1
Exhibit 13
Consolidated Financial Statements
CAPITAL HOLDINGS, INC. AND
SUBSIDIARIES
Years Ended December 31, 1998, 1997 and 1996
with Report of Independent Auditors
2
Capital Holdings, Inc. and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
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
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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
January 15, 1999
1
4
Capital Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31
1998 1997
---------------------------
Assets
Cash and due from banks $ 18,262,969 $ 15,291,951
Federal funds sold 11,000,000 8,000,000
---------------------------
Cash and cash equivalents 29,262,969 23,291,951
Investment securities available-for-sale, at fair
value (amortized cost $181,529,214 in 1998
and $165,465,350 in 1997) 184,583,020 167,520,873
Loans 578,369,916 469,036,091
Less allowance for loan losses 8,145,982 6,947,377
---------------------------
Net loans 570,223,934 462,088,714
Bank premises and equipment 9,751,447 9,548,218
Interest receivable and other assets 7,806,606 7,090,107
---------------------------
TOTAL ASSETS $801,627,976 $669,539,863
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Interest bearing $606,571,823 $529,791,363
Noninterest bearing 56,494,624 49,869,745
---------------------------
Total deposits 663,066,447 579,661,108
Short-term borrowings 72,016,334 30,295,269
Interest payable and other liabilities 8,122,982 9,036,804
---------------------------
Total liabilities 743,205,763 618,993,181
Shareholders' equity:
Common stock, no par value, $.50 stated value;
3,000,000 shares authorized,
2,016,408 shares issued and
outstanding (1,991,922 in 1997) 1,008,204 995,961
Capital in excess of stated value 34,201,997 33,179,413
Retained earnings 21,197,999 15,014,646
Accumulated other comprehensive income 2,014,013 1,356,662
---------------------------
Total shareholders' equity 58,422,213 50,546,682
---------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $801,627,976 $669,539,863
===========================
See accompanying notes.
2
5
Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Income
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------
INTEREST INCOME
Loans, including fees $ 43,725,781 $ 36,924,103 $ 29,899,157
Securities:
Taxable 10,594,117 9,671,309 8,914,952
Exempt from federal income tax 710,187 697,916 682,893
Federal funds sold 537,377 299,661 141,916
-------------------------------------------
Total interest income 55,567,462 47,592,989 39,638,918
INTEREST EXPENSE
Deposits 29,022,126 25,651,782 20,450,873
Short-term borrowings 2,728,797 1,373,872 1,854,351
-------------------------------------------
Total interest expense 31,750,923 27,025,654 22,305,224
-------------------------------------------
Net interest income 23,816,539 20,567,335 17,333,694
Provision for loan losses 1,230,000 1,005,000 980,000
-------------------------------------------
Net interest income after provision
for loan losses 22,586,539 19,562,335 16,353,694
OTHER INCOME
Securities gains (losses)--net 63,555 (1,797) (55,434)
Other 1,617,848 1,207,137 929,727
-------------------------------------------
Total other income 1,681,403 1,205,340 874,293
OTHER EXPENSES
Salaries and employee benefits 6,610,813 5,669,559 4,632,241
FDIC and other insurance 69,651 62,199 2,000
Other 5,853,786 5,020,232 4,186,868
-------------------------------------------
Total other expenses 12,534,250 10,751,990 8,821,109
-------------------------------------------
Income before provision for federal
income tax 11,733,692 10,015,685 8,406,878
Provision for federal income tax 3,805,000 3,234,000 2,681,000
-------------------------------------------
NET INCOME $ 7,928,692 $ 6,781,685 $ 5,725,878
===========================================
Net income per share:
Basic $ 3.96 $ 3.57 $ 3.04
Diluted 3.89 3.43 2.94
See accompanying notes.
