1
Exhibit 13
Consolidated Financial Statements
CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
Years Ended December 31, 1997, 1996 and 1995
with Report of Independent Auditors
[ERNST & YOUNG LLP LOGO]
2
Capital Holdings, Inc. and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
CONTENTS
Report of Independent Auditors........................................1
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets...........................................2
Consolidated Statements of Income.....................................3
Consolidated Statements of Shareholders' Equity.......................4
Consolidated Statements of Cash Flows.................................5
Notes to Consolidated Financial Statements............................6
3
[ERNST & YOUNG LLP LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Capital Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Capital
Holdings, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Capital Holdings,
Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
January 16, 1998
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Capital Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31
1997 1996
---------------------------------------------
ASSETS
Cash and due from banks $ 15,291,951 $ 13,958,201
Federal funds sold 8,000,000
---------------------------------------------
Cash and cash equivalents 23,291,951 13,958,201
Investment securities available-for-sale, at fair
value (amortized cost $165,465,350 in 1997
and $158,405,065 in 1996) 167,520,873 159,209,293
Loans 469,036,091 380,160,315
Less allowance for loan losses 6,947,377 5,942,377
---------------------------------------------
Net loans 462,088,714 374,217,938
Bank premises and equipment 9,548,218 6,010,385
Interest receivable and other assets 7,090,107 6,329,983
---------------------------------------------
TOTAL ASSETS $ 669,539,863 $ 559,725,800
=============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing $ 529,791,363 $ 430,324,792
Noninterest bearing 49,869,745 40,418,300
---------------------------------------------
Total deposits 579,661,108 470,743,092
Short-term borrowings 30,295,269 42,330,560
Interest payable and other liabilities 9,036,804 5,062,044
---------------------------------------------
Total liabilities 618,993,181 518,135,696
Shareholders' equity:
Common stock, no par value, $.50 stated value;
3,000,000 shares authorized,
1,991,922 shares issued and
outstanding (1,897,508 in 1996) 995,961 948,754
Capital in excess of stated value 33,179,413 30,893,093
Retained earnings 15,014,646 9,217,448
Net unrealized holding gains on securities
available-for-sale, net of tax 1,356,662 530,809
---------------------------------------------
Total shareholders' equity 50,546,682 41,590,104
---------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 669,539,863 $ 559,725,800
=============================================
See accompanying notes.
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Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Income
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------------------------------------------------
INTEREST INCOME:
Loans, including fees $ 36,924,103 $ 29,899,157 $ 25,465,465
Securities:
Taxable 9,671,309 8,914,952 8,385,922
Exempt from federal income tax 697,916 682,893 671,365
Federal funds sold 299,661 141,916 229,409
------------------------------------------------------------
Total interest income 47,592,989 39,638,918 34,752,161
INTEREST EXPENSE:
Deposits 25,651,782 20,450,873 18,298,948
Short-term borrowings 1,373,872 1,854,351 1,665,514
------------------------------------------------------------
Total interest expense 27,025,654 22,305,224 19,964,462
------------------------------------------------------------
Net interest income 20,567,335 17,333,694 14,787,699
Provision for loan losses 1,005,000 980,000 850,000
------------------------------------------------------------
Net interest income after provision
for loan losses 19,562,335 16,353,694 13,937,699
OTHER INCOME:
Securities (losses) gains--net (1,797) (55,434) 81,185
Other 1,207,137 929,727 672,092
------------------------------------------------------------
Total other income 1,205,340 874,293 753,277
OTHER EXPENSES:
Salaries and employee benefits 5,669,559 4,632,241 3,740,793
FDIC and other insurance 62,199 2,000 415,569
Other 5,020,232 4,186,868 3,433,653
------------------------------------------------------------
Total other expenses 10,751,990 8,821,109 7,590,015
------------------------------------------------------------
Income before provision for federal
income tax 10,015,685 8,406,878 7,100,961
Provision for federal income tax 3,234,000 2,681,000 2,256,000
------------------------------------------------------------
NET INCOME $ 6,781,685 $ 5,725,878 $ 4,844,961
============================================================
Net income per share:
Basic $ 3.57 $ 3.04 $ 2.59
Diluted 3.43 2.94 2.51
See accompanying notes.
