Capital 10-Q 2000 Q1 Quarterly report

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
	CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
	CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
	NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
SIGNATURES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended March 31, 2000

Commission File Number 33-46573

CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its Charter)

OHIO	34-1588902
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5520 Monroe Street, Sylvania, OH 43560
(Address of principal executive offices and zip code)

(419) 885-7379
(Registrant’s telephone number, including area code)

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.

(1) Yes   X    (2) No       

As of March 31, 2000, there were 7,050,452 shares of common stock outstanding.

CAPITAL HOLDINGS, INC.

Index

			Page Number
PART I. FINANCIAL INFORMATION
	Item 1.Financial Statements (Unaudited):
		Consolidated balance sheets March 31, 2000 and December 31, 1999		3
		Consolidated statements of income Three months ended March 31, 2000 and 1999		4
		Consolidated statements of shareholders’ equity Three months ended March 31, 2000 and 1999		5
		Consolidated statements of cash flows Three months ended March 31, 2000 and 1999		6
		Notes to consolidated financial statements		7
	Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations			8 - 11
PART II. OTHER INFORMATION				12
SIGNATURES				13

2

CAPITAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

			(UNAUDITED)
			MARCH 31, 2000			DECEMBER 31, 1999
ASSETS
	Cash and due from banks		$	22,354,857		$	10,935,827
	Interest bearing deposits in banks			100,000			4,000,000
	Federal funds sold			1,500,000			14,000,000
	Cash and cash equivalents			23,954,857			28,935,827
	Investment securities available for sale, at fair value (amortized			222,081,622			223,817,207
		cost $229,481,148 in 2000 and $229,704,893 in 1999)
	Loans			772,546,727			722,583,284
	Less allowance for loan losses			11,079,008			10,448,496
	Net loans			761,467,719			712,134,788
	Bank premises and equipment			10,352,657			10,443,977
	Interest receivable and other assets			14,711,272			13,880,891
Total Assets			$	1,032,568,127		$	989,212,690
LIABILITIES AND SHAREHOLDERS’ EQUITY
	Deposits:
		Interest bearing	$	767,619,698		$	736,025,803
		Noninterest bearing		66,676,441			66,684,718
	Total deposits			834,296,139			802,710,521
	Other borrowings			97,720,482			90,022,716
	Interest payable and other liabilities			13,009,279			10,367,489
Total Liabilities				945,025,900			903,100,726
SHAREHOLDERS’ EQUITY
	Common stock, no par value, $.167 stated value; 20,000,000 shares authorized and 7,050,452 shares issued and outstanding (7,037,222 at December 31, 1999)			1,177,425			1,175,216
	Capital in excess of stated value			60,504,040			60,222,913
	Retained earnings			30,745,286			28,601,206
	Accumulated other comprehensive (loss) income			(4,884,524	)		(3,887,371	)
Total Shareholders’ Equity				87,542,227			86,111,964
Total Liabilities and Shareholders’ Equity			$	1,032,568,127		$	989,212,690

See accompanying notes.

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CAPITAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

			THREE MONTHS ENDED
			MARCH 31
			2000		1999
Interest income:
		Loans, including fees	$	15,288,459	$	11,943,851
		Securities		3,530,149		2,897,766
		Federal funds sold		30,431		80,704
Total interest income				18,849,039		14,922,321
Interest expense:
		Deposits		9,423,512		7,306,460
		Other borrowings		1,293,536		1,036,235
Total interest expense				10,717,048		8,342,695
Net interest income				8,131,991		6,579,626
Provision for loan losses				630,000		525,000
Net interest income after provision for loan losses				7,501,991		6,054,626
Other income:
		Service charges on deposit accounts		165,150		130,175
		Net securities gains		6,815		29,886
		Other		425,062		433,102
Total other income				597,027		593,163
Other expenses:
		Salaries and employee benefits		2,233,869		1,927,672
		Occupancy and equipment expense		385,025		328,760
		Other		1,322,503		1,304,115
Total other expenses				3,941,397		3,560,547
Income before provision for federal income tax				4,157,621		3,087,242
Provision for federal income tax				1,379,000		1,005,000
Net income			$	2,778,621	$	2,082,242
Per common share:
	Net income
		Basic	$	0.39	$	0.35
		Diluted	$	0.38	$	0.34
	Cash dividends declared		$	0.09	$	0.08
Average shares outstanding:
	Basic			7,045,547		6,059,517
	Diluted			7,303,164		6,216,381

See accompanying notes.

