<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1998
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) (IRS 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. _______
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 February 10, 1999 was $93,732,642
The number of shares of Registrant's Common Stock outstanding on
February 23, 1999 was 2,020,365.
Documents Incorporated by Reference
-----------------------------------
Annual Report to Shareholders for fiscal year ended December 31, 1998 - Parts II
and IV.
Definitive Proxy Statement for the Annual Meeting of Shareholders to be
held May 5, 1999 - Part III.
<PAGE> 2
CAPITAL HOLDINGS, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I
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 7A. Qualitative and Quantitative Disclosures About
Market Risk........................................20
Item 8. Financial Statements and Supplementary Data..............23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..........23
PART III
Item 10. Directors and Executive Officers of the Registrant.......23
Item 11. Executive Compensation...................................23
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................23
Item 13. Certain Relationships and Related Transactions...........23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.....................................24
Signatures.................................................................25
<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, 1998, the total
assets of the Company were $801.6 million with equity capital of $58.4 million.
At December 31, 1997, the total assets of the Company were $669.5 million with
equity capital of $50.5 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 and 4 savings and loans 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,
1998 (the most recent date for which information is readily available), total
deposits held by financial institutions in Lucas and Wood counties approximated
$6.4 billion. Since its opening on August 24, 1989, the Bank has grown from
$12.4 million in assets to $802.2 million in assets as of December 31, 1998. 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, 1998, the Bank had 110 full-time
equivalent employees, which represents a 12% increase in staff since December
31, 1997, at which time there were 98 full-time equivalent employees, and a 746%
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
completed 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. The Company is in the
process of acquiring one acre of vacant land adjacent to our existing
facilities.
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
-------
The Company's common stock is not listed on any securities exchange.
Shares are infrequently traded in the over the counter market on the NASDAQ
bulletin board system under the symbol CLHD.
There were 998 shareholders of record as of February 12, 1999.
In 1998, four quarterly cash dividends totaling $1,745,339 were
declared on the Company's common stock. During 1998, $1,600,028 of dividends
were paid out in cash. The dividend declared represented $.21 per share per
quarter for the first three quarters and $.24 per share for the fourth quarter
of 1998. 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 $60.00,
$47.00, and $37.50 per share at December 31, 1998, 1997, and 1996, respectively.
<PAGE> 5
ITEM 6. SELECT FINANCIAL DATA
- ------- ---------------------
(Dollars in thousands except Per Share Data)
As of and for the Year-Ended December 31)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED RESULTS
OF OPERATIONS:
Interest income $55,568 $47,593 $39,639 $34,752 $26,330
Interest expense 31,751 27,026 22,305 19,964 13,188
---------- ---------- ---------- ---------- ----------
Net interest income 23,817 20,567 17,334 14,788 13,142
Provision for credit losses 1,230 1,005 980 850 993
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for credit losses 22,587 19,562 16,354 13,938 12,149
Other income 1,681 1,205 874 753 636
Other expense 12,534 10,752 8,821 7,590 6,860
---------- ---------- ---------- ---------- ----------
Income before income taxes 11,734 10,015 8,407 7,101 5,925
Income taxes 3,805 3,234 2,681 2,256 1,844
---------- ---------- ---------- ---------- ----------
Net income $7,929 $6,781 $5,726 $4,845 $4,081
========== ========== ========== ========== ==========
CONSOLIDATED BALANCE
SHEET DATA:
Total assets $801,628 $669,540 $559,726 $483,170 $417,832
Cash and cash equivalents 29,263 23,292 13,958 13,048 10,847
Securities available for sale 184,583 167,521 159,209 140,627 77,982
Securities held to maturity - - - - 71,920
Loans, net of deferred loan fees 578,370 469,036 380,160 324,788 251,184
Allowance for credit losses 8,146 6,947 5,942 4,960 4,110
Deposits 663,066 579,661 470,743 407,622 357,533
Shareholders' equity 58,422 50,547 41,590 36,136 27,565
PER SHARE DATA (1):
Net income:
Basic $3.96 $3.57 $3.04 $2.59 $2.20
Diluted 3.89 3.43 2.94 2.51 2.14
Book value at period end 28.97 25.38 21.92 19.18 14.75
Average shares outstanding:
Basic 2,002,486 1,899,904 1,884,278 1,869,017 1,853,856
Diluted 2,036,865 1,975,818 1,947,655 1,927,679 1,910,310
</TABLE>
(1) 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 and 1994. 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
and 1994. 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, 1998.
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 16%, 19%, and 17% in
1998, 1997, and 1996, 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, 1998. Net interest margin (net
interest income divided by average earning assets) was 3.43% for 1998, 3.58% for
1997, and 3.59% for 1996.
Average loans outstanding increased 23%, 23%, and 20% in 1998, 1997,
and 1996, respectively. Average yield on these loans was 8.50%, 8.83%, and
8.79%, respectively. The changes in yield are reflective of the change in market
rates and the refinancing opportunities available during these periods.
Securities represent 25% of the total average earning assets of the Company at
December 31, 1998, and the average yields were 6.47%, 6.62%, and 6.65% as of
December 31, 1998, 1997, and 1996, respectively. The changes in yield are due to
changes in market rates and portfolio mix.
Average total interest bearing liabilities increased to $616 million in
1998 compared with $517 million in 1997 and $432 million in 1996. The average
cost of interest bearing liabilities was 5.16%, 5.23%, and 5.17% for the same
periods. The decrease in yield is a direct reflection of falling short and long
term rates.
<PAGE> 7
TABLE 1 - CONSOLIDATED AVERAGE BALANCE SHEETS AND
ANALYSIS OF NET INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------- --------------------------------- --------------------------------
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 $166,321 $10,594 6.37% $148,361 $9,671 6.52% $136,202 $8,915 6.55%
Tax exempt 13,928 1,076 7.73% 13,623 1,058 7.77% 13,321 1,035 7.77%
Loans 514,259 43,726 8.50% 418,029 36,924 8.83% 340,035 29,899 8.79%
Federal funds sold 9,970 537 5.39% 5,268 300 5.69% 2,660 142 5.34%
--------------------- --------------------- ---------------------
Total Interest Earning
Assets 704,478 55,933 7.94% 585,281 47,953 8.19% 492,218 39,991 8.12%
Noninterest Earning Assets:
Cash and due from banks 15,247 13,191 10,641
Bank premises and
equipment-net 9,675 8,723 4,797
Other assets 7,282 7,073 6,051
Less allowance for
credit losses (7,408) (6,388) (5,380)
--------- --------- ---------
$729,274 $607,880 $508,327
========= ========= =========
Interest Bearing
Liabilities:
Interest checking $168,190 6,945 4.13% $138,910 5,847 4.21% $99,839 3,799 3.81%
Savings deposits 17,474 490 2.80% 17,671 509 2.88% 19,449 566 2.91%
Time deposits 376,350 21,587 5.74% 333,114 19,296 5.79% 278,101 16,086 5.78%
Short-term borrowings 53,538 2,729 5.10% 26,849 1,374 5.12% 34,423 1,854 5.39%
--------------------- --------------------- ---------------------
Total Interest Bearing 615,552 31,751 5.16% 516,544 27,026 5.23% 431,812 22,305 5.17%
Liabilities
Noninterest Bearing
Liabilities:
Demand deposits 51,646 42,372 35,307
Other 7,462 4,404 3,517
--------- --------- ---------
Total Liabilities 674,660 563,320 470,636
Shareholders' Equity 54,614 44,560 37,691
--------- --------- ---------
$729,274 $607,880 $508,327
========= ========= =========
Net Interest Income $24,182 $20,927 $17,686
======= ======= =======
Net Yield on Interest
Earning Assets 3.43% 3.58% 3.59%
===== ===== ====
</TABLE>
NOTE: Nonaccrual loans are included in average loan balances. Interest income
includes the effect of tax equivalent adjustments amounting to $366 in
1998, $360 in 1997 and $352 in 1996, 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>
1998 compared to 1997 1997 compared to 1996
Increase (Decrease) Increase (Decrease)
---------------------------------------- -----------------------------------------
Volume Rate Net Volume Rate Net
---------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest on Earning Assets:
Securities $1,163 ($222) $941 $821 ($42) $779
Loans 8,120 (1,318) 6,802 6,888 137 7,025
Federal funds sold 252 (15) 237 148 10 158
---------------------------------------- -----------------------------------------
Total Interest Income Changes $9,535 ($1,555) $7,980 $7,857 $105 $7,962
======================================== =========================================
Expense on Interest Bearing
Liabilities:
Deposits $3,655 ($285) $3,370 $4,746 $455 $5,201
Short-term borrowings 1,360 (5) 1,355 (391) (89) (480)
---------------------------------------- -----------------------------------------
Total Interest Expense Changes $5,015 ($290) $4,725 $4,355 $366 $4,721
======================================== =========================================
</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 $1,230,000, $1,005,000, and
$980,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
Total allowance for credit losses as a percentage of total loans outstanding at
year end was 1.4%, 1.5%, and 1.6% for the years ended December 31, 1998, 1997,
and 1996, respectively.
Management maintains the allowance for credit losses at a level
adequate to absorb losses inherent in the portfolio. 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 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 a total of
only $252,000 in charge-offs since its inception in 1989, $36,000 of which were
in 1998. The Company was able to operate four consecutive years, 1994 through
1997, without a loan charge-off. 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 $1,681,000 for 1998 increased approximately $476,000 or 39% when
compared to 1997 and 38% when 1997 is compared to 1996. Merchant and credit card
interchange fees combined were approximately $962,000, $777,000, and $620,000 in
1998, 1997, and 1996, respectively. Service charges on deposit accounts were
approximately $395,000, $313,000, and $253,000 in 1998, 1997, and 1996,
respectively.
OTHER EXPENSES
- --------------
Noninterest expense increased 17% in 1998 and 22% in 1997. Salaries and
benefits, which accounted for 53% in both 1998 and 1997 of noninterest expenses,
increased by 17% in 1998 and 22% in 1997. Full-time equivalent employees
increased 12% in 1998 and 26% in 1997. 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 $7.3 million and $6.8 million
at December 31, 1998 and 1997, 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 49.2% for 1998 and 49.4% for 1997.