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Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Capital in Total
Common Excess of Retained Unrealized Shareholders'
Stock Stated Value Earnings Gains (Losses) Equity
--------------------------------------------------------------------
Balance at January 1, 1995 $831,717 $23,953,756 $ 4,852,695 $(2,073,575) $27,564,593
Issuance of 14,839 shares of common stock at $29.00 per share 7,420 422,911 430,331
Common stock dividend, 99,455 shares 49,727 2,759,876 (2,819,518) (9,915)
Net income 4,844,961 4,844,961
Net unrealized gain on securities available-for-sale, net of
tax effect of $1,703,000 3,306,092 3,306,092
--------------------------------------------------------------------
Balance at December 31, 1995 888,864 27,136,543 6,878,138 1,232,517 36,136,062
Issuance of 13,010 shares of common stock at $33.50 per share 6,505 429,330 435,835
Common stock dividend, 106,324 shares 53,162 3,322,625 (3,386,568) (10,781)
Exercise of 447 common stock options at $10.78 per share 223 4,595 4,818
Net income 5,725,878 5,725,878
Net unrealized loss on securities available-for-sale, net of
tax effect of $361,000 (701,708) (701,708)
--------------------------------------------------------------------
Balance at December 31, 1996 948,754 30,893,093 9,217,448 530,809 41,590,104
Issuance of 10,427 shares of common stock 5,213 452,812 458,025
Cash dividend--$.51 per share (984,487) (984,487)
Exercise of 83,987 common stock options, including tax benefit 41,994 1,833,508 1,875,502
Net income 6,781,685 6,781,685
Net unrealized gain on securities available-for-sale, net of
tax effect of $425,000 825,853 825,853
--------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $995,961 $33,179,413 $15,014,646 $ 1,356,662 $50,546,682
====================================================================
See accompanying notes.
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Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 6,781,685 $ 5,725,878 $ 4,844,961
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,005,000 980,000 850,000
Depreciation and amortization 469,909 301,854 286,597
Amortization and accretion of security premiums
and discounts (73,781) (54,105) (88,941)
Loss (gain) on sale of investment securities 1,797 55,434 (81,185)
Deferred income tax (credit) (71,200) (333,200) (247,000)
Changes in assets and liabilities:
Interest receivable and other assets (1,114,366) (450,990) (524,979)
Interest payable and other liabilities 3,636,133 851,910 508,328
------------------------------------------------------
Total adjustments 3,853,492 1,350,903 702,820
------------------------------------------------------
Net cash provided by operating activities 10,635,177 7,076,781 5,547,781
INVESTING ACTIVITIES
Purchases of held-to-maturity securities (1,194,294)
Purchases of available-for-sale securities (48,375,145) (63,954,536) (25,102,365)
Net increase in loans (88,875,776) (55,369,471) (73,604,609)
Purchase of bank premises and equipment (4,007,742) (1,829,085) (875,494)
Proceeds from sales of available-for-sale securities 28,999,960 35,432,969 35,044,038
Proceeds from maturities of available-for-sale securities 12,386,884 8,874,359
Proceeds from maturities of held-to-maturity securities 5,707,506
------------------------------------------------------
Net cash used in investing activities (99,871,819) (76,845,764) (60,025,218)
FINANCING ACTIVITIES
Net increase in deposits 108,918,016 63,121,569 50,088,811
Net (decrease) increase in short-term borrowings (12,035,291) 7,127,852 6,169,368
Issuance of common stock 2,333,527 440,653 430,331
Cash dividends paid (645,860) (10,781) (9,915)
------------------------------------------------------
Net cash provided by financing activities 98,570,392 70,679,293 56,678,595
------------------------------------------------------
Increase in cash and cash equivalents 9,333,750 910,310 2,201,158
Cash and cash equivalents at beginning of year 13,958,201 13,047,891 10,846,733
------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 23,291,951 $ 13,958,201 $ 13,047,891
======================================================
SUPPLEMENTAL DISCLOSURES
Interest paid $ 26,386,253 $ 22,119,961 $ 19,324,820
======================================================
Income taxes paid $ 3,325,000 $ 2,975,000 $ 2,498,998
======================================================
NONCASH OPERATING ACTIVITIES
Change in deferred income taxes on net unrealized
gains or losses on available-for-sale securities $ 425,439 $ (361,482) $ 1,703,139
======================================================
NONCASH INVESTING ACTIVITIES
Change in net unrealized gain (loss) on
available-for-sale securities $ 1,251,292 $ (1,063,190) $ 5,009,232
======================================================
Transfer of held to maturity securities to
available-for-sale securities $ - $ - $ 67,345,338
======================================================
See accompanying notes.
