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 September 30, 1999

Commission File Number 33-46573

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

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 September 30, 1999, there were 6,081,319 shares of common stock outstanding.

1

Table of Contents

CAPITAL HOLDINGS, INC.

Index

2

Table of Contents

CAPITAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS

      See accompanying notes

3

Table of Contents

CAPITAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

      See accompanying notes

4

Table of Contents

CAPITAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

      See accompanying notes

5

Table of Contents

CAPITAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

      See accompanying notes

6

Table of Contents

CAPITAL HOLDINGS, INC.

Notes to Unaudited Consolidated Financial Statements
for the Nine Months Ended September 30, 1999

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 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. 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, 1998.

      The Bank’s maximum exposure to credit losses for loan commitments and standby letters of credit outstanding at September 30, 1999 was $295,355,000 and $24,727,000, respectively, compared to $237,290,000 and $16,819,000, respectively, at December 31, 1998. 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.

7

Table of Contents

CAPITAL HOLDINGS, INC.

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

      Loan growth for the third quarter of 1999 was $15,908,000 or 2.4% and $99,618,000 or 17.2% for the nine months ended September 30, 1999. Loan growth for the nine months ended September 30, 1999, consisted of $32 million or 32% from continued strong borrowing needs of the Bank’s corporate customers, and $58 million or 58% from commercial real estate construction loans. A substantial percentage of the real estate construction loans are supported by quality credit tenant leases or with specific take-out financing. The allowance for credit losses at September 30, 1999, was $9,756,000 or 1.44% of total loans, compared to $8,146,000 or 1.41% of total loans at December 31, 1998. The Bank did not experience any loan losses during the nine months ended September 30, 1999. Nonperforming loans at September 30, 1999 represented less than .01% of total loans. Nonperforming loans consist of loans on nonaccrual and loans over 90 days past due as to principal and interest and still in an accrual status. The allowance for loan losses is maintained at a level considered appropriate by management, based on its estimate of probable losses in the loan portfolio. At September 30, 1999, the Bank had no impaired loans.

      Securities available for sale totaled $218,649,000 or 23.7% of total assets at September 30, 1999. The investment quality of the securities portfolio remains very high with 82.1% 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 life to maturity of approximately 2.7 years. Due to the general rise in interest rates, the total market value of the portfolio decreased $3,940,000 (net of tax) during the nine months ended September 30, 1999.

      The Company’s primary asset is its subsidiary bank, which is in its eleventh year of operation. During the third quarter and for the nine months ended September 30, 1999, the Bank continued to experience an increase in net deposits. Deposits increased $23,897,000 or 3.3% for the third quarter and $80,506,000 or 12.1% during the nine months ended September 30, 1999.

      At the May 5, 1999 Annual Meeting, shareholders approved a 3-for-1 stock split to shareholders of record as of June 25, 1999. The 3-for-1 stock split was 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.

8

Table of Contents

CAPITAL HOLDINGS, INC.

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

      Consolidated net income for the third quarter of 1999 was $2,604,000 or $.42 per diluted share, and $6,964,000 or $1.11 per diluted share for the nine months ended September 30, 1999. This compares to $2,158,000 or $.35 per diluted share for the third quarter of 1998, and $5,876,000 or $.96 per diluted share for the nine months ended September 30, 1998. The increase in income before provision for federal income taxes, excluding securities gains, for the nine months ended September 30, 1999, represents an 18.2% increase over the same period of 1998. 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 effective income tax rate of 32.4% for the nine months ended September 30, 1999 remained comparable to the same period last year.

      Operating expenses of the Company have increased in absolute dollars to support the continued growth of the Bank. As a percentage of average assets, net overhead has decreased slightly from 1.72% for the year ended December 31, 1998, to 1.70% for the nine months ended September 30, 1999. The Company’s efficiency ratio was 48% for the nine months ended September 30, 1999. Salaries and benefits represent 52.5% of other expenses for the third quarter of 1999, compared to 53.3% for the third quarter of 1998. Salary expense for the nine months ended September 30, 1999 increased 20.2% over the same period for 1998. Staff levels have increased from 106 to 123 (full time equivalents) over the past 12 months, to accommodate the increased growth of the bank. Average assets per employee has increased from $6,793,000 at December 31, 1998, to $6,882,000 at September 30, 1999.

      The Company’s Tier 1 Capital ratio was 8.52%, the Total Capital ratio was 9.77%, and the Leverage ratio was 6.88% at September 30, 1999, compared to regulatory capital requirements of 4%, 8% and 4%, respectively. These ratios are well in excess of the regulatory capital requirements. At the Bank level, the Tier 1 Capital ratio was 7.58%, the Total Capital ratio was 10.73% and the Leverage ratio was 6.13% at September 30, 1999. The Company has announced a $24,300,000 common stock offering which it expects to complete in the fourth quarter of 1999.

      Shareholders’ equity has continued to increase from retained earnings of net income. An $.08 per share cash dividend was declared on March 31, 1999, June 30, 1999 and September 30, 1999, payable April 25, 1999, July 25, 1999 and October 25, 1999, respectively. Cash dividends declared represented approximately 21% of year-to-date net income.

9

Table of Contents

CAPITAL HOLDINGS, INC.

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

      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. 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.

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 began to correct and validate compliance. In 1997, the Company alerted its business customers of the Year 2000 problem and assessed the readiness preparations of its major customers and suppliers. Resolution of the Year 2000 problem is among the Company’s highest priorities.

10

Table of Contents

CAPITAL HOLDINGS, INC.

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

      The Company prepared a project plan, identified its major application and processing systems, and is using internal and external resources to modify or replace nonready systems. The Company tested identified critical systems for readiness as part of this process. In addition, the Company evaluated 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 had identified critical vendors and had completed formalized risk assessments of their Year 2000 readiness plans and status. The Company continues to communicate with its critical vendors and monitor their readiness.

      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 300 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 had 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 have continued throughout 1999.

11

Table of Contents

CAPITAL HOLDINGS, INC.

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

      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 executives, 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 tested and management believes it will be able to make any additional minor necessary corrections in a timely manner.

      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, utilities, and services provided by other financial institutions and governmental agencies were disrupted. While the Company has assessed its suppliers, it is not possible to accurately 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 has developed contingency plans and business resumption contingency plans specific to the Year 2000. 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 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.

12

Table of Contents

CAPITAL HOLDINGS, INC.

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

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 anticipated future financial performance. These forward looking statements include plans, expectations and projections, including the impact of Year 2000, that are subject to numerous assumptions, risks and uncertainties. These risks and uncertainties include unanticipated changes in the competitive environment, relationships with third-party vendors and clients, and certain other factors discussed in this report. Actual results could differ materially from those contained in or implied by the Company’s statements.

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

13

Table of Contents

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.

14