<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended DECEMBER 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 33-46573
--------
CAPITAL HOLDINGS, INC.
----------------------
(Exact name of Registrant as specified in its Charter)
OHIO 34-1588902
---- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
5520 MONROE ST., SYLVANIA, OH 43560
-----------------------------------
(Address of principal executive offices, including zip code)
(419) 885-7379
--------------
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
-------------------------------
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
The aggregate market value of the voting stock held by non-affiliates
of the Registrant at March 10, 1998 was $94,023,970.
The number of shares of Registrant's Common Stock outstanding on March
10, 1998 was 2,000,510.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Annual Report to Shareholders for fiscal year ended December 31, 1997 - Parts II
and IV.
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May
7, 1998 - Part III.
<PAGE> 2
CAPITAL HOLDINGS, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
PART I
<S> <C> <C>
Item 1. Business............................................................................3
Item 2. Properties..........................................................................4
Item 3. Legal Proceedings...................................................................4
Item 4. Submission of Matters to a Vote of Security Holders.................................4
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters........................................................4
Item 6. Selected Financial Data.............................................................5
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................6
Item 8. Financial Statements and Supplementary Data........................................19
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................................21
PART III
Item 10. Directors and Executive Officers of the Registrant.................................21
Item 11. Executive Compensation.............................................................21
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................................21
Item 13. Certain Relationships and Related Transactions.....................................21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K...............................................................22
Signatures...........................................................................................23
</TABLE>
<PAGE> 3
PART I.
ITEM 1. BUSINESS
- ------- --------
GENERAL
- -------
Capital Holdings, Inc. (the "Company") is a one-bank holding company
with headquarters in Sylvania, Ohio. The Company was formed in July, 1988, for
the purpose of owning and organizing Capital Bank, N.A. (the "Bank"), a national
banking association which is a wholly-owned subsidiary of the Company.
The Bank opened for business on August 24, 1989, with $12.4 million in
equity capital contributed by the Company. As of December 31, 1997, the total
assets of the Company were $669.5 million with equity capital of $50.5 million.
At December 31, 1996, the Company's total assets were $559.7 million with equity
capital of $41.6 million. On December 31, 1997 and 1996, the Bank paid the
parent Company a $4.0 million and $10.0 million, respectively, cash dividend
which was then subordinated back into the Bank. See "Capital Resources and
Dividends" narrative in Management's Discussion and Analysis of Financial
Condition and Results of Operations for further discussion.
The Bank has focused its business on corporate, executive and
professional customers while pursuing a deposit gathering strategy of offering
money market checking and savings accounts in addition to certificates of
deposits at attractive rates to mid-sized to large depositors with an emphasis
of minimizing the operating costs of obtaining these deposits.
The Bank is located in Sylvania, Ohio, a suburban community northwest
of Toledo, Ohio. In addition to drawing customers from Sylvania, the Bank also
draws customers from Southeast Michigan as well as Lucas and Wood counties in
Ohio. The Bank has defined its market niche as serving small to mid-sized
businesses, professionals and their families.
The Company owns its main office facility located at 5520 Monroe
Street, Sylvania, Ohio through a wholly-owned subsidiary, CBNA Building Company.
The Company and the Bank operate no other offices.
COMPETITION
- -----------
The Bank's primary competition for banking services comes from other
financial institutions located in Lucas and Wood counties. There are currently
14 commercial banks, 5 savings and loans, 1 savings bank and 48 credit unions
believed to be operating physical facilities in these counties. Many of these
institutions are affiliates of companies which have significantly greater assets
than the Bank. As of June 30, 1997 (the most recent date for which information
is readily available), total deposits held by financial institutions in Lucas
and Wood counties approximated $7.1 billion. Since its opening on August 24,
1989, the Bank has grown from $12.4 million in assets to $669.7 million in
assets as of December 31, 1997. The management of the Bank believes the primary
reason for the Bank's success in deposit and loan growth is tied directly to its
niche orientation, and the fact that its products are delivered through highly
personalized service, as well as being very competitive with other financial
institutions in its market area.
EMPLOYEES
- ---------
The Company's primary purpose is to operate as a bank holding company
for its bank subsidiary, Capital Bank, N.A. Therefore, the Company has no
compensated employees. As of December 31, 1997, the Bank had 98 full-time
equivalent employees, which represents a 26% increase in staff since December
31, 1996, at which time there were 78 full-time equivalent employees, and a 654%
increase in staff since the Bank opened in August of 1989 with 13 full-time
equivalent employees. None of the employees are covered by a collective
bargaining agreement.
REGULATION
- ----------
The Company is a registered bank holding company under the Bank Holding
Company Act of 1956 (the "Banking Act") as amended, and as such is subject to
regulation by the Federal Reserve Board. A bank holding company is required to
file with the Federal Reserve Board annual reports and other information
regarding its business operations and those of its subsidiaries. A bank holding
company and its subsidiary banks are also subject to examination by the Federal
Reserve Board.
The Bank is regulated by the Office of the Comptroller of the Currency
("OCC") as a National Banking Association. Additionally, the Bank is regulated
by the Board of Governors of the Federal Reserve System ("FRS") as a member of
the Federal Reserve System. The regulatory agencies have the authority to
regularly examine the Bank and the Bank is subject to the regulations
promulgated by its supervisory agencies. In addition, the deposits of the Bank
are insured by the Federal Deposit Insurance Corporation ("FDIC") and,
therefore, the Bank is subject to FDIC regulations.
<PAGE> 4
ITEM 2. PROPERTIES
- ------- ----------
The Company, through its wholly-owned subsidiary, CBNA Building
Company, owns real estate at 5520 Monroe Street which includes a 50,000 square
foot main office facility. A building expansion of 25,000 square feet was
started in the third quarter of 1996 with final occupancy taken in the second
quarter of 1997. The facility provides the Bank with Class A office space and
all necessary technological supports to operate an effective, personalized bank
which meets the goals of the Company and the Bank. Management of the Company and
Bank as well as the respective Boards of Directors of these organizations,
believe that the facility will be sufficient for expected growth in the Bank for
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company and the Bank from time to time become involved in such
legal proceedings as are incurred in and incidental to the ordinary course of
business. In the opinion of management, any losses resulting from such
proceedings will not be material to the financial condition, liquidity, or
results of operations of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
NONE.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
- ------- ---------------------------------------------------------------------
There is no established public market for the common stock of the
Company.
There were 980 shareholders of record as of March 10, 1998.
In 1997, three quarterly cash dividends totaling $984,487 were declared
on the Company's common stock. As of December 31, 1997, $645,860 of those
dividends had been paid out in cash. The dividend declared represented $.17 per
share per quarter for 1997. The Company expects to continue paying quarterly
cash dividends at approximately the current rate. The ability of the Company to
pay cash dividends is dependent in large part on the ability of the Bank to pay
dividends to the Company. The Bank is a national banking association and, as
such, is subject to restrictions and limitations on the amount and timing of the
dividends it may pay pursuant to the national banking laws and regulations. See
"Liquidity" narrative in Management's Discussion and Analysis of Financial
Condition and Results of Operations for further discussion.
