1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 20, 2003
--------------
FIRST CAPITAL, INC.
-------------------
(Exact name of registrant as specified in its charter)
Indiana 0-25023 35-2056949
------- ------------- --------------
(State or other Jurisdiction of (Commission (IRS Employer
incorporation or organization) File Number) Identification No.)
220 Federal Drive N.W., Corydon, Indiana 47112
---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(812) 738-2198
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name or former address, if changed since last report.)
2
The Registrant hereby amends the items, financial statements, exhibits or other
portions of its Current Report on Form 8-K dated March 20, 2003 and filed on
March 25, 2003 as set forth herein.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
------------------------------------------------------------------
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Hometown Bancshares, Inc. Consolidated Balance Sheets as of December
31, 2002 and 2001
Hometown Bancshares, Inc. Consolidated Statements of Income for the
Years Ended December 31, 2002 and 2001
Hometown Bancshares, Inc. Consolidated Statements of Changes in
Stockholders' Equity for the Years Ended December 31, 2002 and 2001
Hometown Bancshares, Inc. Consolidated Statements of Cash Flows for
the Years Ended December 31, 2002 and 2001
Notes to Consolidated Financial Statements
(b) PRO FORMA FINANCIAL INFORMATION.
First Capital, Inc. and Hometown Bancshares, Inc. Unaudited Pro
Forma Condensed Combined Balance Sheet for the Year Ended December
31, 2002
First Capital, Inc. and Hometown Bancshares, Inc. Unaudited Pro
Forma Condensed Combined Statements of Income for the Three Months
Ended March 31, 2003 and the Year Ended December 31, 2002
Hometown Bancshares, Inc. Notes to the Unaudited Pro Forma Condensed
Combined Financial Statements
(c) EXHIBITS.
None.
2
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST CAPITAL, INC.
Dated: May 30, 2003 By: /s/ William W. Harrod
-------------------------------------
William W. Harrod
President and Chief Executive Officer
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4
[MONROE SHINE LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
HOMETOWN BANCSHARES, INC.
New Albany, Indiana
We have audited the accompanying consolidated balance sheets of HOMETOWN
BANCSHARES, INC. AND SUBSIDIARY as of December 31, 2002 and 2001, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HOMETOWN BANCSHARES,
INC. AND SUBSIDIARY as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Monroe Shine
New Albany, Indiana
January 24, 2003
(except for Note 5, as to which
the date is March 10, 2003)
5
HOMETOWN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
---- ----
ASSETS
Cash and due from banks $ 2,002,368 $ 4,189,377
Interest-bearing deposits with banks 902,293 7,648,817
Securities available for sale, at fair value 5,672,081 -
Securities held to maturity (fair value of $1,141,319 in 2002;
$3,791,045 in 2001) 1,064,028 3,723,896
Federal funds sold 11,541,000 12,583,000
Mortgage loans held for sale 5,593,179 1,411,427
Loans 56,727,859 55,423,082
Less allowance for loan losses 1,572,320 460,603
--------------- ----------------
Net loans 55,155,539 54,962,479
--------------- ----------------
Federal Reserve Bank stock, at cost 179,650 150,000
Federal Home Loan Bank stock, at cost 200,000 200,000
Foreclosed real estate 85,963 -
Premises and equipment 2,266,440 2,346,574
Accrued interest receivable 373,539 365,782
Other assets 476,494 133,211
--------------- ----------------
TOTAL ASSETS $ 85,512,574 $ 87,714,563
=============== ================
LIABILITIES
Deposits:
Noninterest-bearing $ 4,085,020 $ 3,421,473
Interest-bearing 74,340,444 76,850,828
--------------- ----------------
Total deposits 78,425,464 80,272,301
Accrued interest payable 225,216 326,569
Other liabilities 73,623 81,497
--------------- ----------------
Total Liabilities 78,724,303 80,680,367
--------------- ----------------
STOCKHOLDERS' EQUITY
Preferred stock without par value,
Authorized 25,000 shares; none issued - -
Common stock without par value,
Authorized 900,000 shares; issued 229,550 shares 5,972,715 5,972,715
Retained earnings 799,404 1,061,481
Accumulated other comprehensive income 16,152 -
--------------- ----------------
Total Stockholders' Equity 6,788,271 7,034,196
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 85,512,574 $ 87,714,563
=============== ================
See notes to consolidated financial statements.
6
HOMETOWN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
---- ----
INTEREST INCOME
Loans, including fees $ 4,397,517 $ 4,699,008
Securities:
Taxable 348,711 340,390
Tax-exempt 14,681 17,631
Dividends 22,414 23,867
Federal funds sold 159,920 507,396
Interest-bearing deposits in banks 60,638 214,152
-------------- --------------
Total interest income 5,003,881 5,802,444
-------------- --------------
INTEREST EXPENSE
Deposits 2,552,582 3,722,781
Federal funds purchased 60 164
-------------- --------------
Total interest expense 2,552,642 3,722,945
-------------- --------------
Net interest income 2,451,239 2,079,499
Provision for loan losses 1,523,183 106,000
-------------- --------------
Net interest income after provision for loan losses 928,056 1,973,499
-------------- --------------
NONINTEREST INCOME
Service charges on deposit accounts 291,576 207,449
Mortgage brokerage fees 11,587 73,860
Net gain on sale of mortgage loans 129,435 328,979
Other income 38,144 36,360
-------------- --------------
Total noninterest income 470,742 646,648
-------------- --------------
NONINTEREST EXPENSE
Compensation and benefits 1,108,531 1,255,898
Occupancy expense 95,263 84,708
Equipment expense 80,253 80,533
Other expenses 508,283 442,253
-------------- --------------
Total noninterest expense 1,792,330 1,863,392
-------------- --------------
Income before income taxes (393,532) 756,755
Income tax expense (131,455) 276,105
-------------- --------------
NET INCOME $ (262,077) $ 480,650
============== ==============
NET INCOME PER COMMON SHARE $ (1.14) $ 2.32
============== ==============
See notes to consolidated financial statements.
