<PAGE> 1
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 JUNE 30, 1998
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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 June 30, 1998, there were 2,001,143 shares of common stock outstanding.
<PAGE> 2
CAPITAL HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
- ------------------------------
<S> <C> <C>
Item 1. Financial Statements (Unaudited):
Consolidated balance sheets
June 30, 1998 and December 31, 1997 3
Consolidated statements of income
Three months ended June 30, 1998 and 1997 4
Six months ended June 30, 1998 and 1997
Consolidated statements of shareholders' equity
Six months ended June 30, 1998 and 1997 5
Consolidated statements of cash flows
Six months ended June 30, 1998 and 1997 6
Notes to consolidated financial statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 - 9
PART II. OTHER INFORMATION 10
- ---------------------------
SIGNATURES 11
- ----------
</TABLE>
2
<PAGE> 3
CAPITAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, 1998 DECEMBER 31, 1997
--------------- -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,751,256 $ 15,291,951
Federal Funds Sold 9,000,000 8,000,000
------------ ------------
Total Cash and Cash Equivalents 26,751,256 23,291,951
Investment Securities Available for sale, at fair value 178,681,907 167,520,873
Loans 521,494,027 469,036,091
Less: Allowance for credit losses 7,422,578 6,947,377
------------ ------------
Net loans 514,071,449 462,088,714
Bank premises and equipment 9,805,094 9,548,218
Interest receivable and other assets 8,108,723 7,090,107
------------ ------------
Total Assets $737,418,429 $669,539,863
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing $584,614,444 $544,186,632
Noninterest bearing 57,321,379 49,869,745
------------ ------------
Total deposits 641,935,823 594,056,377
Short-term borrowings 34,900,000 15,900,000
Interest payable and other liabilities 6,792,612 9,036,804
------------ ------------
Total Liabilities 683,628,435 618,993,181
SHAREHOLDERS' EQUITY
Common stock, no par value, $.50 stated value;
3,000,000 shares authorized and 2,001,143 shares
issued and outstanding (1,991,922 at December 31, 1997) 1,000,571 995,961
Capital in excess of stated value 33,479,892 33,179,413
Retained earnings 17,892,552 15,014,646
Unrealized net holding gains on securities available for sale 1,416,979 1,356,662
------------ ------------
Total Shareholders' Equity 53,789,994 50,546,682
------------ ------------
Total Liabilities and Shareholders' Equity $737,418,429 $669,539,863
============ ============
</TABLE>
See Accompanying Notes
3
<PAGE> 4
CAPITAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $10,866,041 $ 9,135,409 $21,070,443 $17,612,241
Securities 2,749,164 2,591,282 5,447,198 5,177,292
Federal funds sold 93,483 123,982 208,055 171,447
----------- ----------- ----------- -----------
Total interest income 13,708,688 11,850,673 26,725,696 22,960,980
Interest expense:
Deposits 7,150,435 6,508,100 14,112,511 12,417,906
Short-term borrowings 662,362 246,341 1,142,419 609,055
----------- ----------- ----------- -----------
Total interest expense 7,812,797 6,754,441 15,254,930 13,026,961
----------- ----------- ----------- -----------
Net interest income 5,895,891 5,096,232 11,470,766 9,934,019
Provision for credit losses 280,000 240,000 510,000 480,000
----------- ----------- ----------- -----------
Net interest income after provision for credit losses 5,615,891 4,856,232 10,960,766 9,454,019
Other income:
Securities gains, net 7,917 4,056 21,127 7,806
Other 340,054 295,371 670,794 559,733
----------- ----------- ----------- -----------
Total other income 347,971 299,427 691,921 567,539
Other expenses:
Salaries and employee benefits 1,626,867 1,424,006 3,231,290 2,758,581
Equipment 162,433 123,555 356,075 233,824
Taxes other than income 118,175 97,591 238,650 203,764
Courier services 152,183 130,697 295,436 257,983
Net occupancy 73,108 73,157 144,377 147,885
Other 972,532 811,380 1,828,606 1,560,531
----------- ----------- ----------- -----------
Total other expenses 3,105,298 2,660,386 6,094,434 5,162,568
----------- ----------- ----------- -----------
