-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FHt/1AsOOpqBd0M7LZ31Tee+kkpGO0fIYiOp3QhfSKnmy8TbxAIH9PTML+e4ZwEx M7VLdfdgb7GxdAZnvwGPGg== 0000950124-99-001859.txt : 19990318 0000950124-99-001859.hdr.sgml : 19990318 ACCESSION NUMBER: 0000950124-99-001859 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITOL BANCORP LTD CENTRAL INDEX KEY: 0000840264 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 382761672 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18461 FILM NUMBER: 99567265 BUSINESS ADDRESS: STREET 1: ONE BUSINESS & TRADE CNTR STREET 2: 200 WASHINGTON SQ N CITY: LANSING STATE: MI ZIP: 48933 BUSINESS PHONE: 5174876555 MAIL ADDRESS: STREET 1: ONE BUSINESS & TRADE CENTER STREET 2: 200 WASHINGTON SQUARE NORTH CITY: LANSING STATE: MI ZIP: 48933 10-K 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1998 or ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 33-24728C CAPITOL BANCORP LTD. (Exact name of registrant as specified in its Charter) MICHIGAN 38-2761672 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) ONE BUSINESS & TRADE CENTER 200 WASHINGTON SQUARE NORTH LANSING, MICHIGAN 48933 (Address of principal executive offices) Registrant's telephone number, including area code: (517) 487-6555 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE (Title of class) 8.50% CUMULATIVE TRUST PREFERRED SECURITIES, $10 LIQUIDATION AMOUNT (Title of class) 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 - - Indicate by check mark if disclosure of delinquent filers in response 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. State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked price of stock, as of a specified date within 60 days prior to the date of filing: $84,940,336 as of February 17, 1999. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date: 6,344,886 as of February 17, 1999. DOCUMENTS INCORPORATED BY REFERENCE See Cross-Reference Sheet 2 CAPITOL BANCORP LTD. Form 10-K Fiscal Year Ended: December 31, 1998 CROSS REFERENCE SHEET
ITEM OF FORM 10-K INCORPORATION BY REFERENCE FROM: - ----------------- -------------------------------- PART I ------ Item 1, Business Pages 22-24, 31-35, 45 and 58-60, Annual Report Item 2, Properties Pages 3-19 and 51, Annual Report, and Pages 14-15, Proxy Statement PART II Item 5, Market for Registrant's Pages 20-21, 52-55 and 64, Annual Report Common Equity and Related Stockholder Matters Item 6, Selected Financial Data Page 20, Annual Report Item 7, Management's Discussion Pages 22-39, Annual Report and Analysis of Financial Condition and Results of Operations Item 7a, Quantitative and Qualitative Pages 31-35 and 39, Annual Report Disclosures About Market Risk Item 8, Financial Statements and Pages 40-63 and 20, Annual Report Supplementary Data PART III Item 10, Directors and Executive Pages 4-7, Proxy Statement, and Officers of the Registrant Pages 2 and 64, Annual Report Item 11, Executive Compensation Pages 8-14, Proxy Statement Item 12, Security Ownership of Pages 3-7, 10 and 13, Proxy Statement Certain Beneficial Owners and Management Item 13, Certain Relationships Pages 14-15, Proxy Statement and Related Transactions PART IV Item 14, Exhibits, Financial Statement Pages 40-63, Annual Report Schedules and Reports on Form 8-K
KEY: - ---- "Annual Report" means the 1998 Annual Report of the Registrant provided to Stockholders and the Commission pursuant to Rule 14a-3(b). "Proxy Statement" means the Proxy Statement of the Registrant on Schedule 14A filed pursuant to Rule 14a-101. Note: The page number references herein are based on the paper version of the Annual Report and Proxy Statement. Accordingly, those page number references may differ from the electronically filed versions of those documents. -2- 3 CAPITOL BANCORP LTD. 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
Page ---- PART I ITEM 1. Business...............................................................................................4 ITEM 2. Properties............................................................................................14 ITEM 3. Legal Proceedings.....................................................................................14 ITEM 4. Submission of Matters to a Vote of Security Holders...................................................14 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................15 ITEM 6. Selected Financial Data...............................................................................15 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................15 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............................................15 ITEM 8. Financial Statements and Supplementary Data...........................................................15 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................15 PART III ITEM 10. Directors and Executive Officers of the Registrant....................................................16 ITEM 11. Executive Compensation.................................................................................16 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.........................................16 ITEM 13. Certain Relationships and Related Transactions.........................................................16 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................17
-3- 4 PART I Item 1, Business. a. General development of business: Incorporated by reference from Pages 45-46, Annual Report, under the caption "Note A--Nature of Operations, Basis of Presentation and Principles of Consolidation". b. Financial information about industry segments: Incorporated by reference from Pages 45-46, Annual Report, under the caption "Note A--Nature of Operations, Basis of Presentation and Principles of Consolidation". c. Narrative description of business: Incorporated by reference from Page 45, Annual Report, under the caption "Note A--Nature of Operations, Basis of Presentation and Principles of Consolidation", Pages 31-35, Annual Report, under the caption "Trends Affecting Operations" and Pages 29-31, Annual Report, under the caption "Liquidity, Capital Resources and Capital Adequacy". At December 31, 1998, the Corporation and its subsidiaries employed 307 full time equivalent employees. In 1997, the Registrant formed Capitol Trust I, a Delaware statutory business trust. Capitol Trust I's business and affairs are conducted by its property trustee, a Delaware trustee, and three individual administrative trustees who are employees and officers of the Registrant. Capitol Trust I exists for the sole purpose of issuing and selling its preferred securities and common securities, using the proceeds from the sale of those securities to acquire subordinated debentures issued by the Registrant and certain related services. Additional information regarding Capitol Trust I is incorporated by reference from Page 53, Annual Report, under the caption "Note I--Trust-Preferred Securities". The following tables (Tables A to G, inclusive), present certain statistical information regarding the Corporation's business. -4- 5 DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY (TABLE A) CAPITOL BANCORP LTD. Net interest income, the primary component of earnings, represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the rates earned or paid on them. This table sets forth the daily average balances for the major asset and liability categories and the actual related interest income and expense (in thousands) and average yield/cost for the years ended December 31, 1998, 1997, and 1996.
Year Ended December 31 1998 1997 ---------------------------------------------- ----------------------------------- Interest (1) Interest (1) Average Income/ Average Average Income/ Average Balance Expense Yield/Cost Balance Expense Yield/Cost ---------------------------------------------- ----------------------------------- ASSETS Investment securities: U.S. Treasury and government agencies $62,247 $3,688 5.92% $56,604 $3,516 6.21% States and political subdivisions (2) 1,609 77 4.79% 239 14 5.86% Other 2,679 111 4.14% 2,342 211 9.01% Interest-bearing deposits with banks 9,034 118 1.31% 1,158 19 1.64% Federal funds sold 93,310 5,013 5.37% 50,948 2,805 5.51% Loans held for resale 20,188 1,529 7.57% 7,122 536 7.53% Portfolio loans (3) 605,923 59,132 9.76% 425,664 42,448 9.97% --------------- ------------- ------------- ---------- ---------- ---------- Total Interest-Earning Assets/Interest Income 794,990 69,668 8.76% 544,077 49,549 9.11% Allowance for loan losses (deduct) (7,371) (5,294) Cash and due from banks 30,000 19,159 Premises and equipment, net 8,836 6,045 Other assets 20,861 15,828 --------------- ---------- Total Assets $847,316 $579,815 =============== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings deposits $37,517 $1,487 3.96% $38,496 $1,544 4.01% Time deposits under $100,000 259,916 16,119 6.20% 200,108 12,187 6.09% Time deposits of $100,000 or more 165,627 9,331 5.63% 104,501 6,257 5.99% Other interest-bearing deposits 189,707 7,211 3.80% 110,395 4,111 3.72% Debt obligations 4,751 271 5.70% 9,003 753 8.36% Other 106 --------------- ------------- ------------- ---------- ---------- ---------- Total Interest-Bearing Liabilities/Interest Expense 657,518 34,525 5.25% 462,503 24,852 5.37% Capitol Trust I preferred securities 24,192 2,145 8.87% 822 - - --------------- ------------- ------------- ---------- ---------- ---------- 681,710 36,670 5.38% 463,325 24,852 5.36% Noninterest-bearing demand deposits 94,077 62,166 Accrued interest on deposits and other liabilities 7,267 4,421 Minority interest in consolidated subsidiaries 18,830 8,047 Stockholders' equity 45,432 41,856 --------------- ----------- Total Liabilities and Stockholders' Equity $847,316 $579,815 =============== ------------- =========== ---------- Net Interest Income $32,998 $24,697 ============= ========== Interest Rate Spread (4) 3.39% 3.75% ============= ========== Net Yield on Interest-Earning Assets (5) 4.15% 4.54% ============= ========== Ratio of Average Interest-Earning Assets to Interest-Bearing Liabilities 1.17 X 1.18 X ================= ============== Year Ended December 31 1996 ---------------------------------------------- Interest (1) Average Income/ Average Balance Expense Yield/Cost ---------------------------------------------- ASSETS Investment securities: U.S. Treasury and government agencies $39,549 $2,234 5.65% States and political subdivisions (2) 207 18 8.70% Other 2,510 372 14.82% Interest-bearing deposits with banks 474 42 8.86% Federal funds sold 32,318 1,541 4.77% Loans held for resale 10,737 818 7.62% Portfolio loans (3) 318,491 31,454 9.88% -------------- ------------ -------------- Total Interest-Earning Assets/Interest Income 404,286 36,479 9.02% Allowance for loan losses (deduct) (4,095) Cash and due from banks 14,149 Premises and equipment, net 3,188 Other assets 12,734 -------------- Total Assets $430,262 ============== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Savings deposits $35,288 $1,384 3.92% Time deposits under $100,000 160,502 9,555 5.95% Time deposits of $100,000 or more 66,106 3,935 5.95% Other interest-bearing deposits 69,818 2,418 3.46% Debt obligations 8,625 496 5.75% Other 12 -------------- ------------ -------------- Total Interest-Bearing Liabilities/Interest Expense 340,339 17,800 5.23% Capitol Trust I preferred securities - - - -------------- ------------ -------------- 340,339 17,800 5.23% Noninterest-bearing demand deposits 44,727 Accrued interest on deposits and other liabilities 4,166 Minority interest in consolidated subsidiaries 2,439 Stockholders' equity 38,591 -------------- Total Liabilities and Stockholders' Equity $430,262 ============== ------------ Net Interest Income $18,679 ============ Interest Rate Spread (4) 3.79% ============== Net Yield on Interest-Earning Assets (5) 4.62% ============== Ratio of Average Interest-Earning Assets to Interest-Bearing Liabilities 1.19 X =================
(1) Average yield/cost is determined by dividing the actual interest income/expense by the daily average balance of the asset or liability category. (2) Tax equivalent yield. (3) Average balance of loans includes non-accrual loans. (4) Interest rate spread represents the average yield on interest-earning assets less the average cost of interest-bearing liabilities. (5) Net yield is based on net interest income as a percentage of average total interest-earning assets. -5- 6 CHANGES IN NET INTEREST INCOME (TABLE B) CAPITOL BANCORP LTD. The following table summarizes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Corporation's net interest income during the periods indicated. The change in interest attributable to volume is calculated by multiplying the annual change in volume by the prior year's rate. The change in interest attributable to rate is calculated by multiplying the annual change in rate by the current year's average balance. Any variance attributable jointly to volume and rate changes has been allocated to each category based on the percentage of each to the total change in both categories.
Year Ended December 31 --------------------------------------------------------------------- 1998 compared to 1997 1997 compared to 1996 --------------------------------- --------------------------------- Volume Rate Net Total Volume Rate Net Total -------- -------- --------- -------- -------- ---------- Increase (Decrease) In Interest Income: Investment securities: U.S. Treasury and government agencies $ 350 ($178) $ 172 $ 965 $ 317 $ 1,282 States and political subdivisions 80 (17) 63 3 (7) (4) Other 30 (130) (100) (25) (136) (161) Interest-bearing deposits with banks 129 (30) 99 61 (84) (23) Federal funds sold 2,334 (126) 2,208 888 376 1,264 Loans held for resale 984 9 993 (276) (6) (282) Portfolio loans 17,972 (1,288) 16,684 10,589 405 10,994 -------- -------- -------- -------- -------- -------- Total 21,879 (1,760) 20,119 12,205 865 13,070 Increase (Decrease) In Interest Expense On Deposits: Savings (39) (18) (57) 126 34 160 Time deposits under $100,000 3,642 290 3,932 2,352 280 2,632 Time deposits of $100,000 or more 3,661 (587) 3,074 2,280 42 2,322 Other interest-bearing deposits 2,950 150 3,100 1,406 287 1,693 Debt obligations (355) (127) (482) 22 235 257 Other 106 106 (12) (12) Capitol Trust I preferred securities 2,145 2,145 -------- -------- -------- -------- -------- -------- Total 12,110 (292) 11,818 6,174 878 7,052 -------- -------- -------- -------- -------- -------- Increase (Decrease) in Net Interest Income $ 9,769 ($1,468) $ 8,301 $ 6,031 ($13) $ 6,018 ======== ======== ======== ======== ======== ======== Year Ended December 31 --------------------------------- 1996 compared to 1995 --------------------------------- Volume Rate Net Total -------- -------- --------- Increase (Decrease) In Interest Income: Investment securities: U.S. Treasury and government agencies $ 253 ($35) $ 218 States and political subdivisions (2) 10 8 Other (18) 182 164 Interest-bearing deposits with banks 4 28 32 Federal funds sold 444 (356) 88 Loans held for resale 399 119 518 Portfolio loans 5,239 299 5,538 -------- -------- -------- Total 6,319 247 6,566 Increase (Decrease) In Interest Expense On Deposits: Savings 99 37 136 Time deposits under $100,000 1,830 25 1,855 Time deposits of $100,000 or more 736 (117) 619 Other interest-bearing deposits 348 (227) 121 Debt obligations 98 (94) 4 Other (14) (14) Capitol Trust I preferred securities -------- -------- -------- Total 3,097 (376) 2,721 -------- -------- -------- Increase (Decrease) in Net Interest Income $ 3,222 $ 623 $ 3,845 ======== ======== ========
-6- 7 INVESTMENT PORTFOLIO (TABLE C) CAPITOL BANCORP LTD. The following table sets forth the amortized cost and market value of investment securities as of December 31, 1998, 1997 and 1996 (in thousands):
December 31 ----------------------------------------------------------------- 1998 1997 ------------------------------ ------------------------------- Amortized Market Amortized Market Cost Value Cost Value ------------- ------------- -------------- -------------- U.S. Treasury and government agencies $80,445 $80,667 $60,430 $60,650 States and political subdivisions 2,897 2,930 1,610 1,603 Other: Corporate bonds Federal Reserve Bank stock 116 116 116 116 Federal Home Loan Bank stock 1,431 1,431 1,073 1,073 Corporate stock (1) 1,003 1,003 1,028 1,028 Other investments 317 317 ------------- ------------- -------------- -------------- Total other securities 2,867 2,867 2,217 2,217 ------------- ------------- -------------- -------------- Total investments $86,209 $86,464 $64,257 $64,470 ============= ============= ============== ============== December 31 ------------------------------ 1996 ------------------------------ Amortized Market Cost Value ------------- ------------- U.S. Treasury and government agencies $46,162 $46,221 States and political subdivisions 100 100 Other: Corporate bonds 301 300 Federal Reserve Bank stock 116 116 Federal Home Loan Bank stock 984 984 Corporate stock (1) 1,003 1,003 Other investments ------------- ------------- Total other securities 2,404 2,403 ------------- ------------- Total investments $48,666 $48,724 ============= =============
(1) Consists primarily of investment in the common stock of Access BIDCO, Incorporated. The following table sets forth the amortized cost, relative maturities and weighted average yields of investment securities at December 31, 1998 (in thousands):
U.S. Treasury and States and Political Government Agencies Subdivisions Other ------------------------------------------------------------------------------- Weighted Weighted Weighted Total Amortized Average Amortized Average Amortized Average Carrying Cost Yield Cost Yield Cost Yield Amount ------------- ------------ ------------- ------------- ------------ ----------- ------------ Maturity: Due in one year or less $40,653 5.11% $40,653 Due after one year but within five years 35,448 5.77% $2,296 5.27% 37,744 Due after five years but within ten years 2,089 6.94% 2,089 Due after ten years 2,255 6.71% 601 5.11% 2,856 Without stated maturities $2,867 * 2,867 ------------- ------------- ------------ ------------ Total $80,445 $2,897 $2,867 $86,209 ============= ============= ============ ============
* Investment securities which do not have stated maturities (corporate stock, Federal Reserve Bank and Federal Home Loan Bank stock) do not have stated yields or rates of return and such rates of return vary from time to time. Following is a summary of the weighted average maturities of investment securities (exclusive of securities without stated maturities) at December 31, 1998: U.S. Treasury securities 6 months U.S. Agencies 3 years 9 months States and political subdivisions 5 years 5 months
-7- 8 LOAN PORTFOLIO AND SUMMARY OF OTHER REAL ESTATE OWNED (TABLE D) CAPITOL BANCORP LTD. Portfolio Loans outstanding as of the end of each period are shown in the following table according to type of loan (in thousands):
December 31 --------------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------------ ------------------------------ ------------------------------ Commercial - real estate $417,296 57.62% $262,157 52.14% $180,310 50.42% Commercial - other 173,055 23.89% 133,781 26.61% 103,151 28.84% -------------- ------------- -------------- ------------- -------------- ------------- Total commercial loans 590,351 81.51% 395,938 78.75% 283,461 79.26% Real estate mortgage 80,808 11.16% 66,630 13.25% 53,712 15.02% Installment 53,121 7.33% 40,187 7.99% 20,450 5.72% -------------- ------------- -------------- ------------- -------------- ------------- Total portfolio loans $724,280 100.00% $502,755 100.00% $357,623 100.00% ============== ============= ============== ============= ============== ============= December 31 --------------------------------------------------------------- 1995 1994 ------------------------------ ------------------------------ Commercial - real estate $140,462 49.55% $99,330 41.12% Commercial - other 81,699 28.82% 83,391 34.52% -------------- ------------- -------------- ------------- Total commercial loans 222,161 78.37% 182,721 75.63% Real estate mortgage 48,954 17.27% 47,260 19.56% Installment 12,356 4.36% 11,602 4.80% -------------- ------------- -------------- ------------- Total portfolio loans $283,471 100.00% $241,583 100.00% ============== ============= ============== =============
The following table presents (in thousands) the remaining maturity of portfolio loans outstanding at December 31, 1998 according to scheduled repayments of principal. Aggregate maturities of portfolio loan balances which are due:
Fixed Variable Rate Rate Total -------------- ------------- -------------- In one year or less $193,788 $222,031 $415,819 After one year but within five years 283,085 6,775 289,860 After five years 5,403 5,956 11,359 Non-accrual loans (classified as variable rate) 7,242 7,242 -------------- ------------- -------------- Total $482,276 $242,004 $724,280 ============== ============= ==============
The following summarizes, in general, the Corporation's various loan classifications: Commercial - real estate Comprised of a broad mix of business use and multi-family housing properties, including office, retail, warehouse and light industrial uses. A typical loan size approximates $500,000 and, at December 31, 1998, approximately 15% of such properties were owner-occupied. Commercial - other Includes a range of business credit products, current asset lines of credit and equipment term loans. These products bear higher inherent economic risk than other types of lending activities. A typical loan size approximates $250,000, and multiple account relationships serve to reduce such risks. Real Estate Includes single family residential loans held for permanent portfolio, and home equity lines of credit. Risks are nominal, borne out by loss experience, housing economic data and loan-to-value percentages. Installment Includes a broad range of consumer credit products, secured by automobiles, boats, etc., with typical consumer credit risks. All loans are subject to underwriting procedures commensurate with the loan size, nature of collateral, industry trends, risks and experience factors. Appropriate collateral is required for most loans, as is documented evidence of debt repayment sources. -8- 9 TABLE D, CONTINUED CAPITOL BANCORP LTD. The aggregate amount of nonperforming portfolio loans is set forth in the following table. Nonperforming loans comprise (a) loans accounted for on a nonaccrual basis, and (b) loans contractually past due 90 days or more as to principal and interest payments (but not included in nonaccrual loans in (a) above) and consist primarily of commercial real estate loans. Nonperforming portfolio loans include all loans for which, based on the Corporation's loan rating system, management has concerns. Loans are placed in nonaccrual status when, in management's opinion, there is a reasonable probability of not collecting 100% of future principal and interest payments. In addition, certain loans, although current based on the Corporation's rating criteria, are placed in nonaccrual status. Generally, loans are placed in nonaccrual status when they become 90 days delinquent; however, management may elect to continue the accrual of interest in certain circumstances. When interest accruals are discontinued, interest previously accrued (but unpaid) is reversed. If nonperforming loans (including loans in nonaccrual status) had performed in accordance with their contractual terms during the year, additional interest income of $398,000 would have been recorded in 1998. Interest income recognized on loans in nonaccrual status in 1998 operations approximated $58,000. At December 31, 1998, there were no material amounts of loans which were restructured or otherwise renegotiated as a concession to troubled borrowers. Of the nonperforming loans at December 31, 1998, $1.6 million is guaranteed by an agency of the federal government.