7
HOMETOWN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK EARNINGS INCOME TOTAL
Balances at January 1, 2001 $ 4,984,197 $ 580,831 $ - $ 5,565,028
Net income - 480,650 - 480,650
Issuance of 29,550 shares of common stock 988,518 - - 988,518
------------ ----------- ---------- ------------
Balances at December 31, 2001 5,972,715 1,061,481 - 7,034,196
COMPREHENSIVE INCOME
Net income - (262,077) - (262,077)
Other comprehensive income:
Change in unrealized gain on securities available
for sale, net of deferred income tax expense of $10,594 - - 16,152 16,152
Less: reclassification adjustment - - - -
------------
TOTAL COMPREHENSIVE INCOME (245,925)
------------
------------ ----------- ---------- ------------
Balances at December 31, 2002 $ 5,972,715 $ 799,404 $ 16,152 $ 6,788,271
============ =========== ========== ============
See notes to consolidated financial statements.
8
HOMETOWN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (262,077) $ 480,650
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income taxes (385,488) 18,814
Depreciation 88,597 89,311
Amortization of premium and accretion of discount
on securities, net (3,057) 2,740
Mortgage loans originated for sale (9,350,635) (18,665,253)
Proceeds from mortgage loan sales 5,298,318 19,755,992
Net gain on sale of mortgage loans (129,435) (328,979)
Provision for loan losses 1,523,183 106,000
(Increase) decrease in accrued interest receivable (7,757) 182,456
Decrease in accrued interest payable (101,353) (26,818)
Decrease (increase) in other assets 31,611 (36,581)
Decrease in other liabilities (7,874) (148,005)
--------------- ---------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (3,305,967) 1,430,327
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits with banks 6,746,524 (7,049,311)
Net decrease in federal funds sold 1,042,000 3,619,000
Purchase of securities available for sale (8,638,101) -
Proceeds from maturities of securities available for sale 3,000,000 -
Purchase of securities held to maturity (3,975,000) (9,879,807)
Proceeds from maturities of securities held to maturity 6,387,000 16,702,000
Principal payments on mortgage-backed securities 243,691 185,849
Net increase in loans (1,802,206) (7,412,848)
Purchase of Federal Reserve Bank stock (29,650) -
Purchase of premises and equipment (8,463) (280,637)
--------------- ---------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 2,965,795 (4,115,754)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 663,547 85,667
Net decrease in interest-bearing deposits (2,510,384) (76,104)
Issuance of common stock - 988,518
--------------- ---------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (1,846,837) 998,081
--------------- ---------------
NET DECREASE IN CASH AND DUE FROM BANKS (2,187,009) (1,687,346)
Cash and due from banks at beginning of year 4,189,377 5,876,723
--------------- ---------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 2,002,368 $ 4,189,377
=============== ===============
See notes to consolidated financial statements.
9
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Hometown Bancshares, Inc. (the Company) is a one bank holding company
of Hometown National Bank (the Bank), a wholly-owned subsidiary. The
Company has no operating activities. The Bank provides a variety of
commercial banking services to individual and business customers
through its two offices in southern Indiana.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and the Bank and have been prepared in accordance with
generally accepted accounting principles and conform with general
practices in the banking industry. Intercompany balances and
transactions have been eliminated.
STATEMENT OF CASH FLOWS
The Company has defined cash and cash equivalents as those amounts
included in the balance sheet caption "Cash and due from banks."
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting years. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures
or in satisfaction of loans. In connection with the determination of
the allowance for loan losses and foreclosed real estate, management
obtains independent appraisals for significant properties.
While management uses available information to recognize losses on
loans and foreclosed real estate, further reductions in the carrying
amounts of loans and foreclosed assets may be necessary based on
changes in local economic conditions. In addition, as an integral part
of their examination process, regulatory agencies periodically review
the estimated losses on loans and foreclosed real estate. Such agencies
may require the Bank to recognize additional losses based on their
judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible the
estimated losses on loans and foreclosed real estate may change
materially in the near term. However, the amount of the change that is
reasonably possible cannot be estimated.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt 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.
10
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(1 - continued)
SECURITIES HELD TO MATURITY
Debt securities for which the Bank has the positive intent and ability
to hold to maturity are carried at cost, adjusted for amortization of
premium and accretion of discount using the interest method over the
remaining years to maturity, adjusted for anticipated prepayments.
Mortgage-backed securities represent participating interests in pools
of long-term first mortgage loans originated and serviced by other
financial institutions or the issuers of the securities.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of aggregate cost or estimated fair value. Net
unrealized losses are recognized through a valuation allowance by
charges to income. Realized gains on sales of mortgage loans are
included in noninterest income.
LOANS
Loans receivable are stated at unpaid principal balances, less net
deferred loan fees and the allowance for loan losses. The Bank's real
estate loan portfolio consists of long-term loans, collateralized by
first mortgages on single-family and multi-family residential property
located in the southern Indiana area, commercial real estate loans,
commercial business and consumer loans.
Loan origination fees and certain direct costs of underwriting and
closing loans are defined and the net deferred loan fee or cost is
recognized as an adjustment to interest income over the contractual
life of the loans using the interest method.
The accrual of interest is discontinued on a loan when, in the judgment
of management, the probability of collection of interest is deemed to
be insufficient to warrant further accrual. The Bank does not accrue
interest on loans past due 90 days or more except when the estimated
value of collateral and collection efforts are deemed sufficient to
ensure full recovery. When a loan is placed on non-accrual status,
previously accrued but unpaid interest is deducted from interest
income.
Interest payments received on non-accrual loans, including specific
impaired loans, are recorded as a reduction of the loan principal
balance, and interest income is only recorded once principal recovery
is reasonably assured.
The Bank's practice is to charge off any loan or portion of a loan when
the loan is determined by management to be uncollectible due to the
borrower's failure to meet repayment terms, the borrower's
deteriorating or deteriorated financial condition, the depreciation of
the underlying collateral, the loans classification as a loss by
regulatory examiners, or for other reasons.