Valuation of the Company's Common Stock is performed by an independent
financial consulting firm experienced in appraisals of commercial banks and bank
holding companies. The fair value of the Company's Common Stock was $47.00,
$37.50 and $29.95 per share at December 31, 1997, 1996 and 1995, respectively,
after giving retroactive effect to a 6% stock dividend issued during 1996 and
1995.
<PAGE> 5
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
AS OF AND FOR THE YEAR-ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED RESULTS
OF OPERATIONS:
Interest income $ 47,593 $ 39,639 $ 34,752 $ 26,330 $ 19,508
Interest expense 27,026 22,305 19,964 13,188 9,261
---------- ---------- ---------- ---------- ----------
Net interest income 20,567 17,334 14,788 13,142 10,247
Provision for credit losses 1,005 980 850 993 920
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for credit losses 19,562 16,354 13,938 12,149 9,327
Other income 1,205 874 753 636 589
Other expense 10,752 8,821 7,590 6,860 5,612
---------- ---------- ---------- ---------- ----------
Income before income taxes 10,015 8,407 7,101 5,925 4,304
Income taxes 3,234 2,681 2,256 1,844 1,362
---------- ---------- ---------- ---------- ----------
Net income $ 6,781 $ 5,726 $ 4,845 $ 4,081 $ 2,942
========== ========== ========== ========== ==========
CONSOLIDATED BALANCE
SHEET DATA:
Total assets $ 669,540 $ 559,726 $ 483,170 $ 417,832 $ 322,517
Cash and cash equivalents 23,292 13,958 13,048 10,847 5,730
Securities available for sale (1) 167,521 159,209 140,627 77,982 54,318
Securities held to maturity - - - 71,920 63,945
Loans, net of deferred loan fees 469,036 380,160 324,788 251,184 194,870
Allowance for credit losses 6,947 5,942 4,960 4,110 3,117
Deposits 579,661 470,743 407,622 357,533 262,732
Shareholders' equity 50,547 41,590 36,136 27,565 26,947
PER SHARE DATA (2):
Net income:
Basic $ 3.57 $ 3.04 $ 2.59 $ 2.20 $ 1.61
Diluted 3.43 2.94 2.51 2.14 1.56
Book value at period end 25.38 21.92 19.18 14.75 14.56
Average shares outstanding:
Basic 1,899,904 1,884,278 1,869,017 1,853,856 1,832,886
Diluted 1,975,818 1,947,655 1,927,679 1,910,310 1,883,615
</TABLE>
(1) The Company adopted Financial Accounting Standards No. 115 in 1993.
See "Securities" narrative in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
(2) The Company adopted Financial Accounting Standards No. 128, Earnings
Per Share effective December 31, 1997. Basic per share amounts are
based upon weighted-average number of common shares outstanding for
each period, after giving retroactive effect to a 6% stock dividend
issued during 1996, 1995, 1994 and 1993. Diluted per share amounts are
based upon weighted-average number of common shares outstanding
including dilutive effects of options, warrants and convertible
securities for each period, after giving retroactive effect to a 6%
stock dividend issued during 1996, 1995, 1994 and 1993. All earnings
per share amounts for all periods have been restated to conform to the
Statement 128 requirements. Book value at period end per share amounts
are based upon year-end shares outstanding for each period.
<PAGE> 6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following narrative presents Management's discussion and analysis
of the Company's financial position and results of operations for the past three
years. The objective of this financial review is to enhance the reader's
understanding of the accompanying tables, consolidated financial statements, the
related notes thereto, and statistical information presented elsewhere in this
report.
The Company was organized in July 1988 and commenced banking operations
in August 1989. The Company achieved profitable operations during 1990 and
continued to experience significant growth in assets, deposits and profitability
during the three years ended December 31, 1997.
RESULTS OF OPERATIONS
---------------------
NET INTEREST INCOME
- -------------------
Net interest income, the difference between revenue generated from
earning assets and the interest cost of funding those assets, is the Company's
primary source of earnings. Net interest income increased 19%, 17% and 13% in
1997, 1996 and 1995, respectively. TABLE 1 is an analysis of factors affecting
this change. TABLE 2 sets forth an analysis of the changes in interest earned
and interest paid resulting from changes in volume and rates during each of the
two years in the period ended December 31, 1997. Net interest margin (net
interest income divided by average earning assets) was 3.58% for 1997, 3.59% for
1996 and 3.54% for 1995.
Average loans outstanding increased 23%, 20% and 31% in 1997, 1996 and
1995, respectively. Average yield on these loans was 8.83%, 8.79% and 8.98%,
respectively. The changes in yield are reflective of the change in market rates
and the refinancing opportunities available during these periods. Securities
represent 28% of the total average earning assets of the Company at December 31,
1997, and the average yields were 6.62%, 6.65% and 6.71% as of December 31,
1997, 1996 and 1995, respectively. The changes in yield are due to changes in
market rates and portfolio mix.
Average total interest bearing liabilities increased to $517 million in
1997 compared with $432 million in 1996 and $376 million in 1995. The average
cost of interest bearing liabilities was 5.23%, 5.17% and 5.30% for the same
periods. The increase in yield is a direct reflection of the increased volume
and increasing short term rates.
<PAGE> 7
TABLE 1 - CONSOLIDATED AVERAGE BALANCE SHEETS AND
ANALYSIS OF NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------- ---------------------------- ----------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED OR YIELD OR AVERAGE EARNED OR YIELD OR AVERAGE EARNED OR YIELD OR
BALANCE PAID COST BALANCE PAID COST BALANCE PAID COST
-------------------------------- ---------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Securities:
Taxable $148,361 $9,671 6.52% $136,202 $8,915 6.55% $126,943 $8,386 6.61%
Tax exempt 13,623 1,058 7.77% 13,321 1,035 7.77% 13,121 1,017 7.75%
Loans 418,029 36,924 8.83% 340,035 29,899 8.79% 283,577 25,466 8.98%
Federal funds sold 5,268 300 5.69% 2,660 142 5.34% 3,873 229 5.91%
-------------------- ------------------ ---------------------
Total Interest Earning Assets 585,281 47,953 8.19% 492,218 39,991 8.12% 427,514 35,098 8.21%
Noninterest Earning Assets:
Cash and due from banks 13,191 10,641 9,593
Bank premises and
equipment-net 8,723 4,797 4,211
Other assets 7,073 6,051 5,662
Less allowance for credit losses (6,388) (5,380) (4,574)
--------- -------- ---------
$607,880 $508,327 $442,406
========= ======== =========
Interest Bearing Liabilities:
Interest checking $138,910 5,847 4.21% $99,839 3,799 3.81% $89,608 3,728 4.16%
Savings deposits 17,671 509 2.88% 19,449 566 2.91% 20,729 674 3.25%
Time deposits 333,114 19,296 5.79% 278,101 16,086 5.78% 236,607 13,897 5.87%
Short-term borrowings 26,849 1,374 5.12% 34,423 1,854 5.39% 29,457 1,665 5.65%
-------------------- ------------------ ---------------------
Total Interest Bearing Liabilities 516,544 27,026 5.23% 431,812 22,305 5.17% 376,401 19,964 5.30%
Noninterest Bearing Liabilities:
Demand deposits 42,372 35,307 31,282
Other 4,404 3,517 3,054
--------- -------- ---------
Total Liabilities 563,320 470,636 410,737
Shareholders' Equity 44,560 37,691 31,669
--------- -------- ---------
$607,880 $508,327 $442,406
========= ======== =========
Net Interest Income $20,927 $17,686 $15,134
======= ======= =======
Net Yield on Interest Earning Assets 3.58% 3.59% 3.54%
====== ====== ======
</TABLE>
NOTE: Nonaccrual loans are included in average loan balances. Interest income
includes the effect of tax equivalent adjustments amounting to $360 in
1997, $352 in 1996 and $346 in 1995, using a 34% tax rate. This rate is
based upon the statutory rate and is not necessarily intended to
represent the Company's effective or incremental rate.
