====================================================================================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED DECEMBER 31, 1999 AND 1998
AND JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
December 31, December 31, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable:
Mortgage loans $ 3,112,605 $2,776,362 $ 5,467,632 $ 5,213,556
Consumer and other loans 501,316 452,856 1,027,820 995,710
Mortgage-backed securities 155,598 50,734 184,643 111,751
Other securities:
Federal agency 733,937 249,953 811,098 264,847
Municipal 29,014 260 19,966 9,363
Other 33,259 27,478 59,095 46,245
Federal Home Loan Bank dividends 33,463 23,790 48,509 45,653
Interest bearing deposits with banks 58,636 95,599 179,946 173,192
--------------------------------------------------------------
Total interest income 4,657,828 3,677,032 7,798,709 6,860,317
--------------------------------------------------------------
INTEREST EXPENSE
Deposits 2,249,898 1,993,655 4,016,573 3,808,317
Advances from Federal Home Loan Bank 458,133 151,087 417,995 303,551
--------------------------------------------------------------
Total interest expense 2,708,031 2,144,742 4,434,568 4,111,868
--------------------------------------------------------------
Net interest income 1,949,797 1,532,290 3,364,141 2,748,449
Provision for loan losses 45,000 18,000 44,000 -
--------------------------------------------------------------
Net interest income after provision
for loan losses 1,904,797 1,514,290 3,320,141 2,748,449
NON-INTEREST INCOME
Loan fees and service charges 18,310 29,412 48,284 38,684
Gain on sale of premises and equipment - - - 169,087
Service charges on deposit accounts 122,759 80,729 170,620 123,806
Other income 55,037 35,018 82,304 79,205
--------------------------------------------------------------
Total non-interest income 196,106 145,159 301,208 410,782
--------------------------------------------------------------
NON-INTEREST EXPENSES
Compensation and benefits 633,407 482,603 1,032,773 858,303
Occupancy and equipment 206,875 184,433 398,177 309,943
Deposit insurance premiums 26,636 22,439 46,729 44,198
Merger related expenses 330,808 - - -
Other expenses 331,269 209,398 509,850 399,120
--------------------------------------------------------------
Total non-interest expenses 1,528,995 898,873 1,987,529 1,611,564
--------------------------------------------------------------
Income before income taxes 571,908 760,576 1,633,820 1,547,667
Income tax expense 256,734 292,010 631,769 589,215
--------------------------------------------------------------
Net Income $ 315,174 $ 468,566 $ 1,002,051 $ 958,452
==============================================================
Net income per common share, basic $ .26 $ .36 $ .79 $ .74
==============================================================
Net income per common share, diluted $ .25 $ .36 $ .79 $ .74
==============================================================
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED DECEMBER 31, 1999 AND 1998
AND JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
December 31, December 31 June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 315,174 $ 468,566 $ 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 14,545 3,589 6,320 12,228
Depreciation expense 211,148 93,049 200,929 174,935
Deferred income taxes (43,640) (24,645) 8,120 (9,321)
ESOP compensation expense 23,978 10,250 31,099 -
Increase in cash value of life insurance (24,763) (23,325) (47,484) (46,144)
Provision for loan losses 45,000 18,000 44,000 -
(Increase) decrease in accrued interest receivable (15,794) (74,033) (384,975) 7,506
Increase in accrued interest payable 72,627 73,566 97,507 165,352
Net change in other assets/liabilities (89,050) 148,896 127,693 (162,280)
------------------------------------------------------------
Net Cash Provided By Operating Activities 509,225 693,913 1,085,260 931,641
------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing
deposits in banks 351,703 (3,632,028) 3,558,548 (1,445,357)
Purchase of securities available for sale (33,259) (9,134,978) (22,556,441) (4,146,245)
Proceeds from maturities of securities
available for sale 451,610 3,032,446 6,514,216 3,000,000
Purchase of securities held to maturity (500,000) - (8,475,000) -
Proceeds from maturities of securities held
to maturity - 1,080,000 1,580,000 2,440,000
Principal collected on mortgage-backed securities 138,594 450,525 702,110 562,574
Net increase in loans receivable (9,874,308) (2,474,269) (8,939,728) (5,082,056)
Purchase of Federal Home Loan Bank stock (275,000) - (73,700) (29,700)
Proceeds from sale of premises and equipment - - - 425,000
Purchase of premises and equipment (16,337) (523,210) (1,288,415) (590,828)
------------------------------------------------------------
Net Cash Used in Investing Activities (9,756,997) (11,201,514) (28,978,410) (4,866,612)
------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 4,378,030 3,526,054 13,168,693 6,739,502
Net increase (decrease) in time deposits 1,242,491 429,022 1,383,529 (33,777)
Advances from Federal Home Loan Bank 14,500,000 - 10,000,000 8,500,000
Repayment of advances from Federal Home
Loan Bank (10,000,000) - (3,000,000) (11,500,000)
Net proceeds from issuance of common stock - 6,671,152 6,621,118 -
Exercise of stock options - - 5,759 21,760
Cash received from merger with First Capital,
Inc. MHC - 5,182 5,182 -
Cash dividends paid (246,866) (71,405) (256,264) (142,544)
------------------------------------------------------------
Net Cash Provided By Financing Activities 9,873,655 10,560,005 27,928,017 3,584,941
------------------------------------------------------------
Net Increase (Decrease) in Cash and Due
From Banks 625,883 52,404 34,867 (350,030)
Cash and due from banks at beginning of year 929,524 894,657 894,657 1,244,687
------------------------------------------------------------
Cash and Due From Banks at End of Year $ 1,555,407 $ 947,061 $ 929,524 $ 894,657
============================================================
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 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 consolidated financial statements for the fiscal year ended June
30, 1999 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.
Basis of Presentation
The Company has changed its fiscal year to the calendar year. The
statements of income for the periods ended December 31, 1999 and 1998
present the results of operations for the six month periods then ended.
The statements of income for the periods ended June 30, 1999 and 1998
present the results of operations for the fiscal years then ended.
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.
While management uses available information to recognize losses on
loans and foreclosed real estate, further reductions in the carrying
amounts of loans and foreclosed assets may be necessary based on
changes in local economic conditions. In addition, as an integral part
of their examination process, regulatory agencies periodically review
the estimated losses on loans and foreclosed real estate. Such agencies
may require the Bank to recognize additional losses based on their
judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible the
estimated losses on loans and foreclosed real estate may change
materially in the near term. However, the amount of the change that is
reasonable possible cannot be estimated.
F-7
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
(1 - continued)
Securities Available for Sale
Securities available for sale consist of debt and equity securities and
are stated at fair value. Amortization of premium and accretion of
discount are recognized in interest income using the interest method
over the remaining period to maturity, adjusted for anticipated
prepayments. Unrealized gains and losses, net of tax, on securities
available for sale are reported as a separate component of
stockholders' equity until realized. Realized gains and losses on the
sale of securities available for sale are determined using the specific
identification method.
Securities Held to Maturity
Debt securities for which the Bank has the positive intent and ability
to hold to maturity are carried at cost, adjusted for amortization of
premium and accretion of discount using the interest method over the
remaining period to maturity, adjusted for anticipated prepayments.
Mortgage-backed securities represent participating interests in pools
of long-term first mortgage loans originated and serviced by issuers of
the securities.
Loans
Loans receivable are stated at unpaid principal balances, less net
deferred loan fees and the allowance for loan losses. The Bank's real
estate loan portfolio consists primarily of long-term loans,
collateralized by first mortgages on single-family residences and
multi-family residential properties located in the southern Indiana
area and commercial real estate loans. In addition to real estate
loans, the Bank makes commercial loans and consumer loans.
Loan origination fees and certain direct costs of underwriting and
closing loans are deferred and the net fee or cost is recognized as an
adjustment to interest income over the contractual life of the loans
using the interest method.
The accrual of interest is discontinued on a loan when, in the judgment
of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. The Bank does not accrue
interest on loans past due 90 days or more except when the estimated
value of collateral and collection efforts are deemed sufficient to
ensure full recovery. When a loan is placed on non accrual status,
previously accrued but unpaid interest is deducted from interest
income.
Subsequent receipts on nonaccrual loans, including specific impaired
loans are recorded as a reduction of principal, and interest income is
only recorded once principal recovery is reasonably assured.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specified impaired loans, and economic
conditions. 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.
F-8
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 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.
F-9
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
(2) MERGER WITH HCB BANCORP
On January 12, 2000, the Company completed the plan of merger with HCB
Bancorp (HCB), a bank holding company located in Palmyra, Indiana. HCB
is the parent company of Harrison County Bank, a state-chartered
commercial bank. The merger provided for an exchange of 15.5 shares of
the Company's common stock for each share of HCB common stock. The
merger was accounted for as a pooling of interests. Unaudited pro forma
condensed combined financial information is presented in Note 21.
(3) DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the balance sheets
according to management's intent. Investment securities at December 31,
1999 and June 30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1999:
Securities available for sale:
Mortgage Securities:
FHLMC certificates $ 707,221 - 13,237 693,984
GNMA certificates 3,405,966 $ - $ 146,611 $ 3,259,355
------------------------------------------------------------
4,113,187 - 159,848 3,953,339
------------------------------------------------------------
Other debt securities:
Federal agency 14,000,000 - 872,403 13,127,597
Municipal 1,293,856 - 119,146 1,174,710
------------------------------------------------------------
19,407,043 - 1,151,397 18,255,646
------------------------------------------------------------
Mutual funds 1,035,929 - 35,182 1,000,747
------------------------------------------------------------
Total securities available
for sale $ 20,442,972 $ - $ 1,186,579 $ 19,256,393
============================================================
Securities held to maturity:
Mortgage-backed securities:
FHLMC certificates $ 52,485 $ 161 $ - $ 52,646
GNMA certificates 251,456 - 12,431 239,025
FNMA certificates 323,004 902 12,829 311,077
------------------------------------------------------------
626,945 1,063 25,260 602,748
------------------------------------------------------------
Other debt securities:
Federal agency 8,983,936 - 380,888 8,603,048
------------------------------------------------------------
Total securities held to
maturity $ 9,610,881 $ 1,063 $ 406,148 $ 9,205,796
============================================================
</TABLE>
F-10
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 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, 1999:
Securities available for sale:
Mortgage-backed 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
===========================================================
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>
F-11
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
(3 - continued)
The amortized cost and fair value of debt securities as of December 31,
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 one year through five
years $ 2,000,000 $ 1,923,061 - -
Due after five years through
ten years $ 9,655,000 $ 9,063,672 $ 8,983,936 $ 8,603,048
Due after ten years 3,638,856 3,315,574 - -
--------------------------------------------------------------
15,293,856 14,302,307 8,983,936 8,603,048
Mortgage-backed securities 4,113,187 3,953,339 626,946 602,748
--------------------------------------------------------------
$19,407,043 $18,255,646 $ 9,610,882 $ 9,205,796
==============================================================
</TABLE>
Certain debt securities were pledged to secure advances from the
Federal Home Loan Bank at December 31, 1999. (See Note 7)
(4) LOANS
Loans receivable at December 31, 1999 and June 30, 1999 and 1998
consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1999 1999 1998
---- ---- ----
<S> <C> <C> <C>
Real estate mortgage loans:
Residential $ 68,427,646 $ 63,530,746 $ 57,825,501
Land 384,446 1,018,276 217,720
Residential construction 5,755,630 8,346,117 3,786,787
Commercial real estate 6,250,500 3,678,160 4,370,446
Commercial business loans 6,676,330 5,607,319 5,048,291
Consumer loans:
Home equity and second mortgage loans 4,803,373 2,998,893 2,798,649
Automobile loans 1,786,773 1,615,081 1,574,208
Loans secured by savings accounts 410,830 399,778 465,613
Other consumer loans 1,796,646 1,398,018 1,458,984
------------------------------------------
Gross loans receivable 96,292,174 88,592,388 77,546,199
------------------------------------------
Less:
Deferred loan origination fees, net 206,637 204,499 210,572
Undisbursed portion of loans in process 2,102,371 4,019,310 1,932,310
Allowance for loan losses 522,655 481,619 515,959
------------------------------------------
2,831,663 4,705,428 2,658,841
------------------------------------------
Loans receivable, net $93,460,511 $83,886,960 $74,887,358
==========================================
</TABLE>
F-12
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
(4 - continued)
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
December 31, December 31, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning balances $ 481,619 $ 515,959 $ 515,959 $ 518,645
Provision 45,000 18,000 44,000 -
Recoveries - - 156 -
Loans charged-off (3,964) - (78,496) (2,686)
------------------------------------------------------------
Ending balances $ 522,655 $ 533,959 $ 481,619 $ 515,959
============================================================
</TABLE>
The Bank had no loans specifically classified as impaired at December
31, 1999 and 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 $49,423,
$52,171 and $92,291 for the periods ended December 31, 1999 and June
30, 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 the periods ended
December 31, 1999 and June 30, 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.
The following table represents the aggregate activity for related party
loans which exceeded $60,000 in total for the periods presented:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
---- ----
<S> <C> <C>
Beginning balance $ 5,527,894 $ 3,062,707
New loans 866,585 2,723,901
Payments (819,734) (258,714)
Adjustment (60,697) -
----------- -----------
Ending balance $ 5,514,048 $ 5,527,894
=========== ===========
</TABLE>
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 periods ended December 31, 1999 and June
30, 1999 and 1998, the Bank granted approximately $366,000, $768,000
and $612,000, respectively, to customers of the dealership and such
loans had an aggregate outstanding balance of approximately $1.3
million at December 31, 1999.
F-13
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
(5) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1999 1999 1998
---- ---- ----
<S> <C> <C> <C>
Land and land improvements $ 509,547 $ 509,547 $ 379,547
Leasehold improvements 49,169 46,847 46,847
Office building 2,611,748 2,611,748 1,729,512
Furniture, fixtures and equipment 1,250,633 1,236,618 960,438
-------------------------------------------------
4,421,097 4,404,760 3,116,344
Less accumulated depreciation 927,650 716,502 515,572
-------------------------------------------------
Totals $ 3,493,447 $ 3,688,258 $ 2,600,772
=================================================
</TABLE>
(6) DEPOSITS
The aggregate amount of time deposit accounts with balances of $100,000
or more was approximately $12,239,000, $12,789,000 and $11,002,000 at
December 31, 1999 and June 30, 1999 and 1998, respectively. Deposit
account balances in excess of $100,000 are not federally insured.
At December 31, 1999, scheduled maturities of time deposits were as
follows:
Year ending December 31:
2000 $ 21,254,737
2001 11,456,607
2002 9,542,678
2003 3,678,037
2004 and thereafter 4,416,385
------------
Total $ 50,348,444
============
The Bank held deposits of approximately $2,461,000, $1,526,000 and
$1,469,000 for related parties at December 31, 1999 and June 30, 1999
and 1998, respectively.
(7) ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1999 and June 30, 1999 and 1998, advances from the
Federal Home Loan Bank were as follows:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1999 1999 1998
---------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Rate Amount Rate Amount Rate Amount
<S> <C> <C> <C> <C> <C> <C>
Fixed rate advances 5.73% $13,750,000 5.51% $10,250,000 5.54% $ 5,250,000
Adjustable rate advances 5.13% 3,000,000 5.15% 2,000,000 -
----------- ----------- -----------
$16,750,000 $12,250,000 $ 5,250,000
=========== =========== ===========
</TABLE>
The following is a schedule of maturities for advances outstanding as
of December 31, 1999:
Year ending December 31:
2000 $ 7,000,000
2001 1,750,000
2004 3,000,000
2006 1,000,000
2009 4,000,000
------------
$ 16,750,000
============
F-14
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
(7 - continued)
The advances are secured under a blanket collateral agreement. At
December 31, 1999, eligible collateral included conventional mortgage
loans with a carrying value of $59,629,254 and debt securities with a
carrying value of $26,691,817 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.
The following is a schedule by years of future minimum rental payments
required under this operating lease:
Year ending December 31:
2000 $ 12,690
2001 12,690
2002 12,690
2003 11,633
--------
Total minimum payments required $ 49,703
========
Total minimum rental expense for all operating leases for each of the
periods ended December 31, 1999 and 1998 amounted to $6,345. Total
minimum rental expense for all operating leases for each of the periods
ended June 30, 1999 and 1998 amounted to $12,690.