11
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(1 - continued)
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and economic
conditions. The allowance is increased by a provision for loan losses,
which is charged to expense, and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans are
charged or credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process, management's estimate
of credit losses inherent in the loan portfolio and the related
allowance may change in the near term.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan
basis by either the present value of expected future cash flows at the
loan's effective interest rate or the fair value of the collateral if
the loan is collateral dependent.
PREMISES AND EQUIPMENT
The Bank uses the straight line 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.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred.
12
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(1 - continued)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, FASB issued SFAS 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. This statement applies to all entities and the legal
obligations associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development
and/or normal operation of a long-lived asset, except for certain
obligations of lessees. This statement requires that the fair value of
a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value
can be made. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The
implementation of this statement is not expected to have an impact on
the Company's financial condition and results of operations.
In August 2001, FASB issued SFAS 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. This statement supersedes SFAS 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, and establishes a single financial accounting
model for long-lived assets to be disposed of by sale. The statement
retains the requirements of SFAS 121 to recognize an impairment loss if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and measure an impairment loss as the
difference between the carrying amount and the fair value of the asset.
This statement is effective for financial statements issued for fiscal
years beginning after December 15, 2001, and interim periods within
those fiscal years. The implementation of this statement is not
expected to have an impact on the Company's financial condition or
results of operations.
In May 2002, FASB issued SFAS 145, RESCISSION OF FASB STATEMENTS 4, 44,
AND 64, AMENDMENT OF FASB STATEMENT 13, AND TECHNICAL CORRECTIONS AS OF
APRIL 2002. This statement rescinds SFAS 4, REPORTING GAINS AND LOSSES
FROM EXTINGUISHMENT OF DEBT, and an amendment of that statement, SFAS
64, EXTINGUISHMENT OF DEBT MADE TO SATISFY SINKING-FUND REQUIREMENTS.
This statement also rescinds SFAS 44, ACCOUNTING FOR INTANGIBLE ASSETS
OF MOTOR CARRIERS, and amends SFAS 13, ACCOUNTING FOR LEASES, to
eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. This statement is effective for transactions occurring
after May 15, 2002. The implementation of this statement had no
material impact on the Company's financial condition or results of
operations.
In June 2002, FASB issued SFAS 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES. This statement addresses the
accounting and reporting for costs associated with exit or disposal
activities and nullifies previous guidance. The principal difference
between this statement and prior guidance is that a liability for a
cost associated with an exit or disposal activity can only be
recognized when actually incurred versus the date when management
commits to the plan. This statement establishes that fair value is the
objective for initial measurement of the liability. This statement is
effective for exit or disposal activities that are initiated after
December 31, 2002. The implementation of this statement is not expected
to have an impact on the Company's financial condition or results of
operations.
13
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(1 - continued)
In October 2002, the FASB issued SFAS 147, ACQUISITIONS OF CERTAIN
FINANCIAL INSTITUTIONS, AN AMENDMENT OF FASB STATEMENTS 72 AND 144 AND
FASB INTERPRETATION 9, which addresses the financial accounting and
reporting for the acquisitions of all or part of a financial
institution. SFAS 147 removes acquisitions of financial institutions,
except for transactions between two or more mutual enterprises, from
the scope of both SFAS 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with SFAS 141, BUSINESS
COMBINATIONS, and SFAS 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS
147 also amends SFAS 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS, to include in its scope long-term
customer-relationship and credit cardholder intangible assets, and
requires companies to cease amortization of unidentifiable assets
associated with certain branch acquisitions. The provisions of this
statement were effective beginning October 1, 2002. The implementation
of this statement had no material impact on the Company's financial
condition or results of operation.
(2) PENDING MERGER
On September 25, 2002, the Company and First Capital, Inc. (First
Capital), a thrift holding company for First Harrison Bank in Corydon,
Indiana, entered into an agreement and plan of merger whereby each of
the issued and outstanding common shares of the Company will be
exchanged for the shares of First Capital's common stock or $46.50 in
cash per share. The number of shares of First Capital's common stock to
be exchange for each share of the Company's common stock will be based
on the average closing price of First Capital's common stock over a
twenty day trading period shortly before the closing of the merger.
Elections to receive stock, cash or a combination of stock and cash by
the shareholders will be limited by a requirement that 50% of the total
number of outstanding shares of the Company's common stock be exchanged
for First Capital common stock. The merger is subject to regulatory and
shareholder approvals. The merger is expected to be completed in March
2003.
(3) RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances on hand or with the
Federal Reserve Bank which are noninterest-bearing and unavailable for
investment. The average amount of those reserve balances for the years
ended December 31, 2002 and 2001, were approximately $266,000 and
$460,000, respectively.
14
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(4) DEBT SECURITIES
Debt securities have been classified in the consolidated balance sheets
according to management's intent. The amortized cost and fair value of
held to maturity debt securities and the related unrealized holding
gains and losses were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
DECEMBER 31, 2002:
Securities available for sale:
Federal agency:
Notes and debentures $ 5,645,335 $ 26,746 $ - $ 5,672,081
=====================================================
Securities held to maturity:
Federal agency:
Notes and debentures $ 500,000 $ 56,094 $ - $ 556,094
Mortgage-backed securities 296,028 14,197 - 310,225
------------------------------------------------------
796,028 70,291 - 866,319
---------------------------------------------------
Municipal bonds 268,000 7,000 - 275,000
------------------------------------------------------
Total held to maturity $ 1,064,028 $ 77,291 $ - $ 1,141,319
=======================================================
DECEMBER 31, 2001:
Securities held to maturity:
Federal agency:
Notes and debentures $ 2,895,496 $ 62,569 $ - $ 2,958,065
Mortgage-backed securities 543,400 780 - 544,180
-------------------------------------------------------
3,438,896 63,349 - 3,502,245
-------------------------------------------------------
Municipal bonds 285,000 3,800 - 288,800
-------------------------------------------------------
Total held to maturity $ 3,723,896 $ 67,149 $ - $ 3,791,045
=======================================================
At December 31, 2002, federal agency securities with an amortized cost
of $56,961 and a fair value of $57,797 were pledged to secure public
deposits and certain borrowings.