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Capital Holdings,
Inc. (the Company) and its wholly-owned subsidiaries, Capital Bank, N.A. (the
Bank) and CBNA Building Company (CBNA). The Bank operates in the western part of
Lucas County and a portion of the extreme northwest part of Wood County in
northwestern Ohio as a national banking association and focuses on corporate,
executive and professional customers, with the primary emphasis on deposits from
and commercial loans to businesses and professionals. All significant
intercompany balances and transactions have been eliminated.
The Bank is subject to the regulations of certain federal agencies and undergoes
periodic examinations by those regulatory authorities.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company has
defined cash equivalents as due from banks and federal funds sold with a
maturity of three months or less at date of purchase. The carrying amounts
reported in the balance sheet for cash and cash equivalents approximate those
assets' fair values.
SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-MATURITY
Management determines the appropriate classification of investment securities at
the time of purchase. If the Company has the positive intent and ability to hold
debt securities to maturity and designates them as held-to-maturity, such
securities are stated at amortized cost. Available-for-sale securities are
stated at fair value, with the unrealized gains and losses, net of income tax,
reported as a separate component of shareholders' equity. The Company has no
trading securities.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Interest and dividends are included in interest income from
investments. The cost of securities sold is based on the specific identification
method.
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Currently, the Company invests only in on-balance-sheet derivative securities as
part of the overall asset and liability management process. All such securities
owned at December 31, 1997 and 1996 are issued by U. S. Government sponsored
agencies and represent approximately .7% and 1.3%, respectively, of total
assets.
LOANS
The Bank grants commercial, real estate and consumer loans to customers
primarily in northwest Ohio. Interest on loans is accrued by using the simple
interest method on the principal amounts outstanding. Loan origination and
commitment fees are being deferred and amortized over the estimated life of the
related loans as a yield adjustment.
ALLOWANCE FOR LOAN LOSSES
Inherent to the preparation of financial statements in conformity with generally
accepted accounting principles is the use of accounting estimates. These
estimates are used, when uncertainties exist regarding future events, to
determine the balances in asset and liability accounts. Most significantly, the
Bank uses estimates in determining the value of the allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses
charged to operating expense. Loans are charged off against the allowance for
loan losses when management believes that the loan is impaired or the
collectibility of the principal is unlikely. The allowance is the estimated
amount that management believes will be adequate to absorb potential losses on
existing loans that may become uncollectible, based on evaluations of the
collectibility of loans. The evaluations take into consideration such factors as
changes in the composition and size of the loan portfolio, overall portfolio
quality, review of specific problem loans, current economic conditions and
industry guidelines. While management believes it uses the best information
available to make evaluations, future adjustments to the allowance for loan
losses may be necessary in circumstances that differ substantially from
assumptions in making the evaluations.
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is doubtful.
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- Continued
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
DEPRECIATION
Depreciation of bank premises and equipment is determined using straight-line
rates over estimated useful lives.
DEPOSITS
Interest is paid on customers' deposits at varying rates and periods depending
on the extent, if any, of minimum balance and holding period requirements.
RETIREMENT PLANS
The Bank maintains a retirement savings plan for substantially all employees.
Within certain limitations, contributions can be made by participants on a
pre-tax basis, and the Bank may contribute an amount equal to a certain
percentage, as determined annually by the Board of Directors, of the
participants' semi-monthly contributions. The plan provides for discretionary
profit sharing contributions as determined by the Bank's management. The Company
also maintains a Supplemental Executive Retirement Plan for certain key
management employees. Total expense under these plans in 1997, 1996 and 1995 was
approximately $389,000, $257,000 and $220,000, respectively.
EARNINGS PER SHARE
The Company adopted Financial Accounting Standards Board ("FASB") Statement No.
128, Earnings Per Share effective December 31, 1997. SFAS Statements No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share is calculated by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the Statement 128 requirements.
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
REPORTING COMPREHENSIVE INCOME AND DISCLOSING SEGMENT INFORMATION
FASB Statement Numbers 130 and 131 require the Company to report comprehensive
income and make disclosures about segments meeting specific criteria for fiscal
years beginning after December 15, 1997. The Company will adopt Statement
Numbers 130 and 131 as of January 1, 1998. The impact of adopting these
statements is not expected to be material.
2. CASH AND DUE FROM BANKS
At December 31, 1997 and 1996, approximately $3,687,000 and $2,354,000,
respectively, was restricted due to requirements of the Federal Reserve Board to
maintain certain average reserve balances.