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Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Accumulated
Capital in Other Total
Common Excess of Retained Comprehensive Shareholders'
Stock Stated Value Earnings Income Equity
---------------------------------------------------------------------------------
Balance at January 1, 1996 $ 888,864 $ 27,136,543 $ 6,878,138 $ 1,232,517 $ 36,136,062
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)
-----------------
Comprehensive income 41,160,232
Exercise of 447 common stock options
at $10.78 per share 223 4,595 4,818
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)
------------------------------------------------------------------------------
Balance at December 31, 1996 948,754 30,893,093 9,217,448 530,809 41,590,104
Net income 6,781,685 6,781,685
Net unrealized gain on securities
available-for-sale,
net of tax effect of $425,000 825,853 825,853
-----------------
Comprehensive income 49,197,642
Exercise of 83,987 common stock options,
including tax benefit 41,994 1,833,508 1,875,502
Issuance of 10,427 shares of commons stock 5,213 452,812 458,025
Cash dividend--$.51 per share (984,487) (984,487)
------------------------------------------------------------------------------
Balance at December 31, 1997 995,961 33,179,413 15,014,646 1,356,662 50,546,682
Net income 7,928,692 7,928,692
Net unrealized gain on securities
available-for-sale,
net of tax effect of $342,000 657,351 657,351
-----------------
Comprehensive income 59,132,725
Exercise of 8,556 common stock options,
including tax benefit 4,278 193,114 197,392
Issuance of 15,930 shares of common stock 7,965 829,470 837,435
Cash dividend--$.87 per share (1,745,339) (1,745,339)
------------------------------------------------------------------------------
Balance at December 31, 1998 $ 1,008,204 $ 34,201,997 $ 21,197,999 $ 2,014,013 $ 58,422,213
==============================================================================
See accompanying notes.
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Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------------------
OPERATING ACTIVITIES
Net income $ 7,928,692 $ 6,781,685 $ 5,725,878
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,230,000 1,005,000 980,000
Depreciation and amortization 706,252 469,909 301,854
Amortization and accretion of security premiums
and discounts (46,746) (73,781) (54,105)
(Gain) loss on sale of investment securities (63,555) 1,797 55,434
Deferred income tax credit (345,000) (71,200) (333,200)
Changes in assets and liabilities:
Interest receivable and other assets (712,431) (1,114,366) (450,990)
Interest payable and other liabilities (1,059,133) 3,636,133 851,910
---------------------------------------------------
Total adjustments (290,613) 3,853,492 1,350,903
---------------------------------------------------
Net cash provided by operating activities 7,638,079 10,635,177 7,076,781
INVESTING ACTIVITIES
Purchases of available-for-sale securities (76,970,518) (48,375,145) (63,954,536)
Net increase in loans (109,365,220) (88,875,776) (55,369,471)
Purchase of bank premises and equipment (909,481) (4,007,742) (1,829,085)
Proceeds from sales of available-for-sale securities 53,691,672 28,999,960 35,432,969
Proceeds from maturities of available-for-sale securities 7,325,283 12,386,884 8,874,359
---------------------------------------------------
Net cash used in investing activities (126,228,264) (99,871,819) (76,845,764)
FINANCING ACTIVITIES
Net increase in deposits 83,405,339 108,918,016 63,121,569
Net increase (decrease) in short-term borrowings 41,721,065 (12,035,291) 7,127,852
Issuance of common stock 1,034,827 2,333,527 440,653
Cash dividends paid (1,600,028) (645,860) (10,781)
---------------------------------------------------
Net cash provided by financing activities 124,561,203 98,570,392 70,679,293
---------------------------------------------------
Increase in cash and cash equivalents 5,971,018 9,333,750 910,310
Cash and cash equivalents at beginning of year 23,291,951 13,958,201 13,047,891
---------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 29,262,969 $ 23,291,951 $ 13,958,201
===================================================
SUPPLEMENTAL DISCLOSURES
Interest paid $ 31,273,946 $ 26,386,253 $ 22,119,961
===================================================
Income taxes paid $ 4,026,000 $ 3,325,000 $ 2,975,000
===================================================
NONCASH OPERATING ACTIVITIES
Change in deferred income taxes on net unrealized
gains or losses on available-for-sale securities $ 342,416 $ 425,439 $ (361,482)
===================================================
NONCASH INVESTING ACTIVITIES
Change in net unrealized gain (loss) on
available-for-sale securities $ 1,001,283 $ 1,251,292 $ (1,063,190)
===================================================
See accompanying notes.
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
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 conducts business 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
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, 1998 and 1997 are issued by U. S. Government sponsored
agencies and represent approximately .2% and .7%, respectively, of total assets.
LOANS AND REVENUE RECOGNITION
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.
7
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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 1998, 1997 and 1996 was
approximately $354,000, $394,000 and $257,000, respectively.