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CAPITAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2000 AND 1999

													ACCUMULATED
	COMMON STOCK						CAPITAL IN						OTHER			TOTAL
							EXCESS OF			RETAINED			COMPREHENSIVE			SHAREHOLDERS'
	SHARES			AMOUNT			STATED VALUE			EARNINGS			(LOSS) INCOME			EQUITY
Balance at January 1, 2000		7,037,222		$	1,175,216		$	60,222,913		$	28,601,206			($3,887,371	)	$	86,111,964
Net income											2,778,621						2,778,621
Net unrealized loss on securities available for sale, net of tax effect of $514,000														(997,153	)		(997,153	)
Comprehensive Income																	1,781,468
Exercise of common stock options, including tax benefit		5,833			974			89,440									90,414
Issuance of common stock		7,397			1,235			191,687									192,922
Cash dividend declared, $.09 per share											(634,541	)					(634,541	)
Balance at March 31, 2000		7,050,452		$	1,177,425		$	60,504,040		$	30,745,286			($4,884,524	)	$	87,542,227
Balance at January 1, 1999		6,049,224		$	1,008,204		$	34,201,997		$	21,197,999		$	2,014,013		$	58,422,213
Net income											2,082,242						2,082,242
Net unrealized loss on securities available for sale, net of tax effect of $568,000														(1,102,198	)		(1,102,198	)
Comprehensive Income																	980,044
Exercise of common stock options, including tax benefit		12,780			2,130			181,881									184,011
Issuance of common stock		11,871			1,979			235,441									237,420
Treasury stock purchased		(9,000	)		(1,500	)		(178,500	)								(180,000	)
Treasury stock sold		9,000			1,500			178,500									180,000
Cash dividend declared, $.08 per share											(485,910	)					(485,910	)
Balance at March 31, 1999		6,073,875		$	1,012,313		$	34,619,319		$	22,794,331		$	911,815		$	59,337,778

See accompanying notes.

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CAPITAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

				THREE MONTHS ENDED
				MARCH 31
				2000			1999
OPERATING ACTIVITIES:
	Net Income			$	2,778,621		$	2,082,242
	Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for loan losses			630,000			525,000
		Depreciation and amortization			208,804			192,285
		Amortization and accretion of security premiums and discounts			(18,589	)		(11,348	)
		Gain on sale of investment securities			(6,815	)		(29,886	)
		Deferred income tax expense			(214,200	)		(178,500	)
		Changes in assets and liabilities:
			Interest receivable and other assets		(101,495	)		(1,115,506	)
			Interest payable and other liabilities		2,640,599			1,567,064
	Total adjustments				3,138,304			949,109
	Net cash provided by operating activities				5,916,925			3,031,351
INVESTING ACTIVITIES:
	Purchases of available-for-sale securities				(6,197,680	)		(19,296,627	)
	Net increase in loans				(49,962,931	)		(42,769,733	)
	Purchase of bank premises and equipment				(117,484	)		(141,234	)
	Proceeds from sales and calls of securities available-for-sale				5,505,078			10,278,984
	Proceeds from maturities of securities available-for-sale				941,752			1,169,949
	Net cash used in investing activities				(49,831,265	)		(50,758,661	)
FINANCING ACTIVITIES:
	Net increase in deposits				31,585,618			35,009,920
	Net increase in other borrowings				7,697,766			9,015,531
	Issuance of common stock				283,336			421,431
	Treasury stock purchased				0			(180,000	)
	Treasury stock sold				0			180,000
	Cash dividends paid				(633,350	)		(483,938	)
	Net cash provided by financing activities				38,933,370			43,962,944
Decrease in cash and cash equivalents					(4,980,970	)		(3,764,366	)
Cash and cash equivalents at beginning of period					28,935,827			29,262,969
Cash and cash equivalents at end of period				$	23,954,857		$	25,498,603
Supplemental disclosures:
	Interest paid			$	10,339,837		$	8,619,503
	Income taxes paid			$	156,000		$	225,000

See accompanying notes.