(9) INCOME TAXES
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
December 31, December 31, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current $ 300,374 $ 316,655 $ 623,649 $ 598,536
Deferred (43,640) (24,645) 8,120 (9,321)
--------------------------------------------------------------
Totals $ 256,734 $ 292,010 $ 631,769 $ 589,215
==============================================================
</TABLE>
Significant components of the Bank's deferred tax assets and
liabilities as of December 31, 1999 and June 30, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1999 1999 1998
---- ---- ----
<S> <C> <C> <C>
Deferred tax (assets) liabilities:
Depreciation $ 73,717 $ 77,952 $ 65,634
Deferred loan fees 52,239 44,468 26,446
Deferred compensation plans (136,647) (134,359) (127,170)
Allowance for loan losses (207,024) (190,769) (204,371)
Post-1987 bad debt deduction 114,531 143,164 171,797
Unrealized gain (loss) on securities
available for sale (470,004) (267,098) 1,964
----------------------------------------------------
Net deferred tax asset $ (573,188) $ (326,642) $ (65,700)
====================================================
</TABLE>
F-15
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
(9 - continued)
The reconciliation of income tax expense with the amount which would
have been provided at the federal statutory rate of 34 percent follows:
<TABLE>
<CAPTION>
December 31, December 31 June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Provision at federal statutory tax rate $ 194,449 $ 258,596 $ 555,499 $ 526,207
State income tax-net of federal tax benefit 39,491 40,872 91,696 83,515
Tax exempt interest income (13,788) (1,287) (8,345) (8,813)
Increase in cash value of life insurance (8,420) (7,931) (16,145) (15,689)
Nondeductible merger expenses 61,665 - - -
Other (16,663) 1,760 9,064 3,995
-----------------------------------------------------------
Totals $ 256,734 $ 292,010 $ 631,769 $ 589,215
===========================================================
Effective tax rate 44.9% 38.4% 38.7% 38.1%
===========================================================
</TABLE>
Prior to July 1, 1996, the Bank was permitted by the Internal Revenue
Code to deduct from taxable income an annual addition to a statutory
bad debt reserve subject to certain limitations. Retained earnings at
December 31, 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 December 31, 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
December 31, 1999, the remaining unamortized balance of the post-1987
reserves totaled $336,856 for which a deferred tax liability of
$114,531 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 the years ended June 30, 1999 and 1998, respectively. The Bank
contributed $16,703 and $12,622 to the plan for the periods ended
December 31, 1999 and 1998, respectively.
F-16
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
(10 - continued)
Employee Stock Ownership Plan:
On December 31, 1998, the Company established a leveraged employee
stock ownership plan (ESOP) covering substantially all employees. The
ESOP trust acquired 61,501 shares of Company common stock financed by a
term loan with the Company. The employer loan and the related interest
income are not recognized in the consolidated financial statements as
the debt is serviced from Company contributions. Dividends payable on
allocated shares are charged to retained earnings and are satisfied by
the allocation of cash dividends to participant accounts. Dividends
payable on unallocated shares are not considered dividends for
financial reporting purposes. Shares held by the ESOP trust are
allocated to participant accounts based on the ratio of the current
year principal and interest payments to the total of the current year
and future years principal and interest to be paid on the employer
loan.
Compensation expense is recognized based on the average fair value of
shares released for allocation to participant accounts during the year
with a corresponding credit to stockholders' equity. Compensation
expense recognized for the year ended June 30, 1999 amounted to
$31,099. Compensation expense recognized for the periods ended December
31, 1999 and 1998 amounted to $23,977 and $10,250, respectively.
Company common stock held by the ESOP trust was as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
---- ----
<S> <C> <C>
Allocated shares 5,125 1,025
Shares committed to be released - 2,050
Unearned shares 56,376 58,426
---------------------------------
Total ESOP shares 61,501 61,501
=================================
Fair value of unearned shares $ 676,512 $ 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.
Deferred compensation expense for this plan was $17,440 and $33,866 for
the years ended June 30, 1999 and 1998, respectively. Deferred
compensation expense for this plan was $7,781 and $8,720 for the
periods ended December 31, 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. Deferred compensation expense for this
plan was $10,571 and $16,633 for the years ended June 30, 1999 and
1998, respectively. Deferred compensation expense for this plan was
$3,012 and $5,218 for the periods ended December 31, 1999 and 1998,
respectively.
F-17
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
(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.
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 December
31, 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:
<TABLE>
<CAPTION>
1999 1998
----------------------- ------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
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
========= ========
</TABLE>
For options outstanding at December 31, 1999, the option price per
share ranged from $5.07 to $7.80 and the weighted average remaining
contractual life of the options was 6.9 years.
For purposes of providing the pro forma disclosures required under SFAS
No. 123, the fair market value of stock options granted in fiscal years
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 years ended
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
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
</TABLE>
F-18
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 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:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1999 1998
---- ----
<S> <C> <C>
Pro forma net income $ 1,007 $ 958
Pro forma net income per share:
Basic $ 0.78 $ 0.74
Diluted $ 0.77 $ 0.73
</TABLE>
(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
$272,000 at December 31, 1999.
The following is a summary of the commitments to extend credit at
December 31, 1999 and June 30, 1999 and 1998:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1999 1999 1998
---- ---- ----
<S> <C> <C> <C>
Loan commitments:
Fixed rate $ 998,955 $ 685,125 $ 1,585,597
Adjustable rate 156,000 1,183,000 -
Undisbursed commercial and personal
lines of credit 4,970,538 4,393,796 1,628,128
Undisbursed portion of construction
loans in process 2,102,371 4,019,310 1,932,310
Other loans in process 115,503 159,603 249,893
--------------------------------------------
Total commitments to extend credit $ 8,343,367 $ 10,440,834 $ 5,395,928
============================================
</TABLE>
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve,
to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend
credit and standby letters of credit is represented by the contractual
notional amount of those instruments (see Note 13). The Bank uses the
same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
F-19
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 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
and has not incurred any losses on its commitments during the period
ended December 31, 1999 and the years ended June 30, 1999 and 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.
F-20
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 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 December 31, 1999, that the
Company and its subsidiary meet all capital adequacy requirements to
which they are subject.
As of December 31, 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.
<TABLE>
<CAPTION>
Minimum To Be Well
Capitalized Under
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes: Actions Provisions:
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital (to risk
weighted assets):
Consolidated $ 18,362 22.96% $ 6,397 8.00% N/A
Bank $ 15,956 19.96% $ 6,394 8.00% $ 7,992 10.00%
Tier I capital (to risk
weighted assets):
Consolidated $ 17,839 22.31% $ 3,198 4.00% N/A
Bank $ 15,433 19.31% $ 3,197 4.00% $ 4,795 6.00%
Tier I capital (to adjusted
total assets):
Consolidated $ 17,839 13.37% $ 5,336 4.00% N/A
Bank $ 15,433 11.57% $ 4,001 3.00% $ 6,668 5.00%
Tangible capital (to
adjusted total assets):
Bank $ 15,433 11.57% $ 2,000 1.50% N/A
</TABLE>
F-21
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 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
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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>
F-22
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of financial instruments are
as follows:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1999 1999 1998
---- ---- ----
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Financial assets:
Cash and due from banks $ 1,555 $ 1,555 $ 930 $ 930 $ 895 $ 895
Interest bearing deposits in banks 1,330 1,330 1,681 1,681 5,240 5,240
Securities available for sale 19,256 19,256 20,205 20,205 4,849 4,849
Securities held to maturity 9,611 9,206 9,246 9,063 3,053 3,036
Loans receivable 94,115 91,879 84,369 83,902 75,403 75,789
Less: allowance for loan losses 523 523 482 482 516 516
-----------------------------------------------------------------------
Loans receivable, net 93,592 91,356 83,887 83,420 74,887 75,273
-----------------------------------------------------------------------
Federal Home Loan Bank stock 938 938 663 663 589 589
Financial liabilities:
Deposits 97,635 97,078 92,058 91,832 77,462 77,798
Advances from Federal Home
Loan Bank 16,750 16,027 12,250 11,708 5,250 4,960
Unrecognized financial instruments:
Commitments to extend credit - 10 - - - 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.
F-23
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 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) follows:
Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
---- ----
<S> <C> <C>
Assets:
Cash and interest bearing deposits $ 2,405 $ 2,818
Other assets 39 24
Investment in bank subsidiary 14,716 14,517
-------- --------
$ 17,160 $ 17,359
======== ========
Liabilities and Stockholders' Equity:
Other liabilities $ 37 $ 19
Stockholders' equity 17,123 17,340
-------- --------
$ 17,160 $ 17,359
======== ========
</TABLE>
F-24
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
(18 - continued)
<TABLE>
<CAPTION>
Statements of Income
(In thousands)
Period Ended
------------------------------
December 31, June 30,
1999 1999
---- ----
<S> <C> <C>
Interest income $ 48 $ 48
Other operating expenses 281 80
------------------------------
Loss before income taxes and equity in
undistributed net income of subsidiary (233) (32)
Income tax expense (credit) (39) 2
------------------------------
Loss before equity in undistributed net
income of subsidiary (194) (34)
Equity in undistributed net income of subsidiary 509 1,036
------------------------------
Net income $ 315 $ 1,002
==============================
Statements of Cash Flows
(In thousands)
Operating Activities:
Net income $ 315 $ 1,002
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed net income of subsidiary (509) (1,036)
ESOP compensation expense 24 31
Net change in other assets/liabilities 3 (5)
------------------------------
Net cash used by operating activities (167) (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 (246) (185)
------------------------------
Net cash provided by financing activities (246) 6,442
------------------------------
Net increase (decrease) in cash (413) 2,818
Cash at beginning of year 2,818 -
------------------------------
Cash at end of year $ 2,405 $ 2,818
==============================
</TABLE>
F-25
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
(19) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
<TABLE>
<CAPTION>
December 31, December 31 June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic:
Earnings:
Net income $ 315,174 $ 486,566 $ 1,002,051 $ 958,452
=============================================================
Shares:
Weighted average common
shares outstanding 1,232,276 1,291,824 1,261,915 1,291,063
=============================================================
Net income per common share, basic $ .26 $ .36 $ .79 $ .74
=============================================================
Diluted:
Earnings:
Net income $ 315,174 $ 486,566 $ 1,002,051 $ 958,452
=============================================================
Shares:
Weighted average common
shares outstanding 1,232,276 1,291,824 1,261,915 1,291,063
Add: Dilutive effect of outstanding
options 9,836 3,947 8,710 3,619
-------------------------------------------------------------
Weighted average common shares
outstanding, as adjusted 1,242,112 1,295,771 1,270,625 1,294,682
=============================================================
Net income per common share, diluted $ .25 $ .36 $ .79 $ .74
=============================================================
</TABLE>
Unearned ESOP shares are not considered as outstanding for purposes of
computing the weighted-average common shares outstanding.
(20) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
December 31, December 31 June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash payments for:
Interest $ 2,616,842 $ 2,070,368 $ 4,508,544 $ 3,946,516
Income taxes 365,570 297,682 673,045 486,206
Noncash investing activities:
Transfers from loans to real estate
acquired through foreclosure $ 255,757 $ - $ - $ 105,734
Proceeds from sales of foreclosed
real estate financed through loans - 98,600 98,600 -
</TABLE>
(21) PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as
of December 31, 1999 and the unaudited pro forma condensed combined
statements of income for each of the years in the two-year period ended
December 31, 1999 give effect to the merger with HCB, accounted for as
a pooling of interests.
The unaudited pro forma condensed combined financial information is
based on the historical consolidated financial statements of the
Company and HCB under the assumptions and adjustments set forth in the
accompanying notes to the unaudited pro forma condensed combined
financial statements, and gives effect to the merger as if the merger
had been consummated on January 1, 1998. The unaudited pro forma
condensed combined financial statements do not give effect to the
anticipated cost savings in connection with the merger.
F-26
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
(21 - continued)
The unaudited pro forma condensed combined financial statements should
be read in conjunction with the consolidated historical financial
statements of the Company and HCB, including the respective notes to
those statements. The pro forma information is not necessarily
indicative of the combined financial position or the results of
operations in the future or of the combined financial position or the
results of operations which would have been realized had the merger
been consummated during the periods or as of the dates for which the
pro forma information is presented.
Pro forma per share amounts for the combined company are based on the
exchange ratio.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of December 31, 1999
<TABLE>
<CAPTION>
Pro Forma Pro Forma
First Capital HCB Bancorp Adjustments Combined
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,555,407 $ 4,264,930 $ - $ 5,820,337
Interest bearing deposits with banks 1,329,653 2,372,000 3,701,653
Securities available for sale, at fair value 19,256,393 11,140,466 (300,000) 30,096,859
Securities held to maturity 9,610,881 2,713,732 12,324,613
Federal funds sold - 4,000,000 4,000,000
Loans receivable, net 93,460,511 61,521,476 154,981,987
Other assets 7,467,124 4,404,906 11,872,030
----------------------------------------------------------
Total Assets $ 132,679,969 $ 90,417,510 $ (300,000) $ 222,797,479
==========================================================
LIABILITIES
Deposits $ 97,634,777 $ 77,706,732 $ - $ 175,341,509
Advances from Federal Home Loan Bank 16,750,000 - 16,750,000
Other liabilities 1,172,595 676,511 (19,805) 1,829,301
----------------------------------------------------------
Total Liabilities 115,557,372 78,383,243 (19,805) 193,920,810
----------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - - -
Common stock 12,927 799,250 (787,112) 25,065
Additional paid-in capital 9,405,265 2,503,400 537,112 12,445,777
Retained earnings 8,984,740 8,796,584 - 17,781,324
Accumulated other comprehensive income (loss) (716,575) (64,967) (30,195) (811,737)
Unearned ESOP shares (563,760) - (563,760)
----------------------------------------------------------
Total Stockholders' Equity 17,122,597 12,034,267 (280,195) 28,876,669
----------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 132,679,969 $ 90,417,510 $ (300,000) $ 222,797,479
==========================================================
</TABLE>
F-27
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
Unaudited Pro Forma Condensed Combined Statement of Income
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Pro Forma Pro Forma
First Capital HCB Bancorp Adjustments Combined
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 6,917,337 $ 5,108,095 $ - $ 12,025,432
Securities 1,756,367 868,863 (8,750) 2,616,480
Federal funds sold - 165,945 - 165,945
Interest bearing deposits in banks 142,983 150,281 - 293,264
-------------------------------------------------------------
Total interest income 8,816,687 6,293,184 (8,750) 15,101,121
-------------------------------------------------------------
INTEREST EXPENSE
Deposits 4,272,816 2,568,366 - 6,841,182
Advances from Federal Home Loan Bank 725,041 - - 725,041
-------------------------------------------------------------
Total interest expense 4,997,857 2,568,366 - 7,566,223
-------------------------------------------------------------
Net interest income 3,818,830 3,724,818 (8,750) 7,534,898
Provision for loan losses 71,000 71,250 - 142,250
-------------------------------------------------------------
Net interest income after provision for loan losses 3,747,830 3,653,568 (8,750) 7,392,648
NON-INTEREST INCOME
Service charges on deposit accounts 212,650 387,756 - 600,406
Other income 102,323 327,872 - 430,195
-------------------------------------------------------------
Total non-interest income 314,973 715,628 - 1,030,601
-------------------------------------------------------------
NON-INTEREST EXPENSES
Compensation and benefits 1,183,577 1,533,337 - 2,716,914
Occupancy and equipment 420,619 447,780 - 868,399
Merger related expenses 330,808 85,571 - 416,379
Other expenses 682,647 889,249 - 1,571,896
-------------------------------------------------------------
Total non-interest expenses 2,617,651 2,955,937 - 5,573,588
-------------------------------------------------------------
Income before income taxes 1,445,152 1,413,259 (8,750) 2,849,661
Income tax expense 596,493 483,032 (1,040) 1,078,485
-------------------------------------------------------------
Net Income $ 848,659 $ 930,227 $ (7,710) $ 1,771,176
=============================================================
Net income per common share, basic $ 0.69 $ 11.64 $ 0.72
============================= ============
Net income per common share, diluted $ 0.68 $ 11.64 $ 0.71
============================= ============
Weighted average shares outstanding - basic 1,234,834 79,906 2,473,377
Weighted average shares outstanding - diluted 1,245,908 79,906 2,484,451
</TABLE>
F-28
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
Unaudited Pro Forma Condensed Combined Statement of Income
For the Year Ended December 31,1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
First Capital HCB Bancorp Adjustments Combined
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 6,419,914 $ 4,949,795 $ - $ 11,369,709
Securities 574,992 1,132,037 - 1,707,029
Federal funds sold - 127,121 - 127,121
Interest bearing deposits in banks 176,041 126,160 - 302,201
--------------------------------------------------------------
Total interest income 7,170,947 6,335,113 - 13,506,060
--------------------------------------------------------------
INTEREST EXPENSE
Deposits 3,905,001 2,664,589 - 6,569,590
Advances from Federal Home Loan Bank 278,831 - - 278,831
--------------------------------------------------------------
Total interest expense 4,183,832 2,664,589 - 6,848,421
--------------------------------------------------------------
Net interest income 2,987,115 3,670,524 - 6,657,639
Provision for loan losses 18,000 65,000 - 83,000
--------------------------------------------------------------
Net interest income after provision for loan losses 2,969,115 3,605,524 - 6,574,639
NON-INTEREST INCOME
Service charges on deposit accounts 147,373 335,074 - 482,447
Other income 81,409 333,947 - 415,356
--------------------------------------------------------------
Total non-interest income 228,782 669,021 - 897,803
--------------------------------------------------------------
NON-INTEREST EXPENSES
Compensation and benefits 907,850 1,402,302 - 2,310,152
Occupancy and equipment 337,104 397,402 - 734,506
Other expenses 457,685 886,971 - 1,344,656
--------------------------------------------------------------
Total non-interest expenses 1,702,639 2,686,675 - 4,389,314
--------------------------------------------------------------
Income before income taxes 1,495,258 1,587,870 - 3,083,128
Income tax expense 574,190 502,527 - 1,076,717
--------------------------------------------------------------
Net Income $ 921,068 $ 1,085,343 - $ 2,006,411
==============================================================
Net income per common share, basic $ 0.71 $ 13.58 $ 0.79
============================= ============
Net income per common share, diluted $ 0.71 $ 13.58 $ 0.79
============================= ============
Weighted average shares outstanding - basic 1,291,824 79,900 2,530,274
Weighted average shares outstanding - diluted 1,301,948 79,919 2,540,693
</TABLE>
F-29
<PAGE>
FIRST CAPITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND JUNE 30, 1999 AND 1998
Notes to the Unaudited Pro Forma Condensed Combined Financial Statements
Basis of Presentation
Under generally accepted accounting principles, the transaction was
accounted for as a pooling of interests and, as such, the assets and
liabilities of HCB were combined with those of the Company at book value.