REPORTING COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement has no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the requirements
of Statement 130.
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
OPERATING SEGMENT
On January 1, 1998, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131), became effective. Statement 131 established standards for the reporting of
information about operating segments and related disclosures about products and
services, geographic areas and major customers. The Company operates primarily
in one business segment as a focused commercial business lender. The Company
offers a full set of commercial lending products and services through one
banking office and a comprehensive courier program that enhances customer
service. The Company's primary sources of revenue are interest income and fees
from its investments and commercial loan products.
REPORTING DERIVATIVE INSTRUMENTS & HEDGING ACTIVITIES
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, establishes accounting and reporting standards for hedging
activities and derivative instruments. The Statement is effective for fiscal
years beginning after June 15, 1999. The Company will adopt Statement 133 as of
January 1, 2000. The impact of adopting this statement is not expected to be
material.
2. CASH AND DUE FROM BANKS
At December 31, 1998 and 1997, approximately $1,478,000 and $3,687,000,
respectively, was restricted due to requirements of the Federal Reserve Board to
maintain certain average reserve balances.
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
3. INVESTMENT SECURITIES
The following is a summary of available-for-sale securities:
December 31, 1998
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------
Debt securities:
U. S. Government and
agency obligations $ 143,884,327 $ 2,275,426 $ 152,189 $ 146,007,564
Corporate 15,875,541 313,204 8,652 16,180,093
Municipal 14,445,974 628,059 339 15,073,694
Mortgage-backed 1,662,772 4,343 6,046 1,661,069
---------------------------------------------------------------------
175,868,614 3,221,032 167,226 178,922,420
Other securities 5,660,600 5,660,600
---------------------------------------------------------------------
TOTAL $ 181,529,214 $ 3,221,032 $ 167,226 $ 184,583,020
=====================================================================
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
=====================================================================
The carrying value of securities available-for-sale that are pledged to
secure securities sold under agreements to repurchase and other deposits
was $116,696,000 and $107,076,000 at December 31, 1998 and 1997, respectively.
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
3. INVESTMENT SECURITIES--CONTINUED
Sales of investment securities resulted in realized gains and losses for the
year ended December 31 as follows:
1998 1997 1996
---------------------------------------------
Securities gains $ 72,457 $ 24,899 $ 37,987
Securities losses (8,902) (26,696) (93,421)
---------------------------------------------
NET GAIN (LOSS) $ 63,555 $ (1,797) $ (55,434)
=============================================
The amortized cost and fair value of investment securities at December 31, 1998
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.
Amortized Fair
Cost Value
----------------------------------------
Debt securities, excluding
mortgage-backed securities:
Due in one year or less $ 12,953,694 $ 13,047,609
Due after one year through five years 104,326,643 106,104,982
Due after five years through ten years 56,437,436 57,540,836
Due after ten years 488,069 567,924
----------------------------------------
174,205,842 177,261,351
Mortgage-backed securities:
Due in one year or less 1,430,542 1,432,173
Due after ten years 232,230 228,896
----------------------------------------
1,662,772 1,661,069
----------------------------------------
Total debt securities 175,868,614 178,922,420
Other securities 5,660,600 5,660,600
----------------------------------------
TOTAL $ 181,529,214 $ 184,583,020
========================================
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
4. LOANS
The carrying amount of loans, classified by type, at December 31 are as follows:
1998 1997
------------------------------------------
Commercial $ 124,643,361 $ 103,060,887
Real estate:
Residential--first mortgage 121,358,239 104,659,213
Commercial--owner occupied 118,559,796 99,537,241
Commercial--investment 182,888,352 130,107,734
Consumer 27,260,608 27,848,835
Other 4,570,835 4,507,631
------------------------------------------
579,281,191 469,721,541
Less deferred loan fees 911,275 685,450
------------------------------------------
578,369,916 469,036,091
Less allowance for loan losses 8,145,982 6,947,377
------------------------------------------
$ 570,223,934 $ 462,088,714
==========================================
Transactions affecting the allowance for loan losses for the year ended December
31 are summarized below:
1998 1997 1996
------------------------------------------------------
Balance--January 1 $ 6,947,377 $ 5,942,377 $ 4,960,000
Provision for loan losses 1,230,000 1,005,000 980,000
Net (charge offs) recoveries (31,395) 2,377
------------------------------------------------------
$ 8,145,982 $ 6,947,377 $ 5,942,377
======================================================
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 $16,528,000
and $15,205,000 at December 31, 1998 and 1997, respectively. During 1998,
$12,172,000 of new loans were made and collections and repayments totaled
$10,849,000. The Bank had no material impaired loans at December 31, 1998, 1997
and 1996.