Income before provision for federal income tax 2,858,564 2,495,273 5,558,253 4,858,990
Provision for federal income tax 960,000 790,000 1,840,000 1,560,000
----------- ----------- ----------- -----------
Net income $ 1,898,564 $ 1,705,273 $ 3,718,253 $ 3,298,990
=========== =========== =========== ===========
Net income per share:
Basic $ 0.95 $ 0.90 $ 1.86 $ 1.74
=========== =========== =========== ===========
Diluted $ 0.93 $ 0.86 $ 1.83 $ 1.67
=========== =========== =========== ===========
Average shares outstanding:
Basic 2,000,858 1,898,843 1,999,658 1,898,483
=========== =========== =========== ===========
Diluted 2,031,454 2,026,814 2,026,814 1,974,901
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes
4
<PAGE> 5
CAPITAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
-------------------------- EXCESS OF RETAINED
SHARES AMOUNT STATED VALUE EARNINGS
------------- ----------- ----------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 1,991,922 $995,961 $33,179,413 $15,014,646
Net income 3,718,253
Unrealized gains (losses) on securities, net of tax
Comprehensive Income
Exercise of 4,250 common stock options at $16.44 per share 4,250 2,125 67,745
Issuance of 4,338 shares of common stock at $47.00 per share 4,338 2,169 201,717
Issuance of 633 shares of common stock at $49.50 per share 633 316 31,017
Cash dividend declared, $.21 per share (840,347)
--------------------------------------------------------
Balance at June 30, 1998 2,001,143 $1,000,571 $33,479,892 $17,892,552
========================================================
Balance at January 1, 1997 1,897,508 $948,754 $30,893,093 $9,217,448
Net income 3,298,990
Unrealized gains (losses) on securities, net of tax
Comprehensive Income
Exercise of 1,022 common stock options at $10.78 per share 1,022 511 10,506
Issuance of 340 shares of common stock at $37.50 per share 340 170 12,580
Cash dividend declared, $.17 per share (322,808)
--------------------------------------------------------
Balance at June 30, 1997 1,898,870 $949,435 $30,916,179 $12,193,630
========================================================
<CAPTION>
OTHER TOTAL
COMPREHENSIVE SHAREHOLDERS'
INCOME EQUITY
--------------------------------
<S> <C> <C>
Balance at January 1, 1998 $1,356,662 $50,546,682
Net income 3,718,253
Unrealized gains (losses) on securities, net of tax 60,317 60,317
--------------------------------
Comprehensive Income 3,778,570
Exercise of 4,250 common stock options at $16.44 per share 69,870
Issuance of 4,338 shares of common stock at $47.00 per share 203,886
Issuance of 633 shares of common stock at $49.50 per share 31,333
Cash dividend declared, $.21 per share (840,347)
--------------------------------
Balance at June 30, 1998 $1,416,979 $53,789,994
================================
Balance at January 1, 1997 $530,809 $41,590,104
Net income 3,298,990
Unrealized gains (losses) on securities, net of tax (333,123) (333,123)
--------------------------------
Comprehensive Income 2,965,867
Exercise of 1,022 common stock options at $10.78 per share 11,017
Issuance of 340 shares of common stock at $37.50 per share 12,750
Cash dividend declared, $.17 per share (322,808)
--------------------------------
Balance at June 30, 1997 $197,686 $44,256,930
================================
</TABLE>
See Accompanying Notes
5
<PAGE> 6
CAPITAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 3,718,253 $ 3,298,990
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 510,000 480,000
Depreciation and amortization 328,366 158,854
Amortization and accretion of security premiums and discounts (22,939) (54,413)
Loss (gain) on sale of securities (21,127) (7,806)
Deferred income taxes (173,400) (163,200)
Changes in assets and liabilities:
Increase in interest receivable and other assets (878,585) (817,949)
(Decrease)/increase in interest payable and other liabilities (2,326,000) 1,155,138
------------ ------------
Total adjustments (2,583,685) 750,624
------------ ------------
Net cash provided by operating activities 1,134,568 4,049,614
INVESTING ACTIVITIES:
Purchase of securities available for sale (30,953,845) (21,144,141)
Net increase in loans (52,492,735) (42,183,404)
Purchase of bank premises and equipment (585,242) (3,082,481)