<PAGE> 8
TABLE 2 - ANALYSIS OF NET INTEREST INCOME CHANGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE (DECREASE) INCREASE (DECREASE)
------------------------------------- ------------------------------------
VOLUME RATE NET VOLUME RATE NET
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest on Earning Assets:
Securities $821 ($42) $779 $620 ($73) $547
Loans 6,888 137 7,025 4,960 (527) 4,433
Federal funds sold 148 10 158 (67) (20) (87)
------------------------------------- ------------------------------------
Total Interest Income Changes $7,857 $105 $7,962 $5,513 ($620) $4,893
===================================== ====================================
Expense on Interest Bearing Liabilities:
Deposits $4,746 $455 $5,201 $2,621 ($469) $2,152
Short-term borrowings (391) (89) (480) 260 (71) 189
------------------------------------- ------------------------------------
Total Interest Expense Changes $4,355 $366 $4,721 $2,881 ($540) $2,341
===================================== ====================================
</TABLE>
NOTE: The change in interest not due solely to volume or rate has been
allocated between the factors in proportion to the absolute dollar
amounts of the change in each. Changes in securities reflect taxable
equivalent adjustments.
<PAGE> 9
PROVISION FOR CREDIT LOSSES
- ---------------------------
The provision for credit losses was $1,005,000, $980,000 and $850,000
for the years ended December 31, 1997, 1996 and 1995, respectively. Total
allowance for credit losses as a percentage of total loans outstanding at year
end was 1.5%, 1.6% and 1.5% for the years ended December 31, 1997, 1996 and
1995, respectively.
Management maintains the allowance for credit losses at a level
adequate to absorb potential future losses. The evaluation performed is based
upon a continuous review of historical credit loss experience, specifically
identified problem loans, composition and growth of the loan portfolio, current
and projected economic conditions and other pertinent factors.
Due to its focus on credit quality, the Company has experienced minimal
problems with asset quality and loan charge-offs. The Company has had four
consecutive years of no loan charge-offs and a total of only $216,000 in
charge-offs since its inception. Additional information regarding the provision
and allowance for credit losses is contained in the "Earning Assets" narrative.
OTHER INCOME
- ------------
Other income consists primarily of merchant fees, credit card
interchange fees and service fees on deposit accounts. Total other income of
approximately $1,205,000 for 1997 increased approximately $331,000 or 38% when
compared to 1996 and 16% when 1996 is compared to 1995. Merchant and credit card
interchange fees combined was approximately $777,000, $620,000 and $374,000 in
1997, 1996 and 1995, respectively. Service charges on deposit accounts were
approximately $313,000, $253,000 and $252,000 in 1997, 1996 and 1995,
respectively.
OTHER EXPENSES
- --------------
Noninterest expense increased 22% in 1997 and 16% in 1996. Salaries and
benefits, which accounted for 53% in both 1997 and 1996 of noninterest expenses,
increased by 22% in 1997 and 24% in 1996. Full-time equivalent employees
increased 26% in 1997 and 22% in 1996. Management continues to control overhead
expense without impairing the quality of service provided to customers.
Operating from a single location has proven both efficient and effective. The
Company's total assets per employee approximated $6.8 million and $7.2 million
at December 31, 1997 and 1996, respectively; this compares very favorably to
banks of similar asset size.
The Company's efficiency ratio, computed by dividing other expenses by
net interest income plus other income, was 49.4% for 1997 and 48.4% for 1996.
The increase in the efficiency ratio for 1997 is due primarily to the increased
occupancy costs of the building expansion. This ratio should improve going
forward as we anticipate continued growth in earnings from this single operating
facility. The Company's low ratio is indicative of efficient overhead cost
control
In 1997, occupancy costs increased 88% over 1996 levels, due to the
building expansion becoming fully occupied in the second quarter of 1997.
Depreciation expense for 1997 was approximately $470,000. This represented a 56%
increase over 1996's balance of approximately $302,000.
During 1997, the assessment paid by the Company to the Federal Deposit
Insurance Corporation (FDIC) was $62,000. This compares to only $2,000 being
paid in 1996 due to an August 1995 FDIC vote to reduce premiums banks pay on
deposits in that year. The FDIC returned to charging an assessment per $100 of
deposits, based on your risk classification, in 1997, per the Deposit Insurance
Act of 1996. The Company is currently being assessed the lowest premium rate
established by the FDIC because it is classified in the highest capital rating
category.
PROVISION FOR FEDERAL INCOME TAXES
- ----------------------------------
The Federal income tax expense was $3,234,000, $2,681,000 and
$2,256,000 in 1997, 1996 and 1995, respectively. During each of these years, the
Company realized tax savings from the purchase of tax-free municipal bonds and
from a tax-exempt loan. The effective tax rate was 32.3%, 31.9% and 31.8% in
1997, 1996 and 1995, respectively.
FINANCIAL CONDITION
-------------------
The following discussions address key elements of financial condition,
including earning assets, the sources of funds supporting earning assets, credit
quality and experience, asset and liability management, and capital adequacy.
<PAGE> 10
EARNING ASSETS
--------------
LOANS
- -----
Loans comprised 71%, 69% and 66% of the Company's average earning
assets in 1997, 1996 and 1995, respectively. Loan volume and quality continue to
be strong as the Company grows. The increase in net loans outstanding over the
prior year was $88 million, $54 million and $73 million in 1997, 1996 and 1995,
respectively.
The commercial loan portfolio represents loans to business interests,
located primarily within the Company's defined market area, with no significant
industry concentration. The residential real estate portfolio is primarily
adjustable rate mortgages that qualify for sale into the secondary market;
however, the Company has chosen to retain all residential mortgage loans in its
portfolio.
TABLES 3 and 4 show the composition of the loan portfolio at the end of
each of the last five years and the loan maturities and rate sensitivities at
December 31, 1997.
TABLE 3 - LOAN PORTFOLIO AT DECEMBER 31
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial $103,061 $ 79,492 $ 74,347 $ 59,290 $ 47,893
Real Estate:
Residential-first mortgage 104,659 86,750 70,969 56,168 47,710
Commercial-owner occupied 99,537 76,673 70,121 54,480 47,195
Commercial-investment 130,108 105,275 78,531 57,553 32,981
-------- -------- -------- -------- --------
334,304 268,698 219,621 168,201 127,886
Consumer 27,849 26,995 25,653 22,757 18,205
Other 4,507 5,614 5,767 1,533 1,433
-------- -------- -------- -------- --------
Total Loans 469,721 380,799 325,388 251,781 195,417
Less deferred loan fees 685 639 600 597 547
-------- -------- -------- -------- --------
Total loans net of
deferred loan fees 469,036 380,160 324,788 251,184 194,870
Less allowance for
credit losses 6,947 5,942 4,960 4,110 3,117
-------- -------- -------- -------- --------
Net Loans $462,089 $374,218 $319,828 $247,074 $191,753
======== ======== ======== ======== ========
</TABLE>
<PAGE> 11
The maturity distribution and sensitivity to interest rates of the loan
portfolio are two factors in management's evaluation of the risk characteristics
and the future profitability of the portfolio.