The amortized cost and fair value of debt securities as of December 31,
2002, by contractual maturity, are shown below.
AVAILABLE FOR SALE HELD TO MATURITY
------------------ ----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
Due within one year $ - $ - $ 21,379 $ 22,059
Due after one year through
five years 4,378,193 4,394,831 591,816 650,603
Due after five years through
ten years 517,142 522,188 133,426 137,053
Due after ten years 750,000 755,062 21,379 21,379
-------------------------------------------------------------
5,645,335 5,672,081 768,000 831,094
-------------------------------------------------------------
Mortgage-backed securities - - 296,028 310,225
-------------------------------------------------------------
$ 5,645,335 $ 5,672,081 $ 1,064,028 $ 1,141,319
=============================================================
15
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(5) LOANS RECEIVABLE
Loans receivable at December 31, 2002 and 2001 consisted of the
following:
2002 2001
---- ----
Real estate mortgages:
Residential $ 10,617,270 $ 10,087,005
Commercial real estate 11,246,827 8,120,884
Residential construction 692,400 1,192,400
Commercial real estate construction 4,574,200 5,622,147
Commercial loans 27,960,327 28,330,444
Consumer loans 4,050,280 3,953,027
---------------------------------
59,141,304 57,305,907
Less: Undisbursed portion of construction loans (2,489,631) (1,942,917)
Add: Net deferred loan fees and costs 76,186 60,092
---------------------------------
Total loans $ 56,727,859 $ 55,423,082
=================================
An analysis of the allowance for loan losses is as follows:
2002 2001
---- ----
Beginning balances $ 460,603 $ 416,062
Provision for loan losses 1,523,183 106,000
Recoveries 2,498 2,816
Loans charged-off (413,964) (64,275)
---------------------------------
Ending balances $ 1,572,320 $ 460,603
=================================
The Bank had nonaccrual loans amounting to approximately $588,000 and
$346,000 at December 31, 2002 and 2001, respectively. The total
recorded investment in loans past due ninety days or more and still
accruing interest amounted to approximately $366,000 and $385,000 at
December 31, 2002 and 2001, respectively. The Bank had loans amounting
to approximately $639,000 and $252,000 specifically classified as
impaired at December 31, 2002 and 2001, respectively. The average
recorded investment in impaired loans amounted to approximately
$304,000 and $111,000 for the years ended December 31, 2002 and 2001,
respectively. The allowance for loan losses related to impaired loans
amounted to approximately $503,000 and $60,000 at December 31, 2002 and
2001, respectively. The bank recognized interest income of $6,224 on
impaired loans for the year ended 2002. No interest income was
recognized on impaired loans in 2001.
Subsequent to December 31, 2002 and prior to March 10, 2003, management
completed an analysis of certain delinquent and problem loans which
provided additional evidence about the collectibility of those loans as
of December 31, 2002 and the estimated allowance for loan losses
related to those loans as of that date. This analysis included a
revised evaluation of the collateral for certain collateral dependent
impaired loans and loans past due ninety days or more and still
accruing interest. The accompanying financial statements as of December
31, 2002, include the effects of the changes in management's estimate
of the allowance for loan losses resulting from this analysis.
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.
16
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(5 - continued)
The following table represents the aggregate activity for related party
loans which during the year ended December 31, 2002:
Beginning balance $ 3,230,488
New loans and advances 513,084
Payments (628,199)
---------
Ending balance $ 3,115,373
=========
(6) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
2002 2001
---- ----
Land and land improvements $ 985,868 $ 937,373
Building and improvements 1,076,755 1,122,050
Furniture and equipment 554,258 548,995
------------------------------
2,616,881 2,608,418
Less accumulated depreciation 350,441 261,844
------------------------------
Net book value $ 2,266,440 $ 2,346,574
=============================
(7) INCOME TAXES
The components of income tax expense (credit) were as follows:
2002 2001
---- ----
Current $ 254,033 $ 257,291
Deferred (385,488) 18,814
---------------------------
Totals $ (131,455) $ 276,105
============================
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 2002 and 2001 were as follows:
2002 2001
---- ----
Deferred tax assets (liabilities):
Allowance for loan losses $ 555,234 $ 160,246
Amortizable start-up costs - 2,570
Deferred insurance commissions 5,167 2,301
Deferred loan origination fees and costs, net (29,053) (22,652)
Nonaccrual loans 1,498 -
Depreciation (82,599) (77,706)
Unrealized gain on securities available for sale (10,594) -
-------------------------------
Net deferred tax asset $ 439,653 $ 64,759
===============================
17
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(7- continued)
The reconciliation of the income tax credit with the amount which would
have been provided at the federal statutory rate of 34 percent:
2002 2001
---- ----
Provision (credit) at statutory rate $ (133,801) $ 257,297
State income tax-net of federal tax benefit (12,587) 28,077
Tax exempt interest income (4,437) (5,122)
Nondeductible merger expenses 19,079 -
Other 291 (4,147)
-----------------------------
Total income tax expense $ (131,455) $ 276,105
============================
(8) DEPOSITS
The aggregate amount of time deposit accounts of $100,000 or more
amounted to approximately $26,394,000 and $18,810,000 at December 31,
2002 and 2001, respectively.
At December 31, 2002, scheduled maturities of time deposits were as
follows:
Year ending December 31:
2003 $ 36,527,173
2004 17,535,872
2005 3,971,821
2006 1,223,309
2007 and thereafter 721,882
-----------
Total $ 59,980,057
==========
The Bank held deposits of approximately $1,671,000 and $2,179,000 for
related parties at December 31, 2002 and 2001, respectively.
(9) EMPLOYEE BENEFIT PLAN
The Bank has a qualified defined contribution plan that allows
participating employees to make tax-deferred contributions under
Internal Revenue Code Section 401(k).
The Bank made matching contributions to the plan of $6,109 and $5,434
during 2002 and 2001, respectively.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding various
commitments and contingent liabilities, such as commitments to extend
credit and legal claims, which are not reflected in the balance sheet.