In addition, the statements of income of HCB were combined with the
statements of income of the Company as of the earliest period presented.
The unaudited pro forma condensed combined balance sheet assumes the merger
was consummated on December 31, 1999. Certain reclassifications have been
included in the unaudited pro forma condensed combined balance sheet and
unaudited pro forma condensed combined statements of income to conform
presentation.
Accounting Policies and Financial Statement Classifications
The accounting policies of both companies are in the process of being
reviewed for consistency. As a result of this review, certain conforming
accounting adjustments may be necessary. The nature and extent of these
adjustments have not been determined but are not expected to be
significant.
Pro Forma Adjustments
Pro forma adjustments to common stock and additional paid-in capital at
December 31, 1999, reflect the merger accounted for as a pooling of
interests, through: (1) the exchange of 1,238,837 shares of Company common
stock (using the exchange ratio of 15.5) for 79,925 outstanding shares of
HCB common stock at December 31, 1999, (2) the reclassification adjustment
from common stock to additional paid-in capital to reflect the $.01 par
value of Company common stock and (3) the cancellation of 25,000 shares of
Company common stock held by HCB and classified as available for sale
securities at December 31, 1999.
The pro forma adjustments to interest income and income tax expense for the
year ended December 31, 1999 reflects the elimination of income and the
related income tax expense of HCB for dividends on the 25,000 shares of
Company common stock held during 1999.
The pro forma combined weighted average common shares outstanding for each
of the years in the two-year period ended December 31, 1999, reflect the
First Capital weighted average common shares outstanding plus the converted
HCB weighted average common shares outstanding. Each share of HCB common
stock was converted into 15.5 shares of Company common stock.
F-30
<PAGE>
EXHIBIT 3.2
AMENDED BYLAWS
OF
FIRST CAPITAL, INC.
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE. First Capital, Inc. (hereinafter referred to
as the "Corporation") shall at all times maintain a principal office in the
State of Indiana, which, except as otherwise determined by the Board of
Directors of the Corporation (hereinafter referred to as the "Board"), shall be
in the City of Corydon, County of Harrison.
SECTION 2. OTHER OFFICES. The Corporation may also have offices at such
other places within or without the State of Indiana as the Board shall from time
to time designate or the business of the Corporation shall require.
ARTICLE II
STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. All annual and special meetings of
stockholders shall be held at such places within or without the State of Indiana
as may from time to time be designated by the Board and specified in the notice
of meeting.
SECTION 2. ANNUAL MEETING. A meeting of the stockholders of the
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at 2:00 p.m. on the third
Wednesday of April, if not a legal holiday, and if a legal holiday, then on the
next day following such day which is not a legal holiday, or at such other date
and time as the Board may determine and specify in the notice of the meeting.
SECTION 3. SPECIAL MEETINGS. A special meeting of the stockholders may
only be called by those persons authorized to do so in the Corporation's
Articles of Incorporation. Business transacted at any special meeting of the
stockholders shall be confined to the purpose or purposes stated in the notice
of such meeting.
SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings of the
stockholders shall be conducted in accordance with Indiana law unless otherwise
prescribed by these Bylaws. The Chairman, or in the absence of the Chairman, the
highest ranking officer of the Corporation who is present, or such other person
as the Board shall have designated, shall call to order any meeting of the
stockholders and act as chairman of the meeting. The Secretary of the
Corporation, if present at the meeting, shall be the secretary of the meeting.
In the absence of the Secretary of the Corporation, the secretary of the meeting
shall be such person as the chairman of the meeting shall appoint. The chairman
of any meeting of the stockholders, unless otherwise prescribed by law or
regulation or unless the Chairman has otherwise determined, shall determine the
order of business and the procedure at the meeting.
SECTION 5. NOTICE OF MEETINGS. Written notice stating the date, time and
place of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting of the stockholders is called shall be delivered
no fewer than ten (10) nor more than sixty (60) days before the date of the
meeting, either personally or by mail, by or at the direction of the Chairman,
the Secretary or the directors requesting the meeting to each stockholder of
record entitled to vote at such meeting. If mailed, such notice shall be deemed
given when deposited in the United States mail, postage prepaid, addressed to
the stockholder at his address as it appears on the stock transfer books or
records of the Corporation as of the record date prescribed in Section 6 of this
Article II. When any meeting of the stockholders, either
1
<PAGE>
annual or special, is adjourned for more than thirty (30) days or if, after
adjournment, a new record date is fixed for the adjourned meeting, notice of the
adjourned meeting shall be given as in the case of an original meeting. It shall
not be necessary to give any notice of the date, time and place of any other
adjourned meeting of the stockholders, other than an announcement at the meeting
at which such adjournment is taken.
SECTION 6. FIXING OF RECORD DATE. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of the stockholders
or any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose under Indiana law, the Board may fix, in advance, a date as the
record date for any such determination of stockholders. Such date shall not be
less than ten (10) days and not more than the seventy (70) days before the
meeting or action requiring a determination of stockholders.
SECTION 7. VOTING LISTS. The Secretary of the Corporation, or other
officer or agent of the Corporation having charge of the stock transfer books
for shares of the capital stock of the Corporation, shall prepare and make, at
least five (5) business days before each meeting of the stockholders, a complete
list of the stockholders entitled to vote at such meeting, or any adjournment
thereof, arranged in alphabetical order, with the address of and the number of
shares held by each stockholder. Such list shall be open to the examination of
any stockholder entitled to vote at the meeting, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least five (5)
business days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or at the Corporation's principal office. Such list shall also be
produced and kept open at the time and place of the meeting during the whole
time thereof and shall be subject to the inspection of any stockholder present
at the meeting. The stock transfer books shall be the only evidence as to who
are the stockholders entitled to examine the stock transfer books, or to vote in
person or by proxy at any meeting of stockholders.
SECTION 8. QUORUM. A majority of the outstanding shares of the Corporation
entitled to vote at a meeting of the stockholders, represented in person or by
proxy, shall constitute a quorum at a meeting. If less than a majority of the
outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice
except as otherwise provided in Section 5 of this Article II. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted at the meeting as originally called. The stockholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
SECTION 9. PROXIES. At any meeting of the stockholders, every stockholder
having the right to vote shall be entitled to vote in person, or by proxy
appointed by an instrument in writing and complying with the requirements of
Indiana law.
SECTION 10. VOTING BY THE CORPORATION. Neither treasury shares of its own
capital stock held by the Corporation, nor shares held by another corporation, a
majority of the shares of which entitled to vote for the election of directors
are held by the Corporation, shall be entitled to vote or be counted for quorum
purposes at any meeting of the stockholders; provided, however, that the
Corporation may vote shares of its capital stock held by it, or by any such
other corporation, if such shares of capital stock are held by the Corporation
or such other corporation in a fiduciary capacity.
SECTION 11. INSPECTORS OF ELECTION. The Board shall, in advance of any
meeting of stockholders, appoint one or three persons as inspectors of election,
to act at the meeting or any adjournment thereof and make a written report
thereof.
SECTION 12. NOTICE OF NOMINATIONS AND PROPOSALS. Nominations for the
election of directors and proposals for any new business to be taken up at any
annual or special meeting of stockholders may be made by the board of directors
of the corporation or by any stockholder of the corporation entitled to vote
generally in the election of directors. In order for a stockholder of the
corporation to make any such nominations and/or proposals, he or she shall
2
<PAGE>
give notice thereof in writing, delivered or mailed by first class United States
mail, postage prepaid, to the Secretary of the corporation not less than thirty
(30) days nor more than sixty (60) days prior to any such meeting; provided,
however, that if less than thirty-one (31) days' notice of the meeting is given
to stockholders, such written notice shall be delivered or mailed, as
prescribed, to the Secretary of the corporation not later than the close of the
tenth day following the day on which notice of the meeting was mailed to
stockholders.
Each such notice given by a stockholder with respect to nominations for
election of directors shall set forth (i) the name, age, business address and,
if known, residence address of each nominee proposed in such notice, (ii) the
principal occupation or employment of each such nominees, (iii) the number of
shares of stock of the corporation which are beneficially owned by each such
nominee, (iv) such other information as would be required to be included in a
proxy statement soliciting proxies for the election of the proposed nominee
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
including, without limitation, such person's written consent to being named in
the proxy statement as a nominee and to serving as a director, if elected, and
(v) as to the stockholder giving such notice (a) his name and address as they
appear on the corporation's books and (b) the class and number of shares of the
corporation which are beneficially owned by such stockholder. In addition, the
stockholder making such nomination shall promptly provide any other information
reasonably requested by the corporation. Each such notice given by a stockholder
to the Secretary with respect to business proposals to bring before a meeting
shall set forth in writing as to each matter: (i) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting; (ii) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business; (iii) the class
and number of shares of the corporation which are beneficially owned by the
stockholder; and (iv) any material interest of the stockholder in such business.
Notwithstanding anything in these Articles to the contrary, no business shall be
conducted at the meeting except in accordance with the procedures set forth in
this Section.
The Chairman of the annual or special meeting of stockholders may, if the
facts warrant, determine and declare to the meeting that a nomination or
proposal was not made in accordance with the foregoing procedure, and, if the
Chairman should so determine, the Chairman shall so declare to the meeting and
the defective nomination or proposal shall be disregarded and laid over for
action at the next succeeding adjourned, special or annual meeting of the
stockholders taking place thirty (30) days or more thereafter. This provision
shall not require the holding of any adjourned or special meeting of
stockholders for the purpose of considering such defective nomination or
proposal.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the Corporation shall be
managed under the direction of, the Board except as may be otherwise provided by
law or the Articles of Incorporation. The Board shall elect from among its
members a Chairman, and may elect one (1) or more Vice Chairmen of the Board.
The Chairman, or in his absence the Vice Chairman, shall preside at all meetings
of the Board.
SECTION 2. NUMBER. The number of directors of the Corporation shall be
fixed from time to time exclusively by the Board by resolution adopted by a
majority of the total number of the Corporation's directors.
SECTION 3. REGULAR MEETINGS. A regular meeting of the Board shall be held
without other notice than this Bylaw immediately after, and at the same place
as, the annual meeting of the stockholders or at such other place as may be
designated by the Board. Additional meetings shall be held at such time as the
Board shall fix at such places within or without the State of Indiana as shall
be fixed by the Board. No call shall be required for regular meetings for which
the time and place has been fixed.
3
<PAGE>
SECTION 4. SPECIAL MEETINGS. Special meetings of the Board may be called
by or at the request of the Chairman or the Vice Chairman, or in the absence or
disability of both of them, a majority of the remaining directors. The persons
authorized to call special meetings of the Board may fix any place as the place
for holding any special meeting of the Board called by such persons.
SECTION 5. PARTICIPATION IN MEETINGS. Members of the Board may participate
in regular or special meetings by means of conference telephone or similar
communications equipment by which all persons participating in the meeting can
communicate with each other. A director participating in a meeting by this means
is deemed to be present in person at the meeting.
SECTION 6. NOTICE. The persons authorized to call special meetings of the
Board shall cause the Secretary of the Corporation to give written or oral
notice of the meeting, specifying the time and place of the meeting, to each
director, either personally, by mailing, or by telegram, at least two (2) days
in advance of the meeting. Any director may waive notice of any meeting by a
writing filed with the Secretary. The attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except in the event a
director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting of the Board need be specified in the notice or waiver of notice of such
meeting.
SECTION 7. QUORUM. A majority of the number of directors fixed pursuant to
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the Board, but if less than such majority is present
at a meeting, a majority of the directors present may adjourn the meeting from
time to time. Notice of any adjourned meeting shall be given in the same manner
as prescribed by Section 7 of this Article III.
SECTION 8. MANNER OF ACTING. Unless otherwise prescribed in the Articles
of Incorporation or these Bylaws, the act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board.
SECTION 9. ACTION WITHOUT A MEETING. Any action required or permitted to
be taken by the Board at a meeting may be taken without a meeting if a consent
in writing, setting forth the action so taken, shall be signed by all of the
directors.
SECTION 10. RESIGNATION. Any director may resign at any time by sending a
written notice of such resignation to the Corporation addressed to the Chairman
or the Vice Chairman. Unless otherwise specified therein, such resignation shall
take effect upon receipt thereof.
SECTION 11. VACANCIES. Any vacancy occurring in the Board may be filled in
accordance with the Articles of Incorporation.
SECTION 12. COMPENSATION. Directors, as such, may receive pursuant to
resolution of the Board, fixed fees and other compensation for their services as
directors, including their services as members of committees of the Board.
SECTION 13. QUALIFICATION. Except for persons who are serving or who have
been appointed to serve as a director and who are 70 years of age or older at
the time of the adoption of this bylaw, no person 70 years of age or older shall
be eligible for election, reelection, appointment or reappointment to the Board
of Directors. Persons who are serving or have been appointed to serve as a
director and who are 70 years of age or older at the time of the adoption of
this bylaw shall be eligible for reelection until such person attains 73 years
of age. Notwithstanding the foregoing, the person serving as Chairman of the
Board of Directors at the time of the adoption of this bylaw shall be eligible
for reelection until he attains 73 years of age. A director who reaches the
applicable age limitation may serve as such until the next annual meeting of
stockholders at which directors are elected.
4
<PAGE>
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 1. APPOINTMENT. The Board, by resolution adopted by a majority of
the Board, may designate the Chairman, the President and one (1) or more of the
other directors to constitute an Executive Committee. The designation of any
committee pursuant to this Article IV and the delegation of authority thereto
shall not operate to relieve the Board, or any director, of any responsibility
imposed by law or regulation.
SECTION 2. AUTHORITY. The Executive Committee, when the Board is not in
session, shall have and may exercise all of the authority of the Board except to
the extent, if any, that such authority shall be limited by the resolution
appointing the Executive Committee, or as otherwise expressly provided by law,
the Articles of Incorporation or these Bylaws.
SECTION 3. TENURE. Subject to the provisions of Section 8 of this Article
IV, each member of the Executive Committee shall hold office until the next
regular annual meeting of the Board following his designation and until a
successor is designated as a member of the Executive Committee.
SECTION 4. MEETINGS. Regular meetings of the Executive Committee may be
held without notice at such times and places as the Executive Committee may fix
from time to time. Special meetings of the Executive Committee may be called by
the Chairman or the President, or in the absence or disability of both of them,
by a majority of the remaining members of the Executive Committee upon not less
than one (1) day's notice stating the place, date and hour of the meeting, which
notice may be written or oral. Any member of the Executive Committee may waive
notice of any meeting and no notice of any meeting need be given to any member
thereof who attends in person. The notice of a meeting of the Executive
Committee need not state the business proposed to be transacted at the meetings.
Regular or special meetings may be held my means of conference telephone
or similar communications equipment by which all persons participating in the
meeting can communicate with each other.
SECTION 5. QUORUM. A majority of the members of the Executive Committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the Executive Committee must be authorized by the
affirmative vote of a majority of the members present as a meeting at which a
quorum is present.
SECTION 6. ACTION WITHOUT A MEETING. Any action required or permitted to
be taken by the Executive Committee at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the members of the Executive Committee.
SECTION 7. VACANCIES. Any vacancy in the Executive Committee may be filled
by a resolution adopted by a majority of the Board.
SECTION 8. RESIGNATIONS AND REMOVAL. Any member of the Executive Committee
may be removed at any time with or without cause by resolution adopted by a
majority of the Board. Any member of the Executive Committee may resign from the
Executive Committee at any time by giving written notice to the Chairman or the
President. Unless otherwise specified thereon, such resignation shall take
effect upon receipt. The acceptance of such resignation shall not be necessary
to make it effective.
SECTION 9. PROCEDURE. The Chairman shall be presiding officer of the
Executive Committee, or, in his absence or disability, the President, or in the
absence or disability of both of them, such other persons as may be elected by a
majority of the members present. The Executive Committee may fix its own rules
of procedure which shall not be inconsistent with these bylaws. It shall keep
regular minutes of its proceedings and report the same to the Board for its
information at the meeting thereof held next after the proceedings shall have
been taken.