December 31 -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- Nonperforming loans: (in thousands) Nonaccrual loans: Commercial $2,608 $2,570 $928 $438 $1,121 Real estate 199 59 107 115 156 Installment 185 59 22 28 43 ----------- ----------- ----------- ----------- ----------- Total Nonaccrual loans 2,992 2,688 1,057 581 1,320 Past due loans: Commercial 3,963 897 1,009 379 146 Real estate 183 401 549 299 424 Installment 104 25 84 82 40 ----------- ----------- ----------- ----------- ----------- Total past due loans 4,250 1,323 1,642 760 610 ----------- ----------- ----------- ----------- ----------- Total nonperforming loans $7,242 $4,011 $2,699 $1,341 $1,930 =========== =========== =========== =========== =========== Nonperforming loans as a percentage of total portfolio loans 1.00% 0.80% 0.75% 0.47% 0.80% =========== =========== =========== =========== =========== Nonperforming loans as a percentage of total assets 0.71% 0.58% 0.55% 0.35% 0.61% =========== =========== =========== =========== =========== Allowance for loan losses as a percentage of nonperforming loans 121.75% 155.30% 169.62% 274.94% 166.84% =========== =========== =========== =========== ===========
The table below summarizes activity in other real estate owned, including transfers to and from the loan portfolio and subsequent payments on or sales of the property, for each period (in thousands):
Year Ended December 31 -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- Other real estate owned at January 1 $165 $313 $972 $1,255 $1,364 Properties acquired in restructure of loans or in lieu of foreclosure 612 1,635 1,658 Properties sold (161) (128) (520) (1,714) (1,455) Payments received from borrowers or tenants, credited to carrying amount (75) (10) (47) (300) Other changes, net (10) (92) (204) (12) ----------- ----------- ----------- ----------- ----------- Other real estate owned at December 31 $541 $165 $313 $972 $1,255 =========== =========== =========== =========== =========== Other real estate owned reserve at January 1 $0 $0 $0 $64 $0 Net charge-offs 64 64 ----------- ----------- ----------- ----------- ----------- Other real estate owned reserve at December 31 $0 $0 $0 $0 $64 =========== =========== =========== =========== ===========
Other real estate owned is valued at the lower of fair value or cost (net of estimated selling cost) at the date of transfer/acquisition. Management performs a periodic analysis of estimated fair values to determine potential impairment of other real estate owned. -9- 10 SUMMARY OF LOAN LOSS EXPERIENCE (TABLE E) CAPITOL BANCORP LTD. The table below summarizes portfolio loan balances, daily average loan balances, changes in the allowance for loan losses arising from loans charged-off and recoveries on loans previously charged-off, by loan category, and additions to the allowance for loan losses through provisions charged to expense, as of the end of each period.
Year Ended December 31 ------------------------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in thousands) Allowance for loan losses at January 1 $ 6,229 $ 4,578 $ 3,687 $ 3,220 $ 2,500 Allowance of acquired bank 515 Loans charged-off: Commercial 1,165 551 308 547 339 Real estate 9 117 35 9 Installment 131 49 94 47 36 -------- -------- -------- -------- -------- Total charge-offs 1,305 717 437 594 384 Recoveries: Commercial 336 288 119 178 106 Real estate 4 18 8 3 3 Installment 30 13 5 41 7 -------- -------- -------- -------- -------- Total recoveries 370 319 132 222 116 -------- -------- -------- -------- -------- Net charge-offs 935 398 305 372 268 Additions to allowance charged to expense 3,523 2,049 1,196 839 473 -------- -------- -------- -------- -------- Allowance for loan losses at December 31 $ 8,817 $ 6,229 $ 4,578 $ 3,687 $ 3,220 ======== ======== ======== ======== ======== Total portfolio loans outstanding at December 31 $724,280 $502,755 $357,623 $283,471 $241,583 ======== ======== ======== ======== ======== Ratio of allowance for loan losses to portfolio loans outstanding 1.22% 1.24% 1.28% 1.30% 1.33% ======== ======== ======== ======== ======== Average total portfolio loans for the year $605,923 $425,664 $318,491 $264,919 $203,924 ======== ======== ======== ======== ======== Ratio of net charge-offs to average portfolio loans outstanding 0.15% 0.09% 0.10% 0.14% 0.13% ======== ======== ======== ======== ========
-10- 11 TABLE E, CONTINUED CAPITOL BANCORP LTD. The allowance for loan losses has been established as a general allowance for future losses on the loan portfolio. For internal purposes, management allocates the allowance to all loan classifications. The amounts allocated in the following table, which includes all loans for which, based on the Corporation's loan rating system, management has concerns, should not be interpreted as an indication of future charge-offs and the amounts allocated are not intended to reflect the amount that may be available for future losses since the allowance is a general allowance.
December 31 -------------------------------------------------------- 1998 1997 1996 1995 1994 --------- ------- -------- -------- ------- (in thousands) Commercial $ 4,501 $ 2,875 $ 2,281 $ 1,726 $ 1,831 Real estate mortgage 127 103 67 67 55 Installment 262 185 100 57 61 Unallocated 3,927 3,066 2,130 1,837 1,273 -------- -------- -------- -------- -------- Total Allowance for Loan Losses $ 8,817 $ 6,229 $ 4,578 $ 3,687 $ 3,220 ======== ======== ======== ======== ======== Total portfolio loans outstanding $724,280 $502,755 $357,623 $283,471 $241,583 ======== ======== ======== ======== ======== Percent of allowance to portfolio loans outstanding 1.22% 1.24% 1.28% 1.30% 1.33% ======== ======== ======== ======== ========
In addition to the Corporation's allowance for loan losses, certain commercial loans participate in a loan program sponsored by the State of Michigan. Under that program, the governmental unit shares loss exposure on such loans by funding reserves which are placed as deposits at the banks. Loans participating in this program and related reserves approximated $24.9 million and $2 million, respectively, at December 31, 1998. Such reserve amounts are separate and excluded from the allowance for loan losses. -11- 12 AVERAGE DEPOSITS (TABLE F) CAPITOL BANCORP LTD. The following table presents the average balances of deposits (in thousands) and the average rates of interest paid for the years ended December 31, 1998, 1997 and 1996:
December 31 --------------------------------------------------------------- 1998 1997 1996 ------------------- ------------------ ----------------- Average Average Average Amount Rate Amount Rate Amount Rate ------- ---- ------- ---- ------- ---- Noninterest-bearing demand deposits $94,077 $62,166 $44,727 Savings deposits 37,517 3.96% 38,496 4.01% 35,288 3.92% Time deposits under $100,000 259,916 6.20% 200,108 6.09% 160,502 5.95% Time deposits of $100,000 or more 165,627 5.63% 104,501 5.99% 66,106 5.95% Other interest-bearing deposits 189,707 3.80% 110,395 3.72% 69,818 3.46% -------- -------- -------- Total deposits $746,844 $515,666 $376,441 ======== ======== ========
The following table sets forth the amount of time certificates of deposit issued in amounts of $100,000 or more, by time remaining until maturity, which were outstanding at December 31, 1998 (in thousands):
Three months or less $81,468 Three months to twelve months 100,540 Over 12 months 39,092 -------- $221,100 ========
-12- 13 FINANCIAL RATIOS (TABLE G) CAPITOL BANCORP LTD. The following table shows the ratio of net income to average stockholders' equity, average total assets and certain other ratios for the years ended December 31, 1998, 1997 and 1996:
Year Ended December 31 ---------------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- Net Income as a percentage of: Average stockholders' equity 10.19% 13.28% 12.01% Average total assets 0.55% 0.96% 1.08% Average stockholders' equity as a percentage of average total assets 5.36% 7.22% 8.97% Dividend payout ratio (cash dividends per share as a percentage of net income per share) (1): Basic 45.00% 32.97% 29.41% Diluted 46.25% 34.09% 30.49%
(1) As restated to reflect the Corporation's 1998 6-for-5 stock split as if it had occurred at the beginning of the periods presented. -13- 14 Item 2, Properties. Substantially all of the Corporation's office locations are leased. Each of the Corporation's banks operate from a single location, except Capitol National Bank (which has one branch location in Okemos, Michigan). The addresses of each bank's main office are stated on pages 3-19, Annual Report, which are incorporated herein by reference. Ann Arbor Commerce Bank, in 1998, and Portage Commerce Bank, in 1997, relocated their main offices to substantially larger leased facilities (approximately 18,000 and 10,000 square feet, respectively) in response to asset growth and to better serve customers. Most of the other bank subsidiaries' facilities are generally small (i.e., less than 10,000 square feet), first floor offices with convenient access to parking. Some of the banks have drive-up customer service. The banks are typically located in or near high traffic centers of commerce in their respective communities. Customer service is enhanced through utilization of ATMs to process some customer-initiated transactions and some of the banks also make available a courier service to pick up transactions at customers' locations. The principal offices of the Corporation are located within the same building as Capitol National Bank in Lansing, Michigan. Those headquarters include administrative, operations, accounting, and executive staff and the Corporation's data center. Sun Community Bancorp Limited (a second-tier, 51%-owned bank holding company headquartered in Arizona) occupies executive office space adjacent to Camelback Community Bank in Phoenix. Certain of the office locations are leased from related parties. Incorporated by reference from Page 51, Annual Report, under the caption "Note F--Premises and Equipment" and Pages 14-15, Proxy Statement, from the 9th to 11th paragraph thereunder under the caption "Certain Relationships and Related Transactions". Management believes the Corporation's and the banks' offices to be in good and adequate condition and adequately covered by insurance. Item 3, Legal Proceedings. As of December 31, 1998, there were no material pending legal proceedings to which the Corporation or its subsidiaries is a party or to which any of its property was subject, except for proceedings which arise in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material effect on the consolidated financial position or results of operations of the Corporation. Item 4, Submission of Matters to a Vote of Security Holders. During the fourth quarter of 1998, no matters were submitted to a vote by security holders. -14- 15 PART II Item 5, Market for Registrant's Common Equity and Related Stockholder Matters. A. Market Information: Incorporated by reference from Page 21, Annual Report, under the caption "Information Regarding the Corporation's Common Stock", Pages 53-55, Annual Report, under the caption "Note J--Common Stock and Stock Options" and Page 64, Annual Report, under the caption "Shareholder Information". B. Holders: Incorporated by reference from first sentence of third paragraph on Page 21, Annual Report, under the caption "Information Regarding the Corporation's Common Stock". C. Dividends: Incorporated by reference from Page 20, Annual Report, under the caption "Quarterly Results of Operations" and subcaption "Cash dividends paid per share", Pages 58-60, Annual Report, under the caption "Note O--Dividend Limitations of Subsidiaries and Other Capital Requirements" and the first full paragraph commencing on Page 53, Annual Report, under the caption "Note H--Debt Obligations". Item 6, Selected Financial Data. Incorporated by reference from Page 20, Annual Report, under the caption "Selected Consolidated Financial Data" under the column heading "As of and for the Year Ended December 31, 1998, 1997, 1996, 1995, and 1994". Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Incorporated by reference from Pages 22-38, Annual Report, under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Page 39, Annual Report, under the caption "Forward Looking Statements". Item 7A, Quantitative and Qualitative Disclosures About Market Risk. Incorporated by reference from Pages 31-35, Annual Report, under the caption "Trends Affecting Operations" and Page 39, Annual Report, under the caption "Forward Looking Statements". Item 8, Financial Statements and Supplementary Data. See Item 14 (under subcaption "A. Exhibits") of this Form 10-K for specific description of financial statements incorporated by reference from Annual Report. Incorporated by reference from Page 20, Annual Report, under the caption "Quarterly Results of Operations". Item 9, Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. None. -15- 16 PART III Item 10, Directors and Executive Officers of the Registrant. Incorporated by reference from Pages 4-7, Proxy Statement, under the caption "Election of Directors" (excluding Mr. Epolito) and Page 64, Annual Report, under the caption "Officers of the Corporation". Item 11, Executive Compensation. Incorporated by reference from Pages 9-13, Proxy Statement; Page 8, Proxy Statement, the second paragraph under the caption "Meetings of the Board of Directors" and Page 14, Proxy Statement, the first five paragraphs under the caption "Certain Relationships and Related Transactions". Item 12, Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference from Page 3, Proxy Statement, under the caption "Voting Securities and Principal Holders Thereof", Pages 4-7, Proxy Statement, under the caption "Election of Directors" and Page 10, Proxy Statement, under the captions "Employee Stock Ownership Plan" and "Employee Retirement 401(k) Plan" and Page 13, Proxy Statement, under the caption "Directors Deferred Compensation Plan". Item 13, Certain Relationships and Related Transactions. Incorporated by reference from Pages 14-15, Proxy Statement, under the caption "Certain Relationships and Related Transactions". -16- 17 PART IV Item 14, Exhibits, Financial Statement Schedules and Reports on Form 8-K. A. Exhibits: The following consolidated financial statements of Capitol Bancorp Ltd. and subsidiaries and report of independent auditors included on Pages 40-63 of the Annual Report of the registrant to its stockholders for the year ended December 31, 1998, are incorporated by reference in Item 7: Report of Independent Auditors Consolidated balance sheets--December 31, 1998 and 1997. Consolidated statements of income--Years ended December 31, 1998, 1997 and 1996. Consolidated statements of changes in stockholders' equity--Years ended December 31, 1998, 1997 and 1996. Consolidated statements of cash flows--Years ended December 31, 1998, 1997 and 1996. Notes to consolidated financial statements. All financial statements and schedules have been incorporated by reference from the Annual Report or are included in Management's Discussion and Analysis of Financial Condition and Results of Operations. No schedules are included here because they are either not required, not applicable or the required information is contained elsewhere. B. Reports on Form 8-K: During the fourth quarter of 1998, no reports on Form 8-K were filed by the registrant. -17- 18 SIGNATURES Pursuant to the requirements of Section 13 or 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. CAPITOL BANCORP LTD. Registrant By: \s\ Joseph D. Reid By: \s\ Lee W. Hendrickson ----------------------- ------------------------ Joseph D. Reid Lee W. Hendrickson Chairman, President and Senior Vice President and Chief Executive Officer Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant as Directors of the Corporation on February 4, 1999. \s\ Joseph D. Reid \s\ Robert C. Carr - --------------------------------- ------------------------------- Joseph D. Reid, Chairman, President, Robert C. Carr, Executive Vice Chief Executive Officer and Director President, Treasurer and Director - --------------------------------- ------------------------------- David O'Leary, Secretary and Director Louis G. Allen, Director \s\ Paul R. Ballard \s\ David L. Becker - --------------------------------- ------------------------------- Paul R. Ballard, Executive David L. Becker, Director Vice President and Director \s\ Douglas E. Crist \s\ Richard G. Dorner - --------------------------------- ------------------------------- Douglas E. Crist, Director Richard G. Dorner, Director \s\ Gary A. Falkenberg - --------------------------------- ------------------------------- Gary A. Falkenberg, Director Joel I. Ferguson, Director \s\ Kathleen A. Gaskin \s\ H. Nicholas Genova - --------------------------------- ------------------------------- Kathleen A. Gaskin, Director H. Nicholas Genova, Director \s\ L. Douglas Johns \s\ Michael L. Kasten - --------------------------------- ------------------------------- L. Douglas Johns, Director Michael L. Kasten, Director \s\ James R. Kaye \s\ Leonard Maas - --------------------------------- ------------------------------- James R. Kaye, Director Leonard Maas, Director \s\ Lyle W. Miller - --------------------------------- Lyle W. Miller, Director -18- 19 EXHIBIT INDEX