3. INVESTMENT SECURITIES
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities (FAS No. 115). In November of 1995, the Financial
Accounting Standards Board issued "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" (the Guide).
In implementing the Guide, a one time opportunity was available for a company to
reassess its securities classifications and transfer any or all held-to-maturity
securities to available-for-sale. In accordance with the provisions of the
Guide, the Company elected to transfer all of its held-to-maturity securities at
December 28, 1995 to available-for-sale, at fair value of approximately
$67,300,000.
The following is a summary of available-for-sale securities:
DECEMBER 31, 1997
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------
Debt securities:
U. S. Government and
agency obligations $ 128,850,936 $ 1,463,782 $ 291,451 $ 130,023,267
Corporate 15,421,610 200,902 8,481 15,614,031
Municipal 13,497,064 541,136 14,038,200
Mortgage-backed 3,101,840 4,026 17,961 3,087,905
-----------------------------------------------------------------------
160,871,450 2,209,846 317,893 162,763,403
Other securities 4,593,900 163,570 4,757,470
-----------------------------------------------------------------------
TOTAL $ 165,465,350 $ 2,373,416 $ 317,893 $ 167,520,873
=======================================================================
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
3. INVESTMENT SECURITIES--CONTINUED
DECEMBER 31, 1996
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------
Debt securities:
U. S. Government and
agency obligations $ 120,830,661 $ 1,092,858 $ 728,601 $ 121,194,918
Corporate 17,371,584 155,030 32,078 17,494,536
Municipal 13,313,211 363,487 15,375 13,661,323
Mortgage-backed 3,118,009 4,953 36,046 3,086,916
-----------------------------------------------------------------------
154,633,465 1,616,328 812,100 155,437,693
Other securities 3,771,600 3,771,600
-----------------------------------------------------------------------
TOTAL $ 158,405,065 $ 1,616,328 $ 812,100 $ 159,209,293
=======================================================================
Mortgage-backed securities consist primarily of U. S. Government agency
obligations. The mortgage-backed securities have various stated maturities
through December 2005. The estimated weighted average maturity of this segment
of the portfolio is 1.0 years.
The carrying value of securities available-for-sale that are pledged to secure
securities sold under agreements to repurchase and other deposits was
$107,076,000 and $65,304,000 at December 31, 1997 and 1996, respectively.
Sales of investment securities resulted in realized gains and losses for the
year ended December 31 as follows:
1997 1996 1995
------------------------------------------------
Securities gains $ 24,899 $ 37,987 $ 128,837
Securities losses (26,696) (93,421) (47,652)
------------------------------------------------
NET (LOSS) GAIN $ (1,797) $ (55,434) $ 81,185
================================================
The amortized cost and fair value of investment securities at December 31, 1997
by contractual maturity are shown below. The contractual maturity is utilized
below except for mortgage-backed securities which use expected maturities based
on prepayment trends at the date of acquisition. Expected maturities differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
3. INVESTMENT SECURITIES--CONTINUED
Amortized Fair
Cost Value
-------------------------------------------
Debt securities, excluding
mortgage-backed securities:
Due in one year or less $ 16,181,733 $ 16,222,349
Due after one year through five years 86,744,801 87,467,594
Due after five years through ten years 53,771,027 54,796,838
Due after ten years 1,072,049 1,188,717
-------------------------------------------
157,769,610 159,675,498
Mortgage-backed securities:
Due in one year or less 1,094,431 1,093,435
Due after one year through five years 2,007,409 1,994,470
-------------------------------------------
3,101,840 3,087,905
-------------------------------------------
Total debt securities 160,871,450 162,763,403
Other securities 4,593,900 4,757,470
-------------------------------------------
TOTAL $ 165,465,350 $ 167,520,873
===========================================
4. LOANS
The carrying amount of loans, classified by type, at December 31 are as follows:
1997 1996
--------------------------------------------
Commercial $ 103,060,887 $ 79,492,459
Real estate:
Residential--first mortgage 104,659,213 86,749,725
Commercial--owner occupied 99,537,241 76,673,023
Commercial--investment 130,107,734 105,275,162
Consumer 27,848,835 26,995,179
Other 4,507,631 5,613,398
--------------------------------------------
469,721,541 380,798,946
Less deferred loan fees 685,450 638,631
--------------------------------------------
469,036,091 380,160,315
Less allowance for loan losses 6,947,377 5,942,377
--------------------------------------------
$ 462,088,714 $ 374,217,938
============================================
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
4. LOANS--CONTINUED
Transactions affecting the allowance for loan losses for the year ended December
31 are summarized below:
1997 1996 1995
---------------------------------------------------------
Balance--January 1 $ 5,942,377 $ 4,960,000 $ 4,110,000
Provision for loan losses 1,005,000 980,000 850,000
Recoveries 2,377
---------------------------------------------------------
BALANCE--DECEMBER 31 $ 6,947,377 $ 5,942,377 $ 4,960,000
=========================================================
The Bank has granted loans to certain directors of the Company and to their
affiliates. Such loans are made in the ordinary course of business at the Bank's
normal credit terms including interest rates and collateralization, and do not
represent more than a normal risk of collection. Loans to directors, executive
officers and related individuals and entities totaled approximately $15,637,000
and $14,810,000 at December 31, 1997 and 1996, respectively.