5
<PAGE>
SECTION 10. OTHER COMMITTEES. The Board may by resolution establish an
audit committee or other committees composed of directors as they may determine
to be necessary or appropriate for the conduct of the business of the
Corporation and may prescribe the duties, constitution and procedures thereof.
ARTICLE V
OFFICERS
SECTION 1. POSITIONS. The officers of the Corporation shall consist of a
President, one (1) or more Vice Presidents, a Secretary and a Treasurer, each of
whom shall be elected by the Board. The same individual may simultaneously hold
more than one office in the corporation. The Board may designate one (1) or more
Vice Presidents as Executive Vice President or Senior Vice President. The Board
may also elect or authorize the appointment of such other officers as the
business of the Corporation may require. The officers shall have such authority
and perform such duties as the Board may from time to time authorize or
determine. In the absence of action by the Board, the officers shall have such
powers and duties as generally pertain to their respective offices.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the Corporation
shall be elected annually at the first meeting of the Board held after each
annual meeting of the stockholders. If the election of officers is not held at
such meeting, such election shall be held as soon thereafter as possible. Each
officer shall hold office until his successor shall have been duly elected and
qualified or until his death, resignation or removal in the manner hereinafter
provided. Election or appointment of an officer, employee or agent shall not by
itself create any contractual rights. The Board may authorize the Corporation to
enter into an employment contact with any officer, but no contract shall impair
the right of the Board to remove any officer at any time in accordance with
Section 8 of this Article V.
SECTION 3. PRESIDENT. The President shall have the authority and the duty
to manage the affairs of the Corporation and shall have such other powers and
perform such other duties as are delegated to him by the Board of Directors or
as are incidental to his office. The President shall be a director.
SECTION 4. VICE PRESIDENT. The Vice President or Vice Presidents, if any,
shall perform the duties of the President in his absence or during his
disability to act. In addition, the Vice Presidents shall perform the duties and
exercise the powers usually incident to their respective offices and/or such
other duties and powers as may be properly assigned to them from time to time by
the Board of Directors or the President.
SECTION 5. SECRETARY. The Secretary shall have custody of the minutes and
records of the Corporation. He shall keep the minutes of all meetings of the
stockholders and of the Board of Directors, shall give such notice as may be
required for all such meetings and shall have such other powers and perform such
other duties as are delegated to him by the Board of Directors or the President
or as are incidental to his office.
SECTION 6. TREASURER. The Treasurer shall keep correct and complete books
of account in accordance with the accounting methods adopted by the Board of
Directors, showing the financial condition of the Corporation and the results of
its operations. He shall have custody of all monies, securities, and other
certificates evidencing intangible personal property belonging to the
Corporation. He shall upon request furnish statements of the current financial
condition and the current results of operations of the Corporation and he shall
have such other powers and perform such other duties as are delegated to him by
the Board of Directors or the President or as are incidental to his office.
SECTION 7. OTHER OFFICES. All other officers shall have such powers and
perform such duties as are delegated to them by the Board of Directors or the
President.
SECTION 8. REMOVAL. Any officer may be removed by the Board whenever in
its judgment the best interests of the Corporation will be served thereby.
6
<PAGE>
SECTION 9. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by a majority
vote of the Board for the unexpired portion of the term.
SECTION 10. REMUNERATION. The remuneration of the officers shall be fixed
from time to time by the Board.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS. To the extent permitted by applicable law, the
Articles of Incorporation or these Bylaws, the Board may authorize any officer,
employee or agent of the Corporation to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Corporation. Such
authority may be general or confined to specific instances.
SECTION 2. LOANS. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the Board. Such authority may be general or confined to specific
instances.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by one (1) or more officers, employees or agents
of the Corporation in such manner as shall from time to time be determined by
the Board.
SECTION 4. DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in any
duly authorized depositories as the Board may select.
ARTICLE VIII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares of
capital stock of the Corporation shall be in such form as shall be determined by
the Board. Such certificates shall be signed by the President or any other
officer of the Corporation authorized by the Board, attested by the Secretary or
an Assistant Secretary, and sealed with the corporate seal or a facsimile
thereof. The signatures of such officers upon a certificate may be facsimiles if
the certificate is manually signed on behalf of a transfer agent or a registrar
other than the Corporation itself or one of its employees. Each certificate for
shares of capital stock shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares are issued, with the
number of shares issued and date of issue, shall be entered on the stock
transfer books of the Corporation. All certificates surrendered to the
Corporation for transfer shall be cancelled and no new certificate shall be
issued until the former certificate for a like number of shares shall have been
surrendered and cancelled, except that in the case of a lost, stolen or
destroyed certificate, a new certificate may be issued therefor upon such terms
and indemnity to the Corporation as the Board may prescribe as sufficient to
indemnify the Corporation against any claim that may be made against it on
account of such loss, theft or destruction.
SECTION 2. TRANSFER OF SHARES. Transfer of shares of capital stock of the
Corporation shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record thereof or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney thereunto duly authorized by power of attorney duly executed and filed
with the Corporation. Such transfer shall be made only on surrender for
cancellation of the certificate for such shares. The person in whose name shares
of capital stock stand on the books of the Corporation shall be deemed by the
Corporation to be the owner thereof for all purposes.
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ARTICLE IX
DIVIDENDS
Subject to applicable law, the Articles of Incorporation or these Bylaws,
the Board may, from time to time, declare, and the Corporation may pay,
dividends on the outstanding shares of capital stock of the Corporation.
ARTICLE X
SECURITIES OF OTHER CORPORATIONS
Unless otherwise ordered by the Board, the President shall have full power
and authority on behalf of the Corporation to purchase, sell, transfer, encumber
or vote any and all securities of any other corporation owned by the
Corporation, and may execute and deliver such documents as may be necessary to
effectuate such purchase, sale, transfer, encumbrance or vote. The Board may,
from time to time, confer like powers upon any other person or persons.
ARTICLE XI
FISCAL YEAR, ANNUAL AUDIT
The fiscal year of the Corporation shall end on the 31st day of December
of each year. The Corporation shall be subject to an annual audit as of the end
of its fiscal year by independent public accountants appointed by and
responsible to the Board.
ARTICLE XII
CORPORATE SEAL
The corporate seal of the Corporation, if any, shall be in such form as
the Board shall prescribe.
ARTICLE XIII
CONDUCT OF AFFAIRS OF CORPORATION
The provisions of the Control Share Acquisitions Chapter of the Indiana
Business Corporation Law, as codified at Indiana Code Section 23-1-42, as
amended from time to time, shall not apply to Control Share Acquisitions of
shares of the Corporation.
ARTICLE IV
AMENDMENTS
These Bylaws may be adopted, amended or repealed by a resolution adopted
by a two-thirds (2/3) majority of the directors then in office.
* * *
Adopted by the Board of Directors this 16th day of December 1999.
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EXHIBIT 10.2
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made effective as of December 31, 1998, and is amended
and restated effective January 12, 2000, by and between FIRST HARRISON BANK (the
"BANK"), FIRST CAPITAL, INC. (the "COMPANY"), an Indiana corporation, and SAMUEL
E. UHL ("EXECUTIVE").
WHEREAS, EXECUTIVE serves in a position of substantial responsibility;
WHEREAS, the BANK wishes to assure itself of the services of EXECUTIVE for
the period provided in this Agreement; and
WHEREAS, EXECUTIVE is willing to serve in the employ of the BANK on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, EXECUTIVE agrees to serve
as President and Chief Executive Officer of the BANK. EXECUTIVE also agrees to
serve, if elected, as an officer and director of the COMPANY or any subsidiary
or affiliate of the COMPANY or the BANK. Executive shall render administrative
and management duties to the BANK such as are customarily performed by persons
situated in a similar executive capacity, including but not limited to
overseeing branch operations, deposit and lending activities and regulatory
compliance.
Specifically, EXECUTIVE shall perform all duties which are commonly
incident to the office of President of the BANK including the direction of the
BANK's retail and lending operations, oversight and direction of branch
operations and property, oversight and direction of human resources and such
other tasks related to the operations of the BANK as may be assigned to
EXECUTIVE by the Board of Directors of the Bank.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for thirty six (36) months
thereafter. Commencing on the first anniversary date, and continuing at each
anniversary date thereafter, the Board of Directors of the BANK (the "Board")
may extend the Agreement for an additional year. Prior to the extension of the
Agreement as provided herein, the Board of Directors of the BANK will conduct a
formal performance evaluation of EXECUTIVE for purposes of determining whether
to extend the Agreement, and the results thereof shall be included in the
minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, EXECUTIVE
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shall devote substantially all his business time, attention, skill, and efforts
to the faithful performance of his duties hereunder including activities and
services related to the organization, operation and management of the BANK;
provided, however, that, with the approval of the Board, as evidenced by a
resolution of such Board, from time to time, EXECUTIVE may serve, or continue to
serve, on the boards of directors of, and hold any other offices or positions
in, companies or organizations, which, in such Board's judgment, will not
present any conflict of interest with the BANK, or materially affect the
performance of EXECUTIVE's duties pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The BANK
shall pay EXECUTIVE as compensation a salary of $105,000 per year ("Base
Salary"). Such Base Salary shall be payable in accordance with the customary
payroll practices of the BANK. During the period of this Agreement, EXECUTIVE's
Base Salary shall be reviewed at least annually; the first such review will be
made no later than one year from the date of this Agreement. Such review shall
be conducted by a Committee designated by the Board, and the Board may increase
EXECUTIVE's Base Salary. In addition to the Base Salary provided in this
Section 3(a), the BANK shall provide EXECUTIVE at no cost to EXECUTIVE with all
such other benefits as are provided uniformly to permanent full-time employees
of the BANK.
(b) The BANK will provide EXECUTIVE with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
EXECUTIVE was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the BANK will not, without
EXECUTIVE's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect EXECUTIVE's rights or benefits
thereunder. Without limiting the generality of the foregoing provisions of this
Subsection (b), EXECUTIVE will be entitled to participate in or receive benefits
under any employee benefit plans including, but not limited to, retirement
plans, supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plan, medical coverage or any other employee benefit plan or
arrangement made available by the BANK in the future to its senior executives
and key management employees, subject to, and on a basis consistent with, the
terms, conditions and overall administration of such plans and arrangements.
EXECUTIVE will be entitled to incentive compensation and bonuses as provided in
any plan, or pursuant to any arrangement of the BANK, in which EXECUTIVE is
eligible to participate. Nothing paid to EXECUTIVE under any such plan or
arrangement will be deemed to be in lieu of other compensation to which
EXECUTIVE is entitled under this Agreement, except as provided under
Section 5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the BANK shall pay or reimburse EXECUTIVE for all reasonable travel
and other obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
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4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during EXECUTIVE's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the BANK of EXECUTIVE's full-time employment hereunder for any reason other than
a Change in Control, as defined in Section 5(a) hereof; disability, as defined
in Section 6(a) hereof; death; retirement, as defined in Section 7 hereof; or
Termination for Cause, as defined in Section 8 hereof; (ii) EXECUTIVE's
resignation from the BANK's employ, upon (A) unless consented to by EXECUTIVE, a
material change in EXECUTIVE's function, duties, or responsibilities, which
change would cause EXECUTIVE's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Sections 1 and 2, above (any such material change shall be deemed a continuing
breach of this Agreement), (B) a relocation of EXECUTIVE's principal place of
employment by more than 35 miles from its location at the effective date of this
Agreement, or a material reduction in the benefits and perquisites to EXECUTIVE
from those being provided as of the effective date of this Agreement, (C) the
liquidation or dissolution of the BANK, or (D) any material breach of this
Agreement by the BANK. Upon the occurrence of any event described in clauses
(A), (B), (C) or (D), above, EXECUTIVE shall have the right to elect to
terminate his employment under this Agreement by resignation upon not less than
sixty (60) days prior written notice given within a reasonable period of time
not to exceed, except in case of a continuing breach, four (4) calendar months
after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the BANK shall pay
EXECUTIVE, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the payments due to EXECUTIVE for the remaining
term of the Agreement, including Base Salary, bonuses, and any other cash or
deferred compensation paid or to be paid (including the value of employer
contributions that would have been made on EXECUTIVE's behalf over the remaining
term of the agreement to any tax-qualified retirement plan sponsored by the BANK
as of the Date of Termination), to EXECUTIVE for the term of the Agreement
provided, however, that if the BANK is not in compliance with its minimum
capital requirements or if such payments would cause the BANK's capital to be
reduced below its minimum capital requirements, such payments shall be deferred
until such time as the BANK is in capital compliance. All payments made pursuant
to this Section 4(b) shall be paid in substantially equal monthly installments
over the remaining term of this Agreement following EXECUTIVE's termination;
provided, however, that if the remaining term of the Agreement is less than one
(1) year (determined as of EXECUTIVE's Date of Termination), such payments and
benefits shall be paid to EXECUTIVE in a lump sum within thirty (30) days of the
Date of Termination.
(c) Upon the occurrence of an Event of Termination, the BANK will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage
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maintained by the BANK for EXECUTIVE prior to his termination. Such coverage
shall cease upon the expiration of the remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall have
occurred a Change in Control of the COMPANY or the BANK. For purposes of this
Agreement, a "Change in Control" of the COMPANY or the BANK shall be deemed to
occur if and when (a) there occurs a change in control of the BANK or the
COMPANY within the meaning of the Home Owners Loan Act of 1933 and 12 C.F.R.
Part 574, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of
the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the COMPANY or the BANK representing twenty-five percent (25%) or
more of the combined voting power of the COMPANY's or the BANK's then
outstanding securities, (c) the membership of the board of directors of the
COMPANY or the BANK changes as the result of a contested election, such that
individuals who were directors at the beginning of any twenty-four (24) month
period (whether commencing before or after the date of adoption of this
Agreement) do not constitute a majority of the Board at the end of such period,
or (d) shareholders of the COMPANY or the BANK approve a merger, consolidation,
sale or disposition of all or substantially all of the COMPANY's or the BANK's
assets, or a plan of partial or complete liquidation. Notwithstanding anything
herein to the contrary, a Change in Control shall not include shareholder
approval of the transactions contemplated by the Agreement and Plan of Merger by
and among the Company, FC Acquisition Corp., a subsidiary of the Company, and
HCB Bancorp or the consummation of the transactions contemplated thereby.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board of the BANK or the COMPANY has
reasonably determined that a Change in Control (as defined herein) has occurred,
EXECUTIVE shall be entitled to the benefits provided in paragraphs (c), (d) and
(e) of this Section 5 upon his subsequent involuntary termination following the
effective date of a Change in Control (or voluntary termination within twelve
(12) months of the effective date of a Change in Control following any material
demotion, loss of title, office or significant authority, material reduction in
his annual compensation or benefits (other than a reduction affecting the BANK's
personnel generally), or the relocation of his principal place of employment by
more than 35 miles from its location immediately prior to the Change in
Control), unless such termination is because of his death, retirement as
provided in Section 7, termination for Cause, or termination for Disability.
(c) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the BANK shall pay EXECUTIVE, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to 2.99
times EXECUTIVE's "base amount," within the meaning of (S)280G(b)(3) of the
Internal Revenue Code of 1986 ("Code"), as amended. Such payment shall be made
in a lump sum paid within ten (10) days of EXECUTIVE's Date of Termination.
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(d) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the BANK will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the BANK for EXECUTIVE prior to his severance. Such coverage shall
cease upon the expiration of thirty-six (36) months. In addition, EXECUTIVE
shall be entitled to receive the value of employer contributions that would have
been made on EXECUTIVE's behalf over the remaining term of the agreement to any
tax-qualified retirement plan sponsored by the BANK as of the Date of
Termination.
(e) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
EXECUTIVE under this Section, together with any other payments or benefits
received or to be received by EXECUTIVE in connection with a Change in Control,
would be deemed to include an "excess parachute payment" under (S)280G of the
Code, then, at the election of EXECUTIVE, (i) such payments or benefits shall be
payable or provided to EXECUTIVE over the minimum period necessary to reduce the
present value of such payments or benefits to an amount which is one dollar
($1.00) less than three (3) times EXECUTIVE's "base amount" under (S)280G(b)(3)
of the Code or (ii) the payments or benefits to be provided under this Section 5
shall be reduced to the extent necessary to avoid treatment as an excess
parachute payment with the allocation of the reduction among such payments and
benefits to be determined by EXECUTIVE.
6. TERMINATION FOR DISABILITY.
(a) If EXECUTIVE shall become disabled as defined in the BANK's then
current disability plan (or, if no such plan is then in effect, if EXECUTIVE is
permanently and totally disabled within the meaning of Section 22(e)(3) of the
Code as determined by a physician designated by the Board), the BANK may
terminate EXECUTIVE's employment for "Disability."