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CAPITAL HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements
for the Three Months Ended March 31, 2000

BASIS OF PRESENTATION

The unaudited 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, which is a real estate subsidiary that owns and leases to the Bank, its only operating facility. The Bank conducts business in northwestern Ohio and southeastern Michigan 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. The Company operates primarily in one business segment as a focused commercial business lender.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain reclassifications have been made to prior year amounts to conform with the current year presentation. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from those estimates. For further information refer to the consolidated financial statements and notes thereto appearing in the Company’s annual report on Form 10-K for the year ended December 31, 1999.

The Bank is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities.

The Bank’s maximum exposure to credit losses for loan commitments and standby letters of credit outstanding at March 31, 2000 was $294,072,000 and $31,841,000, respectively, compared to $287,875,000 and $32,459,000, respectively, at December 31, 1999. The increase in loan commitments is due to the increased activity from corporate borrowers as well as from the increase in owner-occupied commercial real estate construction.

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CAPITAL HOLDINGS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The Company’s primary asset is its subsidiary bank, which is in its eleventh year of operation. During the first quarter of 2000, the Company surpassed one billion dollars in total assets. Total assets grew 17.6% on an annualized basis since December 31, 1999.

Loan growth for the first quarter of 2000 was $49,963,000 or 6.9% since December 31, 1999. The increase in loans occurred primarily from strong loan demand and business development efforts, and, to a lesser extent, from certain previously sold loan participations that the Company was able to reacquire. The allowance for loan losses at March 31, 2000, was $11,079,000 or 1.43% of total loans, compared to 1.45% of total loans at December 31, 1999 and 1.40% of total loans at March 31, 1999. The allowance for loan losses is the estimated amount which in the opinion of management will be adequate to absorb potential loan losses in the loan portfolio. There were no nonaccruing loans at quarter end. Loans over 90 days past due as to principal and interest and still in an accrual status represented less than one-tenth of a percent of total loans at quarter end. At March 31, 2000 the Company had no impaired loans.

Investment securities available for sale totaled $222,082,000 or 21.5% of total assets at March 31, 2000. The investment quality of the securities portfolio remains very high with 82.4% of the portfolio in U.S. Treasury and Agency securities. Furthermore, the Bank has no investments in high-risk derivative instruments. The Bank’s portfolio has a weighted average adjusted maturity of approximately 4.5 years. Due to the general rise in interest rates, the total market value of the portfolio decreased $997,000 (net of tax) during the three months ended March 31, 2000.

For the three months ended March 31, 2000, the Bank continued to experience an increase in net deposits. Deposits increased $31,586,000 or 3.9% during the first quarter of 2000. Other borrowings, consisting of Federal Home Loan Bank advances, repurchase agreements, federal funds borrowings and demand notes issued under the U.S. Treasury Tax and Loan Note program, increased $7,698,000 or 8.6% during the first quarter of 2000.

In June 1999, a three-for-one stock split was declared and payable July 15, 1999. All earnings per share and cash dividend per share numbers, average and actual shares outstanding and the par value of common stock shares have been retroactively restated to reflect this three-for-one stock split.

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CAPITAL HOLDINGS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Consolidated net income for the first quarter of 2000 was $2,779,000 compared to $2,082,000 for the first quarter of 1999, representing a 33.4% increase. The increase in income before provision for federal income taxes, excluding securities gains, for the three months ended March 31, 2000, represents a 35.1% increase over the same period of 1999. This increase is a direct result of a 21.5% growth in earning assets, continued high credit quality and a continued emphasis on maintaining a high level of operating efficiency. Net income on a basic per share basis increased 11.4% to $.39 from $.35 in the first quarter of last year. On a diluted basis, net income per share increased 11.8% to $.38 from $.34 for the same period last year. The Company raised additional capital through a stock offering in the fourth quarter of 1999 increasing the number of shares outstanding by 15%. As a result, the percentage change in earnings per share was less than the percentage change in net income.

Net interest income for the first quarter of 2000 was $8,132,000 compared to $6,580,000 for the first quarter of 1999, representing a 23.6% increase. The increase was due largely to a higher volume of loans during the first quarter of 2000 compared to the same period last year. The net interest margin on a fully tax equivalent basis for the first quarter of 2000 was 3.47%, compared to 3.41% for the first quarter of 1999.