Proceeds from maturities of securities available for sale 2,407,683 10,531,764
Proceeds from sales of securities available for sale 17,522,880 10,006,047
------------ ------------
Net cash used in investing activities (64,101,259) (45,872,215)
FINANCING ACTIVITIES:
Net increase in deposits 47,879,446 63,523,858
Net increase/(decrease) in short-term borrowings 19,000,000 (18,773,303)
Issuance of common stock 305,089 23,767
Dividends paid (758,539) --
------------ ------------
Net cash provided by financing activities 66,425,996 44,774,322
------------ ------------
Increase in cash and cash equivalents 3,459,305 2,951,721
Cash and cash equivalents at beginning of period 23,291,951 13,958,201
------------ ------------
Cash and cash equivalents at end of period $ 26,751,256 $ 16,909,922
============ ============
Supplemental disclosures:
Interest paid $ 15,067,274 $ 12,204,343
============ ============
Income taxes paid $ 1,825,000 $ 1,775,000
============ ============
</TABLE>
See Accompanying Notes
6
<PAGE> 7
CAPITAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
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 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. Significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements. 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, 1997.
The Bank's maximum exposure to credit losses for loan commitments and standby
letters of credit outstanding at June 30, 1998 was $204,246,000 and $14,724,000,
respectively, compared to $186,909,000 and $13,439,000, respectively, at
December 31, 1997. The increase in loan commitments is due to owner-occupied
real estate construction to take place within the next twelve months. Management
does not anticipate any significant losses as a result of these commitments.
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 had 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.
7
<PAGE> 8
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 ninth year
of operation. During the second quarter and for the six months ended June 30,
1998, the Bank experienced an increase in net deposits. Deposits increased
$44,327,000 or 7.4% for the second quarter and $47,879,000 or 8.06% during the
first half of 1998.
Loan growth for the second quarter of 1998 was $40,409,000 or 8.4% and
$52,458,000 or 11.2% for the first half of 1998. The allowance for credit losses
at June 30, 1998, was $7,423,000 or 1.4% of total loans, compared to $6,947,000
or 1.5% of total loans at December 31, 1997. The Bank had write offs totaling
$36,000 during the first half of 1998. This was the Bank's first loss in four
years. Nonperforming loans represent .08% of total loans at June 30, 1998.
Management considers the allowance to be adequate at this time. At June 30,
1998, the Bank had no impaired loans.
Securities available for sale totaled $178,682,000 or 24.2% of total assets at
June 30, 1998. The Bank continues to maintain very high investment quality with
81.7% of total securities in U.S. Treasury and Agency securities. The Bank has
no high-risk on or off balance-sheet derivatives. The total market value of the
portfolio increased $60,000 (net of tax) during the first half of 1998. This is
a reflection of the fluctuation in bond rates on both long and short-term
security maturities. The Bank's portfolio has a weighted average life to
maturity of approximately 2.3 years.
Consolidated net income for the second quarter of 1998 was $1,899,000 or $.94
per diluted share, and $3,718,000 or $1.84 per diluted share for the first half
of 1998. This compares to $1,705,000 or $.86 per diluted share for the second
quarter of 1997 and $3,299,000 or $1.67 per diluted share for the first half of
1997. The increase in income before provision for federal income taxes,
excluding securities gains, for the first half of 1998, represents a 14.1%
increase over the same period of 1997. This increase is a direct result of
growth in earning assets, careful attention to noninterest expenses and an
increase in fees collected on lending transactions. The income tax provision of
approximately 33% for the first half of 1998, remained comparable to the same
period last year.