The Company's low ratio is indicative of efficient overhead cost control from
the single operating facility.
Depreciation expense for 1998 was approximately $706,000. This
represented a 50% increase over 1997's balance of approximately $470,000, due
primarily to hardware and software upgrades in 1998 and a full years
depreciation on the building expansion completed in 1997.
During 1998, the assessment paid by the Company to the Federal Deposit
Insurance Corporation (FDIC) was $70,000. This compares to $62,000 being paid in
1997. 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 $3,805,000, $3,234,000, and
$2,681,000 in 1998, 1997, and 1996, 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 32.4%, 32.3%, and 31.9%
in 1998, 1997, and 1996, 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 73%, 71%, and 69% of the Company's average earning
assets in 1998, 1997, and 1996, respectively. Loan volume and quality continue
to be strong as the Company grows. The increase in net loans outstanding over
the prior year was $108 million, $88 million, and $54 million in 1998, 1997, and
1996, 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, 1998.
TABLE 3 - LOAN PORTFOLIO AT DECEMBER 31
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial $124,643 $103,061 $ 79,492 $ 74,347 $ 59,290
Real Estate:
Residential-first mortgage 121,358 104,659 86,750 70,969 56,168
Commercial-owner occupied 118,560 99,537 76,673 70,121 54,480
Commercial-investment 182,888 130,108 105,275 78,531 57,553
------- ------- ------- ------ ------
422,806 334,304 268,698 219,621 168,201
Consumer 27,261 27,849 26,995 25,653 22,757
Other 4,571 4,507 5,614 5,767 1,533
----- ----- ----- ----- -----
Total Loans 579,281 469,721 380,799 325,388 251,781
Less deferred loan fees 911 685 639 600 597
--- --- --- --- ---
Total loans net of deferred
loan fees 578,370 469,036 380,160 324,788 251,184
Less allowance for credit losses 8,146 6,947 5,942 4,960 4,110
----- ----- ----- ----- -----
Net Loans $570,224 $462,089 $374,218 $319,828 $247,074
======== ======== ======== ======== ========
</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, 1998
(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 $21,647 $82,806 $20,190 $124,643
Real Estate:
Residential-first mortgage 4,633 2,284 114,441 121,358
Commercial-owner occupied 1,490 16,325 100,745 118,560
Commercial-investment 13,274 39,788 129,826 182,888
------ ------ ------- -------
19,397 58,397 345,012 422,806
Consumer 15,256 11,610 395 27,261
Other 613 - 3,958 4,571
--- ------ ----- -----
TOTAL $56,913 $152,813 $369,555 $579,281
======= ======== ======== ========
Rate Sensitivities (B,C):
Fixed Rate Loans $22,394 $63,519 $20,500 $106,413
Variable Rate Loans 184,036 269,177 19,655 472,868
------- ------- ------ -------
TOTAL $206,430 $332,696 $40,155 $579,281
======== ======== ======= ========
Percent of Total 35.6% 57.4% 7.0% 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 $570,000, $673,000, $454,000, and $138,000 at
December 31, 1998, 1997, 1996, and 1995, 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, 1998.
<TABLE>
<CAPTION>
TABLE 5 - ALLOWANCE FOR CREDIT LOSSES
(Dollars in thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 6,947 $ 5,942 $ 4,960 $ 4,110 $ 3,117
Loans charged off:
Commercial (21) - - - -
Residential real estate (13) - - - -
Consumer and other (2) - - - -
---------- ------ ------ ------ -----
Total loans charged off (36) - - - -
Recoveries:
Commercial 3 - - - -
Consumer and other 2 - 2 - -
---------- ------ ------ ------ -----
Total recoveries 5 - 2 - -
Net loans charged off (31) - - - -
Provision for credit losses 1,230 1,005 980 850 993
----- ----- --- --- ---
Balance at end of year $ 8,146 $ 6,947 $ 5,942 $ 4,960 $ 4,110
========= ========= ========= ========= =========
Total loans outstanding
at year-end $579,281 $469,721 $380,799 $325,388 $251,781
======== ======== ======== ======== ========
Average loans $514,259 $418,029 $340,035 $283,577 $216,702
======== ======== ======== ======== ========
As a percent of average loans:
Net charge-offs 0.01% N/A N/A N/A N/A
Provision for credit losses 0.24% 0.24% 0.29% 0.30% 0.46%
As a percent of total loans outstanding
at year-end:
Year-end allowance for credit
losses 1.41% 1.48% 1.56% 1.52% 1.64%
</TABLE>
<PAGE> 13
Table 6 is an allocation of the allowance for credit losses for the five years
ended December 31, 1998:
TABLE 6 - ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ -----------------
% of % of % of % of % of
loans loans loans loans loans
Amt. to ttl loans Amt. to ttl loans Amt. to ttl loans Amt. to ttl loans Amt. to ttl loans
---- ------------ ----- ------------ ----- ------------ ----- ------------ ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,158 22% $ 714 22% $ 720 21% $ 957 23% $ 774 23%
Real Estate:
Residential -
first mortgage 415 21% 362 22% 240 23% 179 22% 140 22%
Commercial -
owner occupied 636 20% 573 21% 542 20% 422 22% 310 22%
Commercial -
investment 1,900 32% 1,464 28% 1,263 28% 844 24% 624 23%
----- --- ----- --- ----- --- --- --- --- ---
2,951 73% 2,399 71% 2,045 71% 1,445 68% 1,074 67%
Consumer and other 274 5% 275 7% 293 8% 318 9% 228 10%
--- -- --- -- --- -- --- -- --- ---
Total allocated 4,383 100% 3,388 100% 3,058 100% 2,720 100% 2,076 100%
==== ==== ==== ==== =====
Total unallocated 3,763 3,559 2,884 2,240 2,034
----- ----- ----- ----- -----
Total $8,146 $6,947 $5,942 $4,960 $4,110
====== ====== ====== ====== ======
</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
- ----------
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, 1998,
approximated $2,014,000 (net of $1,040,000 in deferred income taxes); the
unrealized gain recorded at December 31, 1997, approximated $1,357,000 (net of
$698,000 in deferred income taxes); and the unrealized gain recorded December
31, 1996, approximated $531,000 (net of $273,000 in deferred income taxes). The
designation of such securities is made by management based upon liquidity needs
at the time of purchase.
The securities available for sale (SAFS) portfolio at December 31,
1998, is composed primarily of U.S. Treasury (15.3%) and U.S. Government Agency
Securities (64.7%). The remaining 20.0% is composed of certain other securities.
The quality of this portfolio is 84% AAA rated bonds with an average maturity of
2.4 years. The SAFS portfolio represented 23% of total assets at December 31,
1998, and 25% at December 31, 1997.
The SAFS portfolio at December 31, 1998, 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 $9,799 $9,338
State of Michigan 4,433 4,284
</TABLE>
<PAGE> 14
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, 1998. Classification by maturity is determined by the earlier of
maturity date or call date.
TABLE 7 - SECURITIES AVAILABLE FOR SALE
(Dollars in thousands)
<TABLE>
<CAPTION>
CARRYING VALUE AT DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
U.S. government securities
and agency obligations $146,007 $130,023 $121,195 $107,759 $75,753
Corporate debt securities 16,180 15,614 17,494 13,685 -
Municipal obligations 15,074 14,038 13,661 13,619 -
Mortgage-backed securities 1,661 3,088 3,087 3,163 -
Other securities 5,661 4,758 3,772 2,401 2,229
----- ----- ----- ----- -----
TOTAL $184,583 $167,521 $159,209 $140,627 $77,982
======== ======== ======== ======== =======
</TABLE>
TABLE 8 - MATURITY ANALYSIS AT DECEMBER 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
After 5
After 1 Year Years But
Within But Within Within After
1 Year 5 Years 10 Years 10 Years Total
------ ------- -------- -------- -----
<S> <C> <C> <C> <C>
U.S. government securities
and agency obligations $31,210 $108,406 $6,391 - $146,007
Corporate debt securities 1,003 13,160 2,017 - 16,180
Municipal obligations 631 10,702 3,481 260 15,074
Mortgage-backed securities 1,432 - - 229 1,661
Other securities - - - 5,661 5,661
------ ------ ------ ----- -----
TOTAL $34,276 $132,268 $11,889 $6,150 $184,583
======= ======== ======= ====== ========
Weighted average yield:
U.S. government securities
and agency obligations 6.85% 6.22% 6.45% - 6.37%
Corporate debt securities 6.28% 6.51% 6.10% - 6.45%
Municipal obligations 6.97% 7.08% 6.43% 8.08% 6.95%
Mortgage-backed securities 5.94% - - 6.11% 5.96%
Other securities - - - 6.38% 6.38%
TOTAL 6.42%
=======
</TABLE>
The securities held to maturity (SHTM) portfolio represented 17% of
total assets at December 31, 1994. The entire SHTM portfolio was transferred to
SAFS during 1995.
<PAGE> 15
Table 9 sets forth the carrying value of the SHTM portfolio at the
dates indicated.
TABLE 9 - SECURITIES HELD TO MATURITY
(Dollars in thousands)
<TABLE>
<CAPTION>
CARRYING VALUE AT DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
U.S. government securities
and agency obligations - - - - $42,441
Corporate debt securities - - - - 13,749
Municipal obligations - - - - 12,475
Mortgage-backed securities - - - - 3,225
Other securities - - - - 30
--------- ---------- --------- --------- -------
TOTAL - - - - $71,920
========= ========= ========= ========= =======
</TABLE>
FEDERAL FUNDS SOLD
- ------------------
Short-term Federal funds sold are used to manage interest rate
sensitivity and to meet liquidity needs. During 1998, 1997, and 1996, the
average balance of these funds represented less than 1.4% 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 $1,091,000 at
December 31, 1998. 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 $2,543,000 and $1,038,000,
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 $444 million in 1998 from
$373 million in 1997, and $332 million in 1996.