PAGE NUMBER OR INCORPORATED BY EXHIBIT NO. DESCRIPTION REFERENCE FROM: - ----------- ----------- --------------- 3 Articles of Incorporation and Bylaws (1) 4 Instruments Defining the Rights of Security Holders: (a) Common Stock Certificate (1) (b) Indenture dated December 18, 1997 (15) (c) Subordinated Debenture (15) (d) Amended and Restated Trust Agreement dated December 18, 1997 (15) (e) Preferred Security Certificate dated December 18, 1997 (15) (f) Preferred Securities Guarantee Agreement of Capitol Trust I dated December 18, 1997 (15) (g) Agreement as to Expenses and Liabilities of Capitol Trust I (15) 10 Material Contracts: (a) Joseph D. Reid Employment Agreement (as amended effective January 1, 1989) (2) (b) Profit Sharing/401(k) Plan (as amended and restated April 1, 1995) (13) (b1) First and Second Amendments to Profit Sharing/ 401(k) Plan (c) Lease Agreement with Business & Trade Center, Ltd. (11) (d) Employee Stock Ownership Plan (as amended and restated February 10, 1994) (12) (d1) Second and Third Amendments to Employee Stock Ownership Plan (e) Employment Agreements with Robert C. Carr, John C. Smythe, and Charles J. McDonald (2) (f) Executive Supplemental Income Agreements with Robert C. Carr, Paul R. Ballard, Richard G. Dorner, James R. Kaye, Scott G. Kling, John D. Groothuis, David K. Powers, John C. Smythe and Charles J. McDonald (13) (g) Amendment to Employment Agreement of Joseph D. Reid, dated October 2, 1989 (3)
-19- 20
PAGE NUMBER OR INCORPORATED BY EXHIBIT NO. DESCRIPTION REFERENCE FROM: - ----------- ----------- --------------- 10 Material Contracts--continued: (h) Consolidation Agreement between the Corporation and Portage Commerce Bank (4) (i) Amendment to Employment Agreement of Joseph D. Reid, dated January 30, 1990 (5) (j) Employment Agreements with Paul R. Ballard and Richard G. Dorner (6) (k) Employment Agreement with David K. Powers (7) (l) Definitive Exchange Agreement and Closing Memorandum between the Registrant and United Savings Bank, FSB (8) (m) Employment Agreement with James R. Kaye (9) (n) Definitive Exchange Agreement between the Registrant and Financial Center Corporation (10) 13 Annual Report to Security Holders (16) 21 Subsidiaries of the Registrant 23 Consent of BDO Seidman, LLP 27 Financial Data Schedule
KEY: (1) Form S-18, Reg. No. 33-24728C, filed September 15, 1988. (2) Form S-1, Reg. No. 33-30492, filed August 14, 1989. (3) Amendment No. 1 to Form S-1, Reg. No. 33-31323, filed November 20, 1989. (4) Form S-1, Reg. No. 33-31323, filed September 29, 1989. (5) Originally filed as exhibit to Form 10-K for year ended December 31, 1989, filed March 30, 1990; refiled as exhibit to Form 10-KSB for year ended December 31, 1995, filed March 14, 1996, due to time limit for incorporation by reference pursuant to Regulation SB Item 10(f). (6) Originally filed as exhibit to Form 10-K for year ended December 31, 1990, filed March 6, 1991; refiled as exhibit to Form 10-KSB for year ended December 31, 1995, filed March 14, 1996, due to time limit for incorporation by reference pursuant to Regulation SB Item 10(f). (7) Form 10-K for year ended December 31, 1991, filed February 28, 1992. (8) Form 8-K dated July 15, 1992, as amended under Form 8 on September 14, 1992. -20- 21 KEY - CONTINUED: - ---------------- (9) Form 10-KSB for year ended December 31, 1992, filed February 25, 1993. (10) Form S-4, Reg. No. 33-73474, filed December 27, 1993. (11) Form 10-KSB for year ended December 31, 1993, filed March 14, 1994. (12) Form 10-KSB for year ended December 31, 1994, filed March 15, 1995. (13) Form 10-KSB for the year ended December 31, 1995, filed March 14, 1996. (14) Form 10-KSB for the year ended December 31, 1996, filed March 21, 1997. (15) Post Effective Amendment No.1 to Form S-3, Reg. No. 333-41215 and 333-41215-01 filed February 9, 1998. (16) Proxy statement of Registrant in Schedule 14A filed pursuant to Rule 14a-101. -21- EX-10.(B1) 2 FIRST AND SECOND AMENDMENT TO PROFIT SHARING 1 EXHIBIT 10(b1) FIRST AMENDMENT TO THE CAPITOL BANCORP, LTD. EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN The Capitol Bancorp, Ltd. Employee Savings and Stock Ownership Plan is hereby amended effective January 1, 1998 by replacing Section 2.1(t) with the following: 2.1 (t) Employer: Capitol Bancorp, Ltd., a bank holding company organized and existing under the laws of the State of Michigan, and the entities listed below, or their respective successor or successors and any other entity whose Board of Directors authorizes participation in this Plan where Capitol Bancorp, Ltd. by its Board of Directors has approved said participation. Capitol Bancorp, Ltd. may also be referred to as the Primary Employer, as defined in Section 2.1(ss). Employers participating in the Plan in addition to Capitol Bancorp, Ltd. are:
Name of Type of State of Date of Employer Entity Organization Participation -------- ------ ------------ ------------- Portage Commerce Bank Banking corp. Michigan Participating as of restatement date Capitol National Bank Banking corp. Michigan Participating as of restatement date Ann Arbor Commerce Bank Banking corp. Michigan Participating as of restatement date Oakland Commerce Bank Banking corp. Michigan Participating as of restatement date Paragon Bank & Trust Banking corp. Michigan Participating as of restatement date Grand Haven Bank Banking corp. Michigan Participating as of restatement date Macomb Community Bank Banking corp. Michigan Adopted as a restatement effective as of July 1, 1997 Brighton Commerce Bank Banking corp. Michigan Adopted as a restatement effective as of July 1, 1997 Sun Community Bancorp Limited Corporation Arizona January 1, 1998 Bank of Tucson Banking corp. Arizona January 1, 1998 Valley First Community Bank Banking corp. Arizona January 1, 1998
2 Each of the individual Employers named in this Section 2.1(t) may be referred to as an Employer Member. For purposes of Section 5.3, Employer also includes all members of a controlled group of corporations (as defined in Code Section 414(b) as modified by Code Section 415(h)), all commonly controlled trades or businesses (as defined in Code Section 414(c) as modified by Code Section 415(h)) or affiliated service groups (as defined in Code Section 414(m)) of which the Employer is a part, and any other entity required to be aggregated with the Employer pursuant to regulations under Code Section 414(o). CAPITOL BANCORP, LTD. Date: December 26, 1997 By: \s\ Joseph D. Reid ----------------- -------------------- Joseph D. Reid Chairman and CEO 3 SECOND AMENDMENT TO THE CAPITOL BANCORP, LTD. EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN The Capitol Bancorp, Ltd. Employee Savings and Stock Ownership Plan is hereby amended effective July 1, 1998 by adding the following participating employers at the end of the list therein contained:
Name of Type of State of Date of Employer Entity Organization Participation - -------------------------------------------- -------------------- -------------------- -------------------- Kent Commerce Bank Banking corp. Michigan July 1, 1998 Muskegon Commerce Bank Banking corp. Michigan July 1, 1998
CAPITOL BANCORP, LTD. Dated: December 21, 1998 By: \s\ Joseph D. Reid ----------------- -------------------- Joseph D. Reid Chairman and CEO KENT COMMERCE BANK Dated: December 7, 1998 By: \s\ David Veen ---------------- ---------------- David Veen President and CEO MUSKEGON COMMERCE BANK Dated: December 17, 1998 By: \s\ Robert McCarthy ----------------- --------------------- Robert McCarthy President and CEO EX-10.(D1) 3 2ND & 3RD AMEND TO EMPLOYEE STOCK OWNERSHIP PLAN 1 EXHIBIT 10(d1) [SECOND] AMENDMENT TO THE CAPITOL BANCORP, LTD. EMPLOYEE STOCK OWNERSHIP PLAN The Capitol Bancorp, Ltd. Employee Stock Ownership Plan is hereby amended effective January 1, 1997, by replacing Section 2.1(p) with the following: 2.1(p) Employer: Capitol Bancorp, Ltd., a bank holding company organized and existing under the laws of the State of Michigan, Portage Commerce Bank, Ann Arbor Commerce Bank, Capitol National Bank, Oakland Commerce Bank, Paragon Bank & Trust (effective Jan. 1, 1995), Grand Haven Bank (effective July 1, 1994), Macomb Community Bank (effective January 1, 1997) and Brighton Commerce Bank (effective January 8, 1997), all of which are banks organized and existing under the laws of the State of Michigan, and Mortgage Connection, Inc., a corporation organized and existing under the laws of the State of Michigan, or their respective successor or successors and any other entity whose Board of Directors authorizes participation in this Plan where Capitol Bancorp, Ltd. by its Board of Directors has approved said participation. Each of the individual Employers named herein may be referred to as an Employer Member. For purposes of Section 5.3, Employer also includes all members of a controlled group of corporations (as defined in Code Section 414(b) as modified by Code Section 415(h)), all commonly controlled trades or businesses (as defined in Code Section 414(c) as modified by Code Section 415(h)) or affiliated service groups (as defined in Code Section 414(m)) of which the Employer is a part, and any other entity required to be aggregated with the Employer pursuant to regulations under Code Section 414(o). CAPITOL BANCORP, LTD. Date: December 26, 1997 By: \s\ Joseph D. Reid ----------------- ---------------------- Joseph D. Reid Chairman and CEO 2 THIRD AMENDMENT TO THE CAPITOL BANCORP, LTD. EMPLOYEE STOCK OWNERSHIP PLAN The Capitol Bancorp, Ltd. Employee Stock Ownership Plan is hereby amended effective July 1, 1998 by adding the following participating employers at the end of the list contained in Section 2.1(p):
Name of Type of State of Date of Employer Entity Organization Participation - --------------------------------- -------------------- -------------------- -------------------- Kent Commerce Bank Banking corp. Michigan July 1, 1998 Muskegon Commerce Bank Banking corp. Michigan July 1, 1998
CAPITOL BANCORP, LTD. Dated: December 21, 1998 By: \s\ Joseph D. Reid ----------------- -------------------- Joseph D. Reid Chairman and CEO KENT COMMERCE BANK Dated: December 7, 1998 By: \s\ David Veen ---------------- ---------------- David Veen President and CEO MUSKEGON COMMERCE BANK Dated: December 17, 1998 By: \s\ Robert McCarthy ----------------- --------------------- Robert McCarthy President and CEO EX-13 4 ANNUAL REPORT TO SECURITY HOLDERS 1 EXHIBIT 13 FINANCIAL HIGHLIGHTS
1998 1997 1996 -------------------- -------------------- ------------------ Revenues $ 73,226,000 $ 51,706,000 $ 38,184,000 Net Income 4,628,000 5,557,000 4,636,000 Per common share: Net income: Basic 0.74 0.91 0.85 Diluted 0.72 0.88 0.82 Book value at year end 7.77 7.22 7.42 Market price at year end 20.938 25.62 12.71 At December 31: Total assets 1,024,444,000 690,556,000 492,263,000 Stockholders' equity $ 49,292,000 $ 45,032,000 $ 40,159,000 Number of banks 17 11 8
2 [PHOTO] REPORT TO SHAREHOLDERS - -------------------------------------------------------------------------------- TO OUR SHAREHOLDERS: I am pleased to report Capitol Bancorp's significant achievements for 1998 and near-term plans for the future. BANK DEVELOPMENT Our Corporation grew fifty percent from $691 million in assets to a consolidated total in excess of $1 billion. This exceeds a growth rate of forty percent in 1997 and twenty eight percent in 1996. We expect a significant rate of growth to continue in calendar year 1999. Following the opening of Kent Commerce Bank, Grand Rapids, Michigan, in January of 1998, five additional affiliated banks were formed and opened for business before the close of the calendar year. In Phoenix, Arizona, Camelback Community Bank opened in May under the leadership of President Barbara Ralston. It is the signature tenant in a 100,000 square foot office building located in the upscale "24th and Camelback" area. Sunrise Bank of Arizona opened in temporary quarters in December. President Bill Hinz, Executive Vice President Ward Hickey and Executive Vice President Kevin Kinerk each bring expertise in small business (SBA) lending which will serve the Bank as a significant specialty product. The Bank is located in the "44th and Camelback" area, also in Phoenix. In Tucson, Arizona, Southern Arizona Community Bank opened for business in August in a building formerly occupied by a large financial institution in the northwest section of the city. President John P. Lewis, a career Tucson banker, managed the former "branch" earlier in his career. In Mesa, Arizona, we opened Mesa Bank in October recruiting long-time Mesa resident and career banker Neil Barna. The Bank is a highly visible citizen of downtown Mesa occupying a high-rise structure as the signature tenant. Detroit Commerce Bank opened its doors in December as the prominent ground floor tenant of the historic Penobscot Building in downtown Detroit. This facility adds significant identity to the newly formed institution. President Linda Watters reported asset growth to $18 million in the bank's first two weeks of operation. The components of 1998 asset growth rate are significant. Of the $334 million asset growth, $85 million came from banks formed in 1998. $63 million came from banks formed in 1997, which now total $108 million as a group. Banks formed in 1996 grew $57 million or 70% in their second full year of operation. Banks formed before 1996 produced asset growth of $149 million in 1998, an annualized growth rate of about 27%. During the course of 1999 we will embark upon our most ambitious expansion effort to date. We expect to add seven to nine affiliated banks in the states of Arizona, Nevada, California and Indiana. It is our strategy to develop new bank opportunities through the development of affiliated bank-development companies established in each of the states in which we operate. In Arizona, Sun Community Bancorp Limited serves as our affiliate bank-development company. In Nevada, Nevada Community Bancorp Limited serves as the bank-development affiliate. Indiana Community Bancorp Limited serves the Indiana market. California, similarly, will be served by a bank-development company which, at the time of this writing, is in formation. Each affiliate bank-development company will organize new community-based banks and provide consolidated services to each bank encouraging maximum bank operating efficiency. Advanced technological support for our community banks can be obtained without the oppressive cost structure shouldered by solo bank companies. As an example, we have been able to pool our resources in order to address the Y2K issues which confront the banking industry. We have engaged outside consultants and teamed the diverse talent which exists in our affiliated bank structure. This arrangement has allowed us to develop a solution to the Y2K issues 1 3 BOARD OF DIRECTORS LOUIS G. ALLEN Private Banker Bank of Bloomfield Hills PAUL R. BALLARD President and CEO Portage Commerce Bank DAVID L. BECKER President Becker Insurance Agency, P.C. ROBERT C. CARR Executive Vice President Capitol Bancorp Ltd. DOUGLAS E. CRIST President Developers of SW Florida, Inc. RICHARD G. DORNER President and CEO Ann Arbor Commerce Bank GARY A. FALKENBERG, D.O. Physician JOEL I. FERGUSON Chairman Ferguson Development KATHLEEN A. GASKIN Associate Broker and State Appraiser Tomie Raines, Inc. Realtors H. NICHOLAS GENOVA Chairman and CEO Washtenaw News Co., Inc. LEWIS D. JOHNS President Mid-Michigan Investment Company MICHAEL L. KASTEN Managing Partner Kasten Investments, L.L.C. JAMES R. KAYE President and CEO Oakland Commerce Bank LEONARD MAAS President Gillisse Construction Company LYLE W. MILLER President Servco, Inc. DAVID O'LEARY Chairman O'Leary Paint Company JOSEPH D. REID Chairman, President and CEO Capitol Bancorp Ltd. One Business & Trade Center 200 Washington Square N. Lansing, MI 48933 (517) 487-6555 without the imposition of expense that each affiliated bank would incur if required to fund a Y2K solution separately. This development structure minimizes the capital requirements imposed upon the Corporation while allowing for aggressive growth and further reduces the burden of early start-up losses generally associated with new banks. This strategy does not necessitate one hundred percent ownership of each financial institution. We are willing to share ownership with shareholders in the community which the bank serves. A sharing arrangement is mutually beneficial to the Corporation and the communities served by the affiliated banks. EARNINGS PERFORMANCE Consolidated earnings for 1998 remained strong with net income of $4.6 million. 