TABLE 4 - LOAN MATURITIES AND RATE SENSITIVITIES AT DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
WITHIN 1 - 5 OVER 5
1 YEAR YEARS YEARS TOTAL
------ ----- ----- -----
<S> <C> <C> <C> <C>
Loan maturities by type (A,C):
Commercial $ 48,938 $ 38,337 $ 15,786 $103,061
Real Estate:
Residential-first mortgage 7,071 1,340 96,248 104,659
Commercial-owner occupied 2,809 29,293 67,435 99,537
Commercial-investment 20,527 20,634 88,947 130,108
-------- -------- -------- --------
30,407 51,267 252,630 334,304
Consumer 18,445 6,333 3,071 27,849
Other 436 - 4,072 4,508
-------- -------- -------- --------
TOTAL $ 98,226 $ 95,937 $275,559 $469,722
======== ======== ======== ========
Rate Sensitivities (B,C):
Fixed Rate Loans $ 59,926 $253,493 $ 21,987 $335,406
Variable Rate Loans 134,316 - - 134,316
-------- -------- -------- --------
TOTAL $194,242 $253,493 $ 21,987 $469,722
======== ======== ========= ========
Percent of Total 41.35% 53.97% 4.68% 100.00%
======== ======== ========= ========
</TABLE>
(A) Maturities based on ending contractual maturity dates.
(B) Loans are reported at the earliest of maturity or repricing opportunity.
(C) Occasionally extensions or renewals of loan obligations are requested.
These are reviewed on an individual basis and granted if deemed
appropriate. Such extensions, however, do not materially alter the
anticipated loan maturity tables as reported.
The Bank's credit policy establishes guidelines to manage credit risk
and asset quality. These guidelines include loan review and early identification
of problem loans to ensure sound credit decisions. The Bank's credit policies
and procedures are meant to minimize the risk and uncertainties inherent in
lending. In following these policies and procedures, management must rely on
estimates, appraisals and evaluations of loans and the possibility that changes
in these could occur quickly because of changing economic conditions.
Nonperforming assets consist of loans on nonaccrual and loans over
90-days past due as to principal and interest and still in an accrual status.
Nonaccrual loans are loans which are 90-days past due and with respect to which,
in management's opinion, collection of interest is doubtful. These loans no
longer accrue interest and are accounted for on a cash basis. Loans which are
90-days or more past due and still accruing interest are loans which, in
management's opinion, are well secured and are in the process of collection.
Nonperforming loans amounted to $673,000, $454,000, $138,000 and $25,000 at
December 31, 1997, 1996, 1995 and 1994, respectively, which consistently
represents less than .15% of total loans for the same periods.
Potential problem loans are those loans which are on the Bank's "Watch
List" and exhibit characteristics that could cause the loans to become
nonperforming or require restructuring in the future. Management reviews this
list regularly and adjusts for changing conditions.
<PAGE> 12
TABLE 5 is a summary of credit loss experience for the five years ending
December 31, 1997.
TABLE 5 - ALLOWANCE FOR CREDIT LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,942 $ 4,960 $ 4,110 $ 3,117 $ 2,249
Loans charged off:
Commercial - - - - -
Residential real estate - - - - (25)
Consumer and other - - - - (27)
--------- --------- --------- --------- ---------
Total loans charged off - - - - (52)
Recoveries:
Consumer and other - 2 - - -
--------- --------- --------- --------- ---------
Total recoveries - 2 - - -
Net loans charged off - - - - (52)
Provision for credit losses 1,005 980 850 993 920
--------- --------- --------- --------- ---------
Balance at end of year $ 6,947 $ 5,942 $ 4,960 $ 4,110 $ 3,117
========= ========= ========= ========= =========
Total loans outstanding at year-end $ 469,722 $ 380,799 $ 325,388 $ 251,781 $ 195,417
========= ========= ========= ========= =========
Average loans $ 418,029 $ 340,035 $ 283,577 $ 216,702 $ 163,313
========= ========= ========= ========= =========
As a percent of average loans:
Net charge-offs N/A N/A N/A N/A 0.03%
Provision for credit losses 0.24% 0.29% 0.30% 0.46% 0.56%
As a percent of total loans outstanding
at year-end:
Year-end allowance for credit losses 1.48% 1.56% 1.52% 1.64% 1.60%
</TABLE>
<PAGE> 13
TABLE 6 is an allocation of the allowance for credit losses for the five years
ended December 31, 1997:
TABLE 6 - ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------- -------------- ------------- ------------- -------------
% OF % OF % OF % OF % OF
LOANS TO LOANS TO LOANS TO LOANS TO LOANS TO
AMT TTL LOANS AMT TTL LOANS AMT TTL LOANS AMT TTL LOANS AMT TTL LOANS
--- --------- --- --------- ------------- ------------- --- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 714 22% $ 720 21% $ 957 23% $ 774 23% $ 996 25%
Real Estate:
Residential - first mortgage 362 22% 240 23% 179 22% 140 22% 126 24%
Commercial - owner occupied 573 21% 542 20% 422 22% 310 22% 280 24%
Commercial - investment 1,464 28% 1,263 28% 844 24% 624 23% 368 17%
-------- ----- ----- ----- ------ ----- ------ ---- ------ ----
2,399 71% 2,045 71% 1,445 68% 1,074 67% 774 65%
Consumer and other 275 7% 293 8% 318 9% 228 10% 184 10%
-------- ----- ------ ----- ------ ---- ------ ---- ------ ----
Total allocated 3,388 100% 3,058 100% 2,720 100% 2,076 100% 1,954 100%
==== ==== ==== ==== ====
Total unallocated 3,559 2,884 2,240 2,034 1,163
------- ------ ------ ------ ------
Total $6,947 $5,942 $4,960 $4,110 $3,117
====== ====== ====== ====== ======
</TABLE>
The loan portfolio contains no foreign loans nor any concentration to
identified borrowers engaged in the same or similar industries exceeding 10% of
total loans.
SECURITIES
- ----------
During December 1993, the Company elected to adopt Financial Accounting
Standards Board Standard No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (FAS No. 115). Securities available for sale are stated
at fair value, with the unrealized gains and losses, net of income tax, reported
as a separate component of shareholders' equity. The unrealized gain recorded at
December 31, 1997, approximated $1,357,000 (net of $698,000 in deferred income
taxes); the unrealized gain recorded at December 31, 1996, approximated $531,000
(net of $273,000 in deferred income taxes); and the unrealized gain recorded at
December 31, 1995, approximated $1,233,000 (net of $635,000 in deferred income
taxes). The designation of such securities is made by management based upon
liquidity needs at the time of purchase. There was no designation of securities
as available for sale prior to 1992.