Commitments under outstanding standby letters of credit totaled
$160,000 at December 31, 2002.
18
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(10 - continued)
The following is a summary of the commitments to extend credit at
December 31, 2002 and 2001:
2002 2001
---- ----
Loan commitments:
Fixed rate $ 1,284,000 $ 606,212
Adjustable rate 445,000 117,000
Undisbursed portion of commercial and consumer
lines of credit 5,672,849 7,543,655
Undisbursed portion of residential construction loans 556,193 526,224
Undisbursed portion of commercial construction loans 1,933,438 1,416,693
------------------------------
Total commitments to extend credit $ 9,891,480 $ 10,209,784
==============================
(11) CONCENTRATIONS OF CREDIT RISK
At December 31, 2002, the Bank had concentrations of credit risk with
correspondent banks as follows:
Due from bank balances in excess of federal deposit
insurance limit - Bankers Bank of Kentucky $ 1,089,089
Federal funds sold:
Bankers Bank of Kentucky 7,246,000
Farmers Bank, Georgetown, Kentucky 4,000,000
Bank One 195,000
National City Bank 100,000
----------
$ 12,630,089
==========
(12) 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 10). The Bank uses the
same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount and type of collateral obtained, if
deemed necessary by the Bank upon extension of credit, varies and is
based on management's credit evaluation of the counterparty.
19
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(12 - continued)
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
Standby letters of credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Bank's
policy for obtaining collateral, and the nature of such collateral, is
essentially the same as that involved in making commitments to extend
credit.
The Bank has not been required to perform on any financial guarantees
and has not incurred any losses on commitments during the past two
years.
(13) STOCKHOLDERS' EQUITY AND DIVIDENDS
During 2001, the Company issued 29,550 shares of common stock at an
issue price of $35 per share for gross offering proceeds of $1,034,250.
Offering expenses of $45,732 were charged against the gross offering
proceeds.
The dividends which the Bank may pay to the Company are restricted by
federal banking regulations. Generally, subject to certain
restrictions, dividends may only be paid out of retained earnings.
(14) REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory-and
possibly additional discretionary-actions by regulators that, if
undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative
measures of the assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to quantitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2002, that the Company and the
Bank meet all capital adequacy requirements to which it is subject.
As of December 31, 2002, the most recent notification from the Federal
Reserve Bank categorized the Company and the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, each entity must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that management believes have changed either entity's
categories.
20
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(14 - continued)
The actual capital amounts and ratios are also presented in the table.
No amounts were deducted from capital for interest-rate risk in either
year.
MINIMUM
TO BE WELL
MINIMUM CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY: ACTION PROVISIONS:
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 2002:
TOTAL CAPITAL (TO RISK
WEIGHTED ASSETS):
CONSOLIDATED $ 7,570 11.9% $ 5,106 8.0% N/A
Bank $ 7,611 11.9% $ 5,110 8.0% $ 6,388 10.0%
TIER I CAPITAL (TO RISK
WEIGHTED ASSETS):
CONSOLIDATED $ 6,772 10.6% $ 2,553 4.0% N/A
Bank $ 6,813 10.7% $ 2,555 4.0% $ 3,833 6.0%
TIER I CAPITAL (TO AVERAGE
ASSETS):
CONSOLIDATED $ 6,772 7.9% $ 3,437 4.0% N/A
Bank $ 6,813 7.9% $ 3,437 4.0% $ 4,296 5.0%
AS OF DECEMBER 31, 2001:
TOTAL CAPITAL (TO RISK
WEIGHTED ASSETS):
CONSOLIDATED $ 7,495 12.2% $ 4,920 8.0% N/A
Bank $ 7,480 12.2% $ 4,920 8.0% $ 6,151 10.0%
TIER I CAPITAL (TO RISK
WEIGHTED ASSETS):
CONSOLIDATED $ 7,034 11.4% $ 2,460 4.0% N/A
Bank $ 7,019 11.4% $ 2,460 4.0% $ 3,691 6.0%
TIER I CAPITAL (TO AVERAGE
ASSETS):
CONSOLIDATED $ 7,034 8.2% $ 3,435 4.0% N/A
Bank $ 7,020 8.2% $ 3,435 4.0% $ 4,294 5.0%
(15) NET INCOME PER COMMON SHARE
Basic earnings per share is calculated by dividing net income by the
229,550 and 207,162 weighted average common shares outstanding during
2002 and 2001, respectively. The Company has no potential dilutive
common shares.
21
HOMETOWN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2002 AND 2001
(16) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAYMENTS FOR: 2002 2001
---- ----
Interest $ 2,653,995 $ 3,749,763
Taxes 234,488 468,850
NONCASH INVESTING ACTIVITY:
Transfer of loans to real estate
acquired through foreclosure $ 95,105 $ -
(17) ADVERTISING COSTS
Advertising costs are expensed when incurred. Advertising expense was
$38,915 and $43,219 for the years ended December 31, 2002 and 2001,
respectively.
22
PRO FORMA FINANCIAL INFORMATION
FIRST CAPITAL, INC.
The following unaudited pro forma condensed combined balance sheet as of
December 31, 2002 and the unaudited pro forma condensed combined statements of
income for the three months ended March 31, 2003 and the year ended December 31,
2002 give effect to the merger of First Capital, Inc. (First Capital) and
Hometown Bancshares, Inc. (Hometown), accounted for as a purchase.
The unaudited pro forma condensed combined financial information is based on the
historical consolidated financial statements of First Capital and Hometown under
the assumptions and adjustments set forth in the accompanying notes. The
unaudited pro forma condensed combined balance sheet gives effect to the merger
as if the merger had been consummated at the end of the period presented. The
unaudited pro forma condensed combined consolidated statements of income give
effect to the merger as if the merger had been consummated on January 1, 2002.
The unaudited pro forma condensed combined consolidated financial statements do
not give effect to the anticipated cost savings in connection with the merger.