During 1997, $7,402,000 of new loans were made and collections and repayments
totaled $6,575,000.
5. BANK PREMISES AND EQUIPMENT
Major classes of bank premises and equipment at December 31 are as follows:
1997 1996
-----------------------------------------
Cost:
Land and improvements $ 2,076,648 $ 1,801,696
Buildings and improvements 6,765,301 2,393,053
Construction in progress 1,634,958
Equipment 1,866,464 1,308,285
Furniture and fixtures 797,373 491,028
-----------------------------------------
11,505,786 7,629,020
Less accumulated depreciation 1,957,568 1,618,635
-----------------------------------------
$ 9,548,218 $ 6,010,385
=========================================
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
6. DEPOSITS
The carrying amounts of deposits, classified by type, at December 31 are as
follows:
1997 1996
---------------------------------------------
Noninterest bearing demand $ 49,869,745 $ 40,418,300
Interest checking 146,291,238 122,510,259
Savings 17,296,887 18,091,443
Certificates of deposit of $100,000 or more 206,451,627 138,324,266
Other time deposits 159,751,611 151,398,824
---------------------------------------------
$ 579,661,108 $ 470,743,092
=============================================
The maturity distribution of certificates of deposit issued in amounts of
$100,000 and over and outstanding at December 31, 1997 is:
Three months or less $ 93,831,121
Over three and through six months 34,268,133
Over six and through twelve months 34,533,345
Over twelve months 43,819,028
---------------------
$ 206,451,627
=====================
7. SHORT-TERM BORROWINGS
Short-term borrowings, which are comprised of various types of funds at December
31 are summarized below:
1997 1996
------------------------------------------
Securities sold under agreements to
repurchase $ 14,395,269 $ 15,530,560
Federal funds borrowed 7,800,000
Advances from FHLB 15,900,000 19,000,000
------------------------------------------
TOTAL SHORT-TERM BORROWINGS $ 30,295,269 $ 42,330,560
==========================================
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
7. SHORT-TERM BORROWINGS--CONTINUED
At December 31, 1997 and 1996, the Company had $36,200,000 and $8,150,000,
respectively, of unused lines of credit to obtain short-term financing.
The maximum amount of securities sold under agreements to repurchase during 1997
was $14,395,000 and the average for the year was $12,926,000. The underlying
securities were under the Company's control.
Advances from the Federal Home Loan Bank have mortgage loans pledged as
collateral of $23,850,000 and $28,500,000 at December 31, 1997 and 1996,
respectively.
Included in the securities sold under agreements to repurchase were $1,000,000
in 1996 pledged to the City of Sylvania. The weighted average maturity of the
repurchase agreements is 0.1 month in 1996.