1998 earnings decreased and were materially impacted by aggressive expansion in the number of banks within the consolidated group. The overall earnings contribution of our banks is particularly notable in 1998. De novo banks, by their nature, are expected to incur operating losses during their early periods of operations. Accordingly, banks formed in 1998 and 1997, as a group, did not add to earnings. However, banks formed in 1996, and less than three years old at year-end 1998, reported strong positive earnings which approximated a return on average assets of 1%. This measure is particularly significant given the age of those banks while also achieving an asset growth rate of 70% in 1998. Banks formed before 1996 generated a return on average assets of more than 1.2%. Again, this rate of return is significant in the context of their asset growth rate which was more than 25% in 1998. OUR MISSION The strength of our community banks rests upon two seemingly irreconcilable concepts. First, is the independence of bank management. Second, is the dependence of each bank on its affiliation for technology and oversight. We are convinced that we have married these two concepts into a successful formula for growth and profitability. Each of the affiliated financial institutions has complete authority to make all decisions affecting credit, pricing and the marketing of bank services. We rely on the President and the Board of Directors of each bank to determine the best interests of the bank within their community. We seek to encourage a human interface between bank customers and the banking system. However, successful relationship banking cannot be obtained at the expense of technological progress. Customers demand both. Our affiliated network of community banks allows us to explore and fund significant technological innovations on behalf of the community banks and at a moderate cost to the bank. Successful safety and soundness objectives require specialized programs in both risk management and credit administration for the affiliated banks. Moreover, the demands of the customer necessitate implementation of advanced programs in electronic banking. Nevertheless, we are convinced that our community banks will remain in the forefront of change without forgetting the primary mission of caring for the customer. We have laid the foundation for exciting development over the next two years, which we believe will significantly enhance shareholder value. Thank you for your continued support. Sincerely, Joseph D. Reid JOSEPH D. REID Chairman, President and CEO 2 4 [PHOTO] ANN ARBOR COMMERCE BANK - -------------------------------------------------------------------------------- 2950 STATE STREET SOUTH ANN ARBOR, MI 48104 - (734) 887-3100 Ann Arbor--the charm of a college town and the energy of a major business center. It is dynamic, growing, and open to change, yet content with what has stood the test of time. Ann Arbor is a leading medical arena, a cultural center and an incubator for new ideas. This is a town where you might begin your autumn Saturday morning at the Farmer's Market, cheer the football team to a national championship in the afternoon and don your tux for the symphony the same evening...only in Ann Arbor. Ann Arbor Commerce Bank has become an integral part of Ann Arbor--the charm of a personalized community bank with the capability to meet the rapidly changing needs of our market. Reflecting our community, we offer diversity in our services, from traditional checking, savings and CD accounts to our new offering of trust and investment services. We finance student housing, high-tech companies, medical practices, entrepreneurs, as well as small and large residences. Ann Arbor Commerce Bank is committed to retaining that which is tried and true while remaining open to changes we know the future will bring. Ann Arbor Commerce Bank...only in Ann Arbor. Richard G. Dorner RICHARD G. DORNER - President and CEO BOARD OF DIRECTORS MARY LINCOLN CAMPBELL Principal Enterprise Development Fund ROBERT C. CARR Executive Vice President Capitol Bancorp Ltd. RICHARD G. DORNER President and CEO Ann Arbor Commerce Bank CRISTIN REID ENGLISH Vice President of Corporate Development and General Counsel Capitol Bancorp Ltd. JAMES A. FAJEN Attorney at Law Fajen & Miller, P.L.L.C. JAMES W. FINN Chairman and CEO Finn's - JM&J Insurance Agency, Inc. H. NICHOLAS GENOVA Chairman and CEO Washtenaw News Co., Inc. RICHARD M. GREENE Consultant, Mortgage Banking Richard Greene Point Training MARILYN D. KATZ-PEK General Managing Partner Biotechnology Business Consultants, L.L.P. DAVID W. LUTTON President Charles Reinhart Company Realtors FRITZ SEYFERTH Executive Associate Athletic Director University of Michigan Athletic Dept. CARL VAN APPLEDORN, M.D. Vice President Urological Surgery Associates, P.C. WARREN E. WRIGHT Chairman and Partner Renosol Corporation OFFICERS JAMES A. FAJEN Chairman of the Board WARREN E. WRIGHT Secretary RICHARD G. DORNER President and CEO CLIFFORD G. SHELDON Senior Vice President LOUISE A. MORSE Vice President JOHN NIXON III Vice President BRIAN F. PICKNELL Vice President MARK J. SLADE Vice President and Cashier RICHARD G. TICE Vice President ANN ARBOR COMMERCE BANK FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 1997 1996 TOTAL ASSETS $196,446 $138,390 $105,651 PORTFOLIO LOANS 154,060 115,882 79,463 DEPOSITS 172,356 127,852 98,415 TOTAL CAPITAL 12,901 9,759 6,655
3 5 BOARD OF DIRECTORS BRUCE I. ASH Vice President Paul Ash Investment Company SLIVY EDMONDS COTTON Chairman and CEO Perpetua, Inc. MICHAEL J. DEVINE Attorney at Law BRIAN K. ENGLISH English Law Firm WILLIAM A. ESTES, JR. President TEM Corp. RICHARD N. FLYNN President Flynn & Associates MICHAEL F. HANNLEY President Bank of Tucson MICHAEL J. HARRIS Associate Broker Tucson Realty and Trust Company RICHARD F. IMWALLE President University of Arizona Foundation MICHAEL L. KASTEN Managing Partner Kasten Investments, L.L.C. BURTON J. KINERK Attorney at Law Kinerk, Beal, Schmidt & Dyer, P.C. HUMBERTO S. LOPEZ CPA and President HSL Properties, Inc. LYN M. PAPANIKOLAS Manager of Public Relations Arizona Childrens Foundation JOSEPH D. REID Chairman and CEO Sun Community Bancorp Limited OFFICERS JOSEPH D. REID Chairman of the Board and CEO RICHARD N. FLYNN Secretary MICHAEL F. HANNLEY President C. DAVID FOUST Executive Vice President and CCO BARBARA A. SADLER Vice President CHARLENE F. SCHUMAKER Vice President SANDI L. SMITHE Vice President PATRICK W. SNEIZEK Senior Vice President Sun Community Mortgage Company BANK OF [PHOTO] TUCSON - -------------------------------------------------------------------------------- 4400 EAST BROADWAY TUCSON, AZ 85711 - (520) 321-4500 "The Old Pueblo", "Valley of the Sun", "Painted Desert"--these are phrases often used to describe our Tucson community; unique for its tradition, blending a vibrant exciting city with small town ambiance. The Bank of Tucson has drawn from this rich heritage, combining the personal service and tradition of a small bank and business interests while also providing the technology and support so necessary to banking clients in the 21st century. We are an entity that supports large and small business alike, while never wavering from the personal service credo that was our beginning. We have become an integral part of the lush desert and rugged mountain infrastructure of Tucson and the surrounding region because we have restored the standard of the old west where a handshake and a commitment are your stock in trade. This personal approach is fueling our success, not just in satisfied customers, but even more by the significant number of referrals from those customers. It has resulted in our potential customers becoming clients and clients becoming part of the dynamic, successful Bank of Tucson family. That's why we call it "today's banking the old-fashioned way". The Bank of Tucson. Michael F. Hannley MICHAEL F. HANNLEY - President BANK OF TUCSON FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 1997 1996 TOTAL ASSETS $63,860 $41,605 $17,276 PORTFOLIO LOANS 37,899 23,406 4,850 DEPOSITS 57,432 35,926 12,021 TOTAL CAPITAL 6,053 5,412 5,189
4 6 [PHOTO] BRIGHTON COMMERCE BANK - -------------------------------------------------------------------------------- 8700 NORTH SECOND STREET BRIGHTON, MI 48116 - (810) 220-1199 Brighton, one of the fastest growing communities in Michigan, offers a quality of life that makes it one of the more attractive and appealing residential and commercial areas in Southeast Michigan. With its pristine landscape, Brighton offers a quaint downtown on the mill pond, one of the few ski areas in this part of the state and many quality golf courses. Numerous all-sports lakes incorporate into a varied terrain to create attractive residential home sites. Its prime geographical location and impressive demographics also enhance the attractive nature of Brighton. Only forty minutes away by expressway are two of the largest universities in the United States. The University of Michigan and Michigan State University offer Big Ten college sports in addition to academics and entertainment. Brighton is also forty-five minutes by expressway from one of Michigan's major industrial cities--Detroit, the automotive capital of the world--which offers all major professional sports, as well as many other entertainment opportunities. As we look to the future, we expect another exciting year in 1999 thanks to the continued support of a community which is one of the fastest growing in the state, and which appreciates a local community bank. Gary T. Nickerson GARY T. NICKERSON - President and CEO BOARD OF DIRECTORS ROBERT C. CARR Executive Vice President Capitol Bancorp Ltd. MICHAEL B. CORRIGAN President and Owner Corrigan Oil Co., Inc. SCOTT C. GRIFFITH President and Co-Owner ERA Griffith Realty MARK A. LATTERMAN President Latterman & Associates, P.C. PIET W. LINDHOUT Director and CEO Lindhout Associates SUSAN GRIMES MUNSELL Certified Public Accountant GARY T. NICKERSON President and CEO Brighton Commerce Bank MITCHELL J. STANLEY President Mickey Stanley and Associates JAMES A. WINCHEL President and Owner Colt Park Insurance Agency, Inc. OFFICERS ROBERT C. CARR Chairman of the Board MICHAEL B. CORRIGAN Vice Chairman and Secretary GARY T. NICKERSON President and CEO CANDICE G. RANDOLPH Vice President and Cashier WILLIAM R. ANDERSON Vice President JOSEPH M. PETRUCCI Vice President BRIGHTON COMMERCE BANK FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 1997 TOTAL ASSETS $42,871 $23,853 PORTFOLIO LOANS 34,024 13,817 DEPOSITS 39,023 21,518 TOTAL CAPITAL 3,707 1,921
5 7 BOARD OF DIRECTORS SHIRLEY A. AGNOS President Arizona Town Hall MICHAEL J. DEVINE Attorney at Law BRIAN K. ENGLISH English Law Firm MICHAEL L. KASTEN Managing Partner Kasten Investments, L.L.C. JOHN S. LEWIS President Sun Community Bancorp Limited TAMMY A. LINN Community Volunteer SUSAN C. MULLIGAN Certified Public Accountant Miller Wagner Business Services, Inc. EARL A. PETZNIK President and CEO Northside Hay Company WILLIAM J. POST President and CEO Arizona Public Service Co. BARBARA J. RALSTON President Camelback Community Bank JOSEPH D. REID Chairman and CEO Sun Community Bancorp Limited DAN A. ROBLEDO SVP and County Operations Manager Lawyer's Title of Arizona, Inc. MARY JANE RYND, CPA Partner Rynd, Carneal and Ewing JACQUELINE J. STEINER Retired State Senator OFFICERS JOSEPH D. REID Chairman of the Board and CEO BARBARA J. RALSTON President J. ROBERT BOOSMAN Executive Vice President and CCO BETTY L. CORNISH Vice President CHRISTOPHER M. GRAHAM Vice President CAMELBACK [PHOTO] COMMUNITY BANK - -------------------------------------------------------------------------------- 2777 EAST CAMELBACK ROAD PHOENIX, AZ 85016 - (602) 224-5800 Camelback Community Bank opened May 20, 1998. In August we moved into our permanent space in a newly constructed building in the Camelback Corridor, the heart of the emerging financial hub of Phoenix. Phoenix is the sixth largest and one of the fastest growing cities in the country and economic forecasts indicate continued growth for the next several years. In 1998, Phoenix experienced the highest-ever number of new housing starts and saw an increase in the construction of new office buildings and back office space. These factors support growth potential for us. Management and personnel changes resulting from the mergers of the three biggest banks in our marketplace provide new business opportunities for our bank. Customers seek out Camelback Community Bank where they can experience relationship banking and quality customer service. We look forward to continued growth in the coming year as we differentiate our bank through our local decision making and outstanding service. Barbara Ralston BARBARA J. RALSTON - President CAMELBACK COMMUNITY BANK FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 TOTAL ASSETS $10,017 PORTFOLIO LOANS 3,246 DEPOSITS 6,327 TOTAL CAPITAL 3,678
6 8 [PHOTO] CAPITOL NATIONAL BANK - -------------------------------------------------------------------------------- ONE BUSINESS & TRADE CENTER - 200 WASHINGTON SQUARE NORTH LANSING, MI 48933 - (517) 484-5080 Capitol National Bank completed its 16th year of serving its community during 1998 with another strong performance, reporting income in excess of $2 million for the year. We are fortunate to serve a market with a stable economic base which includes state government, Michigan State University and General Motors Corporation. These large cornerstones of our community, coupled with a thriving service sector comprised of many small to medium-sized businesses, have provided excellent growth opportunities for the Bank. We are continually exploring methods to better serve the banking needs of our community so as to better respond to the many new opportunities both today and in the future. During the past year, we introduced check imaging technology for our customers along with expansion of our popular courier service. Our philosophy of providing a high level of service with experienced management accessible to our customers will continue to be our focus for the future growth and success of Capitol National Bank. John C. Smythe JOHN C. SMYTHE - President and CEO BOARD OF DIRECTORS ROBERT C. CARR Executive Vice President Capitol Bancorp Ltd. NAN ELIZABETH CASEY Attorney at Law Casey & Boog, P.C. CHARLES J. CLARK President Clark Construction Company BRIAN K. ENGLISH English Law Firm JAMES C. EPOLITO President and CEO The Accident Fund Company PATRICK F. HAYES President F. D. Hayes Electric RICHARD A. HENDERSON President Henderson & Associates, P.C. CHRISTOPHER HOLMAN Publisher Greater Lansing Business Monthly KEVIN A. KELLY Managing Director Michigan State Medical Society MARK A. LATTERMAN President Latterman & Associates, P.C. BRUCE J. MAGUIRE, III President and Treasurer Spartan Oil Corporation CHARLES J. MCDONALD Executive Vice President and Cashier Capitol National Bank JOHN O'LEARY Co-President O'Leary Paint Company PATRICIA A. REYNOLDS President Capital Region Community Foundation JOHN C. SMYTHE President and CEO Capitol National Bank OFFICERS ROBERT C. CARR Chairman of the Board MARK A. LATTERMAN Vice Chairman PATRICK F. HAYES Secretary JOHN C. SMYTHE President and CEO CHARLES J. MCDONALD Executive Vice President and Cashier JOHN R. FARQUHAR Vice President DAVID E. FELDPAUSCH Vice President CAPITOL NATIONAL BANK FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 1997 1996 TOTAL ASSETS $136,776 $126,552 $104,254 PORTFOLIO LOANS 104,333 94,400 80,749 DEPOSITS 126,062 116,746 95,468 TOTAL CAPITAL 9,759 8,893 8,020
7 9 BOARD OF DIRECTORS RALPH J. BURRELL President Symcon DR. VIVIAN L. CARPENTER Associate Professor/Assistant Dean, CPA Florida A&M University ROBERT C. CARR Executive Vice President Capitol Bancorp Ltd. DONALD M. DAVIS, JR. Vice President, Human Resources Health Alliance Plan DOUGLAS H. GRAHAM Director of Economic Development Detroit Renaissance JOSEPH D. REID Chairman, President and CEO Capitol Bancorp Ltd. MARTHA K. RICHARDSON President Services Marketing Specialists, Inc. JAMES F. STAPLETON President B and R Consultants LINDA A. WATTERS President and CEO Detroit Commerce Bank OFFICERS JOSEPH D. REID Chairman of the Board LINDA A. WATTERS President and CEO ROBERT C. CARR Secretary DETROIT [PHOTO] COMMERCE BANK - -------------------------------------------------------------------------------- 645 GRISWOLD - SUITE 70 DETROIT, MI 48226 - (313) 967-9700 Detroit Commerce Bank, the first bank chartered in the city of Detroit in 28 years, opened on December 14, 1998 in the lobby of the historic, 47-story Penobscot Building. Located downtown in the central business district, the Bank is well positioned for growth. Over the past three years, Detroit has experienced rapid economic expansion, with $5.5 billion in investments led by small businesses and large corporations, as evidenced by the relocation of General Motors World Headquarters to the Renaissance Center after 76 years in the New Center area. Downtown Detroit and its neighborhoods are experiencing a transformation with two new sports stadiums (Detroit Tigers baseball and Detroit Lions football), three new casinos, an entertainment district and new housing developments. Detroit Commerce Bank is a full service bank. Customers can select from a wide range of traditional bank products and services for individuals and small business owners. In a large urban market where the major banks have merged with out-of-state rivals, Detroit Commerce Bank will distinguish itself by providing a high level of personalized customer service supported by the belief that every customer is important, has value and is appreciated. Linda A. Watters LINDA A. WATTERS - President and CEO DETROIT COMMERCE BANK FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 TOTAL ASSETS $18,620 PORTFOLIO LOANS 506 DEPOSITS 15,622 TOTAL CAPITAL 2,979
8 10 [PHOTO] GRAND HAVEN BANK - -------------------------------------------------------------------------------- 15 SOUTH SECOND STREET GRAND HAVEN, MI 49417 - (616) 846-1930 The Tri-Cities area is special for many reasons. Consider the winds and waves of the Lake Michigan waterfront, which make the area a very popular vacation destination. Combine the small-town, resort-like atmosphere with a diverse local economy and strong work ethic and you have an excellent place to live and work. The Tri-Cities' unique personality continues to make it an ideal place for our community oriented, relationship-style approach to banking. The continued growth of Grand Haven Bank indicates that our community appreciates products and services offered in a straightforward, responsive manner. It also shows that our growing client base prefers our local decision-making authority and personal attention to details, rather than subjecting them to across-the-board policies which do not take into account their individual needs. Our customer service delivery system will be improved in 1999 when a new facility is built for us in downtown Grand Haven. While the facility will change, our unwavering commitment to our customers will not. John D. Groothuis JOHN D. GROOTHUIS - President and CEO BOARD OF DIRECTORS PAUL R. BALLARD President and CEO Portage Commerce Bank STANLEY L. BOELKINS Owner and Appraiser Boelkins & Associates PETER E. BOLLINE Owner Wood Specialties Co. BRAD J. FORTENBACHER President Tri-Cast, Inc. JOHN D. GROOTHUIS President and CEO Grand Haven Bank BARI STANTON JOHNSON CEO and Principal Consultant The Stanton Group MARK A. KLEIST Attorney at Law/Treasurer Scholten and Fant, P.C. STEVEN L. MAAS Vice President Gillisse Construction Company CALVIN D. MEEUSEN Certified Public Accountant ARNOLD W. REDEKER, JR. Partner and Vice President Redeker Ford, Inc. ROBERT J. TRAMERI Chairman Paragon Bank & Trust JOHN P. VAN EENENAAM Attorney at Law Scholten and Fant, P.C. GERALD A. WITHERELL President Oakes Agency, Inc. OFFICERS JOHN P. VAN EENENAAM Chairman of the Board PAUL R. BALLARD Vice Chairman ARNOLD W. REDEKER, JR. Secretary JOHN D. GROOTHUIS President and CEO SHERRY J. PATTERSON Vice President GRAND HAVEN BANK FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 1997 1996 TOTAL ASSETS $ 66,872 $ 45,320 $ 32,731 PORTFOLIO LOANS 57,057 35,770 26,162 DEPOSITS 61,797 41,298 29,728 TOTAL CAPITAL 4,724 3,741 2,809