8
<PAGE> 9
CAPITAL HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Other expenses continue to increase as the Bank grows. Net overhead as a
percentage of average assets has increased only slightly from 1.77% for the year
ended December 31, 1997, to 1.78% for the first half of 1998. Salaries and
benefits represent 52.4% of other expenses for the second quarter of 1998,
compared to 53.5% for the second quarter of 1997. Salary expense for the first
half of 1998, increased 17.1% over the same period for 1997. Staff levels have
increased from 96 to 107 (full time equivalents) over the past 12 months, to
accommodate the increased growth of the bank. Average assets per employee has
increased from $6,203,000 at December 31, 1997, to $6,686,000 at June 30, 1998.
The Tier I Capital ratio was 9.43%, the Total Capital ratio was 10.68%, and the
Leverage ratio was 7.38% at June 30, 1998, compared to regulatory capital
requirements of 4%, 8% and 4%, respectively. These ratios are well in excess of
the regulatory capital requirements.
Shareholders equity has continued to increase from retained earnings of net
income. A $.21 per share cash dividend was declared on June 30, 1998, payable on
July 25, 1998. Annualized, this cash dividend represents 22% of the current
years projected earnings.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Company expects that adoption of this
Statement will not have a significant impact on the consolidated financial
statements.
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. If
certain conditions are met, a derivative may be specifically designated as a
fair value, cash flow, or foreign currency hedge. 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. If the Company elects to
apply hedge accounting, it is required to establish at the inception of the
hedge the method it will use for assessing the effectiveness of the hedging
derivative and the measurement approach for determining the ineffective aspect
of the hedge. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company plans to adopt this Statement
effective January 1, 2000. Presently the Company does not utilize derivative or
related types of financial instruments except for Federal agency collateralized
mortgage obligations. Therefore, this Statement is not anticipated to have a
material impact on the Company.
9
<PAGE> 10
CAPITAL HOLDINGS, INC.
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Shareholders Meeting held on May 7, 1998, pursuant to the Notice
of Annual Meeting and Proxy Statement dated April 13, 1998:
1) each of the five nominees were elected as directors
(1,402,540 votes for).
2) amendment to the Capital Holdings, Inc. 1996 Incentive Stock
Option Plan (1,360,370 votes for, 8,328 votes against, 33,842
votes abstained).
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
June 30, 1998.
10
<PAGE> 11
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 8/12/98 /s/ Michael P. Killian
----------------------- --------------------------------------------
Michael P. Killian, Chief Financial Officer,
Senior Vice President
11
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 17,751,256
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 178,681,907
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 521,494,027
<ALLOWANCE> 7,422,578
<TOTAL-ASSETS> 737,418,429
<DEPOSITS> 641,935,823
<SHORT-TERM> 34,900,000
<LIABILITIES-OTHER> 6,792,612
<LONG-TERM> 0
0
0
<COMMON> 1,000,571
<OTHER-SE> 52,789,423
<TOTAL-LIABILITIES-AND-EQUITY> 737,418,429
<INTEREST-LOAN> 21,070,443
<INTEREST-INVEST> 5,447,198
<INTEREST-OTHER> 208,055
<INTEREST-TOTAL> 26,725,696
<INTEREST-DEPOSIT> 14,112,511
<INTEREST-EXPENSE> 15,254,930
<INTEREST-INCOME-NET> 11,470,766
<LOAN-LOSSES> 510,000
<SECURITIES-GAINS> 21,127
<EXPENSE-OTHER> 6,094,434
<INCOME-PRETAX> 5,558,253
<INCOME-PRE-EXTRAORDINARY> 5,558,253
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,718,253
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.84
<YIELD-ACTUAL> 3.501
<LOANS-NON> 159,000
<LOANS-PAST> 256,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,947,377
<CHARGE-OFFS> 36,781
<RECOVERIES> 1,982
<ALLOWANCE-CLOSE> 7,422,578
<ALLOWANCE-DOMESTIC> 6,633,741
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 788,837
</TABLE>