The unaudited pro forma condensed combined consolidated financial statements
should be read in conjunction with the historical consolidated financial
statements of First Capital and Hometown, including the respective notes to
those statements. The pro forma information is not necessarily indicative of the
combined financial position or the results of operations in the future or of the
combined financial position or the results of operations which would have been
realized had the merger been consummated during the periods or as of the dates
for which the pro forma information is presented. We anticipate that the merger
will provide the combined company with financial benefits that include reduced
operating expenses and opportunity to earn more revenue. The pro forma
information, while helpful in illustrating the financial characteristics of the
new company under one set of assumptions does not attempt to predict or suggest
future results.
23
FIRST CAPITAL, INC. AND HOMETOWN BANCSHARES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 2002
(IN THOUSANDS) PRO FORMA
ADJUSTMENTS
FIRST -------------------------------- PRO FORMA
CAPITAL HOMETOWN DEBIT CREDIT COMBINED
ASSETS
Cash and due from banks $ 6,610 $ 2,002 $ 180 (d),(e) $ 5,626 $ 3,166
Interest bearing deposits with banks 6,044 902 - - 6,946
Securities available for sale, at fair value 64,980 5,672 45 (e) - 70,697
Securities held to maturity 1,474 1,064 - - 2,538
Federal funds sold - 11,541 - - 11,541
Loans receivable, net 215,996 60,749 124 (e) - 276,869
Federal Reserve Bank stock - 180 - (d) 180 -
Federal Home Loan Bank stock 2,716 200 - - 2,916
Premises and equipment 7,001 2,266 565 (c), (e) - 9,832
Goodwill - - 4,791 (e) - 4,791
Core deposit intangible - - 566 (e) - 566
Other assets 3,732 937 20 (c),(e) - 4,689
------------ ------------- ---------- --------- -------------
TOTAL ASSETS $ 308,553 $ 85,513 $ 6,291 $ 5,806 $ 394,551
============ ============= ========== ========= =============
LIABILITIES
Deposits $ 216,202 $ 78,425 $ - (e) $ 963 $ 295,590
Borrowed funds 53,776 - - - 53,776
Accrued interest payable 1,128 225 - - 1,353
Other liabilities 1,117 75 12 (a - c),(e) 638 1,818
------------ ------------- ---------- --------- -------------
Total Liabilities 272,223 78,725 12 1,601 352,537
------------ ------------- ---------- --------- -------------
STOCKHOLDERS' EQUITY
Preferred stock - - - - -
Common stock 26 5,973 5,973 (e) 3 29
Additional paid-in capital 12,955 - - (e) 6,134 19,089
Retained earnings 23,079 799 1,252 (a -c),(e) - 22,626
Accumulated other comprehensive income 971 16 16 (e) 971
Unearned stock compensation plans (584) - - - (584)
Treasury stock, at cost (117) - - - (117)
------------ ------------- ---------- --------- -------------
Total Stockholders' Equity 36,330 6,788 7,241 6,137 42,014
------------ ------------- ---------- --------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 308,553 $ 85,513 $ 7,253 $ 7,738 $ 394,551
============ ============= ========== ========= =============
See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
24
FIRST CAPITAL, INC. AND HOMETOWN BANCSHARES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS) PRO FORMA
ADJUSTMENTS
FIRST ---------------------------- PRO FORMA
CAPITAL HOMETOWN DEBIT CREDIT COMBINED
INTEREST INCOME
Loans, including fees $ 3,916 $ 910 $ 5 (f) $ - $ 4,821
Securities 713 48 11 (f) - 750
Dividends 37 5 - - 42
Federal funds sold and interest-bearing
deposits with banks 42 44 - - 86
------------ ------------ ---------- ---------- ------------
Total interest income 4,708 1,007 16 - 5,699
------------ ------------ ---------- ---------- ------------
INTEREST EXPENSE
Deposits 1,327 492 - (f) 94 1,725
Borrowed funds 735 - - - 735
------------ ------------ ---------- ---------- ------------
Total interest expense 2,062 492 - 94 2,460
------------ ------------ ---------- ---------- ------------
Net interest income 2,646 515 16 94 3,239
Provision for loan losses 150 29 - - 179
------------ ------------ ---------- ---------- ------------
Net interest income after provision
for loan losses 2,496 486 16 94 3,060
NONINTEREST INCOME
Service charges on deposit accounts 370 40 - - 410
Commission income 60 23 - - 83
Gain on sale of securities 51 - - - 51
Gain on sale of mortgage loans - - - - -
Other income 28 8 - - 36
------------ ------------ ---------- ---------- ------------
Total noninterest income 509 71 - - 580
------------ ------------ ---------- ---------- ------------
NONINTEREST EXPENSES
Compensation and benefits 1,024 728 - (f) 270 1,482
Occupancy and equipment 194 84 4 (f) - 282
Other expenses 700 421 15 (f) 309 827
------------ ------------ ---------- ---------- ------------
Total noninterest expenses 1,918 1,233 19 579 2,591
------------ ------------ ---------- ---------- ------------
Income before income taxes 1,087 (676) 35 673 1,049
Income tax expense 366 (175) 141 (f) - 332
------------ ------------ ---------- ---------- ------------
NET INCOME $ 721 $ (501) $ 176 $ 673 $ 717
============ ============ ========== ========== ============
NET INCOME PER COMMON SHARE, BASIC $ 0.29 $ (2.18) $ 0.26
============ ============ ============
NET INCOME PER COMMON SHARE, DILUTED $ 0.28 $ (2.18) $ 0.25
============ ============ ============
See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
25
FIRST CAPITAL, INC. AND HOMETOWN BANCSHARES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS) PRO FORMA
ADJUSTMENTS
FIRST --------------------------- PRO FORMA
CAPITAL HOMETOWN DEBIT CREDIT COMBINED
INTEREST INCOME
Loans, including fees $ 15,490 $ 4,398 $ 19 (g) $ - $ 19,869
Securities 3,089 363 44 (g) - 3,408
Dividends 143 22 - - 165
Federal funds sold and interest-bearing
deposits with banks 190 221 - - 411
------------ ------------ ---------- ---------- ------------
Total interest income 18,912 5,004 63 - 23,853
------------ ------------ ---------- ---------- ------------
INTEREST EXPENSE
Deposits 6,090 2,553 - (g) 680 7,963
Borrowed funds 2,712 - - - 2,712
------------ ------------ ---------- ---------- ------------
Total interest expense 8,802 2,553 - 680 10,675
------------ ------------ ---------- ---------- ------------
Net interest income 10,110 2,451 63 680 13,178
Provision for loan losses 305 1,523 - - 1,828
------------ ------------ ---------- ---------- ------------
Net interest income after provision