9 11 BOARD OF DIRECTORS JAMES M. BADALUCO Vice President S.J. Wisinski & Company PAUL R. BALLARD President and CEO Portage Commerce Bank PAUL S. BUITEN Chairman Buiten, Tamblin, Steensma & Associates, Inc. Julius Duthler President Duthler Ford Sales, Inc. Kevin J. Einfeld President BDR Executive Custom Homes GRANT J. GRUEL Attorney at Law and Partner Gruel, Mills, Nims & Pylman GARY D. HENSCH Certified Public Accountant JAMES P. HOVINGA President JPH, Inc. DOUGLAS L. KOOL President Kool Chevrolet-Geo, Inc. DALE R. MEDEMA President Medemaas Carpet & Interiors, Inc. CALVIN D. MEEUSEN Certified Public Accountant JOHN H. PLEUNE President Pleune Service Company, Inc. JOSEPH D. REID Chairman, President and CEO Capitol Bancorp Ltd. MARY L. URSUL General Counsel Spectrum Health DAVID E. VEEN President and CEO Kent Commerce Bank MICHAEL C. WALTON Attorney At Law Tolley, VandenBosch, Walton, Korolewicz & Brengle, P.C. OFFICERS JOSEPH D. REID Chairman of the Board DAVID E. VEEN President and CEO MARTINE KALUSKE Vice President and Cashier MICHAEL P. BOELENS Vice President JOHN J. CODER Vice President KENT [PHOTO] COMMERCE BANK - -------------------------------------------------------------------------------- 4050 LAKE DRIVE GRAND RAPIDS, MI 49546 - (616) 974-0200 Kent Commerce Bank is privileged to be located in one of the fastest growing and most dynamic economic areas in the Midwest--Kent County, Michigan. It has been exciting to be a part of the growth and expansion of both small business and commercial and residential real estate in the metro Grand Rapids community. In our first year of bank operations we have begun to earn a solid reputation as a community-focused business advocate, going the extra mile to deliver on our commitment to provide personalized banking services to local companies. We are actively promoting and participating in community-sponsored lending programs to assist local businesses with their financing objectives. Kent Commerce Bank has also established itself as a capable and responsive real estate lender, where our knowledge of the local market truly sets us apart. Our depositors appreciate our convenient and accessible location, our drive through and 24 hour ATM, and bankers who know them when they call or visit. The response to Kent Commerce Bank in 1998 has been tremendous, and we will continue to thrive by focusing on these strengths. David E. Veen DAVID E. VEEN - President and CEO KENT COMMERCE BANK FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 TOTAL ASSETS $31,587 PORTFOLIO LOANS 22,930 DEPOSITS 28,028 TOTAL CAPITAL 3,490
10 12 [PHOTO] MACOMB COMMUNITY BANK - -------------------------------------------------------------------------------- 16000 HALL ROAD - SUITE 102 CLINTON TOWNSHIP, MI 48038 - (810) 228-1600 It seems like just yesterday that the landscape surrounding Macomb Community Bank's prime location was sparsely populated, highlighted mostly by farmland. Today, our community is home to more than forty facilities owned by Fortune 100 firms. Since 1995, residential housing construction permits are up over 40%. A recent University of Michigan study says it all: "Macomb County ranked first in per person income growth this past decade among comparable counties across our great nation". The vitality of our citizens and community is evident everywhere. The well-publicized M-59 corridor bustles with exciting new retail/commercial, industrial and residential development projects. Natural treasures such as Lake St. Clair and Stoney Creek Metro Park are just minutes from Macomb Community Bank. The neighboring Macomb Center for the Performing Arts, and the north campus of Macomb Community College provide residents with cultural amenities and challenging educational programs. After multiple years of sustained, positive economic growth, the future is indeed bright for our successful community bank to continue its goal of bringing "relationship banking" with a sense of personality and tradition, to the state of Michigan's third most populated community. Stephen C. Tarczy STEPHEN C. TARCZY - President and CEO BOARD OF DIRECTORS EUGENE J. AGNONE, JR., M.D. Medical Oncologist GERALD J. CARNAGO Attorney/CPA, Attorney at Law Carnago & Associates, P.C. Carnago & Carnago, P.C. ROBERT C. CARR Executive Vice President Capitol Bancorp Ltd. CHRISTINA D'ALESSANDRO Vice President Villa Custom Homes, Inc. RONALD G. FORSTER Treasurer Arkay Manufacturing, Inc. ROBERT F. GARVEY Attorney Thomas, Garvey, Garvey & Sciotti JOHN H. JOHNSON President Johnson Consulting Group JAMES R. KAYE President and CEO Oakland Commerce Bank DAVID F. KEOWN Building Official Washington Township SAM A. LOCRICCHIO Executive Vice President Macomb Community Bank VITO MUNACO Owner and Operator WEMCO The Mandamus Group JAMES A. PATRONA President and Owner Universal Press & Machinery, Inc. DELIA RENDON-MARTIN Co-Owner Martin Enterprises STEPHEN C. TARCZY President and CEO Macomb Community Bank OFFICERS ROBERT C. CARR Chairman of the Board RONALD G. FORSTER Vice Chairman STEPHEN C. TARCZY President and CEO SAM A. LOCRICCHIO Executive Vice President and Secretary MACOMB COMMUNITY BANK FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 1997 1996 TOTAL ASSETS $76,044 $41,010 $15,123 PORTFOLIO LOANS 40,426 19,546 5,821 DEPOSITS 69,356 37,227 11,487 TOTAL CAPITAL 6,106 3,412 3,587
11 13 BOARD OF DIRECTORS NEIL R. BARNA President Mesa Bank MICHAEL J. DEVINE Attorney at Law DEBRA L. DUVALL, ED. D. Associate Superintendent Mesa Public Schools BRIAN K. ENGLISH English Law Firm ROBERT R. EVANS, SR. President Baron Resources, Inc. GARY W. HICKEL President Valley First Community Bank STEWART A. HOGUE Owner Commercial Lithographers MICHAEL L. KASTEN Managing Partner Kasten Investments, L.L.C. PHILIP S. KELLIS Partner Dobson Ranch Inn and Resort RUTH L. NESBITT Community Volunteer JOSEPH D. REID Chairman and CEO Sun Community Bancorp Limited JAMES A. SCHMIDT Executive Director-Tax Services Nelson Lambson & Co., P.L.C. DANIEL P. SKINNER President LeBaron and Carroll Insurance TERRY D. TURK President Sun American Mortgage Co. OFFICERS JOSEPH D. REID Chairman of the Board and CEO NEIL R. BARNA President DAVID D. FORTUNE Executive Vice President and CCO SUE KATHE Vice President DANIEL R. LAUX Vice President MESA [PHOTO] BANK - -------------------------------------------------------------------------------- 63 EAST MAIN STREET - SUITE 100 MESA, AZ 85201 - (602) 649-5100 Mesa Bank opened on October 20, 1998 with the backing of nearly 250 shareholders. With the commitment of a strong board of directors with ties to Mesa and the East Valley, Mesa Bank is Mesa's only community bank, providing services to customers with an emphasis on the human touch. Access to senior management, local decision-making capabilities, and prompt responses to customer requests set us apart from our competition. Mesa Bank provides traditional deposit and loan products with an emphasis on business and professional services. Our product line also includes residential interim construction financing and plant or office construction-to-permanent financing. As an affiliate of the Sun Community Bancorp Limited family of banks, Mesa Bank also provides SBA loans, real estate mortgage products and trust services. `Personalized Service from Your Hometown Bank' is not just a slogan but a way of doing business at Mesa Bank. We are proud to be a part of our community. Neil Barna NEIL R. BARNA - President MESA BANK FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 TOTAL ASSETS $6,192 PORTFOLIO LOANS 1,386 DEPOSITS 2,191 TOTAL CAPITAL 4,001
12 14 [PHOTO] MUSKEGON COMMERCE BANK - -------------------------------------------------------------------------------- 255 SEMINOLE ROAD MUSKEGON, MI 49444 - (616) 737-4431 Muskegon Commerce Bank celebrated its first year of operations in December after achieving several milestones during the year. Based on consistent deposit growth and strong loan demand, the Bank quickly outgrew its original facility and relocated to a newly remodeled 5,500 square foot building. The move allowed us to expand our banking services by adding a second drive through lane, an ATM machine, and several private offices. Our new building brought us closer to the residential community which helped generate $20 million in mortgage closings during the year. With the added space we were also able to add to the bank a veteran commercial loan officer who is well-known in Muskegon. While the bank is still growing at a rapid pace, we were able to reach profitability for the first time in November. With our base of core customers we have built a solid foundation for Muskegon Commerce Bank to continue to increase earnings in 1999 while maintaining an aggressive growth strategy. Robert J. McCarthy ROBERT J. MCCARTHY - President and CEO BOARD OF DIRECTORS PAUL R. BALLARD President and CEO Portage Commerce Bank WILLIAM C. COOPER President Omni Fitness Club THOMAS F. DEVOURSNEY President and CEO Pliant Plastics RONALD R. GOSSETT Vice Chairman Muskegon Commerce Bank ROBERT D. JEWELL Chairman Baker College System CHARLES E. JOHNSON II Retired Chairman and CEO SPX Corporation CHRISTOPHER L. KELLY Attorney at Law Parmenter O'Toole DANIEL J. KUZNAR Owner Quality Tool & Stamping Co., Inc. ROBERT J. MCCARTHY President and CEO Muskegon Commerce Bank JOSEPH D. REID Chairman, President and CEO Capitol Bancorp Ltd. PATRICIA J. ROY, D.O. Co-Owner and President Roy and Rosema, P.C. JAMES S. TYLER President Tyler Sales Co., Inc. OFFICERS JOSEPH D. REID Chairman of the Board RONALD R. GOSSETT Vice Chairman ROBERT J. MCCARTHY President and CEO BRUCE A. MAY Vice President DAVID W. SEPPALA Vice President MUSKEGON COMMERCE BANK FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 1997 TOTAL ASSETS $ 28,552 $7,885 PORTFOLIO LOANS 24,491 1,610 DEPOSITS 26,022 5,240 TOTAL CAPITAL 2,424 2,604
13 15 BOARD OF DIRECTORS DONALD A. BOSCO President Donald A. Bosco Building, Inc. ROBERT C. CARR Executive Vice President Capitol Bancorp Ltd. MARK B. CHURELLA President and CEO FDI Group LEON S. COHAN Counsel to the Firm Barris, Scott, Denn & Driker MICHAEL J. DEVINE Attorney at Law JEFFREY L. HAUSWIRTH CPA, CVA, and Principal Jenkins, Magnus, Volk & Carroll, P.C. JAMES R. KAYE President and CEO Oakland Commerce Bank IHOR J. KUCZER Vice President Oakland Commerce Bank DAVID F. LAU, J.D. CLU Chartered Financial Consultant/Owner Lau & Lau Associates AKRAM G. NAMOU Certified Public Accountant JULIUS L. PALLONE President J.L. Pallone Associates FRANCINE PEGUES Regional Sales Director Blue Cross Blue Shield of Michigan OFFICERS MICHAEL J. DEVINE Chairman of the Board JAMES R. KAYE President and CEO IHOR J. KUCZER Vice President and Secretary THOMAS K. PERKINS Vice President OAKLAND [PHOTO] COMMERCE BANK - -------------------------------------------------------------------------------- 31731 NORTHWESTERN HIGHWAY FARMINGTON HILLS, MI 48334 - (248) 855-0550 Oakland Commerce Bank is located in Oakland County, one of the fastest growing counties in Michigan. We are also part of the metro Detroit setting. This positions us to maintain solid growth and to be part of the new opportunities certain to be present in Detroit's revitalization. While growing in the midst of this major metropolitan financial hub, we have seen the creation of larger and larger financial institutions. As their capacity grows, competition becomes more intense to provide expanded products and services. This also creates a growing potential customer base. Simply put, big banks need big businesses. Oakland Commerce Bank focuses on small businesses. We understand that our customers need the latest technology and must be provided a wide variety of products, services and expertise. However, the most important support we can offer small businesses is fulfilling their desire for a relationship that provides a financial partner and consultant. This is the need that Oakland Commerce Bank is committed to fill. James R. Kaye JAMES R. KAYE - President and CEO OAKLAND COMMERCE BANK FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 1997 1996 TOTAL ASSETS $108,747 $81,839 $71,095 PORTFOLIO LOANS 63,261 58,091 54,569 DEPOSITS 97,465 75,549 62,167 TOTAL CAPITAL 6,613 5,811 5,434
14 16 [PHOTO] PARAGON BANK & TRUST - -------------------------------------------------------------------------------- 301 HOOVER BOULEVARD HOLLAND, MI 49423 - (616) 394-9600 Located in Holland, Michigan, a city known for its Dutch heritage and a strong work ethic, Paragon Bank & Trust has flourished as a small community bank for the past eight years. Strong growth from both the automotive and office furniture industries have fueled the local economy and have helped Paragon achieve its goals as a bank. This growth has brought a diversity of new people to Holland and has changed the former, more conservative nature to a more cosmopolitan outlook. Providing financial tools and services to the small business sector in the community is the focus of Paragon Bank & Trust. In response to a demand for financial services relating to non-bank products, our Trust Department has expanded to a state-wide operation by offering mutual funds, brokerage services, investment management services and a variety of insurance investment products in all of the Michigan banks. We look forward to serving you into the new millennium. Scott G. Kling SCOTT G. KLING - President and CEO BOARD OF DIRECTORS PAUL R. BALLARD President and CEO Portage Commerce Bank ROBERT J. BATES Physician Western Mich. Urological Assoc., P.C. CHARLES A. BROWER CPA and Partner DeLong & Brower, P.C. JACK L. DEWITT President Request Foods, Inc. SCOTT DIEPENHORST Principal SD & Associates PAUL ELZINGA Co-Chairman and Director of Business Development Elzinga & Volkers, Inc. SUSAN K. HUTCHINSON Owner Hutchinson's Stores for Children GEORGE P. JULIUS, JR. President and CEO Vista Ventures LAWRENCE D. KERKSTRA President and CEO Kerkstra Precast, Inc. SCOTT G. KLING President and CEO Paragon Bank & Trust LEONARD MAAS President Gillisse Construction Company MITCHELL W. PADNOS Executive Vice President Louis Padnos Iron & Metal Company RICHARD H. RUCH Director Herman Miller, Inc. RICHARD G. SWANEY Attorney at Law Swaney, Thomas & Moritz, P.C. ROBERT J. TRAMERI Chairman Paragon Bank & Trust OFFICERS ROBERT J. TRAMERI Chairman of the Board RICHARD G. SWANEY Vice Chairman SCOTT G. KLING President and CEO ERIC J. HOOGSTRA Senior Vice President-Trust CHRISTOPHER L. HUGAR Senior Vice President PARAGON BANK & TRUST FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 1997 1996 TOTAL ASSETS $86,692 $72,332 $63,752 PORTFOLIO LOANS 63,417 59,184 46,680 DEPOSITS 79,640 66,466 58,940 TOTAL CAPITAL 6,395 5,426 4,484
15 17 BOARD OF DIRECTORS PAUL R. BALLARD President and CEO Portage Commerce Bank DAVID L. BECKER President Becker Insurance Agency, P.C. THOMAS R. BERGLUND Physician ProMed Family Practice PATRICIA E. DOLAN Community Volunteer CRISTIN REID ENGLISH Vice President of Corporate Development and General Counsel Capitol Bancorp Ltd. ALAN A. HALPERN, M.D. President Michigan Orthopedic Surgery & Rehab, Inc. ROBERT L. JOHNSON CFO Medallion Management, Inc. MICHAEL L. KASTEN Managing Partner Kasten Investments, L.L.C. PAUL M. LANE, PH.D. Grand Valley State University WILLIAM J. LONGJOHN Vice President Midwest Business Exchange JOHN W. MARTENS Certified Public Accountant OFFICERS MICHAEL L. KASTEN Chairman of the Board WILLIAM J. LONGJOHN Vice Chairman and Secretary PAUL R. BALLARD President and CEO ALLAN T. REIFF Senior Vice President GARY T. ADAMS Vice President JAMES V. LUNARDE Vice President MARK K. MACLELLAN Vice President HARRY B. STORR Vice President PORTAGE [PHOTO] COMMERCE BANK - -------------------------------------------------------------------------------- 800 EAST MILHAM ROAD PORTAGE, MI 49002 - (616) 323-2200 Portage Commerce Bank celebrated its tenth anniversary this year and continued to grow both in size and profitability. The area continues to develop as a strong regional retail center, and many of the smaller businesses that make up the Portage Commerce Bank customer base have experienced solid growth. The largest employer, Pharmacia & Upjohn, continues to maintain large research and manufacturing facilities in the area, despite moving its corporate headquarters to New Jersey. We continue to see opportunities for growth, as Western Michigan University has announced a major expansion, including a business research park, and three other area colleges have shown record enrollments. Portage Commerce Bank's lenders are experts in small business lending. The Bank's record of loaning its deposit base back to local businesses is a source of great pride to us. We look forward to the next year of serving and growing along with our community. Paul R. Ballard PAUL R. BALLARD - President and CEO PORTAGE COMMERCE BANK FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 1997 1996 TOTAL ASSETS $110,867 $91,759 $73,769 PORTFOLIO LOANS 90,589 72,115 58,177 DEPOSITS 102,690 85,358 68,273 TOTAL CAPITAL 7,783 6,085 5,248