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
5. BANK PREMISES AND EQUIPMENT
Major classes of bank premises and equipment at December 31 are as follows:
1998 1997
--------------------------------------
Cost:
Land and improvements $ 2,098,382 $ 2,076,648
Buildings and improvements 6,831,900 6,765,301
Equipment 2,553,194 1,866,464
Furniture and fixtures 821,393 797,373
--------------------------------------
12,304,869 11,505,786
Less accumulated depreciation 2,553,422 1,957,568
--------------------------------------
$ 9,751,447 $ 9,548,218
======================================
6. DEPOSITS
The carrying amounts of deposits, classified by type, at December 31 are as
follows:
1998 1997
------------------------------------------
Noninterest bearing demand $ 56,494,624 $ 49,869,745
Interest checking 214,565,048 146,291,238
Savings 17,898,867 17,296,887
Certificates of deposit of $100,000 or more 218,687,386 206,451,627
Other time deposits 155,420,522 159,751,611
------------------------------------------
$ 663,066,447 $ 579,661,108
==========================================
The maturity distribution of certificates of deposit issued in amounts of
$100,000 and over and outstanding at December 31, 1998 is:
Three months or less $ 97,329,393
Over three and through six months 36,632,228
Over six and through twelve months 47,462,342
Over twelve months 37,263,423
-------------------
$ 218,687,386
===================
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
7. SHORT-TERM BORROWINGS
Short-term borrowings, which are comprised of various types of funds at December
31 are summarized below:
1998 1997
-----------------------------------
Securities sold under agreements to repurchase $ 14,625,863 $ 14,395,269
Advances from FHLB 53,900,000 15,900,000
Other 3,490,471
-----------------------------------
TOTAL SHORT-TERM BORROWINGS $ 72,016,334 $ 30,295,269
===================================
At December 31, 1998 and 1997, the Company had $24,260,000 and $36,200,000,
respectively, of unused lines of credit to obtain short-term financing.
The maximum amount of securities sold under agreements to repurchase during 1998
was $22,068,000 and the average for the year was $17,790,000. The underlying
securities were under the Company's control.
Advances from the Federal Home Loan Bank have mortgage loans pledged as
collateral of $80,850,000 and $23,850,000 at December 31, 1998 and 1997,
respectively.
Other short-term borrowings include demand notes issued by the Bank to the U.S.
Treasury under the Treasury's tax and loan note program.
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
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:
1998 1997
-------------------------------
Deferred tax liabilities:
Unrealized net holding gains on
securities available for sale $ 1,040,000 $ 698,000
Tax over book depreciation 164,000 126,000
Other 398,000 304,000
-------------------------------
Total deferred tax liabilities 1,602,000 1,128,000
Deferred tax assets:
Allowance for loan losses 2,543,000 2,113,000
Deferred loan fees 105,000 57,000
Other 45,000 44,000
-------------------------------
Total deferred tax assets 2,693,000 2,214,000
-------------------------------
NET DEFERRED TAX ASSETS INCLUDED IN THE CAPTION "INTEREST
RECEIVABLE AND OTHER ASSETS" $ 1,091,000 $ 1,086,000
===============================
The provision (credit) for federal income tax for the years ended December 31
consists of the following:
1998 1997 1996
---------------------------------------------------
Current $ 4,150,000 $ 3,305,200 $ 3,014,200
Deferred (345,000) (71,200) (333,200)
---------------------------------------------------
TOTAL $ 3,805,000 $ 3,234,000 $ 2,681,000
===================================================
15
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Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
8. FEDERAL INCOME TAX--CONTINUED
The effective tax rate differs from the statutory tax rate for the following
reasons and by the following percentages:
1998 1997 1996
--------------------------------------------
Statutory tax rate 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
Interest on investments exempt from
federal income tax (1.9) (2.4) (2.8)
Other .3 .7 .7
--------------------------------------------
EFFECTIVE TAX RATE 32.4% 32.3% 31.9%
============================================
Income tax expense (benefit) related to gains and losses realized on the sale of
securities amounted to approximately, and $22,000, ($1,000), and ($19,000) for
1998, 1997 and 1996, respectively.