(b) Upon EXECUTIVE's termination of employment for Disability, the BANK
will pay EXECUTIVE, as disability pay, a bi-weekly payment equal to three-
quarters (3/4) of EXECUTIVE's bi-weekly rate of Base Salary on the effective
date of such termination. These disability payments shall commence on the
effective date of EXECUTIVE's termination and will end on the earlier of (i) the
date EXECUTIVE returns to the full-time employment of the BANK in the same
capacity as he was employed prior to his termination for Disability and pursuant
to an employment agreement between EXECUTIVE and the BANK; (ii) EXECUTIVE's
full-time employment by another employer; (iii) EXECUTIVE attaining the age of
sixty-five (65); (iv) EXECUTIVE's death; or (v) the expiration of the term of
this Agreement. The disability pay shall be reduced by the amount, if any, paid
to EXECUTIVE under any plan of the BANK providing disability benefits to
EXECUTIVE.
(c) The BANK will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
BANK for EXECUTIVE prior to his termination for Disability. This coverage and
payments shall cease upon the earlier of (i) the date EXECUTIVE returns to the
full-time employment of the BANK, in the same capacity as he was
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employed prior to his termination for Disability and pursuant to an employment
agreement between EXECUTIVE and the BANK; (ii) EXECUTIVE's full-time employment
by another employer; (iii) EXECUTIVE's attaining the age of sixty-five (65);
(iv) EXECUTIVE's death; or (v) the expiration of the term of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to EXECUTIVE during any period during which
EXECUTIVE is incapable of performing his duties hereunder by reason of temporary
disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE; RESIGNATION
Termination by the BANK of EXECUTIVE based on "Retirement" shall mean
retirement at or after attaining age sixty-five (65) or in accordance with any
retirement arrangement established with EXECUTIVE's consent with respect to him.
Upon termination of EXECUTIVE upon Retirement, EXECUTIVE shall be entitled to
all benefits under any retirement plan of the BANK or the COMPANY and other
plans to which EXECUTIVE is a party. Upon the death of EXECUTIVE during the term
of this Agreement, the BANK shall pay to EXECUTIVE's estate the compensation due
to EXECUTIVE through the last day of the calendar month in which his death
occurred. Upon the voluntary resignation of EXECUTIVE during the term of this
Agreement, other than in connection with an Event of Termination, the BANK shall
pay to EXECUTIVE the compensation due to EXECUTIVE through his Date of
Termination.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of EXECUTIVE's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar infractions) or final
cease-and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, EXECUTIVE shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths (3/4) of the members of the Board at a meeting of the Board called
and held for that purpose (after reasonable notice to EXECUTIVE and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, EXECUTIVE was guilty of
conduct justifying termination for Cause and specifying the reasons thereof.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after termination for Cause. Any stock options granted to EXECUTIVE
under any stock option plan or any unvested awards granted under any other stock
benefit plan of the BANK, the COMPANY, or any subsidiary or affiliate thereof,
shall become null and void effective upon EXECUTIVE's receipt of Notice of
Termination for Cause pursuant to Section 10 hereof, and shall not be
exercisable by EXECUTIVE at any time subsequent to such Termination for Cause.
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9. REQUIRED PROVISIONS.
(a) The BOARD may terminate EXECUTIVE's employment at any time, but any
termination by the BOARD, other than Termination for Cause, shall not prejudice
EXECUTIVE's right to compensation or other benefits under this Agreement.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 8 herein.
(b) If EXECUTIVE is suspended and/or temporarily prohibited from
participating in the conduct of the BANK's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the BANK's obligations under the Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the BANK may, in its
discretion, (i) pay EXECUTIVE all or part of the compensation withheld while its
contract obligations were suspended and (ii) reinstate (in whole or in part) any
of its obligations that were suspended.
(c) If EXECUTIVE is removed and/or permanently prohibited from
participating in the conduct of the BANK's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the BANK under the Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the BANK is in default (as defined in Section 3(x)(1) of the FDIA),
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the BANK): (i) by the Director of the Office of Thrift
Supervision (the "Director") or his designee at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or on
behalf of the BANK under the authority contained in Section 13(c) of the FDIA or
(ii) by the Director, or his designee at the time the Director or such designee
approves a supervisory merger to resolve problems related to operation of the
BANK or when the BANK is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(f) Any payments made to EXECUTIVE pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
10. NOTICE.
(a) Any purported termination by the BANK or by EXECUTIVE shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of
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Termination" shall mean a written notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of EXECUTIVE's employment under the provision so indicated.
(b) "Date of Termination" shall mean (A) if EXECUTIVE's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, other than Termination for Cause,
the date specified in the Notice of Termination. In the event of EXECUTIVE's
Termination for Cause, the Date of Termination shall be the same as the date of
the Notice of Termination.
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by EXECUTIVE in which case the Date
of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
11. NON-COMPETITION.
(a) Upon any termination of EXECUTIVE's employment hereunder pursuant to
an Event of Termination as provided in Section 4 hereof, EXECUTIVE agrees not to
compete with the BANK and/or the COMPANY for a period of one (1) year following
such termination in any city, town or county in which the BANK and/or the
COMPANY has an office or has filed an application for regulatory approval to
establish an office, determined as of the effective date of such termination.
EXECUTIVE agrees that during such period and within said cities, towns and
counties, EXECUTIVE shall not work for or advise, consult or otherwise serve
with, directly or indirectly, any entity whose business materially competes with
the depository, lending or other business activities of the BANK and/or the
COMPANY. The parties hereto, recognizing that irreparable injury will result to
the BANK and/or the COMPANY, its business and property in the event of
EXECUTIVE's breach of this Subsection 11(a) agree that in the event of any such
breach by EXECUTIVE, the BANK and/or the COMPANY will be entitled, in addition
to any other remedies and damages available, to an injunction to restrain the
violation hereof by EXECUTIVE, EXECUTIVE's partners, agents, servants,
employers, employees and all persons acting for or with EXECUTIVE. EXECUTIVE
represents and admits that in the event of the termination of his employment
pursuant to Section 4 hereof, EXECUTIVE's experience and capabilities are such
that EXECUTIVE can obtain employment in a business engaged in other lines and/or
of a different nature than the BANK and/or the COMPANY, and that the enforcement
of a remedy by way of
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injunction will not prevent EXECUTIVE from earning a livelihood. Nothing herein
will be construed as prohibiting the BANK and/or the COMPANY from pursuing any
other remedies available to the BANK and/or the COMPANY for such breach or
threatened breach, including the recovery of damages from EXECUTIVE.
(b) EXECUTIVE recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the BANK and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the BANK. EXECUTIVE will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the BANK or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, EXECUTIVE may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the BANK. In the
event of a breach or threatened breach by EXECUTIVE of the provisions of this
Section, the BANK will be entitled to an injunction restraining EXECUTIVE from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the BANK or affiliates thereof, or from
rendering any services to any person, firm, corporation, other entity to whom
such knowledge, in whole or in part, has been disclosed or is threatened to be
disclosed. Nothing herein will be construed as prohibiting the BANK from
pursuing any other remedies available to the BANK for such breach or threatened
breach, including the recovery of damages from EXECUTIVE.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the BANK. The COMPANY, however, guarantees all
payments and the provision of all amounts and benefits due hereunder to
EXECUTIVE and, if such payments are not timely paid or provided by the BANK,
such amounts and benefits shall be paid or provided by the COMPANY.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the BANK or any
predecessor of the BANK and EXECUTIVE, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to EXECUTIVE of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that EXECUTIVE is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
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14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
EXECUTIVE, the BANK, the COMPANY and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Indiana,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or state
law or regulation, including , specifically, 12 C.F.R. Section 563.39(b), the
provisions of such law or regulation shall prevail.
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19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the BANK, if EXECUTIVE is successful pursuant to a legal
judgment, arbitration or settlement.
20. INDEMNIFICATION.
The BANK shall provide EXECUTIVE (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
EXECUTIVE (and his heirs, executors and administrators) to the fullest extent
permitted under Indiana law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the BANK (whether or not he continues to be a directors or officer
at the time of incurring such expenses or liabilities), such expenses and
liabilities to include, but not be limited to, judgment, court costs and
attorneys' fees and the cost of reasonable settlements. The provisions of
12 C.F.R. 545.121 shall apply to the BANK's obligations under this Section 20.
21. SUCCESSOR TO THE BANK OR THE COMPANY.
The BANK and the COMPANY shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the BANK or the COMPANY, expressly
and unconditionally to assume and agree to perform the BANK's or the COMPANY's
obligations under this Agreement, in the same manner and to the same extent that
the BANK or the COMPANY would be required to perform if no such succession or
assignment had taken place.
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IN WITNESS WHEREOF, the BANK and the COMPANY have caused this amended and
restated Agreement to be executed and their seal to be affixed hereunto by a
duly authorized officer, and EXECUTIVE has signed this amended and restated
Agreement, all on the 12th day of January, 2000.
ATTEST: FIRST HARRISON BANK
/s/ Daniel B. NesSmith BY: /s/ Earl Book
- ----------------------------- ---------------------------------
ATTEST: FIRST CAPITAL, INC.
/s/ Marla J. Buelz BY: /s/ William W. Harrod
- ----------------------------- ---------------------------------
WITNESS: EXECUTIVE
/s/ Joel E. Voyles /s/ Samuel E. Uhl
- ----------------------------- -------------------------------------
SAMUEL E. UHL
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EXHIBIT 10.3
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made effective as of December 31, 1998, and amended and
restated effective January 12, 2000, by and between FIRST HARRISON BANK (the
"BANK"), FIRST CAPITAL, INC. (the "COMPANY"), an Indiana corporation, and M.
CHRIS FREDERICK ("EXECUTIVE").
WHEREAS, EXECUTIVE serves in a position of substantial responsibility;
WHEREAS, the BANK wishes to assure itself of the services of EXECUTIVE for
the period provided in this Agreement; and
WHEREAS, EXECUTIVE is willing to serve in the employ of the BANK on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, EXECUTIVE agrees to serve
as Senior Vice President, Chief Financial Officer and Treasurer of the BANK.
During said period, EXECUTIVE also agrees to serve, if elected, as an officer of
the COMPANY or any subsidiary or affiliate of the COMPANY or the BANK. Executive
shall render administrative and management duties to the BANK such as are
customarily performed by persons situated in a similar executive capacity.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for thirty six (36) months
thereafter. Commencing on the first anniversary date, and continuing at each
anniversary date thereafter, the Board of Directors of the BANK (the "Board")
may extend the Agreement for an additional year. Prior to the extension of the
Agreement as provided herein, the Board of Directors of the BANK will conduct a
formal performance evaluation of EXECUTIVE for purposes of determining whether
to extend the Agreement, and the results thereof shall be included in the
minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, EXECUTIVE shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the BANK; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
EXECUTIVE may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the BANK,
or materially affect the performance of EXECUTIVE's duties pursuant to this
Agreement.
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3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The BANK
shall pay EXECUTIVE as compensation a salary of $60,000 per year ("Base
Salary"). Such Base Salary shall be payable in accordance with the customary
payroll practices of the BANK. During the period of this Agreement, EXECUTIVE's
Base Salary shall be reviewed at least annually; the first such review will be
made no later than one year from the date of this Agreement. Such review shall
be conducted by a Committee designated by the Board, and the Board may increase
EXECUTIVE's Base Salary. In addition to the Base Salary provided in this Section
3(a), the BANK shall provide EXECUTIVE at no cost to EXECUTIVE with all such
other benefits as are provided uniformly to permanent full-time employees of the
BANK.
(b) The BANK will provide EXECUTIVE with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
EXECUTIVE was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the BANK will not, without
EXECUTIVE's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect EXECUTIVE's rights or benefits
thereunder. Without limiting the generality of the foregoing provisions of this
Subsection (b), EXECUTIVE will be entitled to participate in or receive benefits
under any employee benefit plans including, but not limited to, retirement
plans, supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plan, medical coverage or any other employee benefit plan or
arrangement made available by the BANK in the future to its senior executives
and key management employees, subject to, and on a basis consistent with, the
terms, conditions and overall administration of such plans and arrangements.
EXECUTIVE will be entitled to incentive compensation and bonuses as provided in
any plan, or pursuant to any arrangement of the BANK, in which EXECUTIVE is
eligible to participate. Nothing paid to EXECUTIVE under any such plan or
arrangement will be deemed to be in lieu of other compensation to which
EXECUTIVE is entitled under this Agreement, except as provided under Section
5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the BANK shall pay or reimburse EXECUTIVE for all reasonable travel
and other obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during EXECUTIVE's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the BANK of EXECUTIVE's full-time employment hereunder for any reason other than
a Change in Control, as defined in Section 5(a) hereof; disability, as defined
in Section 6(a) hereof; death; retirement, as defined in Section 7 hereof; or
Termination for
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Cause, as defined in Section 8 hereof; (ii) EXECUTIVE's resignation from the
BANK's employ, upon (A) unless consented to by EXECUTIVE, a material change in
EXECUTIVE's function, duties, or responsibilities, which change would cause
EXECUTIVE's position to become one of lesser responsibility, importance, or
scope from the position and attributes thereof described in Sections 1 and 2,
above (any such material change shall be deemed a continuing breach of this
Agreement), (B) a relocation of EXECUTIVE's principal place of employment by
more than 35 miles from its location at the effective date of this Agreement, or
a material reduction in the benefits and perquisites to EXECUTIVE from those
being provided as of the effective date of this Agreement, (C) the liquidation
or dissolution of the BANK, or (D) any material breach of this Agreement by the
BANK. Upon the occurrence of any event described in clauses (A), (B), (C) or
(D), above, EXECUTIVE shall have the right to elect to terminate his employment
under this Agreement by resignation upon not less than sixty (60) days prior
written notice given within a reasonable period of time not to exceed, except in
case of a continuing breach, four (4) calendar months after the event giving
rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the BANK shall pay
EXECUTIVE, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the payments due to EXECUTIVE for the remaining
term of the Agreement, including Base Salary, bonuses, and any other cash or
deferred compensation paid or to be paid (including the value of employer
contributions that would have been made on EXECUTIVE's behalf over the remaining
term of the agreement to any tax-qualified retirement plan sponsored by the BANK
as of the Date of Termination), to EXECUTIVE for the term of the Agreement
provided, however, that if the BANK is not in compliance with its minimum
capital requirements or if such payments would cause the BANK's capital to be
reduced below its minimum capital requirements, such payments shall be deferred
until such time as the BANK is in capital compliance. All payments made pursuant
to this Section 4(b) shall be paid in substantially equal monthly installments
over the remaining term of this Agreement following EXECUTIVE's termination;
provided, however, that if the remaining term of the Agreement is less than one
(1) year (determined as of EXECUTIVE's Date of Termination), such payments and
benefits shall be paid to EXECUTIVE in a lump sum within thirty (30) days of the
Date of Termination.
(c) Upon the occurrence of an Event of Termination, the BANK will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the BANK for EXECUTIVE prior to his
termination. Such coverage shall cease upon the expiration of the remaining term
of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall have
occurred a Change in Control of the COMPANY or the BANK. For purposes of this
Agreement, a "Change in Control" of the COMPANY or the BANK shall be deemed to
occur if and when (a) there occurs a change in control of the BANK or the
COMPANY within the meaning of the Home Owners Loan
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Act of 1933 and 12 C.F.R. Part 574, (b) any person (as such term is used in
Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial
owner, directly or indirectly, of securities of the COMPANY or the BANK
representing twenty-five percent (25%) or more of the combined voting power of
the COMPANY's or the BANK's then outstanding securities, (c) the membership of
the board of directors of the COMPANY or the BANK changes as the result of a
contested election, such that individuals who were directors at the beginning of
any twenty-four (24) month period (whether commencing before or after the date
of adoption of this Agreement) do not constitute a majority of the Board at the
end of such period, or (d) shareholders of the COMPANY or the BANK approve a
merger, consolidation, sale or disposition of all or substantially all of the
COMPANY's or the BANK's assets, or a plan of partial or complete liquidation.
Notwithstanding anything herein to the contrary, a Change in Control shall not
include shareholder approval of the transactions contemplated by the Agreement
and Plan of Merger by and among the Company, FC Acquisition Corp., a subsidiary
of the Company, and HCB Bancorp or the consummation of the transactions
contemplated thereby.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board of the BANK or the COMPANY has
reasonably determined that a Change in Control (as defined herein) has occurred,
EXECUTIVE shall be entitled to the benefits provided in paragraphs (c), (d) and
(e) of this Section 5 upon his subsequent involuntary termination following the
effective date of a Change in Control (or voluntary termination within twelve
(12) months of the effective date of a Change in Control following any material
demotion, loss of title, office or significant authority, material reduction in
his annual compensation or benefits (other than a reduction affecting the BANK's
personnel generally), or the relocation of his principal place of employment by
more than 35 miles from its location immediately prior to the Change in
Control), unless such termination is because of his death, retirement as
provided in Section 7, termination for Cause, or termination for Disability.
(c) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the BANK shall pay EXECUTIVE, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to 2.99
times EXECUTIVE's "base amount," within the meaning of (S)280G(b)(3) of the
Internal Revenue Code of 1986 ("Code"), as amended. Such payment shall be made
in a lump sum paid within ten (10) days of EXECUTIVE's Date of Termination.