Certificates of deposit equal to or greater than $100,000 grew to $219
million in 1998 from $206 million in 1997, and $138 million in 1996. The
continued strong marketing effort to secure customers willing to consolidate
deposits into a single investment (i.e. 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 15% in 1998, 23% in 1997, and 15% in 1996.
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>
1998 1997 1996
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C>
Noninterest
bearing deposits $51,646 $42,372 $ 35,307
Money market accounts 168,190 4.13% 138,910 4.21% 99,839 3.81%
Savings 17,474 2.80% 17,671 2.88% 19,449 2.91%
Other time deposits 376,350 5.74% 333,114 5.79% 278,101 5.78%
------- -------- --------
TOTAL $613,660 $532,067 $432,696
======== ======== ========
</TABLE>
The increase (decrease) in average deposits by category for 1998 was as
follows: Noninterest bearing deposits, 22%; money market accounts, 21%; savings,
(1%) and other time deposits, 13%.
Certificates of deposit of $100,000 or more grew 6% in 1998. 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,
1998, is reflective of the interest rate environment during 1998, 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Maturing:
3 months or less $ 97,329 $ 93,831 $ 61,849
Over 3 to 6 months 36,632 34,268 28,243
Over 6 to 12 months 47,462 34,534 28,737
Over 12 months 37,264 43,819 19,495
------ --------- ---------
TOTAL $218,687 $206,452 $138,324
======== ======== ========
</TABLE>
<PAGE> 17
SHORT-TERM BORROWINGS
- ---------------------
Short-term borrowings were $72 million, $30 million, and $42 million at
December 31, 1998, 1997, and 1996, respectively.
Short-term borrowings are primarily composed of advances from The
Federal Home Loan Bank (74.8%). The remaining 25.2% is composed of: 1)
securities sold under agreements to repurchase which are secured transactions, a
majority of which mature within one year or less, 2) Federal funds borrowings,
and 3) $3.5 million of demand notes issued by the Bank to the U.S. Treasury
under the Treasury Tax and Loan Note program. 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
------------------------------ ----------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Weighted average interest rate
at year-end 4.37% 4.20% 4.31% 5.32% 5.61% 5.56%
Amount outstanding at year-end $14,626 $14,395 $15,531 $53,900 $15,900 $19,000
Maximum amount outstanding at
any month end 22,068 14,395 26,012 53,900 18,860 19,000
Daily average amount outstanding
during the year 17,790 12,926 21,255 32,235 12,216 12,015
Weighted average interest rate
for the year 4.61% 4.57% 5.30% 5.37% 5.60% 5.51%
</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, 1998, 1997, and 1996 was $58.4 million,
$50.5 million, and $41.6 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%.
The Company issued a 6% stock dividend in June of 1996, 1995, and 1994.
In June 1997, the Company began to issue quarterly cash dividends. This totaled
$1,745,339 for 1998 and $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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Return on average assets 1.09% 1.12% 1.13%
Return on average equity 14.52% 15.22% 15.19%
Average equity to average assets 7.49% 7.33% 7.41%
Tier 1 capital (1) 9.11% 9.81% 10.14%
Tier 2 capital (2) 10.36% 11.06% 11.39%
Leverage (3) 7.20% 7.67% 7.60%
</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 initiated a company-wide project to prepare its computer
systems, application and infrastructure for Year 2000 compliance. The following
discussion of the implications of the Year 2000 issue for the Company contains
numerous forward-looking statements based on inherently uncertain information.
The cost of the project and the date on which the Company plans to complete the
internal Year 2000 modifications are based on management's best estimates, which
management derived utilizing a number of assumptions of future events including
the continued availability of internal and external resources, including
employees, third party modifications and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ.
In 1996, management determined that many of the Company's critical
processes might not be ready to operate normally in the year 2000 and beyond
without remediation. Since then, the Company completed an assessment and efforts
are underway to correct and validate compliance. In 1997, the Company alerted
its business customers of the Year 2000 problem and is now assessing the
readiness preparations of its major customers and suppliers. Resolution of the
Year 2000 problem is among the Company's highest priorities, and the Company
established a comprehensive program to address its many aspects.
The Company prepared a project plan, identified its major application
and processing systems, and is using internal and external resources to modify
or replace non-ready systems. The Company will test identified critical systems
for readiness as part of this process. In addition, the Company will evaluate
customers and vendors who have significant relationships with the Company to
determine whether they are preparing and will be ready for the year 2000. The
Company considered the potential failure of those customers to be adequately
prepared as part of the credit and review process. However, there can be no
guarantee that the remediation of the systems of the Company's vendors or
customers will be completed on a timely basis.
The Company upgraded computer hardware and software during 1998 to meet
its strategic plan of enhancing its products and services from a competitive
viewpoint. This decision was not related to Year 2000 compliance issues. The
newly installed systems are Year 2000 compliant. The cost of these systems was
approximately $600,000 which was capitalized. The Company has reviewed other
systems, including desktop computers and facilities related items for Year 2000
compliance. Anticipated costs related to the remaining hardware and software
purchases, associated reprogramming, and remedial actions did not exceed
$100,000 in 1998 nor is it expected to exceed that amount in 1999 or 2000. The
Company will fund the costs through normal operating cash flow. The project is
staffed primarily with internal staff redeployed from less time-sensitive
assignments.
The Company is reliant on suppliers and customers, and we are
addressing Year 2000 issues with both groups. As of December 31, 1998, we have
identified critical vendors and have completed formalized risk assessments of
their Year 2000 readiness plans and status. The Company will continue to monitor
and replace vendors or make alternative arrangements when sources are limited or
unavailable.
The Company is also reliant on its customers to make the necessary
preparations for Year 2000 so that their business operations will not be
interrupted, as an interruption could threaten their ability to honor financial
commitments. The Company has identified approximately 298 relationships,
consisting of borrowers, capital market counter parties, funding sources, and
large depositors as having financial volumes sufficiently large to warrant
inquiry as to Year 2000 preparation. The Company has substantially completed a
formal assessment of risk based on these initial reports as of December 31,
1998. Customers found to have a significant risk of not being ready for Year
2000 are encouraged to make the necessary effort. The Company is undertaking
measures to minimize risk with those that appear to pose a significant risk.
Quarterly reviews and follow up assessments of customers will continue through
1999.
The Company's Year 2000 change program includes the active involvement
of senior executives as well as seasoned project managers from throughout the
company. Senior executive, the board of directors and a project steering
committee regularly review the overall program. The federal and state agencies
that regulate the banking industry also monitor the program. The Company's
outside internal audit firm also reviewed the Company's project status.
The Company grouped the principal risks associated with the Year 2000
problem into three categories. The first is the risk that the Company does not
successfully ready its operations for the year 2000. The Company, like other
financial institutions, is heavily dependent on its computer systems. Year 2000
compliant systems have already been implemented and management believes it will
be able to make any other minor necessary corrections in a timely manner.
<PAGE> 19
Computer failure of third parties may also impact the Company's
operations. The most serious impact on the Company's operations from suppliers
would result if basic services such as telecommunications, electric power
suppliers, and services provided by other financial institutions and
governmental agencies were disrupted. While the Company has assessed its
suppliers, it does not yet have sufficient information to estimate the
likelihood of significant disruptions among its suppliers.
Operational failures among the Company's sources of major funding and
larger borrowers could affect their ability to continue to provide funding or
meet obligations when due. It is not possible to accurately estimate the
likelihood, or potential impact, of significant disruptions among the Company's
funding sources and obligors at this time.
The Company is developing remediation contingency plans and business
resumption contingency plans specific to the Year 2000. Remediation contingency
plans address the actions to be taken if the current approach to remediating a
system is falling behind schedule or otherwise appears in jeopardy of failing to
deliver a Year 2000 ready system when needed. Business resumption contingency
plans address the actions that would be taken if critical business functions can
not be carried out in the normal manner due to system or supplier failure.
The Company developed remediation contingency plans with trigger dates
for review and implementation for critical data systems. The Company is also
enhancing its existing business resumption plans to reflect Year 2000 issues and
is developing plans designed to coordinate the efforts of its personnel and
resources in addressing any Year 2000 problems that become known after December
31, 1999.
LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISK
----------------------------------------------------
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, 1998 and 1997, the Company
had $24.3 million and $36.2 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 $55.1 million. The Company currently holds $4.6
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, 1998, the Company
had a total of $237.3 million in unfunded loan commitments and $16.8 million in
unfunded standby letters of credit. Of the total unfunded loan commitments,
$208.4 million were commitments available as lines of credit to be drawn at any
time as customers' cash needs vary, and $28.9 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. The amount of unrestricted retained earnings available
to be paid by the Bank to the Company was approximately $11,176,000 at January
1, 1999.
<PAGE> 20
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, 1998, 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 AND MARKET RISK
- -----------------------------------------
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, 1998,
suggest that the Corporation could expect net interest income to decrease by
approximately $478,000 (if interest rates gradually decline by 100 basis points
over the next twelve months) and, to increase by approximately $177,000 (if
interest rates gradually increase by 100 basis points over the next twelve
months) from 1998 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,
1998 and 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 2000 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 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------
Disclosures regarding market risk have been included in Item 7--Management
Discussion and Analysis
<PAGE> 21
TABLE 12 - INTEREST RATE SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------------------------------------------
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 $182,086 $24,344 $332,696 $40,155 $579,281
Securities available for sale (1) 11,990 22,286 132,268 18,039 184,583
Other assets 37,764 37,764
---------------------------------------------------------------------------------------
Total Assets $194,076 $46,630 $464,964 $95,958 $801,628
=======================================================================================
Liabilities:
Savings, time and interest
checking $296,531 $66,060 $25,294 $0 $387,885
CD's $100,000 & over 112,529 68,895 37,147 116 218,687
Borrowed funds 31,729 0 11,387 28,900 72,016
Other liabilities 64,618 64,618
---------------------------------------------------------------------------------------
Total Liabilities 440,789 134,955 73,828 93,634 743,206
Shareholders' Equity 58,422 58,422
---------------------------------------------------------------------------------------
Total Sources of Funds $440,789 $134,955 $73,828 $152,056 $801,628
=======================================================================================
Maturity/rate sensitivity GAP ($246,713) ($88,325) $391,136 ($56,098)
Cumulative GAP (246,713) (335,038) 56,098
Percent of cumulative GAP to
total assets -31% -42% 7%
</TABLE>
(1) This table classifies securities according to sensitivity to changes in
interest rates.