9. CAPITAL STOCK
The Company has long-term incentive plans under which it has awarded stock
options to executive officers, directors and other key personnel. The Directors'
Stock Option Plan (the Plan) was established in 1995 and allows the Company to
grant directors options to purchase up to 159,000 common shares. Each option
granted under the plan is exercisable at the date of the grant and all options
issued terminate at the earlier of (1) one year following either the
discontinuance of service as a director, (2) change in control of the Company,
or (3) ten years from the date of grant. During 1998, 12,500 options were
granted to Directors under this plan. Options issued under the Plan are
automatically adjusted for common stock dividends. The Plan expires July 1,
2005.
The Company also has established, in 1988 and 1996, stock option plans under
which 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 1998, 97,336 options were granted to key employees under these
plans. Options issued under these plans are automatically adjusted for common
stock dividends. These plans expire ten years from the date they were
established.
16
19
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
9. CAPITAL STOCK--CONTINUED
The Company has elected to follow Accounting Principles Board Opinion No 25.
Accounting for Stock Issued to Employees (APB 25) and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996, respectively: risk-free interest rates of 6.0%, 6.0% and 7.0%;
dividend yield of 2.0%, 2.0% and 6.0%; volatility factors of the expected market
price of the Company's common stock of .20, .20 and .21; and a weighted-average
expected life of the option of 7.5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
1998 1997 1996
---------------- ----------------- ----------------
Proforma net income $ 7,274 $ 6,639 $ 5,706
Proforma basic earnings per share $ 3.63 $ 3.49 $ 3.03
Proforma dilute earnings per share $ 3.57 $ 3.36 $ 2.93
17
20
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
9. CAPITAL STOCK--CONTINUED
The following table summarizes stock options activity for 1998, 1997 and 1996:
Options
-------------------------------
Available Option Price Per
for Grant Outstanding Share Range
---------------------------------------------------
Balance at January 1, 1996 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
Granted (109,836) 109,836 $44.50 to $54.50
Exercised (8,556) $10.78 to $47.00
Forfeited (200) $47.00
-------------------------------
BALANCE AT DECEMBER 31, 1998 170,344 177,498 $10.78 TO $54.50
===============================
EXERCISABLE--DECEMBER 31, 1998 47,634
===============
The following table sets forth the computation of basic and diluted earnings per
share:
Year Ended December 31
1998 1997 1996
-----------------------------------------------------
Numerator for basic and diluted
earnings per share:
Net income $ 7,928,692 $ 6,781,685 $ 5,725,878
=====================================================
Denominator:
Denominator for basic earnings per
share--weighted-average shares 2,002,486 1,899,904 1,884,278
Effect of securities:
Employee stock options 34,379 75,914 63,377
-----------------------------------------------------
Denominator for diluted earnings per
share--adjusted weighted-average shares for
assumed conversions 2,036,865 1,975,818 1,947,655
=====================================================
Basic earnings per share $ 3.96 $ 3.57 $ 3.04
=====================================================
Diluted earnings per share $ 3.89 $ 3.43 $ 2.94
=====================================================
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:
1998 1997 1996
---------------------------------------------------
Postage, telephone and delivery $ 788,379 $ 689,346 $ 643,439
Professional services 796,658 611,217 489,546
Taxes, other than income 454,262 396,055 535,380
Other 3,814,487 3,323,614 2,518,503
---------------------------------------------------
TOTAL OTHER EXPENSES $ 5,853,786 $ 5,020,232 $ 4,186,868
===================================================
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, 1998 and
1997, 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:
1998
------------------------------------------
EXPIRATION LOAN STANDBY LETTERS
DATE COMMITMENTS OF CREDIT
- ------------------------------------------------------------------------------
1999 $ 190,539,000 $ 12,890,000
2000 17,797,000 290,000
2001 and beyond 28,954,000 3,639,000
------------------------------------------
$ 237,290,000 $ 16,819,000
==========================================
1997
------------------------------------------
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
==========================================
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. Under such limitations, the
amount available for payment of dividends to the Company without obtaining prior
approval of the Comptroller of the Currency was approximately $11,176,000 at
January 1, 1999. Additional 1999 earnings will also become available for
distribution. Restricted net assets of the Bank amounted to approximately
$31,850,000 or 55% of the Company's consolidated shareholders' equity at
December 31, 1998.