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 investment securities at December 28, 1995,
to available for sale, at fair value of approximately $67.3 million.
The securities available for sale (SAFS) portfolio at December 31,
1997, is composed primarily of U.S. Treasury (19.5%) and U.S. Government Agency
Securities (60.4%). The remaining 20.1% is composed of certain other securities.
The quality of this portfolio is 80% AAA rated bonds with an average maturity of
2.3 years. The SAFS portfolio represented 25% of total assets at December 31,
1997, and 28% at December 31, 1996.
<PAGE> 14
The SAFS portfolio at December 31, 1997, includes securities issued by
the State of Ohio and the State of Michigan with the following values:
<TABLE>
<CAPTION>
FAIR AMORTIZED
VALUE COST
----- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
State of Ohio $8,840 $8,455
State of Michigan 4,221 4,083
</TABLE>
TABLES 7 and 8 set forth the carrying value of the SAFS portfolio at
the dates indicated, and provide an analysis of the maturities and average
yields on a fully taxable equivalent basis (assuming a 34% tax rate) as of
December 31, 1997. Classification by maturity is determined by the earlier of
maturity date or call date.
TABLE 7 - SECURITIES AVAILABLE FOR SALE
(DOLLARS IN THOUSANDS)
CARRYING VALUE AT DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
U.S. government securities
and agency obligations $130,023 $121,195 $107,759 $ 75,753 $ 49,034
Corporate debt securities 15,614 17,494 13,685 - 3,883
Municipal obligations 14,038 13,661 13,619 - -
Mortgage-backed securities 3,088 3,087 3,163 - -
Other securities 4,758 3,772 2,401 2,229 1,401
-------- -------- -------- -------- --------
TOTAL $167,521 $159,209 $140,627 $ 77,982 $ 54,318
======== ======== ======== ======== ========
</TABLE>
TABLE 8 - MATURITY ANALYSIS AT DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AFTER 1 AFTER 5
YEAR BUT YEARS BUT
WITHIN WITHIN WITHIN AFTER
1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
------ ------- -------- -------- -----
<S> <C> <C> <C> <C>
U.S. government securities
and agency obligations $ 49,801 $ 75,994 $ 4,228 - $130,023
Corporate debt securities 4,556 8,970 2,088 - 15,614
Municipal obligations 386 8,323 4,945 384 14,038
Mortgage-backed securities 1,093 1,995 - - 3,088
Other securities - 8 - 4,750 4,758
---------- -------- -------- -------- --------
TOTAL $ 55,836 $ 95,290 $ 11,261 $ 5,134 $167,521
========== ======== ======== ======== ========
WEIGHTED AVERAGE YIELD:
U.S. government securities
and agency obligations 6.23% 6.64% 6.91% - 6.49%
Corporate debt securities 6.54% 6.57% 7.14% - 6.64%
Municipal obligations 6.22% 7.28% 6.92% 8.07% 7.14%
Mortgage-backed securities 5.58% 5.71% - - 5.67%
Other securities - 9.00% - 6.17% 6.17%
TOTAL 6.54%
</TABLE>
<PAGE> 15
The securities held to maturity (SHTM) portfolio represented 17% of
total assets at December 31, 1994, and 20% at December 31, 1993. As discussed
above, the entire SHTM portfolio was transferred to SAFS during 1995. During
1993, approximately $49 million of SHTM were transferred to SAFS in connection
with the implementation of FAS No. 115.
TABLE 9 sets forth the carrying value of the SHTM portfolio at the
dates indicated.
TABLE 9 - SECURITIES HELD TO MATURITY
(DOLLARS IN THOUSANDS)
CARRYING VALUE AT DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
U.S. government securities
and agency obligations - - - $42,441 $36,432
Corporate debt securities - - - 13,749 13,250
Municipal obligations - - - 12,475 10,890
Mortgage-backed securities - - - 3,225 3,348
Other securities - - - 30 25
--------- -------- -------- ------- -------
TOTAL - - - $71,920 $63,945
========= ======== ======== ======= =======
</TABLE>
FEDERAL FUNDS SOLD
- ------------------
Short-term Federal funds sold are used to manage interest rate
sensitivity and to meet liquidity needs. During 1997, 1996 and 1995, the average
balance of these funds represented less than 1% of average total assets for the
same periods. As the Bank has grown, the ability to manage daily liquidity needs
has become stable and the use of daily Federal funds sold has been maintained at
a very manageable level.
DEFERRED FEDERAL INCOME TAXES
- -----------------------------
Deferred Federal income taxes represent a net asset of $1,086,000 at
December 31, 1997. This amount is comprised primarily of deferred taxes relating
to the nondeductible portion of the credit allowance offset by the unrealized
gains on available for sale securities which total $2,113,000 and $698,000,
respectively. Certain limits exist for deduction of the provision related to
credit losses that exceeds actual experience. With insignificant loan
charge-offs, the Company's tax deduction to date, has been minimal. Sufficient
taxable income in prior years exists to realize the deferred tax assets that are
recorded.
<PAGE> 16
SOURCES OF FUNDS
----------------
DEPOSITS
- --------
The Company's major source of investable funds is core deposits from
retail and business customers. These core deposits consist of interest bearing
and noninterest bearing deposits, excluding certificates of deposit equal to or
greater than $100,000. These core deposits grew to $373 million in 1997 from
$332 million in 1996 and $297 million in 1995.
Certificates of deposit equal to or greater than $100,000 grew to $206
million in 1997 from $138 million in 1996 and $110 million in 1995. The
continued strong marketing effort to secure customers willing to consolidate
deposits into a single investment (ie. certificate of deposit) has allowed the
Company to support a strong loan growth. These funds are used to balance rate
sensitivity and as a supplement to core deposits.
Since the Company places less emphasis on mass marketing of retail
products, its customer base consists of higher net worth individuals and their
related companies, and retirees. The net growth, since the Company opened in
1989, has been without significant fluctuation and the deposit base has been
reliable. Management anticipates a continuation of these trends. Average
deposits increased 23% in 1997, 15% in 1996 and 21% in 1995.
TABLE 10 is a summary of the average amount of, and the average rate paid on,
each of the Bank's deposit categories.
TABLE 10 - AVERAGE DEPOSITS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest
bearing deposits $42,372 $ 35,307 $ 31,282
Money market accounts 138,910 4.21% 99,839 3.81% 89,608 4.16%
Savings 17,671 2.88% 19,449 2.91% 20,729 3.25%
Other time deposits 333,114 5.79% 278,101 5.78% 236,607 5.87%
-------- -------- --------
TOTAL $532,067 $432,696 $378,226
======== ======== ========
</TABLE>
The increase (decrease) in average deposits by category for 1997 was as
follows: Noninterest bearing deposits, 20%; money market accounts, 39%; savings,
(9%) and other time deposits, 20%.
Certificates of deposit of $100,000 or more grew 49% in 1997. As the
Company grows, the market penetration of the retail customer base expands. In
addition, customers are continually consolidating banking relationships, taking
advantage of the Company's competitively priced deposit products. The maturity
distribution of certificates of deposit of $100,000 or more at December 31,
1997, is reflective of the interest rate environment during 1997, which had more
favorable rates in long-term investments.