<PAGE> 22
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> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The Report of Independent Auditors and Consolidated Financial
Statements included in the 1998 Annual Report to Shareholders are incorporated
herein by reference.
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, 1998. 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. The information required regarding disclosure of any known late filings
or failure by an insider to file a report required by Section 16(a) of the
Securities Exchange Act is incorporated herein by reference to the information
under the heading "Compliance with Section 16(a) of the Securities Exchange Act
of 1934" in the definitive Proxy Statement of the Company.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION AND DIRECTORSHIP
- ---- --- -------------------------------------
<S> <C> <C>
Michael P. Killian 47 Chief Financial Officer of the Company, Senior Vice President - Operations
and Chief Financial Officer of the Bank
Stephen J. Kovatch 56 Assistant Secretary of the Company, Senior Vice President - Marketing
of the Bank
Robert A. Walters 40 Senior Vice President - Retail 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> 24
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 1998
Annual Report to Shareholders of Capital Holdings, Inc., are incorporated by
reference in Item 8:
Consolidated Balance Sheets at December 31, 1998 and 1997.
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996.
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997, and 1996.
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996.
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.
<TABLE>
<CAPTION>
<S> <C> <C>
(b) Reports on Form 8-K
- --- -------------------
None
(c) Exhibits
- --- --------
Exhibit No.
-----------
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., as amended June 9, 1998
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 1998 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 Annual Report on Form
10-K for the year ended December 31, 1995.
(d) Financial Statement Schedules
-----------------------------
None required.
<PAGE> 25
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.
/s/ John S. Szuch 2/23/99
By ------------------------------------------------------------
John S. Szuch Date
Chairman and Chief Executive Officer
Director
/s/ Robert A. Sullivan 2/23/99
By -----------------------------------------------------------
Robert A. Sullivan Date
President and Chief Operating Officer
Director
/s/ Michael P. Killian 2/23/99
By ------------------------------------------------------------
Michael P. Killian Date
Senior Vice President and Chief Financial Officer
/s/ Bruce K. Lee 2/23/99
By ------------------------------------------------------------
Bruce K. Lee Date
Executive Vice President
Director
<PAGE> 26
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.
/s/ James M. Appold 2/23/99
By ----------------------------------------------
James M. Appold Date
Director
By ----------------------------------------------
David P. Bennett Date
Director
By ----------------------------------------------
Yale M. Feniger Date
Director
/s/ George A. Isaac, III 2/23/99
By ----------------------------------------------
George A. Isaac, III Date
Director
/s/ Michael C. Landin 2/23/99
By ----------------------------------------------
Michael C. Landin Date
Director
/s/ Ronald R. Langenderfer 2/23/99
By ----------------------------------------------
Ronald R. Langenderfer Date
Director
<PAGE> 27
/s/ Joel A. Levine 2/23/99
By ----------------------------------------------
Joel A. Levine Date
Director
/s/ W. G. Lyden, III 2/23/99
By ----------------------------------------------
W. G. Lyden, III Date
Director
/s/ Thomas W. Noe 2/23/99
By ---------------------------------------------
Thomas W. Noe Date
Director
/s/ Noel Romanoff 2/23/99
By ---------------------------------------------
Noel Romanoff Date
Director
/s/ James D. Sayre 2/23/99
By ---------------------------------------------
James D. Sayre Date
Director
<PAGE> 1
EXHIBIT 10
CAPITAL HOLDINGS, INC.
NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of the Capital Holdings, Inc. Directors' Stock Option Plan
is to eliminate cash compensation for services as a Director by nonemployees
(other than for committee service) and encourage Directors to acquire a larger
stock ownership in Capital Holdings, Inc., thus increasing their proprietary
interest in the business and increasing their incentive to continue active
service as a Director in the interest of Capital Holdings, Inc. and all its
shareholders. Accordingly, Capital Holdings, Inc. will, from time to time during
the term of the Plan, grant to Directors, options to purchase Capital Holdings,
Inc. Common Shares subject to the conditions hereinafter provided.
2. DEFINITIONS
Unless the context clearly indicates otherwise, the following terms
have the meanings set forth below:
"Board of Directors" means the Board of Directors of Capital Holdings,
Inc.
"Change in Control" shall result if:
1. Any person or group (as such terms are used in
connection with Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, "Exchange Act") is or becomes the
"beneficial owner" (as defined in Rule 13(d)(3) and 13(d)(5)
under the Exchange Act), directly or indirectly, of securities
of Capital Holdings, Inc. representing 50% or more of the
combined voting power of Capital Holdings, Inc.'s then
outstanding securities; or
2. Capital Holdings, Inc. is a party to a merger,
consolidation, sale of assets or other reorganization, or a
proxy contest, as a consequence of which members of the Board
of Directors in office immediately prior to such transaction
or event constitute less than a majority of the Board of
Directors thereafter; or
3. During any period of 24 consecutive months,
individuals who at the beginning of such period constitute the
Board of Directors (including for this purpose any new
director whose election or nomination for election by Capital
Holdings, Inc.'s stockholders was approved by a vote of at
least one-half of the directors then still in office who were
directors at the beginning of such period) cease for any
reason to constitute at least a majority of the Board of
Directors.
Notwithstanding the foregoing, no Trust Department or designated
fiduciary or other trustee of such Trust Department of Capital Holdings, Inc. or
a subsidiary of Capital Holdings, Inc., or other similar fiduciary capacity of
Capital Holdings, Inc. with direct voting control of the stock shall be included
or considered. Further, no profit-sharing, employee stock ownership, employee
stock purchase and savings, employee pension, or other employee benefit plan of
Capital Holdings, Inc. or any of its subsidiaries, and no Trustee of any such
plan in its capacity as such Trustee, shall be included or considered.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board of Directors.
"Common Shares" means the common shares of Capital Holdings, Inc., no
par value.
"Company" means Capital Holdings, Inc., an Ohio corporation and all
corporations which comprise a "controlled group of corporations" as defined in
Section 414(b) of the Code, of which Capital Holdings, Inc. is a member.
"Director" means a member of the Board of Directors of Capital Holdings
,Inc.
"Grant Date," as used with respect to a particular Option, means the
date as of which such Option is granted pursuant to the Plan.
"Optionee" means the Director to which an Option is granted pursuant to
the Plan.
<PAGE> 2
"Option" means the right granted pursuant to Section 5 of the Plan to
purchase Common Shares.
"Plan" means this Capital Holdings, Inc. Directors' Stock Option Plan
as it may be amended from time to time.
3. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee. The Committee shall be
vested with full authority to make such rules and regulations as it deems
necessary or desirable to administer the Plan and to interpret the provisions of
the Plan. Any determination, decision or action of the Committee in connection
with the construction, interpretation, administration or application of the Plan
shall be final, conclusive and binding upon all Optionees and any person
claiming under or through an Optionee, unless otherwise determined by the Board.
Any determination, decision or action of the Committee provided for in
the Plan may be made or taken by action of the Board if it so determines, with
the same force and effect as if such determination, decision or action had been
made or taken by the Committee. No member of the Committee or of the Board shall
be liable for any determination, decision or action made in good faith with
respect to the Plan or any Option granted under the Plan. The fact that a member
of the Board shall at the time, or shall theretofore have been or thereafter may
be, a person who has received or is eligible to receive an Option shall not
disqualify him or her from taking part in and voting at any time as a member of
the Board in favor of or against any amendment or repeal of the Plan.
4. STOCK SUBJECT TO THE PLAN
(a) The stock to be issued upon exercise of Options granted under the
Plan shall be Capital Holdings, Inc. Common Shares, which shall be made
available at the discretion of the Board, either from authorized but unissued
Common Shares or from Common Shares reacquired by Capital Holdings, Inc.,
including shares purchased in the open market. The aggregate number of Common
Shares which may be issued under or subject to Options granted under this Plan
shall not exceed 150,000 Common Shares.
(b) In the event that any outstanding Option or portion thereof under
the Plan for any reason expires or is terminated, the Common Shares allocable to
the unexercised portion of such Option may again be made subject to Option under
the Plan.
5. GRANT OF OPTIONS
(a) At the effective date of the Plan each person who is then a
Director of Capital Holdings, Inc. and not a full-time employee of the Company,
shall automatically receive a grant of options on 250 Capital Holdings, Inc.
Common Shares. In addition, on the first day of January of each year after the
effective date of the Plan and throughout the term of the Plan: (i) each
director of Capital Holdings, Inc., who shall have served as a nonemployee
director of Capital Holdings, Inc., during the preceding year shall receive a
grant of options on 50 Common Shares for each regular board meeting attended by
such director during the preceding year; and (ii) each person serving as a
nonemployee director as of such date shall receive a grant of options on 500
Common Shares as a retainer for the ensuing year, without any action by the
Board or the Committee. No Option granted shall be a "Qualified Stock Option"
under the Code.
6. OPTION PRICE
The purchase price per share of each Common Share which is subject to
an Option shall be 100 percent of the fair market value of such Common Share on
the date the Option is granted. For purposes of the Plan, the fair market value
of a Common Share shall be the average of the bid-and-ask price as reported by
the National Association of Securities Dealers Automated Quotation
System/National Market System (NASDAQ/NMS) for the ten-trading days immediately
preceding the grant of such Options or if such shares are not traded on such
exchange, then as determined by an independent appraiser as of the day
immediately preceding the grant of such Options.
7. ELIGIBILITY OF OPTIONEES
(a) All nonemployee directors of Capital Holdings, Inc., (including
members of the Committee) are eligible to receive grants of Options.