8. FEDERAL INCOME TAX
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31 are as
follows:
1997 1996
----------------------------------------
Deferred tax liabilities:
Unrealized net holding gains on
securities available for sale $ 698,000 $ 273,000
Tax over book depreciation 126,000 101,000
Other 304,000 90,000
----------------------------------------
Total deferred tax liabilities 1,128,000 464,000
Deferred tax assets:
Allowance for loan losses 2,113,000 1,772,000
Deferred loan fees 57,000 69,000
Other 44,000 63,000
----------------------------------------
Total deferred tax assets 2,214,000 1,904,000
----------------------------------------
NET DEFERRED TAX ASSETS INCLUDED IN THE CAPTION "INTEREST
RECEIVABLE AND OTHER ASSETS" $ 1,086,000 $ 1,440,000
========================================
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
8. FEDERAL INCOME TAX--CONTINUED
The provision (credit) for federal income tax for the years ended December 31
consists of the following:
1997 1996 1995
------------------------------------------------------
Current $ 3,305,200 $ 3,014,200 $ 2,503,000
Deferred (71,200) (333,200) (247,000)
------------------------------------------------------
TOTAL $ 3,234,000 $ 2,681,000 $ 2,256,000
======================================================
The effective tax rate differs from the statutory tax rate for the following
reasons and by the following percentages:
1997 1996 1995
--------------------------------------------------
Statutory tax rate 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
Interest on investments exempt from
federal income tax (2.4) (2.8) (3.2)
Other .7 .7 1.0
--------------------------------------------------
EFFECTIVE TAX RATE 32.3% 31.9% 31.8%
==================================================
Income tax expense (benefit) related to gains and losses realized on the sale of
securities amounted to approximately ($1,000), ($19,000) and $28,000 for 1997,
1996 and 1995, respectively.
15
18
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
9. CAPITAL STOCK
During 1996 and 1995, a 6% common stock dividend was declared which resulted in
the issuance of common shares totaling 106,324 and 99,455, respectively. An
amount equal to the estimated fair value thereof was transferred from retained
earnings to common stock and to capital in excess of stated value.
The Company established a Directors' Stock Option Plan during 1995 to replace
cash compensation for attendance at monthly board meetings and to provide an
annual retainer for nonemployee directors. Accordingly, during the term of the
Plan, the Company will grant directors options to purchase up to 159,000 common
shares. During 1997 and 1996, 12,350, and 9,805 options, respectively, were
granted at an option price equal to market value of the underlying shares on the
grant date. Each option granted under the Plan is exercisable after five years
from the date of the grant and all options issued terminate at the earlier of
one year following either the discontinuance of service as a director or a
change in control of the Company. Options issued under the Plan are
automatically adjusted for common stock dividends. The Plan expires July 1,
2005.
The Company also has stock option plans under which 285,248 shares of common
stock may be issued to key employees at prices not less than market value at the
date of grant. The option period is ten years from the date of grant, and no
options are exercisable until the fifth anniversary of the grant. During 1997,
15,500 options were granted to key employees under these plans. Options issued
under these plans are automatically adjusted for common stock dividends. The
plans expire on November 22, 1998 and February 13, 2006.
16
19
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
9. CAPITAL STOCK--CONTINUED
The following table summarizes stock options activity for 1997, 1996 and 1995:
Options
-------------------------------
Available Option Price Per
for Grant Outstanding Share Range
-------------------------------------------------------
Balance at January 1, 1995 13,398 109,634 $10.78 to $23.58
Authorized 159,000
Granted (3,180) 3,180 $27.36
-------------------------------
Balance at December 31, 1995 169,218 112,814 $10.78 to $27.36
Authorized 159,000
Granted (22,619) 22,619 $29.95
Exercised (447) $10.78
Forfeited 2,431 (2,431) $10.78 to $33.50
-------------------------------
Balance at December 31, 1996 308,030 132,555 $10.78 TO $33.50
Granted (27,850) 27,850 $37.50
Exercised (83,987) $10.78 TO $16.44
-------------------------------
BALANCE AT DECEMBER 31, 1997 280,180 76,418 $10.78 TO $37.50
===============================
EXERCISABLE - DECEMBER 31, 1997 13,348
===============
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, Accounting for Stock Based Compensation. The Statement requires the
recording of stock options at fair value or continuing with the Company's
practice of not recognizing compensation expense for fixed period awards issued
at current market value. If the Company elects to continue the existing
accounting, the disclosure of supplemental pro forma financial information
reflecting the fair value recognition of stock option based compensation is
required. Management has assessed the impact of this requirement and determined
that the pro forma impact is not material to the operations of the Company for
1997 or 1996. Management used the Black Sholes valuation model to perform this
assessment. Key assumptions included an estimated volatility of .206, expected
option life of 10 years, an expected dividend yield of 6%, and a risk free
interest rate of 7%.