for loan losses 9,805 928 63 680 11,350
NONINTEREST INCOME
Service charges on deposit accounts 1,382 292 - - 1,674
Commission income 261 12 - - 273
Gain on sale of securities 18 - - - 18
Gain on sale of mortgage loans - 129 - - 129
Other income 76 38 - - 114
------------ ------------ ---------- ---------- ------------
Total noninterest income 1,737 471 - - 2,208
------------ ------------ ---------- ---------- ------------
NONINTEREST EXPENSES
Compensation and benefits 3,554 1,109 - - 4,663
Occupancy and equipment 746 175 15 (g) - 936
Other expenses 2,231 508 61 (g) - 2,800
------------ ------------ ---------- ---------- ------------
Total noninterest expenses 6,531 1,792 76 - 8,399
------------ ------------ ---------- ---------- ------------
Income before income taxes 5,011 (393) 139 680 5,159
Income tax expense 1,763 (131) 184 (g) - 1,816
------------ ------------ ---------- ---------- ------------
NET INCOME $ 3,248 $ (262) $ 323 $ 680 $ 3,343
============ ============ ========== ========== ============
NET INCOME PER COMMON SHARE, BASIC $ 1.31 $ (1.14) $ 1.21
============ ============ ============
NET INCOME PER COMMON SHARE, DILUTED $ 1.30 $ (1.14) $ 1.21
============ ============ ============
See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
26
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial information is based on the
historical consolidated financial statements of First Capital and Hometown and
is presented to give effect to the merger described in Note 1. The merger will
be accounted for as a purchase under the assumptions and adjustments set forth
below. The unaudited pro forma condensed combined financial statements do not
give effect to any anticipated cost savings in connection with the merger.
The unaudited pro forma condensed combined financial statements should be read
in conjunction with the historical consolidated financial statements of First
Capital and Hometown, including the respective notes to those statements. The
pro forma information is not necessarily indicative of the combined financial
position or the results of operations in the future or of the combined financial
position or the results of operations that would have been realized had the
merger been consummated as of the date or during the periods for which the pro
forma information is presented.
NOTE 1. BASIS OF PRESENTATION
On March 20, 2003, First Capital consummated its acquisition of Hometown, a bank
holding company located in New Albany, Indiana, pursuant to an Agreement and
Plan of Merger dated September 25, 2002. Hometown is the parent company of
Hometown National Bank, which was merged with and into the Bank.
Pursuant to the terms of the merger agreement, Hometown stockholders who elected
to receive Company stock received 2.487 shares of Company common stock and
Hometown shareholders who elected to receive cash received $46.50 in cash for
each share of Hometown common stock. Hometown stockholders who did not submit
properly completed election forms within the required timeframe received 0.773
shares of Company common stock and $32.05 in cash for each share of Hometown
common stock. The Company issued 285,446 shares of common stock and paid
approximately $5.4 million in cash consideration to former Hometown
stockholders. The value assigned to the common shares issued in the transaction
was approximately $6.1 million determined by the average closing price of the
Company's common stock over a twenty-day period ending March 17, 2003. The
transaction was accounted for under the purchase method of accounting.
Accordingly, the results of operations of Hometown have been included in the
Company's results of operations since the date of acquisition. Under the
purchase method of accounting, the purchase price is allocated to the respective
assets acquired and liabilities assumed based on their estimated fair values,
net of applicable income tax effects. The excess of cost over the fair value of
the net assets acquired has been recorded as goodwill.
The unaudited pro forma condensed combined balance sheet assumes the merger was
consummated on December 31, 2002. The unaudited pro forma condensed combined
statements of income give effect to the merger as if the merger occurred on
January 1, 2002.
27
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE 2. ACCOUNTING POLICIES AND FINANCIAL STATEMENT CLASSIFICATIONS
The accounting policies of both companies are in the process of being reviewed
for consistency. As a result of this review, certain conforming accounting
adjustments may be necessary. The nature and extent of these adjustments have
not been determined but are not expected to be significant.
NOTE 3. MERGER- AND RESTRUCTURING-RELATED CHARGES
A liability of $270,000 (pre-tax) has been recorded in the unaudited pro forma
combined balance sheet to reflect First Capital's merger- and
restructuring-related charges in connection with the merger. This liability
resulted in a $55,000 after-tax charge to retained earnings in the unaudited pro
forma combined balance sheet.
Merger- and restructuring-related charges include additional office supplies and
signage expenses relating to the name change at the Hometown locations, expenses
related to conversion of Hometown's data processing systems, and capital
expenditures for data processing equipment. The effect of the proposed charge
has been reflected in the unaudited pro forma combined balance sheet as of
December 31, 2002. However, since the charges are nonrecurring, they have not
been reflected in the unaudited pro forma combined statements of income. (See
note 6)
NOTE 4. PRO FORMA EARNINGS PER SHARE
The pro forma combined earnings per share information for the three month period
ended March 31, 2003 and the year ended December 31, 2002, has been computed
based on the pro forma combined weighted average common shares outstanding for
each period as if the merger had occurred at the beginning of the earliest
period presented. The basic and fully diluted weighted average common shares
outstanding for First Capital were adjusted to include the converted Hometown
weighted average common shares outstanding. In accordance with the Agreement,
50% of the outstanding common shares of Hometown will be converted into common
shares of First Capital at an exchange ratio of 2.487.