TABLE 11 - CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AT DECEMBER 31
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Maturing:
3 months or less $ 93,831 $ 61,849 $ 54,946
Over 3 to 6 months 34,268 28,243 17,077
Over 6 to 12 months 34,534 28,737 20,374
Over 12 months 43,819 19,495 17,806
--------- --------- --------
TOTAL $206,452 $138,324 $110,203
======== ======== ========
</TABLE>
<PAGE> 17
SHORT-TERM BORROWINGS
- ---------------------
Short-term borrowings were $30 million, $42 million and $35 million at
December 31, 1997, 1996 and 1995, respectively.
Short-term borrowings are primarily composed of advances from The
Federal Home Loan Bank (52.5%). The remaining 47.5% is composed of securities
sold under agreements to repurchase which are secured transactions, a majority
of which mature within one year or less and Federal funds borrowings. Additional
information regarding securities sold under agreements to repurchase and Federal
Home Loan Bank borrowings is summarized below:
<TABLE>
<CAPTION>
SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE FEDERAL HOME LOAN BANK
------------------------ ----------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Weighted average interest rate
at year-end 4.20% 4.31% 5.34% 5.61% 5.56% 5.58%
Amount outstanding at year-end $14,395 $15,531 $24,203 $15,900 $19,000 $8,000
Maximum amount outstanding at
any month end 14,395 26,012 26,003 18,860 19,000 9,000
Daily average amount outstanding
during the year 12,926 21,255 23,098 12,216 12,015 5,759
Weighted average interest rate
for the year 4.57% 5.30% 5.69% 5.60% 5.51% 5.45%
</TABLE>
CAPITAL RESOURCES AND DIVIDENDS
- -------------------------------
Shareholders' equity is a stable, noninterest bearing source of funds
which provides support for asset growth and is the primary component of capital.
Shareholders' equity at December 31, 1997, 1996 and 1995 was $50.5 million,
$41.6 million and $36.1 million, respectively. During 1997 and 1996, the Bank
paid a $4,000,000 and $10,000,000, respectively, cash dividend to the parent
company. The parent company then issued $4,000,000 and $10,000,000 in 1997 and
1996, respectively, in subordinated debt to the Bank. Principal is due at
maturity, January 1, 2008, and January 1, 2007, respectively, with interest
payable at 6.75%.
In April 1993, shareholders voted to increase the authorized common
stock from 1.5 million shares to 3.0 million shares. The Company issued a 6%
stock dividend in June of 1996, 1995, 1994 and 1993. In June 1997, the Company
began to issue quarterly cash dividends of $.17 per share. This totaled $984,487
for 1997.
The following shows consolidated operating and capital ratios of the
Company for each of the past three years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Return on average assets 1.12% 1.13% 1.10%
Return on average equity 15.22% 15.19% 15.30%
Average equity to average assets 7.33% 7.41% 7.16%
Tier 1 capital (1) 9.81% 10.14% 10.19%
Tier 2 capital (2) 11.06% 11.39% 11.44%
Leverage (3) 7.67% 7.60% 7.47%
</TABLE>
(1) Shareholders' equity less the effect of securities available for sale
market value adjustment per FAS No. 115 and intangibles, if applicable,
computed as a ratio to risk-adjusted assets, as defined in the 1994
risk-based capital guidelines.
(2) Tier 1 capital plus qualifying credit loss allowance, computed as a ratio
to risk-adjusted assets, as defined in the 1994 risk- based capital
guidelines.
(3) Tier 1 capital, computed as a ratio to the latest quarter's average assets,
less goodwill, if applicable.
The Company's capital ratios are well in excess of the minimum regulatory
risk-based capital requirements of 4% for Tier 1 capital and leverage and 8% for
Tier 2 capital.
<PAGE> 18
YEAR 2000
- ---------
The Company has determined that it will need to modify or replace
portions of its software and hardware so that its computer systems will function
properly with respect to dates in the year 2000 and beyond. The Company has
initiated discussions with third-party software and hardware suppliers and
determined that the Company will have available the operating systems that are
fully compliant. The Company has developed a plan to modify its information
technology and will begin the conversion by the middle of 1998. All applications
and hardware upgrades will be substantially complete by early 1999 at an
estimated cost of $100,000 to $250,000, which will be capitalized, that is
attributable to Year 2000 issues. We do not expect this project to have a
significant effect on operations. The Company's Year 2000 initiative is being
managed by a team of internal staff and the internal costs of this activity,
which will be expensed, is not expected to be material to the Company's
financial position.
The Company is currently evaluating the Year 2000 readiness of its
significant suppliers, large customers and other financial institutions to
ensure that those parties have appropriate plans to remediate Year 2000 issues
where their systems interface with the Company's systems or otherwise impact its
operations. The Company is assessing the extent to which its operations are
vulnerable should those organizations fail to remediate properly their computer
systems.
While the Company believes its planning efforts are adequate to address
its Year 2000 concerns, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis and will not have a material effect on the Company. The costs
of Year 2000 modifications and date of completion will be closely monitored and
are based on management's best estimates. Actual results, however, could differ
from those anticipated.
LIQUIDITY AND INTEREST RATE SENSITIVITY
---------------------------------------
LIQUIDITY
- ---------
Liquidity is measured by the Company's ability to raise funds through
deposits, borrowed funds, capital or cash flow from the repayment of loans.
These funds are used to meet deposit withdrawals, maintain reserve requirements,
fund loans and operate the Company. Liquidity is achieved through the growth of
core deposits and liquid assets, including securities available for sale,
matured securities and Federal funds sold. Asset and liability management is the
process of managing the balance sheet to achieve a mix of earning assets and
liabilities that maximizes profitability, while providing adequate liquidity.
The Company's major source of funds is a substantial base of core
funds, defined as core deposits plus shareholders' equity and other liabilities.
The Company supplements core funds by regularly issuing certificates of deposit
and repurchase agreements. The Company also has the ability to borrow money on a
daily basis through correspondent banks and the Federal Home Loan Bank to
satisfy short-term liquidity needs. At December 31, 1997, and 1996, the Company
had $36.2 million and $8.2 million, respectively, of unused lines of credit.
During January 1997, the Company's Board of Directors approved an increase in
the investment by the Bank in the Federal Home Loan Bank from $2.9 million to
$6.0 million. This increased the Company's available line of credit with the
Federal Home Loan Bank to $36.0 million. The Company currently holds $3.6
million in Federal Home Loan Bank stock.
In addition to normal loan funding and deposit flow, the Company also
needs to maintain liquidity to meet the demands of certain unfunded loan
commitments and standby letters of credit. As of December 31, 1997, the Company
had a total of $186.9 million in unfunded loan commitments and $13.4 million in
unfunded standby letters of credit. Of the total unfunded loan commitments,
$136.5 million were commitments available as lines of credit to be drawn at any
time as customers' cash needs vary, and $50.4 million were for loan commitments
scheduled to close and become funded within the next six months. The Company
monitors fluctuations in balances and manages its overall liquidity, taking into
account these unfunded commitments.
On a parent company basis, the Company's primary source of funds is
dividends paid by the subsidiary Bank. The ability of the Bank to pay dividends
is subject to limitations under various laws and regulations and to prudent and
sound banking principles. 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.