(d) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the BANK will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the BANK for EXECUTIVE prior to his severance. Such coverage shall
cease upon the expiration of thirty-six (36) months. In addition, EXECUTIVE
shall be entitled to receive the value of employer contributions that would have
been made on EXECUTIVE's behalf over the remaining term of the agreement to any
tax-qualified retirement plan sponsored by the BANK as of the Date of
Termination.
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(e) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
EXECUTIVE under this Section, together with any other payments or benefits
received or to be received by EXECUTIVE in connection with a Change in Control,
would be deemed to include an "excess parachute payment" under (S)280G of the
Code, then, at the election of EXECUTIVE, (i) such payments or benefits shall be
payable or provided to EXECUTIVE over the minimum period necessary to reduce the
present value of such payments or benefits to an amount which is one dollar
($1.00) less than three (3) times EXECUTIVE's "base amount" under (S)280G(b)(3)
of the Code or (ii) the payments or benefits to be provided under this Section 5
shall be reduced to the extent necessary to avoid treatment as an excess
parachute payment with the allocation of the reduction among such payments and
benefits to be determined by EXECUTIVE.
6. TERMINATION FOR DISABILITY.
(a) If EXECUTIVE shall become disabled as defined in the BANK's then
current disability plan (or, if no such plan is then in effect, if EXECUTIVE is
permanently and totally disabled within the meaning of Section 22(e)(3) of the
Code as determined by a physician designated by the Board), the BANK may
terminate EXECUTIVE's employment for "Disability."
(b) Upon EXECUTIVE's termination of employment for Disability, the BANK
will pay EXECUTIVE, as disability pay, a bi-weekly payment equal to three-
quarters (3/4) of EXECUTIVE's bi-weekly rate of Base Salary on the effective
date of such termination. These disability payments shall commence on the
effective date of EXECUTIVE's termination and will end on the earlier of (i) the
date EXECUTIVE returns to the full-time employment of the BANK in the same
capacity as he was employed prior to his termination for Disability and pursuant
to an employment agreement between EXECUTIVE and the BANK; (ii) EXECUTIVE's
full-time employment by another employer; (iii) EXECUTIVE attaining the age of
sixty-five (65); (iv) EXECUTIVE's death; or (v) the expiration of the term of
this Agreement. The disability pay shall be reduced by the amount, if any, paid
to EXECUTIVE under any plan of the BANK providing disability benefits to
EXECUTIVE.
(c) The BANK will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
BANK for EXECUTIVE prior to his termination for Disability. This coverage and
payments shall cease upon the earlier of (i) the date EXECUTIVE returns to the
full-time employment of the BANK, in the same capacity as he was employed prior
to his termination for Disability and pursuant to an employment agreement
between EXECUTIVE and the BANK; (ii) EXECUTIVE's full-time employment by another
employer; (iii) EXECUTIVE's attaining the age of sixty-five (65); (iv)
EXECUTIVE's death; or (v) the expiration of the term of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to EXECUTIVE during any period during which
EXECUTIVE is incapable of performing his duties hereunder by reason of temporary
disability.
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7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE; RESIGNATION
Termination by the BANK of EXECUTIVE based on "Retirement" shall mean
retirement at or after attaining age sixty-five (65) or in accordance with any
retirement arrangement established with EXECUTIVE's consent with respect to him.
Upon termination of EXECUTIVE upon Retirement, EXECUTIVE shall be entitled to
all benefits under any retirement plan of the BANK or the COMPANY and other
plans to which EXECUTIVE is a party. Upon the death of EXECUTIVE during the term
of this Agreement, the BANK shall pay to EXECUTIVE's estate the compensation due
to EXECUTIVE through the last day of the calendar month in which his death
occurred. Upon the voluntary resignation of EXECUTIVE during the term of this
Agreement, other than in connection with an Event of Termination, the BANK shall
pay to EXECUTIVE the compensation due to EXECUTIVE through his Date of
Termination.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of EXECUTIVE's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar infractions) or final
cease-and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, EXECUTIVE shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths (3/4) of the members of the Board at a meeting of the Board called
and held for that purpose (after reasonable notice to EXECUTIVE and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, EXECUTIVE was guilty of
conduct justifying termination for Cause and specifying the reasons thereof.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after termination for Cause. Any stock options granted to EXECUTIVE
under any stock option plan or any unvested awards granted under any other stock
benefit plan of the BANK, the COMPANY, or any subsidiary or affiliate thereof,
shall become null and void effective upon EXECUTIVE's receipt of Notice of
Termination for Cause pursuant to Section 10 hereof, and shall not be
exercisable by EXECUTIVE at any time subsequent to such Termination for Cause.
9. REQUIRED PROVISIONS.
(a) The BOARD may terminate EXECUTIVE's employment at any time, but any
termination by the BOARD, other than Termination for Cause, shall not prejudice
EXECUTIVE's right to compensation or other benefits under this Agreement.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 8 herein.
(b) If EXECUTIVE is suspended and/or temporarily prohibited from
participating in the conduct of the BANK's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal
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Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(3) and (g)(1)), the BANK's
obligations under the Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the BANK may, in its discretion, (i) pay EXECUTIVE all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations that were suspended.
(c) If EXECUTIVE is removed and/or permanently prohibited from
participating in the conduct of the BANK's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the BANK under the Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the BANK is in default (as defined in Section 3(x)(1) of the FDIA),
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the BANK): (i) by the Director of the Office of Thrift
Supervision (the "Director") or his designee at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or on
behalf of the BANK under the authority contained in Section 13(c) of the FDIA or
(ii) by the Director, or his designee at the time the Director or such designee
approves a supervisory merger to resolve problems related to operation of the
BANK or when the BANK is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(f) Any payments made to EXECUTIVE pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
10. NOTICE.
(a) Any purported termination by the BANK or by EXECUTIVE shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of EXECUTIVE's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if EXECUTIVE's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, other than Termination for Cause,
the date
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specified in the Notice of Termination. In the event of EXECUTIVE's Termination
for Cause, the Date of Termination shall be the same as the date of the Notice
of Termination.
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by EXECUTIVE in which case the Date
of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
11. NON-COMPETITION.
(a) Upon any termination of EXECUTIVE's employment hereunder pursuant to
an Event of Termination as provided in Section 4 hereof, EXECUTIVE agrees not to
compete with the BANK and/or the COMPANY for a period of one (1) year following
such termination in any city, town or county in which the BANK and/or the
COMPANY has an office or has filed an application for regulatory approval to
establish an office, determined as of the effective date of such termination.
EXECUTIVE agrees that during such period and within said cities, towns and
counties, EXECUTIVE shall not work for or advise, consult or otherwise serve
with, directly or indirectly, any entity whose business materially competes with
the depository, lending or other business activities of the BANK and/or the
COMPANY. The parties hereto, recognizing that irreparable injury will result to
the BANK and/or the COMPANY, its business and property in the event of
EXECUTIVE's breach of this Subsection 11(a) agree that in the event of any such
breach by EXECUTIVE, the BANK and/or the COMPANY will be entitled, in addition
to any other remedies and damages available, to an injunction to restrain the
violation hereof by EXECUTIVE, EXECUTIVE's partners, agents, servants,
employers, employees and all persons acting for or with EXECUTIVE. EXECUTIVE
represents and admits that in the event of the termination of his employment
pursuant to Section 4 hereof, EXECUTIVE's experience and capabilities are such
that EXECUTIVE can obtain employment in a business engaged in other lines and/or
of a different nature than the BANK and/or the COMPANY, and that the enforcement
of a remedy by way of injunction will not prevent EXECUTIVE from earning a
livelihood. Nothing herein will be construed as prohibiting the BANK and/or the
COMPANY from pursuing any other remedies available to the BANK and/or the
COMPANY for such breach or threatened breach, including the recovery of damages
from EXECUTIVE.
(b) EXECUTIVE recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the BANK and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the BANK. EXECUTIVE will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned
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or considered business activities of the BANK or affiliates thereof to any
person, firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, EXECUTIVE may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the BANK. In the
event of a breach or threatened breach by EXECUTIVE of the provisions of this
Section, the BANK will be entitled to an injunction restraining EXECUTIVE from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the BANK or affiliates thereof, or from
rendering any services to any person, firm, corporation, other entity to whom
such knowledge, in whole or in part, has been disclosed or is threatened to be
disclosed. Nothing herein will be construed as prohibiting the BANK from
pursuing any other remedies available to the BANK for such breach or threatened
breach, including the recovery of damages from EXECUTIVE.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the BANK. The COMPANY, however, guarantees all
payments and the provision of all amounts and benefits due hereunder to
EXECUTIVE and, if such payments are not timely paid or provided by the BANK,
such amounts and benefits shall be paid or provided by the COMPANY.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the BANK or any
predecessor of the BANK and EXECUTIVE, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to EXECUTIVE of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that EXECUTIVE is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
EXECUTIVE, the BANK, the COMPANY and their respective successors and assigns.
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15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Indiana,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or state
law or regulation, including, specifically, 12 C.F.R. Section 563.39(b), the
provisions of such law or regulation shall prevail.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the BANK, if EXECUTIVE is successful pursuant to a legal
judgment, arbitration or settlement.
20. INDEMNIFICATION.
The BANK shall provide EXECUTIVE (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
EXECUTIVE (and his heirs, executors and administrators) to the fullest extent
permitted under Indiana law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by
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reason of his having been a director or officer of the BANK (whether or not he
continues to be a directors or officer at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgment, court costs and attorneys' fees and the cost of reasonable
settlements. The provisions of 12 C.F.R. 545.121 shall apply to the BANK's
obligations under this Section 20.
21. SUCCESSOR TO THE BANK OR THE COMPANY.
The BANK and the COMPANY shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the BANK or the COMPANY, expressly
and unconditionally to assume and agree to perform the BANK's or the COMPANY's
obligations under this Agreement, in the same manner and to the same extent that
the BANK or the COMPANY would be required to perform if no such succession or
assignment had taken place.
IN WITNESS WHEREOF, the BANK and the COMPANY have caused this amended and
restated Agreement to be executed and their seal to be affixed hereunto by a
duly authorized officer, and EXECUTIVE has signed this amended and restated
Agreement, all on the 12th day of January, 2000.
ATTEST: FIRST HARRISON BANK
/s/ Marla J. Buelz BY: /s/ Samuel E. Uhl
- ---------------------------- -------------------------------
Samuel E. Uhl
[SEAL]
ATTEST: FIRST CAPITAL, INC.
/s/ Marla J. Buelz BY: /s/ J. Gordon Pendleton
- ---------------------------- -------------------------------
J. Gordon Pendleton
[SEAL]
WITNESS: EXECUTIVE
/s/ Daniel B. NesSmith /s/ M. Chris Frederick
- ---------------------------- -------------------------------
M. CHRIS FREDERICK
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EXHIBIT 10.4
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made effective as of December 31, 1998, and amended and
restated effective January 12, 2000, by and between FIRST HARRISON BANK (the
"BANK"), FIRST CAPITAL, INC. (the "COMPANY"), an Indiana corporation, and JOEL
E. VOYLES ("EXECUTIVE").
WHEREAS, EXECUTIVE serves in a position of substantial responsibility;
WHEREAS, the BANK wishes to assure itself of the services of EXECUTIVE for
the period provided in this Agreement; and
WHEREAS, EXECUTIVE is willing to serve in the employ of the BANK on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, EXECUTIVE agrees to serve
as Senior Vice President - Retail Banking of the BANK. During said period,
EXECUTIVE also agrees to serve, if elected, as an officer of the COMPANY or any
subsidiary or affiliate of the COMPANY or the BANK. Executive shall render
administrative and management duties to the BANK such as are customarily
performed by persons situated in a similar executive capacity.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for thirty six (36) months
thereafter. Commencing on the first anniversary date, and continuing at each
anniversary date thereafter, the Board of Directors of the BANK (the "Board")
may extend the Agreement for an additional year. Prior to the extension of the
Agreement as provided herein, the Board of Directors of the BANK will conduct a
formal performance evaluation of EXECUTIVE for purposes of determining whether
to extend the Agreement, and the results thereof shall be included in the
minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, EXECUTIVE shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the BANK; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
EXECUTIVE may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the BANK,
or materially affect the performance of EXECUTIVE's duties pursuant to this
Agreement.
<PAGE>
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The BANK
shall pay EXECUTIVE as compensation a salary of $57,500 per year ("Base
Salary"). Such Base Salary shall be payable in accordance with the customary
payroll practices of the BANK. During the period of this Agreement, EXECUTIVE's
Base Salary shall be reviewed at least annually; the first such review will be
made no later than one year from the date of this Agreement. Such review shall
be conducted by a Committee designated by the Board, and the Board may increase
EXECUTIVE's Base Salary. In addition to the Base Salary provided in this Section
3(a), the BANK shall provide EXECUTIVE at no cost to EXECUTIVE with all such
other benefits as are provided uniformly to permanent full-time employees of the
BANK.
(b) The BANK will provide EXECUTIVE with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
EXECUTIVE was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the BANK will not, without
EXECUTIVE's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect EXECUTIVE's rights or benefits
thereunder. Without limiting the generality of the foregoing provisions of this
Subsection (b), EXECUTIVE will be entitled to participate in or receive benefits
under any employee benefit plans including, but not limited to, retirement
plans, supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plan, medical coverage or any other employee benefit plan or
arrangement made available by the BANK in the future to its senior executives
and key management employees, subject to, and on a basis consistent with, the
terms, conditions and overall administration of such plans and arrangements.
EXECUTIVE will be entitled to incentive compensation and bonuses as provided in
any plan, or pursuant to any arrangement of the BANK, in which EXECUTIVE is
eligible to participate. Nothing paid to EXECUTIVE under any such plan or
arrangement will be deemed to be in lieu of other compensation to which
EXECUTIVE is entitled under this Agreement, except as provided under Section
5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the BANK shall pay or reimburse EXECUTIVE for all reasonable travel
and other obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during EXECUTIVE's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the BANK of EXECUTIVE's full-time employment hereunder for any reason other than
a Change in Control, as defined in Section 5(a) hereof; disability, as defined
in Section 6(a) hereof; death; retirement, as defined in Section 7 hereof; or
Termination for
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Cause, as defined in Section 8 hereof; (ii) EXECUTIVE's resignation from the
BANK's employ, upon (A) unless consented to by EXECUTIVE, a material change in
EXECUTIVE's function, duties, or responsibilities, which change would cause
EXECUTIVE's position to become one of lesser responsibility, importance, or
scope from the position and attributes thereof described in Sections 1 and 2,
above (any such material change shall be deemed a continuing breach of this
Agreement), (B) a relocation of EXECUTIVE's principal place of employment by
more than 35 miles from its location at the effective date of this Agreement, or
a material reduction in the benefits and perquisites to EXECUTIVE from those
being provided as of the effective date of this Agreement, (C) the liquidation
or dissolution of the BANK, or (D) any material breach of this Agreement by the
BANK. Upon the occurrence of any event described in clauses (A), (B), (C) or
(D), above, EXECUTIVE shall have the right to elect to terminate his employment
under this Agreement by resignation upon not less than sixty (60) days prior
written notice given within a reasonable period of time not to exceed, except in
case of a continuing breach, four (4) calendar months after the event giving
rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the BANK shall pay
EXECUTIVE, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the payments due to EXECUTIVE for the remaining
term of the Agreement, including Base Salary, bonuses, and any other cash or
deferred compensation paid or to be paid (including the value of employer
contributions that would have been made on EXECUTIVE's behalf over the remaining
term of the agreement to any tax-qualified retirement plan sponsored by the BANK
as of the Date of Termination), to EXECUTIVE for the term of the Agreement
provided, however, that if the BANK is not in compliance with its minimum
capital requirements or if such payments would cause the BANK's capital to be
reduced below its minimum capital requirements, such payments shall be deferred
until such time as the BANK is in capital compliance. All payments made pursuant
to this Section 4(b) shall be paid in substantially equal monthly installments
over the remaining term of this Agreement following EXECUTIVE's termination;
provided, however, that if the remaining term of the Agreement is less than one
(1) year (determined as of EXECUTIVE's Date of Termination), such payments and
benefits shall be paid to EXECUTIVE in a lump sum within thirty (30) days of the
Date of Termination.
(c) Upon the occurrence of an Event of Termination, the BANK will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the BANK for EXECUTIVE prior to his
termination. Such coverage shall cease upon the expiration of the remaining term
of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall have
occurred a Change in Control of the COMPANY or the BANK. For purposes of this
Agreement, a "Change in Control" of the COMPANY or the BANK shall be deemed to
occur if and when (a) there occurs a change in control of the BANK or the
COMPANY within the meaning of the Home Owners Loan
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Act of 1933 and 12 C.F.R. Part 574, (b) any person (as such term is used in
Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial
owner, directly or indirectly, of securities of the COMPANY or the BANK
representing twenty-five percent (25%) or more of the combined voting power of
the COMPANY's or the BANK's then outstanding securities, (c) the membership of
the board of directors of the COMPANY or the BANK changes as the result of a
contested election, such that individuals who were directors at the beginning of
any twenty-four (24) month period (whether commencing before or after the date
of adoption of this Agreement) do not constitute a majority of the Board at the
end of such period, or (d) shareholders of the COMPANY or the BANK approve a
merger, consolidation, sale or disposition of all or substantially all of the
COMPANY's or the BANK's assets, or a plan of partial or complete liquidation.