(b) Subject to the terms of the Plan, and subject to review by the
Board, the Committee shall have exclusive jurisdiction (i) to determine the
dates on which, or the time periods during which, the Option may be exercised;
(ii) to determine the purchase price of the shares subject to each Option in
accordance with Section 6 of the Plan; and (iii) to
<PAGE> 3
prescribe the form, which shall be consistent with the Plan, of the instrument
evidencing any Options granted under the Plan.
(c) Neither anything contained in the Plan or in any document under the
Plan nor the grant of any Option under the Plan shall confer upon any Optionee
any right to continue as a Director of Capital Holdings, Inc. or limit in any
respect the right of Capital Holdings, Inc.'s shareholders to terminate the
Optionee's directorship at any time and for any reason.
8. NONTRANSFERABILITY OF OPTIONS
No Option granted under the Plan shall be assignable or transferable by
the Optionee other than by will or the laws of descent and distribution. During
the lifetime of an Optionee, the Option shall be exercisable only by such
Optionee, except: (i) in the event of the disability of the Optionee resulting
in the appointment, by a court of competent jurisdiction, of a legal guardian or
personal representative with appropriate authority, then by such person in the
name of Optionee; or (ii) in the name of the Optionee pursuant to a power of
attorney, acceptable in form and substance to Capital Holdings, Inc.
Notwithstanding the above, an Optionee may,: (a) designate in writing a
beneficiary to exercise his or her Option after the Optionee's death; (b)
transfer an Option to a revocable inter vivos trust as to which the Optionee is
the settlor; and (c) transfer an Option for no consideration to any of the
following permissible transferees (each a "Permissible Transferee"): (w) any
member of the Immediate Family of the Optionee to whom such Option was granted,
(x) any trust solely for the benefit of members of the Optionee's Immediate
Family, or (y) any partnership whose only partners are members of the Optionee's
Immediate Family; and further provided that (i) the transferee shall remain
subject to all of the terms and conditions applicable to such Options prior to
and after such transfer; and (ii) any such transfer shall be subject to and in
accordance with the rules and regulations prescribed by the Board of Directors.
Any such transfer to a permissible Transferee shall consist of one or more
options covering a minimum of one hundred (100) option shares. An Option may not
be retransferred by a Permissible Transferee except by will or the laws of
descent and distribution and then only to another Permissible Transferee. In the
case of (b) and (c), the option shall only be exercisable by the trustee or
Permissible Transferee, as applicable. For the purposes hereof, "Immediate
Family" means, with respect to a particular Optionee, such Optionee's child,
stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling,
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law, and shall include adoptive relationships.
9. TERM AND EXERCISE OF OPTIONS
(a) Each Option granted under the Plan shall be exercisable immediately
upon grant.
(b) Except as provided by paragraph 10 hereof, all Options issued under
this Plan shall terminate at the earlier of: (i) one year following the
discontinuance of service as a director of the Optionee; (ii) one year following
a Change of Control of Capital Holdings, Inc, or (iii) ten years from the date
of grant.
(c) A person electing to exercise an Option shall give written notice
to Capital Holdings, Inc. of such election and of the number of shares he or she
has elected to purchase, in such forms as the Committee shall have prescribed or
approved, and shall at the time of exercise tender the full purchase price of
the shares he or she has elected to purchase. The purchase price shall be paid
in full in cash upon the exercise of the Option; provided, however, that in lieu
of cash, with the approval of the Committee at or prior to exercise, an Optionee
may exercise his or her Option by tendering to Capital Holdings, Inc. Common
Shares owned by him or her and having a fair market value equal to the cash
exercise price applicable to his or her Option with the then fair market value
of such shares to be determined in the same manner as provided in Section 6 of
the Plan with respect to the determination of the fair market value of Common
Shares on the date an Option is granted.
10. EXTENSION OF EXERCISE PERIOD FOR FORMER DIRECTORS
If an Optionee dies during the one-year period following termination of
service as a Director or a Change of Control as provided by paragraph 9 hereof,
the Option shall terminate one year after the date of death of such Director.
11. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS
Subject to the terms and conditions and within the limitations of the
Plan, the Committee may modify outstanding Options granted under the Plan, but
no such modification shall alter or modify the amount or purchase price of the
shares subject to such Option (except pursuant to Section 14 of the Plan) or the
timing of the award of such Option. The foregoing notwithstanding, no
modification of an Option shall, without the consent of the Optionee, alter or
impair any rights or obligations under any Option theretofore granted under the
Plan.
<PAGE> 4
12. PERIOD IN WHICH OPTIONS MAY BE GRANTED
Options may be granted pursuant to the Plan at any time on or before
July 1, 2005.
13. AMENDMENT OR TERMINATION OF THE PLAN
The Board may at any time terminate, amend, modify or suspend the Plan;
provided that, without the approval of the shareholders of Capital Holdings,
Inc., no amendment or modification shall be made by the Board which:
(a) Changes the class of stock or increases the maximum number of
shares as to which Options may be granted under the Plan.
(b) Changes the designation of persons eligible to receive options
under the Plan.
(c) Alters the method by which the Option price is determined.
(d) Materially modifies the requirements as to eligibility for
participation in the Plan.
(e) Alters this Section 13 so as to defeat its purpose.
Further, no amendment, modification, suspension or termination of the
Plan shall in any manner affect any Option theretofore granted under the Plan
without the consent of the Optionee or any person validly claiming under or
through the Optionee.
14. CHANGES IN CAPITALIZATION
(a) In the event that the Common Shares of Capital Holdings, Inc., as
presently constituted, shall be changed into or exchanged for a different number
or kind of shares of stock or other securities of Capital Holdings, Inc. or of
another corporation (whether by reason of merger, consolidation,
recapitalization, reclassification, stock dividend, stock split, combination of
shares or otherwise), or if the number of such shares of stock shall be
increased through the payment of a stock dividend; then, subject to the
provision of Subsection (c) below, there shall be substituted for or added to
each share of stock of Capital Holdings, Inc. which was theretofore
appropriated, or which thereafter may become subject to an Option under the
Plan, the number and kind of shares of stock or other securities into which each
outstanding share of the stock of Capital Holdings, Inc. shall be so changed or
for which each such share shall be exchanged or to which each such share shall
be entitled, as the case may be. Outstanding Options shall also be appropriately
amended as to price and other terms, as may be necessary to reflect the
foregoing events.
(b) If there shall be any other change in the number or kind of the
outstanding shares of the stock of Capital Holdings, Inc., or of any stock or
other securities into which such stock shall have been changed, or for which it
shall have been exchanged, and if the board or the Committee (as the case may
be), shall in its sole discretion, determine that such change equitably requires
an adjustment in any Option which was theretofore granted or which may
thereafter be granted under the Plan, then such adjustment shall be made in
accordance with such determination.
(c) Fractional shares resulting from any adjustment in Options pursuant
to this Section 14 may be settled as the Board or the Committee (as the case may
be) shall determine.
(d) To the extent that the foregoing adjustments relate to stock or
securities of Capital Holdings, Inc., such adjustments shall be made by the
Committee, whose determination in that respect shall be final, binding and
conclusive. Notice of any adjustment shall be given by Capital Holdings, Inc. to
each holder of an Option which shall have been so adjusted.
(e) The grant of an Option pursuant to the Plan shall not affect in any
way the right or power of Capital Holdings, Inc. to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, to merge, to consolidate, to dissolve, to liquidate or to sell or
transfer all or any part of its business or assets.
15. LISTING AND REGISTRATIONS OF SHARES
(a) No Option granted pursuant to the Plan shall be exercisable in
whole or in part if at any time the Board or the Committee (as the case may be)
shall determine in its discretion that the listing, registration or
qualification of the Common Shares subject to such Option on any securities
exchange or under any applicable law, or the consent or approval of any
governmental regulatory body, is necessary or desirable as a condition of, or in
connection with, the granting of such Option
<PAGE> 5
or the issue of shares thereunder, unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any condition not acceptable to the Board.
(b) If a registration statement under the Securities Act of 1933 with
respect to the shares issuable upon exercise of any Option granted under the
Plan is not in effect at the time of exercise, as a condition of the issuance of
the shares, the person exercising such Option shall give the Committee a written
statement, satisfactory in form and substance to the Committee, that he or she
is acquiring the shares for his or her own account for investment and not with a
view to their distribution. Capital Holdings, Inc. may place upon any stock
certificate, for shares issuable upon exercise of such Option, the following
legend or such other legend as the Committee may prescribe to prevent
disposition of the share in violation of the Securities Act of 1933 or other
applicable law:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 ("ACT") AND MAY NOT BE SOLD, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED OR OFFERED FOR SALE IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THEM
UNDER THE ACT OR A WRITTEN OPINION OF COUNSEL FOR CAPITAL HOLDINGS,
INC. THAT REGISTRATION IS NOT REQUIRED.
16. PLAN EFFECTIVE DATE
The Plan was approved by Capital Holdings, Inc.'s Board of Directors on
August 15, 1995, and approved by the shareholders at the Annual Meeting of
Shareholders held on April 25, 1996, with an effective date of July 1, 1995.
Unless sooner terminated by the Board, the Plan will terminate ten years from
its effective date and no Options may be granted under the Plan after such
termination date.