17
20
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
9. CAPITAL STOCK--CONTINUED
The following table sets forth the computation of basic and diluted earnings per
share:
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------
Numerator for basic and diluted
earnings per share:
Net income $ 6,781,685 $ 5,725,878 $ 4,844,961
=====================================================
Denominator:
Denominator for basic earnings per
share--weighted-average shares 1,899,904 1,884,278 1,869,017
Effect of securities:
Employee stock options 75,914 63,377 58,662
-----------------------------------------------------
Denominator for diluted earnings per
share--adjusted weighted-average
shares for assumed conversions 1,975,818 1,947,655 1,927,679
=====================================================
BASIC EARNINGS PER SHARE $ 3.57 $ 3.04 $ 2.59
=====================================================
DILUTED EARNINGS PER SHARE $ 3.43 $ 2.94 $ 2.51
=====================================================
18
21
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
10. OTHER EXPENSES
The components of other expenses for the years ended December 31 are as follows:
1997 1996 1995
-----------------------------------------------------
Postage, telephone and delivery $ 689,346 $ 643,439 $ 597,374
Professional services 611,217 489,546 425,968
Taxes, other than income 396,055 535,380 406,251
Other 3,323,614 2,518,503 2,004,060
-----------------------------------------------------
TOTAL OTHER EXPENSES $ 5,020,232 $ 4,186,868 $ 3,433,653
=====================================================
11. COMMITMENTS
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. Loan commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition in the contract.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. 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.
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized, if any, in the balance sheet. The Bank's maximum
exposure to loan loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual notional amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. Collateral, such as
accounts receivable, securities, inventory, property and equipment, is obtained
based on management's credit assessment of the borrower.
19
22
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
11. COMMITMENTS--CONTINUED
Fair value of the Bank's off-balance-sheet instruments (commitments to extend
credit and standby letters of credit) is based on rates currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. At December 31, 1997 and
1996, the rates on existing off-balance-sheet instruments were substantially
equivalent to current market rates, considering the underlying credit standing
of the counterparties.
The Bank's maximum exposure to credit losses for loan commitments and standby
letters of credit outstanding at December 31 was as follows:
1997
---------------------------------------------
EXPIRATION LOAN STANDBY LETTERS
DATE COMMITMENTS OF CREDIT
- ---------------------------------------------------------------------------------
1998 $ 157,039,000 $ 3,013,000
1999 13,172,000 2,983,000
2000 and beyond 16,698,000 7,443,000
---------------------------------------------
$ 186,909,000 $ 13,439,000
=============================================
1996
---------------------------------------------
1997 $ 104,875,000 $ 2,287,000
1998 1,782,000 1,267,000
1999 and beyond 15,746,000 5,853,000
---------------------------------------------
$ 122,403,000 $ 9,407,000
=============================================
Management does not anticipate any significant losses as a result of these
commitments.
20
23
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
12. RETAINED EARNINGS AND REGULATORY CAPITAL
Bank regulatory agencies limit the transfer of assets in the form of dividends,
loans or advances from banks to the parent company. As of January 1, 1998, the
Bank must earn $911,000 or obtain the prior regulatory approval of the
Comptroller of the Currency for payment of dividends to the Company. Additional
1998 earnings will also become available for distribution. Restricted net assets
of the Bank amounted to approximately $33,598,000 or 66% of the Company's
consolidated net assets at December 31, 1997.
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 possible additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the
Company and the Bank meet all capital adequacy requirements to which it is
subject.