Notwithstanding anything herein to the contrary, a Change in Control shall not
include shareholder approval of the transactions contemplated by the Agreement
and Plan of Merger by and among the Company, FC Acquisition Corp., a subsidiary
of the Company, and HCB Bancorp or the consummation of the transactions
contemplated thereby.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board of the BANK or the COMPANY has
reasonably determined that a Change in Control (as defined herein) has occurred,
EXECUTIVE shall be entitled to the benefits provided in paragraphs (c), (d) and
(e) of this Section 5 upon his subsequent involuntary termination following the
effective date of a Change in Control (or voluntary termination within twelve
(12) months of the effective date of a Change in Control following any material
demotion, loss of title, office or significant authority, material reduction in
his annual compensation or benefits (other than a reduction affecting the BANK's
personnel generally), or the relocation of his principal place of employment by
more than 35 miles from its location immediately prior to the Change in
Control), unless such termination is because of his death, retirement as
provided in Section 7, termination for Cause, or termination for Disability.
(c) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the BANK shall pay EXECUTIVE, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to 2.99
times EXECUTIVE's "base amount," within the meaning of (S)(S)280G(b)(3) of the
Internal Revenue Code of 1986 ("Code"), as amended. Such payment shall be made
in a lump sum paid within ten (10) days of EXECUTIVE's Date of Termination.
(d) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the BANK will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the BANK for EXECUTIVE prior to his severance. Such coverage shall
cease upon the expiration of thirty-six (36) months. In addition, EXECUTIVE
shall be entitled to receive the value of employer contributions that would have
been made on EXECUTIVE's behalf over the remaining term of the agreement to any
tax-qualified retirement plan sponsored by the BANK as of the Date of
Termination.
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(e) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
EXECUTIVE under this Section, together with any other payments or benefits
received or to be received by EXECUTIVE in connection with a Change in Control,
would be deemed to include an "excess parachute payment" under (S)(S)280G of
the Code, then, at the election of EXECUTIVE, (i) such payments or benefits
shall be payable or provided to EXECUTIVE over the minimum period necessary to
reduce the present value of such payments or benefits to an amount which is one
dollar ($1.00) less than three (3) times EXECUTIVE's "base amount" under
ss.280G(b)(3) of the Code or (ii) the payments or benefits to be provided under
this Section 5 shall be reduced to the extent necessary to avoid treatment as an
excess parachute payment with the allocation of the reduction among such
payments and benefits to be determined by EXECUTIVE.
6. TERMINATION FOR DISABILITY.
(a) If EXECUTIVE shall become disabled as defined in the BANK's then
current disability plan (or, if no such plan is then in effect, if EXECUTIVE is
permanently and totally disabled within the meaning of Section 22(e)(3) of the
Code as determined by a physician designated by the Board), the BANK may
terminate EXECUTIVE's employment for "Disability."
(b) Upon EXECUTIVE's termination of employment for Disability, the BANK
will pay EXECUTIVE, as disability pay, a bi-weekly payment equal to three-
quarters (3/4) of EXECUTIVE's bi-weekly rate of Base Salary on the effective
date of such termination. These disability payments shall commence on the
effective date of EXECUTIVE's termination and will end on the earlier of (i) the
date EXECUTIVE returns to the full-time employment of the BANK in the same
capacity as he was employed prior to his termination for Disability and pursuant
to an employment agreement between EXECUTIVE and the BANK; (ii) EXECUTIVE's
full-time employment by another employer; (iii) EXECUTIVE attaining the age of
sixty-five (65); (iv) EXECUTIVE's death; or (v) the expiration of the term of
this Agreement. The disability pay shall be reduced by the amount, if any, paid
to EXECUTIVE under any plan of the BANK providing disability benefits to
EXECUTIVE.
(c) The BANK will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
BANK for EXECUTIVE prior to his termination for Disability. This coverage and
payments shall cease upon the earlier of (i) the date EXECUTIVE returns to the
full-time employment of the BANK, in the same capacity as he was employed prior
to his termination for Disability and pursuant to an employment agreement
between EXECUTIVE and the BANK; (ii) EXECUTIVE's full-time employment by another
employer; (iii) EXECUTIVE's attaining the age of sixty-five (65); (iv)
EXECUTIVE's death; or (v) the expiration of the term of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to EXECUTIVE during any period during which
EXECUTIVE is incapable of performing his duties hereunder by reason of temporary
disability.
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7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE; RESIGNATION
Termination by the BANK of EXECUTIVE based on "Retirement" shall mean
retirement at or after attaining age sixty-five (65) or in accordance with any
retirement arrangement established with EXECUTIVE's consent with respect to him.
Upon termination of EXECUTIVE upon Retirement, EXECUTIVE shall be entitled to
all benefits under any retirement plan of the BANK or the COMPANY and other
plans to which EXECUTIVE is a party. Upon the death of EXECUTIVE during the term
of this Agreement, the BANK shall pay to EXECUTIVE's estate the compensation due
to EXECUTIVE through the last day of the calendar month in which his death
occurred. Upon the voluntary resignation of EXECUTIVE during the term of this
Agreement, other than in connection with an Event of Termination, the BANK shall
pay to EXECUTIVE the compensation due to EXECUTIVE through his Date of
Termination.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of EXECUTIVE's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar infractions) or final
cease-and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, EXECUTIVE shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths (3/4) of the members of the Board at a meeting of the Board called
and held for that purpose (after reasonable notice to EXECUTIVE and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, EXECUTIVE was guilty of
conduct justifying termination for Cause and specifying the reasons thereof.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after termination for Cause. Any stock options granted to EXECUTIVE
under any stock option plan or any unvested awards granted under any other stock
benefit plan of the BANK, the COMPANY, or any subsidiary or affiliate thereof,
shall become null and void effective upon EXECUTIVE's receipt of Notice of
Termination for Cause pursuant to Section 10 hereof, and shall not be
exercisable by EXECUTIVE at any time subsequent to such Termination for Cause.
9. REQUIRED PROVISIONS.
(a) The BOARD may terminate EXECUTIVE's employment at any time, but any
termination by the BOARD, other than Termination for Cause, shall not prejudice
EXECUTIVE's right to compensation or other benefits under this Agreement.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 8 herein.
(b) If EXECUTIVE is suspended and/or temporarily prohibited from
participating in the conduct of the BANK's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal
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Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(3) and (g)(1)), the BANK's
obligations under the Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the BANK may, in its discretion, (i) pay EXECUTIVE all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations that were suspended.
(c) If EXECUTIVE is removed and/or permanently prohibited from
participating in the conduct of the BANK's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the BANK under the Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the BANK is in default (as defined in Section 3(x)(1) of the FDIA),
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the BANK): (i) by the Director of the Office of Thrift
Supervision (the "Director") or his designee at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or on
behalf of the BANK under the authority contained in Section 13(c) of the FDIA or
(ii) by the Director, or his designee at the time the Director or such designee
approves a supervisory merger to resolve problems related to operation of the
BANK or when the BANK is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(f) Any payments made to EXECUTIVE pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)(S)1828(k) and any regulations promulgated thereunder.
10. NOTICE.
(a) Any purported termination by the BANK or by EXECUTIVE shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of EXECUTIVE's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if EXECUTIVE's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, other than Termination for Cause,
the date
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specified in the Notice of Termination. In the event of EXECUTIVE's Termination
for Cause, the Date of Termination shall be the same as the date of the Notice
of Termination.
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by EXECUTIVE in which case the Date
of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
11. NON-COMPETITION.
(a) Upon any termination of EXECUTIVE's employment hereunder pursuant to
an Event of Termination as provided in Section 4 hereof, EXECUTIVE agrees not to
compete with the BANK and/or the COMPANY for a period of one (1) year following
such termination in any city, town or county in which the BANK and/or the
COMPANY has an office or has filed an application for regulatory approval to
establish an office, determined as of the effective date of such termination.
EXECUTIVE agrees that during such period and within said cities, towns and
counties, EXECUTIVE shall not work for or advise, consult or otherwise serve
with, directly or indirectly, any entity whose business materially competes with
the depository, lending or other business activities of the BANK and/or the
COMPANY. The parties hereto, recognizing that irreparable injury will result to
the BANK and/or the COMPANY, its business and property in the event of
EXECUTIVE's breach of this Subsection 11(a) agree that in the event of any such
breach by EXECUTIVE, the BANK and/or the COMPANY will be entitled, in addition
to any other remedies and damages available, to an injunction to restrain the
violation hereof by EXECUTIVE, EXECUTIVE's partners, agents, servants,
employers, employees and all persons acting for or with EXECUTIVE. EXECUTIVE
represents and admits that in the event of the termination of his employment
pursuant to Section 4 hereof, EXECUTIVE's experience and capabilities are such
that EXECUTIVE can obtain employment in a business engaged in other lines and/or
of a different nature than the BANK and/or the COMPANY, and that the enforcement
of a remedy by way of injunction will not prevent EXECUTIVE from earning a
livelihood. Nothing herein will be construed as prohibiting the BANK and/or the
COMPANY from pursuing any other remedies available to the BANK and/or the
COMPANY for such breach or threatened breach, including the recovery of damages
from EXECUTIVE.
(b) EXECUTIVE recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the BANK and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the BANK. EXECUTIVE will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned
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or considered business activities of the BANK or affiliates thereof to any
person, firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, EXECUTIVE may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the BANK. In the
event of a breach or threatened breach by EXECUTIVE of the provisions of this
Section, the BANK will be entitled to an injunction restraining EXECUTIVE from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the BANK or affiliates thereof, or from
rendering any services to any person, firm, corporation, other entity to whom
such knowledge, in whole or in part, has been disclosed or is threatened to be
disclosed. Nothing herein will be construed as prohibiting the BANK from
pursuing any other remedies available to the BANK for such breach or threatened
breach, including the recovery of damages from EXECUTIVE.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the BANK. The COMPANY, however, guarantees all
payments and the provision of all amounts and benefits due hereunder to
EXECUTIVE and, if such payments are not timely paid or provided by the BANK,
such amounts and benefits shall be paid or provided by the COMPANY.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the BANK or any
predecessor of the BANK and EXECUTIVE, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to EXECUTIVE of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that EXECUTIVE is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
EXECUTIVE, the BANK, the COMPANY and their respective successors and assigns.
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15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Indiana,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or state
law or regulation, including, specifically, 12 C.F.R. Section 563.39(b), the
provisions of such law or regulation shall prevail.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the BANK, if EXECUTIVE is successful pursuant to a legal
judgment, arbitration or settlement.
20. INDEMNIFICATION.
The BANK shall provide EXECUTIVE (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
EXECUTIVE (and his heirs, executors and administrators) to the fullest extent
permitted under Indiana law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by
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reason of his having been a director or officer of the BANK (whether or not he
continues to be a directors or officer at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgment, court costs and attorneys' fees and the cost of reasonable
settlements. The provisions of 12 C.F.R. 545.121 shall apply to the BANK's
obligations under this Section 20.
21. SUCCESSOR TO THE BANK OR THE COMPANY.
The BANK and the COMPANY shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the BANK or the COMPANY, expressly
and unconditionally to assume and agree to perform the BANK's or the COMPANY's
obligations under this Agreement, in the same manner and to the same extent that
the BANK or the COMPANY would be required to perform if no such succession or
assignment had taken place.
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IN WITNESS WHEREOF, the BANK and the COMPANY have caused this amended and
restated Agreement to be executed and their seal to be affixed hereunto by a
duly authorized officer, and EXECUTIVE has signed this amended and restated
Agreement, all on the 12th day of January, 2000.
ATTEST: FIRST HARRISON BANK
/s/ Marla J. Buelz BY: /s/ Samuel E. Uhl
- ------------------------------ ----------------------------------
Samuel E. Uhl
[SEAL]
ATTEST: FIRST CAPITAL, INC.
/s/ Marla J. Buelz BY: /s/ J. Gordon Pendleton
- ------------------------------ ----------------------------------
J. Gordon Pendleton
[SEAL]
WITNESS: EXECUTIVE
/s/ Daniel B. NesSmith /s/ Joel E. Voyles
- ------------------------------ --------------------------------
JOEL E. VOYLES
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EXHIBIT 10.9
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made effective as of January 12, 2000, by and between
FIRST HARRISON BANK (the "BANK"), FIRST CAPITAL, INC. (the "COMPANY"), an
Indiana corporation, and WILLIAM W. HARROD ("EXECUTIVE").
WHEREAS, EXECUTIVE serves in a position of substantial responsibility;
WHEREAS, the COMPANY wishes to assure itself of the services of EXECUTIVE
for the period provided in this Agreement; and
WHEREAS, EXECUTIVE is willing to serve in the employ of the COMPANY and
the BANK for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, EXECUTIVE agrees to serve
as President and Chief Executive Officer of the COMPANY and Chief Operating
Officer of the BANK. EXECUTIVE shall render administrative and management
services to the COMPANY and the BANK such as are customarily performed by
persons situated in similar executive capacities, including but not limited to:
(i) monitoring investments, insurance activities and financial matters in
EXECUTIVE'S capacity as President and Chief Executive Officer of the COMPANY;
and (ii) overseeing information systems, electronic banking services and
marketing efforts in EXECUTIVE'S capacity as Chief Operating Officer of the
BANK.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for thirty six (36) months
thereafter. Commencing on the first anniversary date, and continuing at each
anniversary date thereafter, the Board of Directors of the COMPANY (the "Board")
may extend the Agreement for an additional year. Prior to the extension of the
Agreement as provided herein, the Board will conduct a formal performance
evaluation of EXECUTIVE for purposes of determining whether to extend the
Agreement, and the results thereof shall be included in the minutes of the
Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, EXECUTIVE shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the COMPANY; provided, however, that, with the
approval of the Board, as evidenced by a resolution of such Board, from time to
time, EXECUTIVE may serve, or continue to serve, on the boards of directors of,
and hold any other offices or positions in, companies or
<PAGE>
organizations, which, in such Board's judgment, will not present any conflict of
interest with the BANK, or materially affect the performance of EXECUTIVE's
duties pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The
COMPANY shall pay EXECUTIVE as compensation a salary of $105,000 per year ("Base
Salary"). However, payments made pursuant to this Section 5 shall be allocated
between the COMPANY and the BANK in proportion to the services rendered and time
expended on such activities by EXECUTIVE as determined by the COMPANY and the
BANK. Base Salary shall be payable through the BANK in accordance with the
customary payroll practices of the BANK. During the period of this Agreement,
EXECUTIVE's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement. Such
review shall be conducted by a Committee designated by the Board, and the Board
may increase EXECUTIVE's Base Salary. In addition to the Base Salary provided in
this Section 3(a), the BANK shall provide EXECUTIVE at no cost to EXECUTIVE with
all such other benefits as are provided uniformly to permanent full-time
employees of the BANK.
(b) EXECUTIVE will be eligible to participate in or receive benefits under
any employee benefit plans including, but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans, health-and-
accident plan, medical coverage or any other employee benefit plan or
arrangement made available by the BANK in the future to its senior executives
and key management employees, subject to, and on a basis consistent with, the
terms, conditions and overall administration of such plans and arrangements.