<PAGE> 19
INTEREST RATE RISK
- ------------------
Balance sheet structure and interest rate changes play important roles
in the growth of net interest income. The Company's Asset/Liability Committee
(ALCO) manages the overall rate sensitivity and mix of the balance sheet to
anticipate and minimize the effects of interest rate fluctuations and maintain a
consistent net interest margin. The relative measure of assets and liabilities
that will mature or are scheduled to reprice within various time categories is
known as "GAP." Because the Company has more liabilities than assets repricing
within one year at December 31, 1997, it has a negative GAP and is considered
liability sensitive. In a rising rate environment, this liability surplus would
most likely detract from net interest income. In a declining rate environment,
the effect would most likely be favorable. Experience has shown that this
generalization does not fully capture the true dynamics of interest rate changes
since asset and liability rates do not adjust equally.
INTEREST RATE SENSITIVITY
- -------------------------
A number of measures are used to monitor and manage interest rate risk,
including income simulation and interest sensitivity (GAP) analyses. An income
simulation model is management's primary tool used to assess the direction and
magnitude of variations in net interest income resulting from changes in
interest rates. Key assumptions in the model include prepayment speeds on
various loan and investment assets; cash flows and maturities of financial
instruments held for purposes other than trading; changes in market conditions,
loan volumes, and pricing; deposit sensitivity; client preferences; and
management's financial capital plans. These assumptions are inherently
uncertain, subject to fluctuation and revision in a dynamic environment and , as
a result, the model cannot precisely estimate net interest income or exactly
predict the impact of higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes and changes in market conditions and
management strategies, among other factors.
Results of the multiple simulations done as of December 31, 1997,
suggest that the Corporation could expect net interest income to increase by
approximately $754,000 (if interest rates gradually decline by 100 basis points
over the next twelve months) and, to decrease by approximately $744,000 (if
interest rates gradually increase by 100 basis points over the next twelve
months) from 1997 levels of net interest income. These variances in net interest
income were well within the Company's policy parameters established to manage
such risk. In addition to changes in interest rates, the level of future net
interest income is also dependent on a number of other variables, including the
growth, composition and absolute levels of deposits, loans, and other earning
assets and interest bearing liabilities, economic and competitive conditions,
client preferences and other factors.
TABLE 12, Interest Rate Sensitivity Analysis, shows as of December 31,
1997, assets and liabilities which are maturing at various periods in time and
which will be subject to repricing. A formal asset/liability management analysis
is performed on a monthly basis by Austin Advisors, Inc., a firm specializing in
consulting and providing assistance to banks. This information is presented and
reviewed by the "ALCO" Committee.
FORWARD-LOOKING STATEMENTS
- --------------------------
The foregoing disclosure contains "forward-looking statements" within
the meaning of the Securities Act of 1933 and the Securities Exchange Act of
1934, both as amended, with respect to expectations for future periods. These
forward looking statements relate to the impact of Year 200 and the interest
rate sensitivity analysis, all changes which are subject to risks and
uncertainties that could cause actual results to differ. These risks and
uncertainties include unanticipated changes in the competitive environment and
relationships with third party vendors and clients and certain other factors
discussed in this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The Report of Independent Auditors and Consolidated Financial
Statements included on pages 9 through 20 of the 1997 Annual Report to
Shareholders are incorporated herein by reference.
<PAGE> 20
TABLE 12 - INTEREST RATE SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------------------------------
1 TO 4 4 MONTHS 1 TO 5 OVER
MONTHS TO 1 YEAR YEARS 5 YEARS TOTAL
------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Assets:
Loans, gross $165,000 $29,242 $253,493 $21,987 $469,722
Securities available for sale (1) 28,471 27,365 95,290 16,395 167,521
Other assets 32,297 32,297
----------------------------------------------------------------------------------------
Total Assets $193,471 $56,607 $348,783 $70,679 $669,540
========================================================================================
Liabilities:
Savings, time and interest
checking $221,278 $64,848 $37,213 $0 $323,339
CD's $100,000 & over 108,634 53,999 43,711 108 206,452
Borrowed funds 16,500 1,000 5,895 6,900 30,295
Other liabilities 58,907 58,907
----------------------------------------------------------------------------------------
Total Liabilities 346,412 119,847 86,819 65,915 618,993
Shareholders' Equity 50,547 50,547
----------------------------------------------------------------------------------------
Total Sources of Funds $346,412 $119,847 $86,819 $116,462 $669,540
========================================================================================
Maturity/rate sensitivity GAP ($152,941) ($63,240) $261,964 ($45,783)
Cumulative GAP (152,941) (216,181) 45,783
Percent of cumulative GAP to
total assets -23% -32% 7%
</TABLE>
(1) This table classifies securities according to sensitivity to changes in
interest rates.
<PAGE> 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The following table lists the Non-Director, Executive Officers of the
Company and its subsidiary, Capital Bank, N.A., and certain other information
with respect to each individual, as of December 31, 1997. The information
required by this item with respect to Directors of the Company and its
subsidiary, Capital Bank, N.A., is incorporated herein by reference to the
information under the heading "Election of Directors and Information with
Respect to Directors and Officers" in the definitive Proxy Statement of the
Company.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION AND DIRECTORSHIP
- ---- --- -------------------------------------
<S> <C> <C>
Michael P. Killian 46 Chief Financial Officer of the Company, Senior Vice President - Operations
and Chief Financial Officer of the Bank
Stephen J. Kovatch 55 Assistant Secretary of the Company, Senior Vice President - Marketing of the Bank
Bruce K. Lee 37 Executive Vice President - Lending of the Bank
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
Information required by this item is incorporated herein by reference
to the information under the heading "Executive Compensation and Other
Information" in the definitive Proxy Statement of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
Information required by this item is incorporated herein by reference
to the information under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the definitive Proxy Statement of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
Information required by this item is incorporated herein by reference
to the information under the heading "Certain Relationships and Related
Transactions" in the definitive Proxy Statement of the Company.
<PAGE> 22
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
- -------- --------------------------------------------------------------
(A) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
--------------------------------------------------------
The following consolidated financial statements included in the 1997
Annual Report to Shareholders of Capital Holdings, Inc., are incorporated by
reference in ITEM 8:
Consolidated Balance Sheets at December 31, 1997 and 1996.
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Schedules are omitted because they are inapplicable, not required, or
the information is included in the consolidated financial statements or notes
thereto.
(B) REPORTS ON FORM 8-K
-------------------
None
(C) EXHIBITS
--------
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C> <C>
3.1 Articles of Incorporation of Capital Holdings, Inc. *
---
3.2 Code of Regulations of Capital Holdings, Inc. *
---
3.3 Articles of Incorporation of Capital Holdings, Inc., as amended +
May 18, 1993 ---
4.0 Certificate for Common Shares of Capital Holdings, Inc. *
---
10 Nonemployee Director Stock Option Plan &
of Capital Holdings, Inc. ---
10.4 1988 Incentive Stock Option Plan of Capital Holdings, Inc. *
---
10.5 Lease between Capital Bank, N.A. and CBNA Building Company, *
a wholly-owned subsidiary of Capital Holdings, Inc. ---
10.6 Supplemental Executive Retirement Plan of Capital Holdings, Inc. $
---
13 The Company's 1997 Annual Report to Shareholders - Except
for the portions of the report expressly incorporated
by reference, the Report is furnished solely for the
information of the Commission and is not deemed
"filed" as part hereof
21 List of Subsidiaries *
---
(i) Capital Bank, N.A., a national banking
association chartered by the Office of the
Comptroller of the Currency of the United States
(ii) CBNA Building Company, an Ohio corporation
23.1 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
* Documents incorporated by reference from the Company's S-1 Registration
Statement, File Number 33-46573, effective May 8, 1992.