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
21
24
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
12. RETAINED EARNINGS AND REGULATORY CAPITAL--CONTINUED
The following schedule presents the Company's regulatory capital ratios as of
December 31:
Total Tier I Tier I
Risk-Based Risk-Based Leverage
Capital Capital Capital
------------------------------------------------
Minimum capital adequacy percentage 8% 4% 4%
Percentage to be well capitalized 10% 6% 5%
Actual percentage--December 31, 1997 11.1% 9.8% 7.7%
Actual percentage--December 31, 1996 11.4% 10.1% 7.6%
December 31, 1997:
Required capital $ 40,126,000 $ 20,063,000 $ 25,648,000
Capital to be well capitalized 50,158,000 30,095,000 32,059,000
Actual capital 55,468,000 49,190,000 49,190,000
December 31, 1996:
Required capital $ 32,471,000 $ 16,236,000 $ 21,622,000
Capital to be well capitalized 40,589,000 24,353,000 27,271,000
Actual capital 46,133,000 41,059,000 41,059,000
13. FAIR VALUE STATEMENT OF CONDITION
The Financial Accounting Standards Board Statement No. 107, Disclosures about
Fair Value of Financial Instruments (Statement No. 107) requires disclosure of
fair value information about financial instruments, whether or not recognized in
the statement of financial condition, for which it is practicable to estimate
that value. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
22
25
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
13. FAIR VALUE STATEMENT OF CONDITION--CONTINUED
The following is a comparative condensed consolidated statement of condition
based on carrying and estimated fair values as of December 31, 1997 and 1996:
1997
------------------------------------------
CARRYING ESTIMATED
VALUE FAIR VALUES
------------------------------------------
Assets:
Cash and cash equivalents $ 23,291,951 $ 23,291,951
Investment securities 167,520,873 167,520,873
Loans, net 462,088,714 464,062,180
------------------------------------------
652,901,538 $ 654,875,004
======================
Other assets 16,638,325
---------------------
TOTAL ASSETS $ 669,539,863
=====================
Liabilities and shareholders' equity:
Deposits $ 579,661,108 $ 579,851,786
Short-term borrowings 30,295,269 30,295,269
------------------------------------------
609,956,377 $ 610,147,055
======================
Other liabilities 9,036,804
---------------------
618,993,181
Shareholders' equity: 50,546,682
---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 669,539,863
=====================
23
26
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
13. FAIR VALUE STATEMENT OF CONDITION--CONTINUED
1996
-------------------------------------------
CARRYING ESTIMATED
VALUE FAIR VALUES
-------------------------------------------
Assets:
Cash and cash equivalents $ 13,958,201 $ 13,958,201
Investment securities 159,209,293 159,209,293
Loans, net 374,217,938 375,553,895
-------------------------------------------
547,385,432 $ 548,721,389
======================
Other assets 12,340,368
----------------------
TOTAL ASSETS $ 559,725,800
======================
Liabilities and shareholders' equity:
Deposits $ 470,743,092 $ 471,157,243
Short-term borrowings 42,330,560 42,320,671
-------------------------------------------
513,073,652 $ 513,477,914
======================
Other liabilities 5,062,044
----------------------
518,135,696
Shareholders' equity 41,590,104
----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 559,725,800
======================
14. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
DECEMBER 31
1997 1996
--------------------------------------------
CONDENSED BALANCE SHEETS
Assets:
Cash $ 1,500,001 $ 570,350
Investment in and advances to subsidiaries 49,033,260 40,717,004
Other assets 352,048 302,750
--------------------------------------------
TOTAL ASSETS $ 50,885,309 $ 41,590,104
============================================
Liabilities and shareholders' equity:
Other liabilities--dividends payable $ 338,627 $ 0
Shareholders' equity 50,546,682 41,590,104
--------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 50,885,309 $ 41,590,104
============================================
24
27
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
14. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY--CONTINUED
YEAR ENDED DECEMBER 31
-------------------------------------------------------
1997 1996 1995
-------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
Dividend from subsidiary $ 4,000,000 $ 10,000,000
Interest and fee income 675,810 450 $ 900
Expenses 769,870 87,489 68,939
-------------------------------------------------------
Income (loss) before equity in undistributed net
income of subsidiaries 3,905,940 9,912,961 (68,039)
Increase (decrease) in undistributed net income of
subsidiaries 2,875,745 (4,187,083) 4,913,000
-------------------------------------------------------
NET INCOME $ 6,781,685 $ 5,725,878 $ 4,844,961
=======================================================
CONDENSED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income $ 6,781,685 $ 5,725,878 $ 4,844,961
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed net income of subsidiaries (2,875,745) 4,187,083 (4,913,000)
Decrease (increase) in other assets 209,159 450 13,250
-------------------------------------------------------
Net cash provided by (used in) operating activities 4,115,099 9,913,411 (54,789)
INVESTING ACTIVITIES
Increase in note receivable from subsidiary (4,000,000) (10,000,000)
Investment in subsidiaries (722,615) (425,000)
Purchase of investment securities (150,500) (257,500) (5,000)
-------------------------------------------------------
Net cash used in investing activities (4,873,115) (10,257,500) (430,000)
FINANCING ACTIVITIES
Issuance of common stock 2,333,527 440,653 430,331
Payment of dividends (645,860) (10,781) (9,915)
-------------------------------------------------------
Net cash provided by financing activities 1,687,667 429,872 420,416
-------------------------------------------------------
Increase (decrease) in cash 929,651 85,783 (64,373)
Cash at beginning of year 570,350 484,567 548,940
-------------------------------------------------------
CASH AT END OF YEAR $ 1,500,001 $ 570,350 $ 484,567
=======================================================
25