<PAGE> 1
Exhibit 13
Consolidated Financial Statements
CAPITAL HOLDINGS, INC. AND
SUBSIDIARIES
Years Ended December 31, 1998, 1997 and 1996
with Report of Independent Auditors
<PAGE> 2
Capital Holdings, Inc. and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
<PAGE> 3
Report of Independent Auditors
Board of Directors and Shareholders
Capital Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Capital
Holdings, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Capital Holdings,
Inc. and subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
January 15, 1999
1
<PAGE> 4
Capital Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 18,262,969 $ 15,291,951
Federal funds sold 11,000,000 8,000,000
---------------------------
Cash and cash equivalents 29,262,969 23,291,951
Investment securities available-for-sale, at fair
value (amortized cost $181,529,214 in 1998
and $165,465,350 in 1997) 184,583,020 167,520,873
Loans 578,369,916 469,036,091
Less allowance for loan losses 8,145,982 6,947,377
---------------------------
Net loans 570,223,934 462,088,714
Bank premises and equipment 9,751,447 9,548,218
Interest receivable and other assets 7,806,606 7,090,107
---------------------------
TOTAL ASSETS $801,627,976 $669,539,863
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Interest bearing $606,571,823 $529,791,363
Noninterest bearing 56,494,624 49,869,745
---------------------------
Total deposits 663,066,447 579,661,108
Short-term borrowings 72,016,334 30,295,269
Interest payable and other liabilities 8,122,982 9,036,804
---------------------------
Total liabilities 743,205,763 618,993,181
Shareholders' equity:
Common stock, no par value, $.50 stated value;
3,000,000 shares authorized,
2,016,408 shares issued and
outstanding (1,991,922 in 1997) 1,008,204 995,961
Capital in excess of stated value 34,201,997 33,179,413
Retained earnings 21,197,999 15,014,646
Accumulated other comprehensive income 2,014,013 1,356,662
---------------------------
Total shareholders' equity 58,422,213 50,546,682
---------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $801,627,976 $669,539,863
===========================
</TABLE>
See accompanying notes.
2
<PAGE> 5
Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 43,725,781 $ 36,924,103 $ 29,899,157
Securities:
Taxable 10,594,117 9,671,309 8,914,952
Exempt from federal income tax 710,187 697,916 682,893
Federal funds sold 537,377 299,661 141,916
-------------------------------------------
Total interest income 55,567,462 47,592,989 39,638,918
INTEREST EXPENSE
Deposits 29,022,126 25,651,782 20,450,873
Short-term borrowings 2,728,797 1,373,872 1,854,351
-------------------------------------------
Total interest expense 31,750,923 27,025,654 22,305,224
-------------------------------------------
Net interest income 23,816,539 20,567,335 17,333,694
Provision for loan losses 1,230,000 1,005,000 980,000
-------------------------------------------
Net interest income after provision
for loan losses 22,586,539 19,562,335 16,353,694
OTHER INCOME
Securities gains (losses)--net 63,555 (1,797) (55,434)
Other 1,617,848 1,207,137 929,727
-------------------------------------------
Total other income 1,681,403 1,205,340 874,293
OTHER EXPENSES
Salaries and employee benefits 6,610,813 5,669,559 4,632,241
FDIC and other insurance 69,651 62,199 2,000
Other 5,853,786 5,020,232 4,186,868
-------------------------------------------
Total other expenses 12,534,250 10,751,990 8,821,109
-------------------------------------------
Income before provision for federal
income tax 11,733,692 10,015,685 8,406,878
Provision for federal income tax 3,805,000 3,234,000 2,681,000
-------------------------------------------
NET INCOME $ 7,928,692 $ 6,781,685 $ 5,725,878
===========================================
Net income per share:
Basic $ 3.96 $ 3.57 $ 3.04
Diluted 3.89 3.43 2.94
</TABLE>
See accompanying notes.
3
<PAGE> 6
Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Capital in Other Total
Common Excess of Retained Comprehensive Shareholders'
Stock Stated Value Earnings Income Equity
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 888,864 $ 27,136,543 $ 6,878,138 $ 1,232,517 $ 36,136,062
Net income 5,725,878 5,725,878
Net unrealized loss on securities
available-for-sale,
net of tax effect of $361,000 (701,708) (701,708)
-----------------
Comprehensive income 41,160,232
Exercise of 447 common stock options
at $10.78 per share 223 4,595 4,818
Issuance of 13,010 shares of common
stock at $33.50 per share 6,505 429,330 435,835
Common stock dividend, 106,324 shares 53,162 3,322,625 (3,386,568) (10,781)
------------------------------------------------------------------------------
Balance at December 31, 1996 948,754 30,893,093 9,217,448 530,809 41,590,104
Net income 6,781,685 6,781,685
Net unrealized gain on securities
available-for-sale,
net of tax effect of $425,000 825,853 825,853
-----------------
Comprehensive income 49,197,642
Exercise of 83,987 common stock options,
including tax benefit 41,994 1,833,508 1,875,502
Issuance of 10,427 shares of commons stock 5,213 452,812 458,025
Cash dividend--$.51 per share (984,487) (984,487)
------------------------------------------------------------------------------
Balance at December 31, 1997 995,961 33,179,413 15,014,646 1,356,662 50,546,682
Net income 7,928,692 7,928,692
Net unrealized gain on securities
available-for-sale,
net of tax effect of $342,000 657,351 657,351
-----------------
Comprehensive income 59,132,725
Exercise of 8,556 common stock options,
including tax benefit 4,278 193,114 197,392
Issuance of 15,930 shares of common stock 7,965 829,470 837,435
Cash dividend--$.87 per share (1,745,339) (1,745,339)
------------------------------------------------------------------------------
Balance at December 31, 1998 $ 1,008,204 $ 34,201,997 $ 21,197,999 $ 2,014,013 $ 58,422,213
==============================================================================
</TABLE>
See accompanying notes.
4
<PAGE> 7
Capital Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,928,692 $ 6,781,685 $ 5,725,878
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,230,000 1,005,000 980,000
Depreciation and amortization 706,252 469,909 301,854
Amortization and accretion of security premiums
and discounts (46,746) (73,781) (54,105)
(Gain) loss on sale of investment securities (63,555) 1,797 55,434
Deferred income tax credit (345,000) (71,200) (333,200)
Changes in assets and liabilities:
Interest receivable and other assets (712,431) (1,114,366) (450,990)
Interest payable and other liabilities (1,059,133) 3,636,133 851,910
---------------------------------------------------
Total adjustments (290,613) 3,853,492 1,350,903
---------------------------------------------------
Net cash provided by operating activities 7,638,079 10,635,177 7,076,781
INVESTING ACTIVITIES
Purchases of available-for-sale securities (76,970,518) (48,375,145) (63,954,536)
Net increase in loans (109,365,220) (88,875,776) (55,369,471)
Purchase of bank premises and equipment (909,481) (4,007,742) (1,829,085)
Proceeds from sales of available-for-sale securities 53,691,672 28,999,960 35,432,969
Proceeds from maturities of available-for-sale securities 7,325,283 12,386,884 8,874,359
---------------------------------------------------
Net cash used in investing activities (126,228,264) (99,871,819) (76,845,764)
FINANCING ACTIVITIES
Net increase in deposits 83,405,339 108,918,016 63,121,569
Net increase (decrease) in short-term borrowings 41,721,065 (12,035,291) 7,127,852
Issuance of common stock 1,034,827 2,333,527 440,653
Cash dividends paid (1,600,028) (645,860) (10,781)
---------------------------------------------------
Net cash provided by financing activities 124,561,203 98,570,392 70,679,293
---------------------------------------------------
Increase in cash and cash equivalents 5,971,018 9,333,750 910,310
Cash and cash equivalents at beginning of year 23,291,951 13,958,201 13,047,891
---------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 29,262,969 $ 23,291,951 $ 13,958,201
===================================================
SUPPLEMENTAL DISCLOSURES
Interest paid $ 31,273,946 $ 26,386,253 $ 22,119,961
===================================================
Income taxes paid $ 4,026,000 $ 3,325,000 $ 2,975,000
===================================================
NONCASH OPERATING ACTIVITIES
Change in deferred income taxes on net unrealized
gains or losses on available-for-sale securities $ 342,416 $ 425,439 $ (361,482)
===================================================
NONCASH INVESTING ACTIVITIES
Change in net unrealized gain (loss) on
available-for-sale securities $ 1,001,283 $ 1,251,292 $ (1,063,190)
===================================================
</TABLE>
See accompanying notes.
5
<PAGE> 8
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Capital Holdings,
Inc. (the Company) and its wholly-owned subsidiaries, Capital Bank, N.A. (the
Bank) and CBNA Building Company (CBNA). The Bank conducts business in the
western part of Lucas County and a portion of the extreme northwest part of Wood
County in northwestern Ohio as a national banking association and focuses on
corporate, executive and professional customers, with the primary emphasis on
deposits from and commercial loans to businesses and professionals. All
significant intercompany balances and transactions have been eliminated.
The Bank is subject to the regulations of certain federal agencies and undergoes
periodic examinations by those regulatory authorities.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company has
defined cash equivalents as due from banks and federal funds sold with a
maturity of three months or less at date of purchase. The carrying amounts
reported in the balance sheet for cash and cash equivalents approximate those
assets' fair values.
SECURITIES AVAILABLE-FOR-SALE
Management determines the appropriate classification of investment securities at
the time of purchase. If the Company has the positive intent and ability to hold
debt securities to maturity and designates them as held-to-maturity, such
securities are stated at amortized cost. Available-for-sale securities are
stated at fair value, with the unrealized gains and losses, net of income tax,
reported as a separate component of shareholders' equity. The Company has no
trading securities.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Interest and dividends are included in interest income from
investments. The cost of securities sold is based on the specific identification
method.
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, 1998 and 1997 are issued by U. S. Government sponsored
agencies and represent approximately .2% and .7%, respectively, of total assets.
LOANS AND REVENUE RECOGNITION
The Bank grants commercial, real estate and consumer loans to customers
primarily in northwest Ohio. Interest on loans is accrued by using the simple
interest method on the principal amounts outstanding. Loan origination and
commitment fees are being deferred and amortized over the estimated life of the
related loans as a yield adjustment.
ALLOWANCE FOR LOAN LOSSES
Inherent to the preparation of financial statements in conformity with generally
accepted accounting principles is the use of accounting estimates. These
estimates are used, when uncertainties exist regarding future events, to
determine the balances in asset and liability accounts. Most significantly, the
Bank uses estimates in determining the value of the allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses
charged to operating expense. Loans are charged off against the allowance for
loan losses when management believes that the loan is impaired or the
collectibility of the principal is unlikely. The allowance is the estimated
amount that management believes will be adequate to absorb potential losses on
existing loans that may become uncollectible, based on evaluations of the
collectibility of loans. The evaluations take into consideration such factors as
changes in the composition and size of the loan portfolio, overall portfolio
quality, review of specific problem loans, current economic conditions and
industry guidelines. While management believes it uses the best information
available to make evaluations, future adjustments to the allowance for loan
losses may be necessary in circumstances that differ substantially from
assumptions in making the evaluations.