+ Document incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1993.
& Document incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995.
$ Document incorporated by reference from the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
(D) FINANCIAL STATEMENT SCHEDULES
-----------------------------
None required.
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on the dates indicated.
CAPITAL HOLDINGS, INC.
By
---------------------------------------------------------------
John S. Szuch Date
Chairman and Chief Executive Officer
Director
By
---------------------------------------------------------------
Robert A. Sullivan Date
President and Chief Operating Officer
Director
By
---------------------------------------------------------------
Michael P. Killian Date
Senior Vice President and Chief Financial Officer
<PAGE> 24
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
Capital Holdings, Inc. and Subsidiaries and in the capacities and on the dates
indicated.
By
---------------------------------------------------------------
James M. Appold Date
Director
By
---------------------------------------------------------------
David P. Bennett Date
Director
By
---------------------------------------------------------------
Yale M. Feniger Date
Director
By
---------------------------------------------------------------
George A. Isaac, III Date
Director
By
---------------------------------------------------------------
Michael C. Landin Date
Director
By
---------------------------------------------------------------
Ronald R. Langenderfer Date
Director
<PAGE> 25
By
---------------------------------------------------------------
Joel A. Levine Date
Director
By
---------------------------------------------------------------
W. G. Lyden, III Date
Director
By
---------------------------------------------------------------
Thomas W. Noe Date
Director
By
---------------------------------------------------------------
Noel Romanoff Date
Director
By
---------------------------------------------------------------
James D. Sayre Date
Director
By
---------------------------------------------------------------
James M. Tuschman Date
Director
<PAGE> 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]
<PAGE> 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
<PAGE> 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
1
<PAGE> 4
Capital Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------------------------------------------
<S> <C> <C>
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
=============================================
</TABLE>
See accompanying notes.
2
<PAGE> 5
Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
See accompanying notes.
3
<PAGE> 6
Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Capital in Total
Common Excess of Retained Unrealized Shareholders'
Stock Stated Value Earnings Gains (Losses) Equity
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
====================================================================
</TABLE>
See accompanying notes.
4
<PAGE> 7
Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
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
======================================================
</TABLE>
See accompanying notes.
5
<PAGE> 8
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.
6
<PAGE> 9
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.
7
<PAGE> 10
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.
8
<PAGE> 11
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
=======================================================================
</TABLE>
9
<PAGE> 12
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
3. INVESTMENT SECURITIES--CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
=======================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
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
================================================
</TABLE>
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.
10
<PAGE> 13
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
3. INVESTMENT SECURITIES--CONTINUED
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
-------------------------------------------
<S> <C> <C>
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
===========================================
</TABLE>
4. LOANS
The carrying amount of loans, classified by type, at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------
<S> <C> <C>
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
============================================
</TABLE>
11
<PAGE> 14
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:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
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
=========================================================
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------
<S> <C> <C>
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
=========================================
</TABLE>
12
<PAGE> 15
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:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------
<S> <C> <C>
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
=============================================
</TABLE>
The maturity distribution of certificates of deposit issued in amounts of
$100,000 and over and outstanding at December 31, 1997 is:
<TABLE>
<S> <C>
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
=====================
</TABLE>
7. SHORT-TERM BORROWINGS
Short-term borrowings, which are comprised of various types of funds at December
31 are summarized below:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------
<S> <C> <C>
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
==========================================
</TABLE>
13
<PAGE> 16
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:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------
<S> <C> <C>
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
========================================
</TABLE>
14
<PAGE> 17
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:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
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
======================================================
</TABLE>
The effective tax rate differs from the statutory tax rate for the following
reasons and by the following percentages:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
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%
==================================================
</TABLE>
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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Options
-------------------------------
Available Option Price Per
for Grant Outstanding Share Range
-------------------------------------------------------
<S> <C> <C> <C>
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
===============
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
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
=====================================================
</TABLE>
18
<PAGE> 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:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
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
=====================================================
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
1997
---------------------------------------------
EXPIRATION LOAN STANDBY LETTERS
DATE COMMITMENTS OF CREDIT
- ---------------------------------------------------------------------------------
<S> <C> <C>
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
=============================================
</TABLE>
Management does not anticipate any significant losses as a result of these
commitments.
20
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Total Tier I Tier I
Risk-Based Risk-Based Leverage
Capital Capital Capital
------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
1997
------------------------------------------
CARRYING ESTIMATED
VALUE FAIR VALUES
------------------------------------------
<S> <C> <C>
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
=====================
</TABLE>
23
<PAGE> 26
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
13. FAIR VALUE STATEMENT OF CONDITION--CONTINUED
<TABLE>
<CAPTION>
1996
-------------------------------------------
CARRYING ESTIMATED
VALUE FAIR VALUES
-------------------------------------------
<S> <C> <C>
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
======================
</TABLE>
14. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------------------
<S> <C> <C>
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
============================================
</TABLE>
24
<PAGE> 27
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
14. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY--CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
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
=======================================================
</TABLE>
25
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-46573) pertaining to the Capital Bank, N.A. Retirement Savings
Plan, of our report dated January 16, 1998, with respect to the consolidated
financial statements of Capital Holdings, Inc., incorporated by reference in
the Annual Report (Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG, LLP
Cleveland, Ohio
March 19, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,291,951
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 167,520,873
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 469,036,091
<ALLOWANCE> 6,947,377
<TOTAL-ASSETS> 669,539,863
<DEPOSITS> 579,661,108
<SHORT-TERM> 30,295,269
<LIABILITIES-OTHER> 9,036,804
<LONG-TERM> 0
0
0
<COMMON> 995,961
<OTHER-SE> 49,550,721
<TOTAL-LIABILITIES-AND-EQUITY> 669,539,863
<INTEREST-LOAN> 36,924,103
<INTEREST-INVEST> 10,668,886
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 47,592,989
<INTEREST-DEPOSIT> 25,651,782
<INTEREST-EXPENSE> 27,025,654
<INTEREST-INCOME-NET> 20,567,335
<LOAN-LOSSES> 1,005,000
<SECURITIES-GAINS> (1,797)
<EXPENSE-OTHER> 10,751,990
<INCOME-PRETAX> 10,015,685
<INCOME-PRE-EXTRAORDINARY> 10,015,685
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,781,685
<EPS-PRIMARY> 3.57
<EPS-DILUTED> 3.43
<YIELD-ACTUAL> 3.58
<LOANS-NON> 433,000
<LOANS-PAST> 240,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,942,377
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 6,947,377
<ALLOWANCE-DOMESTIC> 3,388,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,559,377
</TABLE>