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, 1998, that the
Company and the Bank meet all capital adequacy requirements to which it is
subject.
As of December 31, 1998, 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, 1998 10.4% 9.1% 7.2%
Actual percentage--December 31, 1997 11.1% 9.8% 7.7%
December 31, 1998:
Required capital $ 49,559,000 $ 24,779,000 $ 31,333,000
Capital to be well capitalized 61,949,000 37,169,000 39,167,000
Actual capital 64,157,000 56,408,000 56,408,000
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
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, 1998 and 1997:
1998
------------------------------------------
CARRYING ESTIMATED
VALUE FAIR VALUES
------------------------------------------
Assets:
Cash and cash equivalents $ 29,262,969 $ 29,262,969
Investment securities 184,583,020 184,583,020
Loans, net 570,223,934 573,013,603
------------------------------------------
784,069,923 $ 786,859,592
====================
Other assets 17,558,053
---------------------
TOTAL ASSETS $ 801,627,976
=====================
Liabilities and shareholders' equity:
Deposits $ 663,066,447 $ 663,937,736
Short-term borrowings 72,016,334 72,345,679
------------------------------------------
735,082,781 $ 736,283,415
====================
Other liabilities 8,122,982
---------------------
743,205,763
Shareholders' equity: 58,422,213
---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 801,627,976
=====================
23
26
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
13. FAIR VALUE STATEMENT OF CONDITION--CONTINUED
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
======================
14. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
DECEMBER 31
1998 1997
------------------------------------------
CONDENSED BALANCE SHEETS
Assets:
Cash $ 704,696 $ 1,500,001
Investment in and advances to subsidiaries 57,551,207 49,033,260
Other assets 650,250 352,048
------------------------------------------
TOTAL ASSETS $ 58,906,153 $ 50,885,309
==========================================
Liabilities and shareholders' equity:
Other liabilities--dividends payable $ 483,940 $ 338,627
Shareholders' equity 58,422,213 50,546,682
------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 58,906,153 $ 50,885,309
==========================================
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
----------------------------------------------------
1998 1997 1996
----------------------------------------------------
CONDENSED STATEMENTS OF INCOME
Dividend from subsidiary $ 4,000,000 $ 10,000,000
Interest and fee income $ 945,661 675,810 450
Gain on securities 41,732
Expenses 811,338 769,870 87,489
----------------------------------------------------
Income before equity in undistributed
net income of subsidiaries 176,055 3,905,940 9,912,961
Increase (decrease) in undistributed
net income of subsidiaries 7,752,637 2,875,745 (4,187,083)
----------------------------------------------------
NET INCOME $ 7,928,692 $ 6,781,685 $ 5,725,878
====================================================
CONDENSED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income $ 7,928,692 $ 6,781,685 $ 5,725,878
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Equity in undistributed net income of subsidiaries (7,752,637) (2,875,745) 4,187,083
(Increase) decrease in other assets (434,159) 209,159 450
Gain on sale of investments (41,732)
----------------------------------------------------
Net cash provided by (used in) operating activities (299,836) 4,115,099 9,913,411
INVESTING ACTIVITIES
Increase in note receivable from subsidiary (4,000,000) (10,000,000)
Investment in subsidiaries (722,615)
Proceeds from sale and maturities of securities 69,732
Purchase of investment securities (150,500) (257,500)
----------------------------------------------------
Net cash used in investing activities 69,732 (4,873,115) (10,257,500)
FINANCING ACTIVITIES
Issuance of common stock 1,034,826 2,333,527 440,653
Payment of dividends (1,600,027) (645,860) (10,781)
----------------------------------------------------
Net cash (used in) provided by financing activities (565,201) 1,687,667 429,872
----------------------------------------------------
(Decrease) increase in cash (795,305) 929,651 85,783
Cash at beginning of year 1,500,001 570,350 484,567
----------------------------------------------------
CASH AT END OF YEAR $ 704,696 $ 1,500,001 $ 570,350
====================================================
25