The provision for loan losses for the first quarter of 2000 was $630,000 compared to $525,000 during the first quarter of 1999. The increase in the provision was due to a higher volume of growth in loans during the first quarter of 2000 compared to the first quarter last year.

Non-interest expenses of the Company have increased in absolute dollars to support the continued growth of the Bank. Non-interest expenses increased 10.7% in the first quarter of 2000 compared to the same period last year while net revenues grew significantly more at 21.7%. As a percentage of average assets, non-interest expenses have decreased slightly from 1.66% for the year ended December 31, 1999, to 1.59% for the three months ended March 31, 2000. The Company’s efficiency ratio was 45% for the first quarter of 2000, which is significantly better than the national peer benchmark of 64%. Salaries and benefits represented 56.7% of other expenses for the first quarter of 2000, compared to 54.1% for the first quarter of 1999. Salaries and benefits expense for the three months ended March 31, 2000 increased 15.9% over the same period for 1999. The increase is due to a higher staffing level to support the growth of the bank, a generally higher cost for employee benefits and normal increases in compensation. Average assets per employee has increased from $7,102,000 at December 31, 1999, to $7,810,000 at March 31, 2000. Other non-interest expenses, excluding salaries and benefits, increased a relatively modest 4.6% for the first quarter of 2000 compared to the same period last year.

9

CAPITAL HOLDINGS, INC.

MANAGEMENT’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The Company’s Total Risk-Based Capital ratio was 12.19%, the Tier 1 Risk-Based Capital ratio was 10.94%, and the Tier 1 Leverage Capital ratio was 9.22% at March 31, 2000, compared to regulatory capital requirements of 10%, 6% and 5%, respectively for a well capitalized institution. At the Bank level, the Total Risk-Based Capital ratio was 11.07%, the Tier 1 Risk-Based Capital ratio was 7.00%, and the Tier 1 Leverage Capital ratio was 6.00% at March 31, 2000.

Shareholders’ equity has continued to increase from retained earnings of net income. A $.09 per share cash dividend was declared on March 31, 2000, payable April 25, 2000. Cash dividends declared represented approximately 23% of net income for the first quarter of 2000.

In June 1998, the FASB issued Statement No. 133. “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 establishes accounting and reporting standards for hedging activities and for derivative instruments, including certain derivative instruments embedded in other contracts. This statement requires a company to recognize all derivatives as either assets or liabilities in its balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative (i.e. gains and losses) depends on the intended use of the derivative and the resulting designation. With the issuance of FASB Statement No. 137, the effective date of FASB Statement No. 133 changes to include all fiscal quarters of fiscal years beginning after June 15, 2000. Presently the Company does not utilize derivative or related types of financial instruments except for certain Federal agency collateralized mortgage obligations. Therefore, this Statement is not anticipated to have a material impact on the Company.

10

CAPITAL HOLDINGS, INC.

MANAGEMENT’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 was passed by Congress to encourage corporations to provide investors with information about its anticipated future financial performance, goals and strategies. The act provides a safe harbor for such disclosure, or in other words, protection from unwarranted litigation, if actual results are not the same as management’s expectations.

The Company desires to provide its shareholders with sound information about past performance and future trends. Consequently, this report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements including certain plans, expectations, goals and projections that are subject to numerous assumptions, risks and uncertainties. Actual results could differ materially from those contained in or implied by the Company’s statements due to a variety of factors including: changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; material unforeseen changes in the financial condition or results of operations of the Company’s customers; and the nature, extent and timing of governmental actions and reforms. The management of the Company encourages readers of this report to understand forward-looking statements to be strategic objectives rather than absolute targets of performance.

11

CAPITAL HOLDINGS, INC.

MANAGEMENT’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits
	27     Financial Data Schedule
(b)	No reports on Form 8-K were filed for the quarter ended March 31, 2000.

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SIGNATURES

      Pursuant to the requirements for 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.

		CAPITAL HOLDINGS, INC.
Date	5/12/00	/s/ David L. Mead
		David L. Mead Chief Financial Officer, Senior Vice President

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