EXECUTIVE will be entitled to incentive compensation and bonuses as provided in
any plan, or pursuant to any arrangement of the BANK, in which EXECUTIVE is
eligible to participate. Nothing paid to EXECUTIVE under any such plan or
arrangement will be deemed to be in lieu of other compensation to which
EXECUTIVE is entitled under this Agreement, except as provided under Section
5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the BANK or the COMPANY, as appropriate, shall pay or reimburse
EXECUTIVE for all reasonable travel and other obligations under this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during EXECUTIVE's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the COMPANY of EXECUTIVE's full-time employment hereunder for any reason other
than a Change in Control, as defined in Section 5(a) hereof; disability, as
defined in Section 6(a) hereof; death; retirement, as defined in Section 7
hereof; or Termination for Cause, as defined in Section 8 hereof; (ii)
EXECUTIVE's resignation from the
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COMPANY's employ, upon (A) unless consented to by EXECUTIVE, a material change
in EXECUTIVE's function, duties, or responsibilities, which change would cause
EXECUTIVE's position to become one of lesser responsibility, importance, or
scope from the position and attributes thereof described in Sections 1 and 2,
above (any such material change shall be deemed a continuing breach of this
Agreement), (B) a relocation of EXECUTIVE's principal place of employment by
more than 35 miles from its location at the effective date of this Agreement, or
a material reduction in the benefits and perquisites to EXECUTIVE from those
being provided as of the effective date of this Agreement, (C) the liquidation
or dissolution of the COMPANY, or (D) any material breach of this Agreement by
the COMPANY. Upon the occurrence of any event described in clauses (A), (B), (C)
or (D), above, EXECUTIVE shall have the right to elect to terminate his
employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within a reasonable period of time not to
exceed, except in case of a continuing breach, four (4) calendar months after
the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the COMPANY shall pay
EXECUTIVE, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the payments due to EXECUTIVE for the remaining
term of the Agreement, including Base Salary, bonuses, and any other cash or
deferred compensation paid or to be paid (including the value of employer
contributions that would have been made on EXECUTIVE's behalf over the remaining
term of the agreement to any tax-qualified retirement plan sponsored by the
COMPANY as of the Date of Termination), to EXECUTIVE for the term of the
Agreement provided, however, that if the COMPANY is not in compliance with its
minimum capital requirements or if such payments would cause the COMPANY's
capital to be reduced below its minimum capital requirements, such payments
shall be deferred until such time as the COMPANY is in capital compliance. All
payments made pursuant to this Section 4(b) shall be paid in substantially equal
monthly installments over the remaining term of this Agreement following
EXECUTIVE's termination; provided, however, that if the remaining term of the
Agreement is less than one (1) year (determined as of EXECUTIVE's Date of
Termination), such payments and benefits shall be paid to EXECUTIVE in a lump
sum within thirty (30) days of the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the BANK will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the BANK for EXECUTIVE prior to his
termination. Such coverage shall cease upon the expiration of the remaining term
of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall have
occurred a Change in Control of the COMPANY or the BANK. For purposes of this
Agreement, a "Change in Control" of the COMPANY or the BANK shall be deemed to
occur if and when (a) there occurs a change in control of the BANK or the
COMPANY within the meaning of the Home Owners Loan Act of 1933 and 12 C.F.R.
Part 574, (b) any person (as such term is used in Sections 13(d) and
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14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or
indirectly, of securities of the COMPANY or the BANK representing twenty-five
percent (25%) or more of the combined voting power of the COMPANY's or the
BANK's then outstanding securities, (c) the membership of the board of directors
of the COMPANY or the BANK changes as the result of a contested election, such
that individuals who were directors at the beginning of any twenty-four (24)
month period (whether commencing before or after the date of adoption of this
Agreement) do not constitute a majority of the Board at the end of such period,
or (d) shareholders of the COMPANY or the BANK approve a merger, consolidation,
sale or disposition of all or substantially all of the COMPANY's or the BANK's
assets, or a plan of partial or complete liquidation.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control has occurred or the Board of the BANK or the COMPANY has
reasonably determined that a Change in Control (as defined herein) has occurred,
EXECUTIVE shall be entitled to the benefits provided in paragraphs (c), (d) and
(e) of this Section 5 upon his subsequent involuntary termination following the
effective date of a Change in Control (or voluntary termination within twelve
(12) months of the effective date of a Change in Control following any material
demotion, loss of title, office or significant authority, material reduction in
his annual compensation or benefits (other than a reduction affecting the BANK's
personnel generally), or the relocation of his principal place of employment by
more than 35 miles from its location immediately prior to the Change in
Control), unless such termination is because of his death, retirement as
provided in Section 7, termination for Cause, or termination for Disability.
(c) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the COMPANY shall pay EXECUTIVE, or in the event of
his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay or liquidated damages, or both, a sum equal to
2.99 times EXECUTIVE's "base amount," within the meaning of (S)280G(b)(3) of the
Internal Revenue Code of 1986 ("Code"), as amended. Such payment shall be made
in a lump sum paid within ten (10) days of EXECUTIVE's Date of Termination.
(d) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the COMPANY will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained for EXECUTIVE prior to his severance. Such coverage shall cease upon
the expiration of thirty-six (36) months. In addition, EXECUTIVE shall be
entitled to receive the value of employer contributions that would have been
made on EXECUTIVE's behalf over the remaining term of the agreement to any tax-
qualified retirement plan sponsored by the BANK or the COMPANY as of the Date of
Termination.
(e) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
EXECUTIVE under this Section, together with any other payments or benefits
received or to be received by EXECUTIVE in connection with a Change in Control,
would be deemed to include an "excess parachute payment" under (S)280G of the
Code, then, at the election of EXECUTIVE, (i) such payments or benefits shall be
payable or provided to EXECUTIVE over the minimum period necessary to reduce the
present value of such
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payments or benefits to an amount which is one dollar ($1.00) less than three
(3) times EXECUTIVE's "base amount" under (S)280G(b)(3) of the Code or (ii) the
payments or benefits to be provided under this Section 5 shall be reduced to the
extent necessary to avoid treatment as an excess parachute payment with the
allocation of the reduction among such payments and benefits to be determined by
EXECUTIVE.
6. TERMINATION FOR DISABILITY.
(a) If EXECUTIVE shall become disabled as defined in the BANK's then
current disability plan (or, if no such plan is then in effect, if EXECUTIVE is
permanently and totally disabled within the meaning of Section 22(e)(3) of the
Code as determined by a physician designated by the Board), the BANK may
terminate EXECUTIVE's employment for "Disability."
(b) Upon EXECUTIVE's termination of employment for Disability, the BANK
will pay EXECUTIVE, as disability pay, a bi-weekly payment equal to three-
quarters (3/4) of EXECUTIVE's bi-weekly rate of Base Salary on the effective
date of such termination. These disability payments shall commence on the
effective date of EXECUTIVE's termination and will end on the earlier of (i) the
date EXECUTIVE returns to the full-time employment of the BANK in the same
capacity as he was employed prior to his termination for Disability and pursuant
to an employment agreement between EXECUTIVE and the BANK; (ii) EXECUTIVE's
full-time employment by another employer; (iii) EXECUTIVE attaining the age of
sixty-five (65); (iv) EXECUTIVE's death; or (v) the expiration of the term of
this Agreement. The disability pay shall be reduced by the amount, if any, paid
to EXECUTIVE under any plan of the BANK providing disability benefits to
EXECUTIVE.
(c) The BANK will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
BANK for EXECUTIVE prior to his termination for Disability. This coverage and
payments shall cease upon the earlier of (i) the date EXECUTIVE returns to the
full-time employment of the BANK, in the same capacity as he was employed prior
to his termination for Disability and pursuant to an employment agreement
between EXECUTIVE and the BANK; (ii) EXECUTIVE's full-time employment by another
employer; (iii) EXECUTIVE's attaining the age of sixty-five (65); (iv)
EXECUTIVE's death; or (v) the expiration of the term of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to EXECUTIVE during any period during which
EXECUTIVE is incapable of performing his duties hereunder by reason of temporary
disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE; RESIGNATION
Termination by the COMPANY of EXECUTIVE based on "Retirement" shall mean
retirement at or after attaining age sixty-five (65) or in accordance with any
retirement arrangement established with EXECUTIVE's consent with respect to him.
Upon termination of EXECUTIVE
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upon Retirement, EXECUTIVE shall be entitled to all benefits under any
retirement plan of the BANK or the COMPANY and other plans to which EXECUTIVE is
a party. Upon the death of EXECUTIVE during the term of this Agreement, the
COMPANY shall pay to EXECUTIVE's estate the compensation due to EXECUTIVE
through the last day of the calendar month in which his death occurred. Upon the
voluntary resignation of EXECUTIVE during the term of this Agreement, other than
in connection with an Event of Termination, the COMPANY shall pay to EXECUTIVE
the compensation due to EXECUTIVE through his Date of Termination.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of EXECUTIVE's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar infractions) or final
cease-and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, EXECUTIVE shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths (3/4) of the members of the Board at a meeting of the Board called
and held for that purpose (after reasonable notice to EXECUTIVE and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, EXECUTIVE was guilty of
conduct justifying termination for Cause and specifying the reasons thereof.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after termination for Cause. Any stock options granted to EXECUTIVE
under any stock option plan or any unvested awards granted under any other stock
benefit plan of the BANK, the COMPANY, or any subsidiary or affiliate thereof,
shall become null and void effective upon EXECUTIVE's receipt of Notice of
Termination for Cause pursuant to Section 10 hereof, and shall not be
exercisable by EXECUTIVE at any time subsequent to such Termination for Cause.
9. REQUIRED PROVISIONS.
(a) The BANK may terminate EXECUTIVE's employment at any time, but any
termination by the BANK, other than Termination for Cause, shall not prejudice
EXECUTIVE's right to compensation or other benefits under this Agreement.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 8 herein.
(b) If EXECUTIVE is suspended and/or temporarily prohibited from
participating in the conduct of the BANK's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the BANK's obligations under the Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the BANK may, in its
discretion, (i) pay EXECUTIVE all or part of the compensation withheld while its
contract obligations were suspended and (ii) reinstate (in whole or in part) any
of its obligations that were suspended.
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(c) If EXECUTIVE is removed and/or permanently prohibited from
participating in the conduct of the BANK's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the BANK under the Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the BANK is in default (as defined in Section 3(x)(1) of the FDIA),
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the BANK): (i) by the Director of the Office of Thrift
Supervision (the "Director") or his designee at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or on
behalf of the BANK under the authority contained in Section 13(c) of the FDIA or
(ii) by the Director, or his designee at the time the Director or such designee
approves a supervisory merger to resolve problems related to operation of the
BANK or when the BANK is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(f) Any payments made to EXECUTIVE pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
10. NOTICE.
(a) Any purported termination by the COMPANY or by EXECUTIVE shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of EXECUTIVE's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if EXECUTIVE's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, other than Termination for Cause,
the date specified in the Notice of Termination. In the event of EXECUTIVE's
Termination for Cause, the Date of Termination shall be the same as the date of
the Notice of Termination.
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by EXECUTIVE in which case the Date
of Termination shall be the date specified in the Notice, the Date of
Termination
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shall be the date on which the dispute is finally determined, either by mutual
written agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
11. NON-COMPETITION.
(a) Upon any termination of EXECUTIVE's employment hereunder pursuant to
an Event of Termination as provided in Section 4 hereof, EXECUTIVE agrees not to
compete with the BANK and/or the COMPANY for a period of one (1) year following
such termination in any city, town or county in which the BANK and/or the
COMPANY has an office or has filed an application for regulatory approval to
establish an office, determined as of the effective date of such termination.
EXECUTIVE agrees that during such period and within said cities, towns and
counties, EXECUTIVE shall not work for or advise, consult or otherwise serve
with, directly or indirectly, any entity whose business materially competes with
the depository, lending or other business activities of the BANK and/or the
COMPANY. The parties hereto, recognizing that irreparable injury will result to
the BANK and/or the COMPANY, its business and property in the event of
EXECUTIVE's breach of this Subsection 11(a) agree that in the event of any such
breach by EXECUTIVE, the BANK and/or the COMPANY will be entitled, in addition
to any other remedies and damages available, to an injunction to restrain the
violation hereof by EXECUTIVE, EXECUTIVE's partners, agents, servants,
employers, employees and all persons acting for or with EXECUTIVE. EXECUTIVE
represents and admits that in the event of the termination of his employment
pursuant to Section 4 hereof, EXECUTIVE's experience and capabilities are such
that EXECUTIVE can obtain employment in a business engaged in other lines and/or
of a different nature than the BANK and/or the COMPANY, and that the enforcement
of a remedy by way of injunction will not prevent EXECUTIVE from earning a
livelihood. Nothing herein will be construed as prohibiting the BANK and/or the
COMPANY from pursuing any other remedies available to the BANK and/or the
COMPANY for such breach or threatened breach, including the recovery of damages
from EXECUTIVE.
(b) EXECUTIVE recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the COMPANY and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the COMPANY. EXECUTIVE will not, during or
after the term of his employment, disclose any knowledge of the past, present,
planned or considered business activities of the COMPANY or affiliates thereof
to any person, firm, corporation, or other entity for any reason or purpose
whatsoever. Notwithstanding the foregoing, EXECUTIVE may disclose any knowledge
of banking, financial and/or economic principles, concepts or ideas which are
not solely and exclusively derived from the business plans and activities of the
COMPANY. In the event of a breach or threatened breach by EXECUTIVE of the
provisions of this Section, the COMPANY will be entitled to an injunction
restraining EXECUTIVE from disclosing, in whole or in part, the knowledge of the
past, present, planned or
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considered business activities of the COMPANY or affiliates thereof, or from
rendering any services to any person, firm, corporation, other entity to whom
such knowledge, in whole or in part, has been disclosed or is threatened to be
disclosed. Nothing herein will be construed as prohibiting the COMPANY from
pursuing any other remedies available to the COMPANY for such breach or
threatened breach, including the recovery of damages from EXECUTIVE.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the COMPANY, unless otherwise specified herein.
The BANK, however, guarantees all payments and the provision of all amounts and
benefits due hereunder to EXECUTIVE and, if such payments are not timely paid or
provided by the COMPANY, such amounts and benefits shall be paid or provided by
the BANK.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the COMPANY or any
predecessor of the COMPANY and EXECUTIVE, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to EXECUTIVE of
a kind elsewhere provided. This Agreement supercedes and replaces in its
entirety the agreement between EXECUTIVE and Harrison County Bank dated February
19, 1999. No provision of this Agreement shall be interpreted to mean that
EXECUTIVE is subject to receiving fewer benefits than those available to him
without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
EXECUTIVE, the BANK, the COMPANY and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by
9
<PAGE>
written instrument of the party charged with such waiver or estoppel. No such
written waiver shall be deemed a continuing waiver unless specifically stated
therein, and each such waiver shall operate only as to the specific term or
condition waived and shall not constitute a waiver of such term or condition for
the future as to any act other than that specifically waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Indiana,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or state
law or regulation, including, specifically, 12 C.F.R. Section 563.39(b), the
provisions of such law or regulation shall prevail.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the COMPANY, if EXECUTIVE is successful pursuant to a legal
judgment, arbitration or settlement.
20. INDEMNIFICATION.
The COMPANY shall provide EXECUTIVE (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
EXECUTIVE (and his heirs, executors and administrators) to the fullest extent
permitted under Indiana law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the COMPANY (whether or not he continues to be a directors or
officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgment, court costs and
attorneys' fees and the cost of reasonable settlements.
10
<PAGE>
21. SUCCESSOR TO THE BANK OR THE COMPANY.
The BANK and the COMPANY shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the BANK or the COMPANY, expressly
and unconditionally to assume and agree to perform the BANK's or the COMPANY's
obligations under this Agreement, in the same manner and to the same extent that
the BANK or the COMPANY would be required to perform if no such succession or
assignment had taken place.
IN WITNESS WHEREOF, the BANK and the COMPANY have caused this Agreement to
be executed and their seal to be affixed hereunto by a duly authorized officer,
and EXECUTIVE has signed this Agreement, all on the 12th day of January, 2000.
ATTEST: FIRST CAPITAL, INC.
/s/ Marla J. Buelz BY: /s/ J. Gordon Pendleton
- ----------------------------- ---------------------------------
J. Gordon Pendleton
ATTEST: FIRST HARRISON BANK
/s/ Marla J. Buelz BY: /s/ Samuel E. Uhl
- ----------------------------- ---------------------------------
Samuel E. Uhl
WITNESS: EXECUTIVE
/s/ Daniel B. NesSmith BY: /s/ William W. Harrod
- ----------------------------- ---------------------------------
William W. Harrod
11
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in First Capital, Inc.'s
Registration Statement No. 333-76543 on Form S-8 and in First Capital, Inc.'s
Registration Statement No. 333-95987 on Form S-8 of our report dated January 13,
2000 for the six month transition period ended December 31, 1999 appearing in
this Form 10-KSB.
/s/ MONROE SHINE AND CO., INC.
New Albany, Indiana
March 17, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF FIRST CAPITAL, INC. FOR THE SIX MONTH TRANSITION PERIOD
ENDED DECEMBER 31, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,555
<INT-BEARING-DEPOSITS> 1,330
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,256
<INVESTMENTS-CARRYING> 9,611
<INVESTMENTS-MARKET> 9,206
<LOANS> 93,983
<ALLOWANCE> 523
<TOTAL-ASSETS> 132,680
<DEPOSITS> 97,635
<SHORT-TERM> 7,000
<LIABILITIES-OTHER> 1,173
<LONG-TERM> 9,750
0
0
<COMMON> 9,415
<OTHER-SE> 17,123
<TOTAL-LIABILITIES-AND-EQUITY> 132,680
<INTEREST-LOAN> 3,614
<INTEREST-INVEST> 985
<INTEREST-OTHER> 59
<INTEREST-TOTAL> 4,658
<INTEREST-DEPOSIT> 2,250
<INTEREST-EXPENSE> 2,708
<INTEREST-INCOME-NET> 1,950
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,529
<INCOME-PRETAX> 572
<INCOME-PRE-EXTRAORDINARY> 572
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 315
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.25
<YIELD-ACTUAL> 7.56
<LOANS-NON> 41
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 482
<CHARGE-OFFS> 4
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 523
<ALLOWANCE-DOMESTIC> 523
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