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is doubtful.
7
<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 1998, 1997 and 1996 was
approximately $354,000, $394,000 and $257,000, respectively.
REPORTING COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement has no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the requirements
of Statement 130.
8
<PAGE> 11
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
OPERATING SEGMENT
On January 1, 1998, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131), became effective. Statement 131 established standards for the reporting of
information about operating segments and related disclosures about products and
services, geographic areas and major customers. The Company operates primarily
in one business segment as a focused commercial business lender. The Company
offers a full set of commercial lending products and services through one
banking office and a comprehensive courier program that enhances customer
service. The Company's primary sources of revenue are interest income and fees
from its investments and commercial loan products.
REPORTING DERIVATIVE INSTRUMENTS & HEDGING ACTIVITIES
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, establishes accounting and reporting standards for hedging
activities and derivative instruments. The Statement is effective for fiscal
years beginning after June 15, 1999. The Company will adopt Statement 133 as of
January 1, 2000. The impact of adopting this statement is not expected to be
material.
2. CASH AND DUE FROM BANKS
At December 31, 1998 and 1997, approximately $1,478,000 and $3,687,000,
respectively, was restricted due to requirements of the Federal Reserve Board to
maintain certain average reserve balances.
9
<PAGE> 12
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
3. INVESTMENT SECURITIES
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities:
U. S. Government and
agency obligations $ 143,884,327 $ 2,275,426 $ 152,189 $ 146,007,564
Corporate 15,875,541 313,204 8,652 16,180,093
Municipal 14,445,974 628,059 339 15,073,694
Mortgage-backed 1,662,772 4,343 6,046 1,661,069
---------------------------------------------------------------------
175,868,614 3,221,032 167,226 178,922,420
Other securities 5,660,600 5,660,600
---------------------------------------------------------------------
TOTAL $ 181,529,214 $ 3,221,032 $ 167,226 $ 184,583,020
=====================================================================
</TABLE>
<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>
The carrying value of securities available-for-sale that are pledged to
secure securities sold under agreements to repurchase and other deposits
was $116,696,000 and $107,076,000 at December 31, 1998 and 1997, respectively.
10
<PAGE> 13
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
3. INVESTMENT SECURITIES--CONTINUED
Sales of investment securities resulted in realized gains and losses for the
year ended December 31 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Securities gains $ 72,457 $ 24,899 $ 37,987
Securities losses (8,902) (26,696) (93,421)
---------------------------------------------
NET GAIN (LOSS) $ 63,555 $ (1,797) $ (55,434)
=============================================
</TABLE>
The amortized cost and fair value of investment securities at December 31, 1998
by contractual maturity are shown below. The contractual maturity is utilized
below except for mortgage-backed securities which use expected maturities based
on prepayment trends at the date of acquisition. Expected maturities differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------------------------------------
<S> <C> <C>
Debt securities, excluding
mortgage-backed securities:
Due in one year or less $ 12,953,694 $ 13,047,609
Due after one year through five years 104,326,643 106,104,982
Due after five years through ten years 56,437,436 57,540,836
Due after ten years 488,069 567,924
----------------------------------------
174,205,842 177,261,351
Mortgage-backed securities:
Due in one year or less 1,430,542 1,432,173
Due after ten years 232,230 228,896
----------------------------------------
1,662,772 1,661,069
----------------------------------------
Total debt securities 175,868,614 178,922,420
Other securities 5,660,600 5,660,600
----------------------------------------
TOTAL $ 181,529,214 $ 184,583,020
========================================
</TABLE>
11
<PAGE> 14
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
4. LOANS
The carrying amount of loans, classified by type, at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------
<S> <C> <C>
Commercial $ 124,643,361 $ 103,060,887
Real estate:
Residential--first mortgage 121,358,239 104,659,213
Commercial--owner occupied 118,559,796 99,537,241
Commercial--investment 182,888,352 130,107,734
Consumer 27,260,608 27,848,835
Other 4,570,835 4,507,631
------------------------------------------
579,281,191 469,721,541
Less deferred loan fees 911,275 685,450
------------------------------------------
578,369,916 469,036,091
Less allowance for loan losses 8,145,982 6,947,377
------------------------------------------
$ 570,223,934 $ 462,088,714
==========================================
</TABLE>
Transactions affecting the allowance for loan losses for the year ended December
31 are summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Balance--January 1 $ 6,947,377 $ 5,942,377 $ 4,960,000
Provision for loan losses 1,230,000 1,005,000 980,000
Net (charge offs) recoveries (31,395) 2,377
------------------------------------------------------
$ 8,145,982 $ 6,947,377 $ 5,942,377
======================================================
</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 $16,528,000
and $15,205,000 at December 31, 1998 and 1997, respectively. During 1998,
$12,172,000 of new loans were made and collections and repayments totaled
$10,849,000. The Bank had no material impaired loans at December 31, 1998, 1997
and 1996.
12
<PAGE> 15
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
5. BANK PREMISES AND EQUIPMENT
Major classes of bank premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------
<S> <C> <C>
Cost:
Land and improvements $ 2,098,382 $ 2,076,648
Buildings and improvements 6,831,900 6,765,301
Equipment 2,553,194 1,866,464
Furniture and fixtures 821,393 797,373
--------------------------------------
12,304,869 11,505,786
Less accumulated depreciation 2,553,422 1,957,568
--------------------------------------
$ 9,751,447 $ 9,548,218
======================================
</TABLE>
6. DEPOSITS
The carrying amounts of deposits, classified by type, at December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------
<S> <C> <C>
Noninterest bearing demand $ 56,494,624 $ 49,869,745
Interest checking 214,565,048 146,291,238
Savings 17,898,867 17,296,887
Certificates of deposit of $100,000 or more 218,687,386 206,451,627
Other time deposits 155,420,522 159,751,611
------------------------------------------
$ 663,066,447 $ 579,661,108
==========================================
</TABLE>
The maturity distribution of certificates of deposit issued in amounts of
$100,000 and over and outstanding at December 31, 1998 is:
<TABLE>
<CAPTION>
<S> <C>
Three months or less $ 97,329,393
Over three and through six months 36,632,228
Over six and through twelve months 47,462,342
Over twelve months 37,263,423
-------------------
$ 218,687,386
===================
</TABLE>
13
<PAGE> 16
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
7. SHORT-TERM BORROWINGS
Short-term borrowings, which are comprised of various types of funds at December
31 are summarized below:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Securities sold under agreements to repurchase $ 14,625,863 $ 14,395,269
Advances from FHLB 53,900,000 15,900,000
Other 3,490,471
-----------------------------------
TOTAL SHORT-TERM BORROWINGS $ 72,016,334 $ 30,295,269
===================================
</TABLE>
At December 31, 1998 and 1997, the Company had $24,260,000 and $36,200,000,
respectively, of unused lines of credit to obtain short-term financing.
The maximum amount of securities sold under agreements to repurchase during 1998
was $22,068,000 and the average for the year was $17,790,000. The underlying
securities were under the Company's control.
Advances from the Federal Home Loan Bank have mortgage loans pledged as
collateral of $80,850,000 and $23,850,000 at December 31, 1998 and 1997,
respectively.
Other short-term borrowings include demand notes issued by the Bank to the U.S.
Treasury under the Treasury's tax and loan note program.
14
<PAGE> 17
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
8. FEDERAL INCOME TAX
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Deferred tax liabilities:
Unrealized net holding gains on
securities available for sale $ 1,040,000 $ 698,000
Tax over book depreciation 164,000 126,000
Other 398,000 304,000
-------------------------------
Total deferred tax liabilities 1,602,000 1,128,000
Deferred tax assets:
Allowance for loan losses 2,543,000 2,113,000
Deferred loan fees 105,000 57,000
Other 45,000 44,000
-------------------------------
Total deferred tax assets 2,693,000 2,214,000
-------------------------------
NET DEFERRED TAX ASSETS INCLUDED IN THE CAPTION "INTEREST
RECEIVABLE AND OTHER ASSETS" $ 1,091,000 $ 1,086,000
===============================
</TABLE>
The provision (credit) for federal income tax for the years ended December 31
consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Current $ 4,150,000 $ 3,305,200 $ 3,014,200
Deferred (345,000) (71,200) (333,200)
---------------------------------------------------
TOTAL $ 3,805,000 $ 3,234,000 $ 2,681,000
===================================================
</TABLE>
15
<PAGE> 18
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
8. FEDERAL INCOME TAX--CONTINUED
The effective tax rate differs from the statutory tax rate for the following
reasons and by the following percentages:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------
<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 (1.9) (2.4) (2.8)
Other .3 .7 .7
--------------------------------------------
EFFECTIVE TAX RATE 32.4% 32.3% 31.9%
============================================
</TABLE>
Income tax expense (benefit) related to gains and losses realized on the sale of
securities amounted to approximately, and $22,000, ($1,000), and ($19,000) for
1998, 1997 and 1996, respectively.
9. CAPITAL STOCK
The Company has long-term incentive plans under which it has awarded stock
options to executive officers, directors and other key personnel. The Directors'
Stock Option Plan (the Plan) was established in 1995 and allows the Company to
grant directors options to purchase up to 159,000 common shares. Each option
granted under the plan is exercisable at the date of the grant and all options
issued terminate at the earlier of (1) one year following either the
discontinuance of service as a director, (2) change in control of the Company,
or (3) ten years from the date of grant. During 1998, 12,500 options were
granted to Directors under this plan. Options issued under the Plan are
automatically adjusted for common stock dividends. The Plan expires July 1,
2005.