28
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE 5. PRO FORMA BALANCE SHEET ADJUSTMENTS
The following is a summary of the pro forma adjustments to reflect the business
combination and the effect of merger and restructuring related expenses in the
pro forma balance sheet:
DEBIT CREDIT
(IN THOUSANDS)
(a) Merger transaction costs of Hometown
Retained earnings $ 225
Other liabilities $ 225
Pro forma adjustment to recognize a liability for merger transaction
costs of Hometown incurred prior to or coincident with consummation
of the merger. (No income tax benefit has been assumed)
(b) Employee severance costs of Hometown
Retained earnings $ 173
Other liabilities $ 173
Pro forma adjustment to recognize a liability, net of tax benefit,
for amounts payable by Hometown pursuant to the severance and
non-competition agreement with C. Ronald Clark coincident with
consummation of the merger. (Total severance and non-competition
payments to Mr. Clark of $270,000, net of income tax benefit of
$97,000)
(c) Non-recurring merger and restructuring -related costs
Premises and equipment $ 165
Other assets 20
Retained earnings 55
Other liabilities $ 240
Pro forma adjustment to recognize a liability, net of tax benefit,
for non-recurring merger and restructuring-related expenses and for
capital expenditures for data processing equipment, software and
related costs. See Note 3 for additional information.
(d) Redemption of restricted equity securities of Hometown
Cash and due from banks $ 180
Federal Reserve Bank stock $ 180
Pro forma adjustment to record expected redemption of Federal Reserve
Bank stock of Hometown upon consummation of merger.
29
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE 5. PRO FORMA BALANCE SHEET ADJUSTMENTS - CONTINUED
DEBIT CREDIT
(IN THOUSANDS)
(e) Purchase accounting adjustments
Core deposit intangible $ 566
Goodwill 4,791
Securities available for sale 45
Loans receivable 124
Premises and equipment 400
Other liabilities (deferred income taxes) 12
Common stock 5,973
Retained earnings 799
Accumulated other comprehensive income 16
Cash and due from banks $ 5,626
Common stock 3
Additional paid-in capital 6,134
Deposits 963
Pro forma adjustments to recognize the fair value adjustments
assigned to loans, time deposits, and premises and equipment, and the
core deposit intangible and goodwill for the acquisition of Hometown
using the purchase method of accounting at December 31, 2002. The
core deposit intangible represents the economic value of core
deposits as a funding source. Core deposits is defined as total
demand and savings deposits of Hometown of approximately $19 million.
The core deposit intangible is amortized over an estimated economic
life of 9.3 years.
Following is a summary of the excess of cost over the fair value of
acquired net assets (goodwill) recognized in the pro forma balance
sheet:
(IN THOUSANDS)
Cost of acquired entity:
Common stock of First Capital issued in
exchange for 114,775 common shares of Hometown
Bancshares at an exchange ratio of 2.487,
285,446 shares at an average closing price of $21.50 $ 6,137
Cash consideration for 114,775 common shares of
Hometown Bancshares (50%) at $46.50 per share 5,337
Direct costs of the business combination 289
------------
Total cost of Hometown $ 11,763
Pro forma fair value of acquired assets and (liabilities) at
12/31/02:
Total carrying amount of assets $ 85,513
Unrealized gain on securities held to maturity 45
Fair value adjustment for acquired loans 124
Fair value adjustment for premises and equipment 400
Value of acquired core deposit intangible 566
Net deferred tax asset related to purchase adjustments 12
Total carrying amount of liabilities (78,725)
Fair value adjustment for time deposit liabilities (963)
------------
Pro forma net assets acquired 6,972
------------
Goodwill $ 4,791
============
30
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE 6. PRO FORMA STATEMENT OF INCOME ADJUSTMENTS
The following is a summary of the pro forma adjustments to reflect the effect of
the purchase accounting adjustments and the effect of nonrecurring merger
related expenses in the pro forma statement of income for the three month period
ended March 31, 2003:
DEBIT CREDIT
(IN THOUSANDS)
(f)
Interest income on loans $ 5
Interest income on securities 11
Occupancy and equipment - depreciation 4
Other expenses - amortization of core deposit
intangible 15
Income taxes 141
Interest expense on deposits $ 94
Compensation and benefits - nonrecurring
severance benefits 270
Other expenses - nonrecurring merger related
expenses 309
The following is a summary of the pro forma adjustments to reflect the effect of
the purchase accounting adjustments in the pro forma statement of income for the
year ended December 31, 2002:
(g)
Interest income on loans $ 19
Interest income on securities 44
Occupancy and equipment - depreciation 15
Other expenses - amortization of core deposit
intangible 61
Income taxes 184
Interest expense on deposits $ 680
The above pro forma adjustments are made to recognize the amortization of the
purchase accounting fair value adjustments for loans, time deposits, and
securities, and the core deposit intangible amortization and depreciation
expense related to the fair value adjustment on premises and equipment for the
respective periods assuming the merger took place on January 1, 2002. The fair
value adjustment for securities, loans, premises and equipment and the core
deposit intangible have been amortized using the straight-line method over the
estimated economic lives of the acquired assets. The fair value adjustment on
time deposits represents a discount and has been amortized based on the
contractual maturities of the time deposits acquired. The pro forma adjustment
for income taxes has been recognized using a combined effective tax rate of 34%.
The nonrecurring merger-related expenses incurred during the three month period
ended March 31, 2002 includes legal and professional expenses incurred by
Hometown to facilitate the merger and no tax benefit has been assumed.
31
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS - CONTINUED
NOTE 6. PRO FORMA STATEMENT OF INCOME ADJUSTMENTS - CONTINUED
As noted above, the fair value adjustment for the time deposit liabilities
represents a significant discount to be recognized in earnings following the
merger. This fair value adjustment results from current market interest rates
which are lower than the contractual rates of the acquired time deposits. The
fair value adjustment is expected to be recognized in earnings based on the
contractual maturities of the time deposits during each of the next four years
as follows:
(IN THOUSANDS)
Year ending December 31:
2003 $ 600
2004 287
2005 63
2006 13
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$ 963
==============