16 18 [PHOTO] SOUTHERN ARIZONA COMMUNITY BANK - -------------------------------------------------------------------------------- 6400 NORTH ORACLE ROAD TUCSON, AZ 85704 - (520) 219-5000 Southern Arizona Community Bank opened on August 17th. The name is no coincidence. The original Southern Arizona Bank, opened in the early 1900's, provided community banking services to Arizona pioneers. Our mission remains the same as it was for that early financial institution--community, relationship banking. The true relationship banking attitude expressed in our slogan "Banking the Way It Should Be" will distinguish our bank from the mega banks mired in image and service issues resulting from continued mergers. Southern Arizona Community Bank is located in the fast-growing northwest area of Tucson. Our target market is the small to medium sized business and professional clients the large banks have historically ignored. We have listened and our business philosophy is what this community wants and deserves. The word "community" has a special meaning to our staff, directors and shareholders. Community is the shared spirit of a common history. Community is knowing our customer's needs without having to ask. Community is what will build this bank. Southern Arizona Community Bank looks forward to the millennium with superior performance expectations. John P. Lewis JOHN P. LEWIS - President BOARD OF DIRECTORS WILLIAM R. ASSENMACHER President T. A. Caid Industries, Inc. THOMAS F. CORDELL Director and Multi-Media Specialist University of Arizona, ECAT MICHAEL J. DEVINE Attorney at Law ROBERT A. ELLIOTT President and Owner Robert A. Elliott, Inc. BRIAN K. ENGLISH English Law Firm MICHAEL F. HANNLEY President Bank of Tucson MICHAEL L. KASTEN Managing Partner Kasten Investments, L.L.C. JOHN P. LEWIS President Southern Arizona Community Bank JIM LIVENGOOD Director of Athletics University of Arizona JAMES A. MATHER Certified Public Accountant and Attorney at Law JOSEPH D. REID Chairman and CEO Sun Community Bancorp Limited LOUISE M. THOMAS President Events Made Special PAUL A. ZUCARELLI Principal and Owner Gordon, Zucarelli and Handley Insurance OFFICERS JOSEPH D. REID Chairman of the Board and CEO JOHN P. LEWIS President MICHAEL J. TRUEBA Executive Vice President and CCO SOUTHERN ARIZONA COMMUNITY BANK FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 TOTAL ASSETS $12,395 PORTFOLIO LOANS 2,925 DEPOSITS 8,255 TOTAL CAPITAL 4,127
17 19 BOARD OF DIRECTORS SANDY A. ABALOS President Abalos and Associates, P.C. MICHAEL J. DEVINE Attorney at Law BRIAN K. ENGLISH English Law Firm HOWARD J. HICKEY, III Executive Vice President Sunrise Bank of Arizona WILLIAM D. HINZ, II President Sunrise Bank of Arizona MICHAEL L. KASTEN Managing Partner Kasten Investments, L.L.C. JOHN T. KATSENES Manager Katsenes Enterprises KEVIN B. KINERK Executive Vice President Sunrise Bank of Arizona G. D. "RAB" PAQUETTE President Commercial Blueprint Co. JOSEPH D. REID Chairman and CEO Sun Community Bancorp Limited DR. MARK STEIG Mark Steig D.D.S, M.S. JAMES R. WENTWORTH Principal Wentworth, Webb and Postal, L.L.C. OFFICERS JOSEPH D. REID Chairman of the Board and CEO WILLIAM D. HINZ, II President HOWARD J. HICKEY, III Executive Vice President KEVIN B. KINERK Executive Vice President MARIAN B. CREEL Vice President DOUGLAS N. REYNOLDS Vice President LEONARD C. ZAZULA Vice President SUNRISE [PHOTO] BANK OF ARIZONA - -------------------------------------------------------------------------------- 4350 EAST CAMELBACK ROAD - SUITE 100A PHOENIX, AZ 85018 - (602) 956-6250 Sunrise Bank of Arizona opened its doors December 16, 1998 to an overwhelming response from the Phoenix business community. Our experienced team of SBA and commercial lenders have gotten off to a fast start approving and closing eight loans in our first two weeks of operations, while occupying temporary space. Sunrise Bank of Arizona is well positioned to take advantage of Phoenix's tremendous growth. 1998 saw more than ten million square feet of multi-tenant office and industrial space built in Phoenix. At the same time all of this new growth was added to the market, strong demand from users kept vacancy rates level at 7.92% for industrial space and 9.34% for professional office space. 1999 forecasts predict even higher levels of construction in the Valley as more and more companies expand or choose to move to Phoenix. Sunrise Bank of Arizona is committed to "bringing the relationship back to banking" to help our customers make the most of Phoenix's robust economic times. William D. Hinz II WILLIAM D. HINZ, II - President SUNRISE BANK OF ARIZONA FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 TOTAL ASSETS $5,411 PORTFOLIO LOANS 1,745 DEPOSITS 1,283 TOTAL CAPITAL 4,016
18 20 BOARD OF DIRECTORS W. CRAIG BERGER President W. Craig Berger Financial Services, Ltd. MARILYN D. CUMMINGS Realtor Russ Lyon Realty Company MICHAEL J. DEVINE Attorney at Law BRIAN K. ENGLISH English Law Firm W. RANDY FITZPATRICK Certified Public Accountant Fitzpatrick , Hopkins, Kelly and Leonhard, P.L.C. WARNER A. GABEL, III President and Designated Broker Gabel Investments, Inc. PATRICK J. HARRIS Vice President of Marketing Skill Golf, Inc. GARY W. HICKEL President Valley First Community Bank MICHAEL L. KASTEN Managing Partner Kasten Investments, L.L.C. GORDON D. MURPHY Chairman Esperanca MARY DUNLAP OGILVY President Phoenix Museum of History JOSEPH D. REID Chairman and CEO Sun Community Bancorp Limited HARRY ROSENZWEIG Co-Owner Harry's Fine Jewelry OFFICERS JOSEPH D. REID Chairman of the Board and CEO PATRICK J. HARRIS Secretary GARY W. HICKEL President EDWARD T. WILLIAMS Executive Vice President and CCO FREDERICK A. SCHERTENLIEB Senior Vice President - Trust LANCE K. WISE Vice President [PHOTO] VALLEY FIRST COMMUNITY BANK - -------------------------------------------------------------------------------- 7501 EAST MCCORMICK PARKWAY - NORTH COURT - SUITE 105N SCOTTSDALE, AZ 85258-3495 - (602) 596-0883 Located in one of the Valley's signature office complexes at McCormick Ranch, our Scottsdale location affords us the opportunity to service the waterfront redevelopment taking place in the downtown area as well as the expanding concentration of business in the Scottsdale Airpark. Scottsdale's growth has been aided by various partnerships which exist among the residents who have a passionate interest in their community. Valley First's focus is on forging partnerships with the small business owners, professionals, and high net worth households located in and adjacent to the Scottsdale metropolitan area. Personalized service and electronic convenience, coupled with an enthusiastic and highly professional staff, have enabled us to establish a loyal base of customers in our short history. Scottsdale's future is extremely bright as it continues to be one of Arizona's fastest growing communities, and Valley First looks forward to being an integral part of this growth. Gary Hickel GARY W. HICKEL - President VALLEY FIRST COMMUNITY BANK FINANCIAL HIGHLIGHTS
At end of year (in thousands) 1998 1997 TOTAL ASSETS $36,588 $12,826 PORTFOLIO LOANS 20,879 7,830 DEPOSITS 32,445 8,603 TOTAL CAPITAL 3,994 4,170
19 21 Selected Consolidated Financial Data (in thousands, except per share data)
AS OF AND FOR THE YEAR ENDED DECEMBER 31 ------------------------------------------------------------------------------ 1998(1) 1997(2) 1996(3) 1995(4) 1994 --------------- --------------- --------------- -------------- --------------- For the year: Interest income $ 69,668 $ 49,549 $ 36,479 $ 29,914 $ 21,480 Interest expense 36,670 24,852 17,800 15,079 9,397 Net interest income 32,998 24,697 18,679 14,835 12,083 Provision for loan losses 3,523 2,049 1,196 839 473 Noninterest income 3,558 2,157 1,705 1,272 2,189 Noninterest expense 25,821 16,360 12,307 10,460 10,563 Net income 4,628 5,557 4,636 3,073 2,076 Net income per share:(5) Basic .74 .91 .85 .63 .52 Diluted .72 .88 .82 .62 .52 Cash dividends paid per share(5) .33 .30 .25 .19 .19 At end of year: Total assets $1,024,444 $ 690,556 $ 492,263 $ 384,070 $ 316,312 Total earning assets 952,682 641,561 455,502 357,446 292,817 Portfolio loans 724,280 502,755 357,623 283,471 241,583 Deposits 890,890 604,407 436,166 340,287 279,650 Debt obligations 23,600 6,500 8,712 7,924 Trust-preferred securities 24,255 24,126 Stockholders' equity 49,292 45,032 40,159 30,865 25,714
QUARTERLY RESULTS OF OPERATIONS -------------------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL FOR QUARTER QUARTER QUARTER QUARTER THE YEAR --------------- --------------- --------------- -------------- --------------- Year ended December 31, 1998:(1) Interest income $ 15,016 $ 16,756 $ 18,430 $ 19,466 $ 69,668 Interest expense 7,870 8,767 9,719 10,314 36,670 Net interest income 7,146 7,989 8,711 9,152 32,998 Provision for loan losses 825 833 800 1,065 3,523 Income before income taxes 1,031 2,179 2,313 1,689 7,212 Net income 633 1,384 1,510 1,101 4,628 Net income per share:(5) Basic .10 .22 .24 .17 .74 Diluted .10 .21 .23 .17 .72 Cash dividends paid per share(5) .083 .083 .083 .083 .333 Year ended December 31, 1997:(2) Interest income $ 10,534 $ 11,878 $ 13,039 $ 14,098 $ 49,549 Interest expense 5,166 5,785 6,682 7,219 24,852 Net interest income 5,368 6,093 6,357 6,879 24,697 Provision for loan losses 454 512 476 607 2,049 Income before income taxes 1,890 1,995 2,278 2,282 8,445 Net income 1,262 1,320 1,476 1,499 5,557 Net income per share:(5) Basic .21 .22 .24 .24 .91 Diluted .20 .21 .23 .23 .88 Cash dividends per share(5) .075 .075 .075 .075 .30
(1) Includes Kent Commerce Bank effective January 1998 and Detroit Commerce Bank effective December 1998, both located in Michigan and majority-owned by the Corporation and, in Arizona, Camelback Community Bank (effective May 1998), Southern Arizona Community Bank (effective August 1998), Mesa Bank (effective October 1998) and Sunrise Bank of Arizona (effective December 1998), majority-owned de novo bank subsidiaries of Sun Community Bancorp Limited. (2) Includes Brighton Commerce Bank, effective January 1997, and Muskegon Commerce Bank, effective December 1997, which are 59% and 51% owned by the Corporation, respectively. Also includes Valley First Community Bank, effective June 1997, which is 51% owned by Sun Community Bancorp Limited, a second-tier holding company 51% owned by the Corporation and formed in May 1997. (3) Includes Bank of Tucson and Macomb Community Bank, effective June 1996 and September 1996, respectively, both of which are 51% owned by the Corporation (Bank of Tucson became a wholly-owned subsidiary of Sun Community Bancorp Limited, which is 51% owned by the Corporation, in May 1997). (4) The Corporation formed and implemented Grand Haven Bank as a de novo bank effective May 1, 1995 (formerly a branch of Paragon Bank & Trust, which was acquired in 1994). Effective March 31, 1995, the Corporation sold a majority interest in Amera Mortgage Corporation (formerly Mortgage Connection, Inc., acquired in 1992); for periods after March 31, 1995, the Corporation's remaining investment has been accounted for under the equity method. (5) As restated to reflect the Corporation's 1998 6-for-5 stock split as if it had occurred at the beginning of the periods presented. 20 22 INFORMATION REGARDING THE CORPORATION'S COMMON STOCK The Corporation's common stock is traded on the National Market Tier of the Nasdaq Stock Market(SM) under the symbol "CBCL". Market quotations regarding the range of high and low sales prices of the Corporation's common stock (as restated for the Corporation's 6-for-5 stock split in December 1998), which reflect inter-dealer prices without retail mark-up, mark-down or commissions, were as follows:
1998 1997 ---------------------------- --------------------------- LOW HIGH LOW HIGH ------------- -------------- ------------- ------------- Quarter Ended: March 31 $25.625 $20.833 $12.083 $13.542 June 30 25.417 20.104 11.458 15.000 September 30 21.667 18.333 14.375 22.083 December 31 22.500 16.250 20.104 27.500
During 1998 and 1997, the Corporation paid quarterly cash dividends of $0.083 and $0.075 per share, respectively (as restated). As of February 17, 1999, there were approximately 2,500 beneficial holders of the Corporation's common stock, based on information supplied to the Corporation from its stock transfer agent and other sources. At that date, 6,344,886 shares of common stock were outstanding. The Corporation's stock transfer agent is UMB Bank, n.a., 928 Grand Ave., P.O. Box 410064, Kansas City, Missouri 64141-0064 (telephone (800) 884-4225). The Corporation has a Shareholder Investment Program which offers a variety of convenient features including dividend reinvestment, certain fee-free transactions, certificate safekeeping and other benefits. For a copy of the Program Prospectus, informational brochure and enrollment materials, contact UMB Bank, n.a. at (800) 884-4225 or Capitol Bancorp Ltd. at (517) 487-6555. In addition to the Corporation's common stock, trust-preferred securities of Capitol Trust I (a subsidiary of the Corporation) are also traded on the National Market Tier of The Nasdaq Stock Market(SM) under the symbol "CBCLP". Such trust-preferred securities consist of 2,530,000, 8.5% cumulative preferred securities, with a liquidation amount of $10 per preferred security. The trust-preferred securities are guaranteed by the Corporation and mature in 2027, are callable after 2002 and may be extended to 2036 if certain conditions are met. AVAILABILITY OF FORM 10-K AND CERTAIN OTHER REPORTS A copy of the Corporation's 1998 report on Form 10-K, without exhibits, is available to holders of the Corporation's common stock or trust-preferred securities without charge, upon written request. Form 10-K includes certain statistical and other information regarding the Corporation and its business. Requests to obtain Form 10-K should be addressed to Linda D. Pavona, Vice President, Capitol Bancorp Ltd., One Business & Trade Center, 200 Washington Square North, Lansing, Michigan 48933. Form 10-K, and certain other periodic reports, are filed with the Securities and Exchange Commission ("the Commission"). The Commission maintains an internet web site that contains reports, proxy and information statements and other information regarding companies which file electronically (which includes the Corporation). The Commission's web site address is http:\\www.sec.gov. The Corporation's filings with the Commission can also be accessed through the Corporation's web site, http:\\www.cbcl.com. 21 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section of the Annual Report discusses the Corporation's financial condition and results of operations and should be read in conjunction with the consolidated financial statements. This discussion also includes certain supplementary statistical and other data which are described more fully in the Corporation's report on Form 10-K, copies of which are available upon request as indicated on page 21. This section includes a discussion of historical financial information as well as some statements which are "forward-looking". Such forward-looking statements are subject to a variety of future events and uncertainties. Readers are cautioned to not place significant reliance on such forward-looking statements. A more comprehensive cautionary warning regarding forward-looking statements is presented herein on page 39 which is incorporated herein by reference. Past trends and results may not be reliable indicators of future results or trends. The Corporation wishes to caution readers that a number of important factors, which are outside the Corporation's control, could affect the Corporation's actual future results and cause actual future results to differ materially from those in the forward-looking statements. OVERVIEW At the end of 1998, the Corporation reported a significant achievement: Total assets exceeding $1 billion. Total assets increased nearly 50% in 1998, following 40% growth in 1997. At year-end 1998, the consolidated group consisted of seventeen banks, eleven in Michigan and six in Arizona. Six new banks were added in 1998. Consolidated earnings for 1998 remained strong with net income of $4.6 million compared to $5.6 million in 1997 and $4.6 million in 1996. The 1998 decrease was materially impacted by the aggressive expansion in the number of banks within the consolidated group. CHANGES IN CONSOLIDATED GROUP 1998, 1997 and 1996 have been significant periods of evolution for the Corporation. Through the development of de novo (newly formed) banks, the Corporation has evolved into a bank-development company in addition to its role in managing investments in its consolidated bank subsidiaries. The Corporation is a uniquely structured affiliation of community banks. Each bank, which typically has only one location, is focused on meeting the banking needs of entrepreneurs, professionals and other individuals seeking individually-tailored service. Each bank has full decision-making authority in structuring and approving loans and the delivery of other banking services. Each bank is managed by an on-site president and management team under the direction of its local board of directors, which is comprised of business leaders from that bank's community. The Corporation's de novo community banking philosophy involves the formation and operation of small, customer-focused community banks. In recent years (particularly 1997 and 1998), de novo banks have been organized on a `partnership' basis through which local investors purchase up to 49% of the de novo bank's common stock and initial capital. Ideally, between 22 24 100 and 150 local business leaders and other community individuals become stakeholders in those community banks. This approach also serves to form the initial customer base for those de novo banks, inasmuch as those community stakeholders typically open accounts at their new community bank. During 1998, six new banks were formed using this philosophy. Four of those banks are located in Arizona and two are in Michigan. In 1997, three new banks were formed (two in Michigan and one in Arizona). In 1996, two de novo banks were formed. At year-end 1998, eleven of the Corporation's seventeen banks were three years old or younger. At year-end 1998, the Corporation's affiliate banks include the following:
Year Formed or Acquired Community ---------------- ----------------------- In Michigan: Ann Arbor Commerce Bank 1990 Ann Arbor Brighton Commerce Bank 1997 Brighton Capitol National Bank 1982 Lansing Detroit Commerce Bank 1998 Detroit Grand Haven Bank 1995 Grand Haven Kent Commerce Bank 1998 Grand Rapids Macomb Community Bank 1996 Clinton Township Muskegon Commerce Bank 1997 Muskegon Oakland Commerce Bank 1992 Farmington Hills Paragon Bank & Trust 1994(1) Holland Portage Commerce Bank 1990(2) Portage In Arizona: Bank of Tucson 1996 Tucson Camelback Community Bank 1998 Phoenix Mesa Bank 1998 Mesa Southern Arizona Community Bank 1998 Tucson Sunrise Bank of Arizona 1998 Phoenix Valley First Community Bank 1997 Scottsdale