The Company also has established, in 1988 and 1996, stock option plans under
which shares of common stock may be issued to key employees at prices not less
than market value at the date of grant. The option period is ten years from the
date of grant, and no options are exercisable until the fifth anniversary of the
grant. During 1998, 97,336 options were granted to key employees under these
plans. Options issued under these plans are automatically adjusted for common
stock dividends. These plans expire ten years from the date they were
established.
16
<PAGE> 19
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
9. CAPITAL STOCK--CONTINUED
The Company has elected to follow Accounting Principles Board Opinion No 25.
Accounting for Stock Issued to Employees (APB 25) and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996, respectively: risk-free interest rates of 6.0%, 6.0% and 7.0%;
dividend yield of 2.0%, 2.0% and 6.0%; volatility factors of the expected market
price of the Company's common stock of .20, .20 and .21; and a weighted-average
expected life of the option of 7.5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ----------------- ----------------
<S> <C> <C> <C>
Proforma net income $ 7,274 $ 6,639 $ 5,706
Proforma basic earnings per share $ 3.63 $ 3.49 $ 3.03
Proforma dilute earnings per share $ 3.57 $ 3.36 $ 2.93
</TABLE>
17
<PAGE> 20
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
9. CAPITAL STOCK--CONTINUED
The following table summarizes stock options activity for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Options
-------------------------------
Available Option Price Per
for Grant Outstanding Share Range
---------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1996 169,218 112,814 $10.78 to $27.36
Authorized 159,000
Granted (22,619) 22,619 $29.95
Exercised (447) $10.78
Forfeited 2,431 (2,431) $10.78 to $33.50
-------------------------------
Balance at December 31, 1996 308,030 132,555 $10.78 to $33.50
Granted (27,850) 27,850 $37.50
Exercised (83,987) $10.78 to $16.44
-------------------------------
Balance at December 31, 1997 280,180 76,418 $10.78 to $37.50
Granted (109,836) 109,836 $44.50 to $54.50
Exercised (8,556) $10.78 to $47.00
Forfeited (200) $47.00
-------------------------------
BALANCE AT DECEMBER 31, 1998 170,344 177,498 $10.78 TO $54.50
===============================
EXERCISABLE--DECEMBER 31, 1998 47,634
===============
</TABLE>
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Net income $ 7,928,692 $ 6,781,685 $ 5,725,878
=====================================================
Denominator:
Denominator for basic earnings per
share--weighted-average shares 2,002,486 1,899,904 1,884,278
Effect of securities:
Employee stock options 34,379 75,914 63,377
-----------------------------------------------------
Denominator for diluted earnings per
share--adjusted weighted-average shares for
assumed conversions 2,036,865 1,975,818 1,947,655
=====================================================
Basic earnings per share $ 3.96 $ 3.57 $ 3.04
=====================================================
Diluted earnings per share $ 3.89 $ 3.43 $ 2.94
=====================================================
</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>
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Postage, telephone and delivery $ 788,379 $ 689,346 $ 643,439
Professional services 796,658 611,217 489,546
Taxes, other than income 454,262 396,055 535,380
Other 3,814,487 3,323,614 2,518,503
---------------------------------------------------
TOTAL OTHER EXPENSES $ 5,853,786 $ 5,020,232 $ 4,186,868
===================================================
</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, 1998 and
1997, the rates on existing off-balance-sheet instruments were substantially
equivalent to current market rates, considering the underlying credit standing
of the counterparties.
The Bank's maximum exposure to credit losses for loan commitments and standby
letters of credit outstanding at December 31 was as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------
EXPIRATION LOAN STANDBY LETTERS
DATE COMMITMENTS OF CREDIT
- ------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 190,539,000 $ 12,890,000
2000 17,797,000 290,000
2001 and beyond 28,954,000 3,639,000
------------------------------------------
$ 237,290,000 $ 16,819,000
==========================================
1997
------------------------------------------
1998 $ 157,039,000 $ 3,013,000
1999 13,172,000 2,983,000
2000 and beyond 16,698,000 7,443,000
------------------------------------------
$ 186,909,000 $ 13,439,000
==========================================
</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. Under such limitations, the
amount available for payment of dividends to the Company without obtaining prior
approval of the Comptroller of the Currency was approximately $11,176,000 at
January 1, 1999. Additional 1999 earnings will also become available for
distribution. Restricted net assets of the Bank amounted to approximately
$31,850,000 or 55% of the Company's consolidated shareholders' equity at
December 31, 1998.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possible additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the
Company and the Bank meet all capital adequacy requirements to which it is
subject.
As of December 31, 1998, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
21
<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, 1998 10.4% 9.1% 7.2%
Actual percentage--December 31, 1997 11.1% 9.8% 7.7%
December 31, 1998:
Required capital $ 49,559,000 $ 24,779,000 $ 31,333,000
Capital to be well capitalized 61,949,000 37,169,000 39,167,000
Actual capital 64,157,000 56,408,000 56,408,000
December 31, 1997:
Required capital $ 40,126,000 $ 20,063,000 $ 25,648,000
Capital to be well capitalized 50,158,000 30,095,000 32,059,000
Actual capital 55,468,000 49,190,000 49,190,000
</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, 1998 and 1997:
<TABLE>
<CAPTION>
1998
------------------------------------------
CARRYING ESTIMATED
VALUE FAIR VALUES
------------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 29,262,969 $ 29,262,969
Investment securities 184,583,020 184,583,020
Loans, net 570,223,934 573,013,603
------------------------------------------
784,069,923 $ 786,859,592
====================
Other assets 17,558,053
---------------------
TOTAL ASSETS $ 801,627,976
=====================
Liabilities and shareholders' equity:
Deposits $ 663,066,447 $ 663,937,736
Short-term borrowings 72,016,334 72,345,679
------------------------------------------
735,082,781 $ 736,283,415
====================
Other liabilities 8,122,982
---------------------
743,205,763
Shareholders' equity: 58,422,213
---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 801,627,976
=====================
</TABLE>
23
<PAGE> 26
Capital Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements--Continued
13. FAIR VALUE STATEMENT OF CONDITION--CONTINUED
<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>
14. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------------------
<S> <C> <C>
CONDENSED BALANCE SHEETS
Assets:
Cash $ 704,696 $ 1,500,001
Investment in and advances to subsidiaries 57,551,207 49,033,260
Other assets 650,250 352,048
------------------------------------------
TOTAL ASSETS $ 58,906,153 $ 50,885,309
==========================================
Liabilities and shareholders' equity:
Other liabilities--dividends payable $ 483,940 $ 338,627
Shareholders' equity 58,422,213 50,546,682
------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 58,906,153 $ 50,885,309
==========================================
</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
----------------------------------------------------
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME
Dividend from subsidiary $ 4,000,000 $ 10,000,000
Interest and fee income $ 945,661 675,810 450
Gain on securities 41,732
Expenses 811,338 769,870 87,489
----------------------------------------------------
Income before equity in undistributed
net income of subsidiaries 176,055 3,905,940 9,912,961
Increase (decrease) in undistributed
net income of subsidiaries 7,752,637 2,875,745 (4,187,083)
----------------------------------------------------
NET INCOME $ 7,928,692 $ 6,781,685 $ 5,725,878
====================================================
CONDENSED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net income $ 7,928,692 $ 6,781,685 $ 5,725,878
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Equity in undistributed net income of subsidiaries (7,752,637) (2,875,745) 4,187,083
(Increase) decrease in other assets (434,159) 209,159 450
Gain on sale of investments (41,732)
----------------------------------------------------
Net cash provided by (used in) operating activities (299,836) 4,115,099 9,913,411
INVESTING ACTIVITIES
Increase in note receivable from subsidiary (4,000,000) (10,000,000)
Investment in subsidiaries (722,615)
Proceeds from sale and maturities of securities 69,732
Purchase of investment securities (150,500) (257,500)
----------------------------------------------------
Net cash used in investing activities 69,732 (4,873,115) (10,257,500)
FINANCING ACTIVITIES
Issuance of common stock 1,034,826 2,333,527 440,653
Payment of dividends (1,600,027) (645,860) (10,781)
----------------------------------------------------
Net cash (used in) provided by financing activities (565,201) 1,687,667 429,872
----------------------------------------------------
(Decrease) increase in cash (795,305) 929,651 85,783
Cash at beginning of year 1,500,001 570,350 484,567
----------------------------------------------------
CASH AT END OF YEAR $ 704,696 $ 1,500,001 $ 570,350
====================================================
</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 15, 1999, 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, 1998.
/S/ ERNST & YOUNG, LLP
ERNST & YOUNG, LLP
Detroit, Michigan
February 23, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,262,969
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 184,583,020
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 578,369,916
<ALLOWANCE> 8,145,982
<TOTAL-ASSETS> 801,627,976
<DEPOSITS> 663,066,447
<SHORT-TERM> 72,016,334
<LIABILITIES-OTHER> 8,122,982
<LONG-TERM> 0
0
0
<COMMON> 1,008,204
<OTHER-SE> 57,414,009
<TOTAL-LIABILITIES-AND-EQUITY> 801,627,976
<INTEREST-LOAN> 43,725,781
<INTEREST-INVEST> 11,841,681
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 55,567,462
<INTEREST-DEPOSIT> 29,022,126
<INTEREST-EXPENSE> 31,750,923
<INTEREST-INCOME-NET> 23,816,539
<LOAN-LOSSES> 1,230,000
<SECURITIES-GAINS> 63,555
<EXPENSE-OTHER> 12,534,250
<INCOME-PRETAX> 11,733,692
<INCOME-PRE-EXTRAORDINARY> 11,733,692
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,928,692
<EPS-PRIMARY> 3.96
<EPS-DILUTED> 3.89
<YIELD-ACTUAL> 3.43
<LOANS-NON> 149,000
<LOANS-PAST> 421,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,947,377
<CHARGE-OFFS> 36,000
<RECOVERIES> 5,000
<ALLOWANCE-CLOSE> 8,145,982
<ALLOWANCE-DOMESTIC> 4,383,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,763,000
</TABLE>