(1) Became a subsidiary in 1994, however, was formed in 1990. (2) Became a subsidiary in 1990, however, was formed in 1988. The Corporation's ongoing development of community banks in the southwestern portion of the United States is carried out through Sun Community Bancorp Limited ("Sun"). Sun is a second-tier subsidiary bank holding company which is 51% owned by Capitol Bancorp (Sun became a 51% owned subsidiary when it acquired, through a share exchange, all of the outstanding common stock of Bank of Tucson, previously a 51% owned subsidiary of Capitol Bancorp). Sun is headquartered in Phoenix, Arizona with a full complement of management staff, including credit administration, asset/liability management, information systems and other key functions. Sun also raised additional capital in 1998 through private stock offerings aggregating $17 million, including $8.7 million invested by Capitol Bancorp. 23 25 Because of the addition of de novo banks during the past three years, comparability of consolidated results of operations and financial position is difficult. This is particularly true because generally accepted accounting principles require consolidation of 100% of subsidiaries' assets and liabilities and, with respect to earnings, only count the Corporation's actual ownership percentage (which varies by entity from essentially 26%--in the case of banks owned 51% by Sun--to 100%, depending upon the individual bank). CHANGES IN CONSOLIDATED FINANCIAL POSITION Total consolidated assets exceeded $1 billion at December 31, 1998, an increase of $334 million or 48% over assets at the beginning of the year of $691 million. Total consolidated assets at the beginning of 1997 approximated $492 million. The components of 1998 asset growth are particularly notable. Of the $334 million asset growth, $85 million came from banks formed in 1998 and, hence, did not exist in the prior year. $63.4 million of asset growth came from banks formed in 1997 which, as a group, reported total assets of $108 million at year-end 1998, compared to $44.6 million at year-end 1997. Banks formed in 1996, with total assets of $140 million at year-end 1998 and $82.6 million at year-end 1997, grew $57.4 million or nearly 70% in their second full year of operation. The Corporation's more mature banks (i.e., formed prior to 1996) produced asset growth of $149 million in 1998, or an annualized growth rate of about 27%. These asset growth rates are significant and record-setting for the Corporation. Most of the 1998 asset growth occurred in portfolio loans, which increased $221.5 million or 44%. Total portfolio loans increased 40% in 1997 to $502.8 million. Most loan growth occurred in commercial loans, consistent with the banks' emphasis on fulfilling the credit needs of entrepreneurs, professionals, commercial real estate developers and other small, local businesses within their communities. Commercial loans approximated 82% of total portfolio loans at year-end 1998. Cash and cash equivalents also increased significantly in 1998 from $92.8 million to $151 million. The primary funding source for asset growth is the deposit gathering activity of the banks. Total deposits increased from $604 million to $891 million in 1998, an increase of 47%. In 1997, deposits increased about 39% from the $436 million level at the beginning of the year. Other funding sources for asset growth in 1998 included borrowings on lines of credit and resources provided by minority interests. Additionally, in late 1997, the Corporation issued approximately $25 million of trust-preferred securities in a public offering. These funding sources, as well as additional commentary regarding deposit gathering activities, are discussed more fully in the "Liquidity, Capital Resources and Capital Adequacy" section of this narrative. 24 26 A comparative summary of the individual banks' financial position follows (dollar amounts in thousands):
Allowance as a Percentage of Total Total Allowance for Nonperforming Total Assets Portfolio Loans Loan Losses Loans Portfolio Loans ---------------------- ------------------- ---------------- ----------------- --------------- 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997 ---------------------- ------------------- ---------------- ----------------- --------------- Ann Arbor Commerce Bank $ 196,446 $138,390 $154,060 $115,882 $ 2,080 $ 1,564 $ 662 $ 913 1.35% 1.35% Brighton Commerce Bank 42,871 23,853 34,024 13,817 341 139 -- -- 1.00 1.01 Capitol National Bank 136,776 126,552 104,333 94,400 1,406 1,270 880 760 1.35 1.35 Detroit Commerce Bank 18,620 n/a 506 n/a 6 n/a -- n/a 1.19 n/a Grand Haven Bank 66,872 45,320 57,057 35,770 682 427 62 32 1.20 1.19 Kent Commerce Bank 31,587 n/a 22,930 n/a 250 n/a -- n/a 1.09 n/a Macomb Community Bank 76,044 41,010 40,426 19,546 405 196 -- -- 1.00 1.00 Muskegon Commerce Bank 28,552 7,885 24,491 1,610 245 17 1 -- 1.00 1.06 Oakland Commerce Bank 108,747 81,839 63,261 58,091 724 686 2,032 744 1.14 1.18 Paragon Bank & Trust 86,692 72,332 63,417 59,184 732 663 2,936 660 1.15 1.12 Portage Commerce Bank 110,867 91,759 90,589 72,115 1,150 950 669 902 1.27 1.32 Sun Community Bancorp Ltd.: Bank of Tucson 63,860 41,605 37,899 23,406 392 235 -- -- 1.03 1.00 Camelback Community Bank 10,017 n/a 3,246 n/a 33 n/a -- n/a 1.02 n/a Mesa Bank 6,192 n/a 1,386 n/a 14 n/a -- n/a 1.01 n/a Southern Arizona Community Bank 12,395 n/a 2,925 n/a 30 n/a -- n/a 1.03 n/a Sunrise Bank of Arizona 5,411 n/a 1,745 n/a 18 n/a -- n/a 1.03 n/a Valley First Community Bank 36,588 12,826 20,879 7,830 209 82 -- -- 1.00 1.05 Other, net (14,093) 7,185 1,106 1,104 100 -- -- -- -- -- ----------- -------- -------- -------- ------- ------- ------- ------- ---- ---- Consolidated $ 1,024,444 $690,556 $724,280 $502,755 $ 8,817 $ 6,229 $ 7,242 $ 4,011 1.22% 1.24% =========== ======== ======== ======== ======= ======= ======= ======= ==== ====
n/a - not applicable The allowance for loan losses increased $2.6 million in 1998 and $1.6 million in 1997. The allowance for loan losses is increased by provisions charged to operations and is reduced by net loan charge-offs. The increase in the allowance for loan losses (which correlates with an increase in the provision for loan losses charged to operations) is related to growth in the loan portfolio, in general. The allowance for loan losses, as a percentage of portfolio loans, approximated 1.22% at December 31, 1998, compared with 1.24% at year-end 1997 and 1.28% in 1996. The decrease in the allowance percentage is primarily the result of the Corporation's addition of de novo banks during the past three years. De novo banks, as a condition of charter approval, are required to maintain an allowance for loan losses of not less than 1% for their first few years of operation, which is not materially different than requirements under generally accepted accounting principles. More mature banks typically maintain substantially higher loan loss allowances, on a percentage basis. The lower allowance ratio for de novo banks is appropriate in the context of their young and, hence, unseasoned loan portfolios. While the lower allowance ratio is appropriate in early 25 27 periods for de novo banks, ultimately it is expected that they will increase their allowance ratios as they mature and their loan portfolios become more seasoned. Nonperforming loans (defined as loans which are 90 days or more past due and loans on nonaccrual status) increased significantly in 1998 to $7.2 million ($5.6 million net of government guarantees), compared with $4 million at year-end 1997 and $2.7 million in 1996. While these increases are, in part, attributable to the combined effects of portfolio growth and maturity, the 1998 increase is primarily the result of two specific larger credit relationships (one each at Oakland Commerce Bank and Paragon Bank & Trust) which deteriorated during 1998. There are no material amounts of impaired loans or other individually material amounts of nonperforming loans at December 31, 1998. Of the nonperforming loans at December 31, 1998, $1.6 million is guaranteed by an agency of the federal government. The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. A number of elements are considered in management's determination of the adequacy of the allowance which include evaluation of recent loss experience, current economic conditions, volume, amount and composition of the portfolio, loan commitments outstanding and other factors. In addition to the recorded allowance for loan losses, certain loans ($24.9 million at December 31, 1998) are enrolled in a loan program sponsored by the State of Michigan and have specific loss reserves ($2 million) which are separate and excluded from the allowance for loan losses. CONSOLIDATED RESULTS OF OPERATIONS Revenue growth has been significant. Total revenues (interest income and noninterest income) increased 42% in 1998 to $73.2 million, compared with $51.7 million in 1997 and $38.2 million in 1996. Revenue growth approximated 35% in 1997 and 22% in 1996. Revenue growth and net interest income generally lag behind the rate of asset growth. This is because asset growth is funded primarily through increases in interest-bearing deposits which are not immediately deployed into the highest-yielding asset category--loans. Additionally, de novo banks, because of their start-up nature, first generate deposits, often at a pace faster than the rate of deployment into loans. The overall earnings contribution of the various bank subsidiaries is particularly notable in 1998. De novo banks, by their nature, are expected to incur operating losses during their early periods of operations. Accordingly, banks formed in 1997 and 1998, as a group, did not contribute positively to consolidated earnings. It is, however, notable that banks formed in 1997 as a group reported their first quarterly period of profitability for the fourth quarter of 1998. Banks formed in 1996 and, accordingly, less than three years old at year-end 1998, produced the significant achievement of strong positive earnings which approximated a return on average assets of 1%. This performance measure is particularly significant for the age of those banks and also in relation to achieving that rate of return while also producing an asset growth rate of nearly 70% in 1998. 26 28 Banks formed before 1996, the Corporation's most mature and highest performing ones, produced earnings which represented a return on average assets of more than 1.2%. Again, this rate of return on average assets is significant and notable in the context of their asset growth rate (more than 25% in 1998) and other factors. The majority of the increase in consolidated interest income (and net interest income) is the result of increases in interest-earning assets. Interest expense similarly increased during the periods due to volume. In 1998, market interest rates decreased, impacting rates on federal funds sold, variable rate loans and interest-bearing demand deposits and also reducing rates on new and/or renewing fixed rate loans and time deposits. These changes in market interest rates had the effect of reducing the net interest margin in 1998. A comparative summary of operations follows (dollar amounts in thousands):
Return on Return on Net Income Average Equity Average Assets -------------------------------- ---------------------------- ------------------------ 1998 1997 1996 1998 1997 1996 1998 1997 1996 -------- -------- ------- ------ ----- ------ ------ ----- ----- Ann Arbor Commerce Bank $ 2,125 $ 1,869 $ 1,177 19.13% 23.36% 20.90% 1.32% 1.58% 1.36% Brighton Commerce Bank (48) (505) n/a n/a n/a n/a n/a n/a n/a Capitol National Bank 2,012 1,804 1,573 21.62 21.41 20.79 1.69 1.64 1.61 Detroit Commerce Bank (21) n/a n/a n/a n/a n/a n/a n/a n/a Grand Haven Bank 615 341 220 14.19 10.53 8.10 1.11 .85 .83 Kent Commerce Bank (415) n/a n/a n/a n/a n/a n/a n/a n/a Macomb Community Bank 323 (83) (120) 7.16 n/a n/a .56 n/a n/a Muskegon Commerce Bank (191) (25) n/a n/a n/a n/a n/a n/a n/a Oakland Commerce Bank 866 917 637 13.77 16.39 11.88 .90 1.18 .91 Paragon Bank & Trust 678 701 623 11.35 13.80 12.74 .82 1.04 1.12 Portage Commerce Bank 1,393 1,168 1,091 20.38 20.83 22.00 1.34 1.38 1.58 Sun Community Bancorp Ltd.: Bank of Tucson 776 150 (164) 12.73 2.88 n/a 1.25 .47 n/a Camelback Community Bank (370) n/a n/a n/a n/a n/a n/a n/a n/a Mesa Bank (118) n/a n/a n/a n/a n/a n/a n/a n/a Southern Arizona Community (252) Bank n/a n/a n/a n/a n/a n/a n/a n/a Sunrise Bank of Arizona (26) n/a n/a n/a n/a n/a n/a n/a n/a Valley First Community Bank (81) (245) n/a n/a n/a n/a n/a n/a n/a Other, net (2,638) (535) (401) n/a n/a n/a n/a n/a n/a -------- -------- ------- ------ ----- ------ ------ ----- ----- Consolidated $ 4,628 $ 5,557 $ 4,636 10.19% 13.28% 12.01% .55% .96% 1.08% ======== ======== ======= ====== ===== ====== ====== ===== =====
n/a - not applicable On a consolidated basis, earnings in 1998 were adversely affected by two factors: the predictable impact of aggressive growth through formation of de novo banks and asset growth, discussed previously, and losses associated with a particular customer incurred early in the year. In February 1998, a bank customer drew checks against uncollected funds aggregating $1.5 million at Oakland Commerce Bank. Management subsequently became aware that the customer may have drawn larger amounts at other, unaffiliated, financial institutions. While it is believed, based on management's analysis of the bank's relationship with that customer, that the majority of the amount involved is covered by real estate collateral, management concluded that the bank may sustain some loss from this occurrence. In the first quarter of 1998, $600,000 of 27 29 the uncollected funds was written off and the bank charged off approximately $300,000 related to that customer relationship in the second quarter of 1998. Future resolution of the credit relationship with that customer will take an extended period of time, complicated by the customer's filing for bankruptcy protection and lawsuits filed by financial institutions, including a suit against the Corporation's bank subsidiary brought by an unaffiliated financial institution which incurred larger losses. The provision for loan losses approximated $3.5 million in 1998, compared with $2 million in 1997 and $1.2 million in 1996. As previously discussed, the increase in the provision for loan losses is primarily related to portfolio growth and new banks. Growth in noninterest income in 1998 approximated 65%. The significant 1998 increase was primarily the result of increases in fees from origination of non-portfolio residential mortgage loans which increased from $298,000 in 1997 ($200,000 in 1996) to $1.4 million in 1998. The dramatic increase in this revenue category (which is reported gross, exclusive of commissions paid to loan originators recorded as compensation expense) is the byproduct of low mortgage interest rates during 1998 which created a favorable environment for significant loan originations and a focused marketing effort. Because these mortgage loans tend to have low interest rates which are fixed for periods up to thirty years, such loans are sold into the secondary market through an affiliate, Amera Mortgage Corporation (49% owned by the Corporation) or to other investors. Service charges on deposit accounts have increased significantly in each of the last three years, largely as a result of growth in the number of transaction accounts at the Corporation's mature banks and the impact of de novo banks. Trust fee income, which is a growing source of revenue for the Corporation ($472,000 in 1998 compared to $355,000 in 1997 and $262,000 in 1996), is expected to grow in future periods as trust operations are expanded to ultimately include all of the Corporation's banks. Noninterest expenses have increased significantly during each of the past three years. Total noninterest expense approximated $25.8 million in 1998, compared with $16.4 million in 1997 and $12.3 million in 1996. The most significant element of noninterest expense is the category of salaries and employee benefits. In 1998, total salaries and employee benefits approximated $13.4 million, compared with $8.4 million in 1997 and $6.4 million in 1996; these increases correspond with the growth in the size of the more mature banks as well as the increased number of banks within the consolidated group. Similar increases occurred in the other categories of noninterest expense such as occupancy, equipment costs and other. Federal income tax expense generally approximates the statutory tax rate of 34% of income before federal income taxes. The effective income tax rate is slightly higher in 1998 (35.8%) mainly due to amortization of intangible assets which is not deductible for federal income tax purposes. 28 30 LIQUIDITY, CAPITAL RESOURCES AND CAPITAL ADEQUACY At December 31, 1998, the Corporation maintained significant liquidity. Cash and cash equivalents approximated $151 million or about 15% of total assets. In addition to cash and cash equivalents, significant liquidity exists in the form of loans held for resale ($36.8 million and $11.4 million at December 31, 1998 and 1997, respectively) and investment securities available for sale ($83.6 million and $62.3 million at December 31, 1998 and 1997, respectively). Together, total liquidity approximated $271.4 million at December 31, 1998 (26.5% of total assets) and $166.4 million at year-end 1997 (24.1% of total assets). Management has designated most of the Corporation's investment securities as being `available for sale' due to the banks' typical strategy of maintaining a relatively high loan-to-deposit ratio to maximize earnings. Accordingly, such investment securities available for sale are carried at market value with the market value adjustment being reflected as an element of stockholders' equity (net of related tax effect) on the Corporation's consolidated balance sheet (also described as accumulated other comprehensive income). In addition to sources of liquidity within the Corporation's consolidated balance sheet, additional liquidity is available in the form of lines of credit. Three of the Corporation's banks have secured lines of credit with the Federal Home Loan Bank of Indianapolis aggregating $15.1 million with $1.1 million of availability at December 31, 1998 ($11.6 million of availability at December 31, 1997). Further, the Corporation has a line of credit facility with an unaffiliated bank which, as amended and increased in early 1999, provides for up to $20 million of availability ($9.6 million was drawn at December 31, 1998). As discussed previously, the primary funding source for asset growth is deposits. Each of the banks offer a full array of deposit products. The banks emphasize time deposits by offering attractive rates in comparison to competitors, when needed, to fund loan demand. Time deposits approximated $523 million or 59% of total deposits at December 31, 1998 ($365 million or 60% at December 31, 1997). The banks also emphasize noninterest-bearing demand deposits (checking accounts) which amounted to $121 million or 13.6% of total deposits at December 31, 1998 ($83 million or 13.8% at December 31, 1997). The level of checking account deposits is important in reducing the banks' overall cost of funds. Deposits at each of the banks are insured up to the maximum amount covered by FDIC insurance. To supplement deposit insurance coverage, certain municipal government deposits at some of the banks have their deposits guaranteed by Capitol Bancorp ($21.2 million at December 31, 1998). In December 1997, the Corporation and a subsidiary (Capitol Trust I) completed a $25 million public offering of trust-preferred securities. The amount of the trust-preferred securities (net of issuance costs, which are being amortized over the life of the securities) is classified between liabilities and equity on the Corporation's consolidated balance sheet under the caption "guaranteed preferred beneficial interests in the Corporation's subordinated debentures". Under current regulatory guidelines, such trust-preferred securities are included as capital for purposes 29 31 of meeting certain ratio requirements. The trust-preferred securities account for most of the 1998 increase in interest expense from debt obligations. As noted previously, the Corporation owns (directly or indirectly) between 26% and 100% of its consolidated affiliated banks. For banks which are not wholly-owned by the Corporation, appropriate accounting recognition is given to applicable minority interests in those subsidiaries on the Corporation's consolidated balance sheet. Minority interests in consolidated subsidiaries approximated $27.6 million at December 31, 1998 and $11 million at December 31, 1997 ($4.7 million at December 31, 1996). Resources provided by minority interests approximated $16.6 million in 1998 and $6.3 million in 1997. The Corporation's strategy of majority ownership (less than 100% ownership) for its de novo expansion has generated significant resources provided by minority interests in those entities. Stockholders' equity approximated $49.3 million at December 31, 1998, an increase of $4.3 million for the year. Such net increase is the result of net income for the year, less cash dividends paid, and proceeds from the exercise of stock options and shares issued to acquire the minority interest in a particular bank subsidiary. In December 1998, the Corporation issued a 6-for-5 (20%) stock split. All share and per share information appearing in the consolidated financial statements has been retroactively restated to reflect the stock split as if it had occurred at the beginning of the periods presented. Near year end 1996 and 1997, the Corporation issued 10% stock dividends whereby each shareholder received one share for each ten shares then held. All per-share information appearing in the consolidated financial statements has been retroactively restated to reflect such stock dividends as if they had occurred at the beginning of the periods presented. Although stock dividends do not reduce stockholders' equity, or result in currently taxable income to the recipients, accounting rules require that a transfer be made from retained earnings to common stock when such stock dividends are "paid". Such accounting recognition is required to be made based on the fair value of the shares distributed. Due to increases in the market value of the Corporation's common stock, distribution of the 1997 10% stock dividend resulted in negative retained earnings at December 31, 1997. During 1998, 1997 and 1996, the Corporation paid cash dividends per share of $0.33, $0.30 and $0.25, respectively (restated, as previously discussed). The Corporation currently intends to continue payment of quarterly cash dividends for the foreseeable future; however, future payment of any cash dividends is contingent upon liquidity, cash adequacy and other factors in future periods. Accordingly, there can be no assurance with respect to payment of future cash dividends. At December 31, 1998, stockholders' equity approximated 4.8% of total assets, a decrease from 6.5% at December 31, 1997. The 1998 percentage decrease resulted from significant asset growth during the year. Total equity capital (stockholders' equity plus minority interest in consolidated subsidiaries) amounted to $76.9 million or 7.5% of total assets at December 31, 1998. Total capital funds (Capitol Trust I preferred securities plus minority 30 32 interest in consolidated subsidiaries plus stockholders' equity) approximated $101 million at December 31, 1998 or 9.9% of total assets. The Corporation and each of its affiliated banks are subject to very complex banking rules and regulations relating to capital adequacy. Key ratios of leverage, Tier I capital and Tier II capital (as those terms are currently defined in regulatory guidance) and corresponding ratios in relation to total assets and risk-weighted assets are set forth in Note O of the consolidated financial statements appearing on pages 58-60 of the Annual Report. Under the current regulatory framework, banks are categorized as "well capitalized", "adequately capitalized" or "inadequately capitalized". Banks which fall into the "inadequately capitalized" category are subject to the "prompt corrective action" provisions of the FDIC Improvement Act, which can result in significant regulatory agency intervention and other adverse action. Although it is permissible to maintain capital adequacy at the "adequately capitalized" level, the Corporation's management proactively manages the capital of each affiliated bank with the current objective of maintaining those banks in the "well capitalized" category. Classification as a "well capitalized" institution enables such institutions to enjoy the lowest-cost deposit insurance assessment and less restrictive regulatory intervention in relation to certain banking business activities. De novo banks, as a condition of charter approval, are required to maintain certain higher capital ratios. Generally, such banks are required to maintain a Tier I capital to assets ratio of not less than 8% for the first three years of operation in addition to maintaining the previously discussed allowance for loan losses of not less than 1% of portfolio loans. Such capital ratio requirements, in the opinion of management, do not constrict the operations of de novo banks during the period that the ratios are required and, consistent with management's effort to maintain capital adequacy at each affiliated bank, the Corporation will infuse such amounts of capital as are necessary to maintain compliance with those capital requirements. In the opinion of management, all of the Corporation's affiliated banks meet the criteria to be classified as "well capitalized" at December 31, 1998. TRENDS AFFECTING OPERATIONS The most significant trends which can impact the financial condition and results of operations of financial institutions are changes in market rates of interest and changes in general economic conditions. Changes in interest rates, either up or down, can have an impact on net interest income (plus or minus), depending on the direction and timing of such changes. At any point in time, there is a difference between interest rate-sensitive assets and interest rate-sensitive liabilities. That difference, from a timing perspective, arises because it is practically impossible to maintain a perfectly matched relationship between rate-sensitive assets and liabilities. This means that when interest rates change, the timing of the effect of such interest rate changes can differ between their effect on assets and liabilities. The difference between interest rate-sensitive assets and interest rate-sensitive liabilities is characterized as a "gap" which is quantified by the distribution of rate-sensitive amounts within various time periods in which they reprice or mature. The following table summarizes the Corporation's consolidated financial position in relation to "gap" at December 31, 1998 (dollar amounts in thousands): 31 33
Interest Rate Sensitivity ---------------------------------------------------------------------- 0 to 3 4 to 12 1 to 5 Over Months Months Years 5 Years Total -------------- ------------- --------------- ------------ ----------- ASSETS Federal funds sold $ 104,050 $ 104,050 Interest-bearing deposits with banks 1,732 1,732 Loans held for resale 36,789 36,789 Investment securities 34,509 $ 21,905 $ 24,098 $ 5,952 86,464 Portfolio loans: Commercial 300,542 74,710 213,369 1,730 590,351 Real estate mortgage 21,264 17,064 39,240 3,240 80,808 Installment 7,445 14,181 30,628 867 53,121 Non-earning assets and other 2,919 71,129 -------------- ------------- --------------- ------------ ----------- Total Assets $ 506,331 $ 127,860 $ 310,254 $ 11,789 $ 1,024,444 ============== ============= =============== ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: Time deposits over $100,000 $ 81,468 $ 100,540 $ 39,092 $ 221,100 Time deposits under $100,000 71,950 177,387 52,251 $ 77 301,665 All other interest-bearing deposits 247,139 247,139 -------------- ------------- --------------- ------------ ----------- Total interest-bearing deposits 400,557 277,927 91,343 77 769,904 Debt obligations 20,600 2,000 1,000 23,600 Non-interest bearing liabilities 129,817 Capitol Trust I preferred securities 24,255 24,255 Minority interest in consolidated subsidiaries 27,576 Stockholders' equity 49,292 -------------- ------------- --------------- ------------ ----------- Total Liabilities and Stockholders' Equity $ 421,157 $ 279,927 $ 92,343 $ 24,332 $ 1,024,444 ============== ============= =============== ============ =========== Interest rate sensitive period gap $ 85,174 $ (152,067) $ 217,911 $ (12,543) Interest rate sensitive cumulative gap $ 85,174 $ (66,893) $ 151,018 $ 138,475 Period rate sensitive assets/period rate sensitive liabilities 1.20 0.46 3.36 0.48 Cumulative rate sensitive assets/cumulative rate sensitive liabilities 1.20 0.90 1.19 1.17 Cumulative gap to total assets 8.31% -6.53% 14.74% 13.52%
The "gap" changes daily based upon changes in the underlying assets and liabilities at each of the Corporation's affiliate banks. Analyzing exposure to interest rate risk is prone to imprecision because the "gap" is constantly changing, the "gap" differs at each of the banks, and it is difficult to predict the timing, amount and direction of future changes in market interest rates and the corresponding effect on customer behavior. The Corporation's affiliated banks endeavor to manage and monitor interest rate risk in concert with market conditions. Management strives to maintain a balanced position of interest rate-sensitive assets and liabilities. The Corporation and its banks have not engaged in speculative positions through the use of derivatives in anticipation of interest rate movements. In these most recent periods of lower interest rates, affiliated banks emphasize variable rate loans and time deposits to the extent possible in a competitive environment; however, competitive influences often result in making fixed rate loans, although the banks seek to limit the duration of such loans. Similarly, low interest rates generally make competition more intense for deposits, 32 34 since loan demand will typically increase during periods of lower rates and, accordingly, result in higher interest costs on deposits, adversely impacting interest margins. Future interest rates and the impact on earnings are difficult to predict. In addition to interest rate risk relating to the Corporation's interest-bearing assets and liabilities, changes in interest rates also can impact future transaction volume of loans and deposits at the banks. For activities which are influenced by levels of interest rates for transaction volume (for example, origination of residential mortgage loans), pricing margins and demand can become impacted significantly by changes in interest rates. As a means of monitoring and managing exposure to interest rate risk, management uses a computerized simulation model which, at a static point in time, is intended to estimate pro forma effects of changes in interest rates. Using the consolidated "gap" table information above and the Corporation's simulation model, the following table illustrates, on a consolidated basis, changes which would occur in annual levels of interest income, interest expense and net interest income (in thousands) assuming one hundred and two hundred basis point ("bp") increases and decreases in interest rates:
Pro Forma Assuming Pro Forma Effect of Pro Forma Effect of No Change Interest Rate Increases Interest Rate Decreases in Interest ---------------------------- ----------------------------- Rates +100 bp +200 bp -100 bp -200 bp ------------ ------------ ------------ ------------ ------------ Interest income $ 76,986 $ 82,376 $ 87,764 $ 71,683 $ 66,409 Interest expense 40,089 44,943 49,798 35,234 30,380 ------------ ------------ ------------ ------------ ------------ Net interest income $ 36,897 $ 37,433 $ 37,966 $ 36,449 $ 36,029 ============ ============ ============ ============ ============
The pro forma analysis above is intended to quantify theoretical changes in interest income based on stated assumptions. Such pro forma analysis excludes the effect of numerous other variables such as borrowers' ability to repay loans or the ability of banks to obtain deposits in a radically changed interest-rate environment and how management would revise its asset and liability management priorities in concert with rate changes. Simulation modeling techniques are inherently flawed and inaccurate due to the number of variables and due to the fact that the actual effects of changes in interest rates are subject to some variables (for example, customer behavior) which simulation models cannot effectively predict. Therefore, actual future results will differ from pro forma simulation model analyses and such differences may be significant. General economic conditions also have a significant impact on financial institution results of operations and financial condition. Economic conditions nationally and in the banks' local environments have remained relatively stable and positive. Local economic conditions, and to some extent national economic conditions, have a significant impact on levels of loan demand as well as the ability of borrowers to repay loans and the availability of funds for customers to make deposits. Throughout 1998, 1997 and 1996, the U.S. economy has continued to produce the longest peacetime economic expansion in history. While worldwide economic conditions are 33 35 unstable, the duration of the current economic expansion period in the United States is questionable. Additionally, issues regarding the century date change and its impact on financial institutions, their customers and the economy in general are uncertain. Continuing consolidation of the banking industry on a national basis, and in the respective markets of the Corporation's banks, has presented opportunities for growth. As a result of consolidation of the banking industry, coupled with the closure of branch locations by larger institutions and conversion of customer relationships into perceived `commodities' by the larger banks, many customer relationships have been displaced, generating opportunities for development by the Corporation's banks. For retail customers, banking services have become a commodity in an environment that is dominated by larger mega-bank or mass-merchandising institutions. For the professional, entrepreneur and other customers seeking a more service-oriented, customized banking relationship, the Corporation's affiliated banks fill that need through their focus on single-location banks with full, local decision-making authority. In those markets in which the Corporation's affiliated banks are located, the banks focus on service delivery and keeping the bank's size at an appropriate level; only a modest market share of deposits and loan activity is necessary to achieve profitability and reasonable earnings performance. The ongoing banking consolidation environment further presents opportunities for expansion of de novo banking activities in numerous markets. While it is difficult to predict specific locations and markets for future de novo banking development, plans are underway in early 1999 for additional de novo banks in Arizona and elsewhere in the southwestern United States as well as exploring opportunities in the midwest. As previously discussed, de novo banks generally incur operating losses during their early periods of operations. Management expects the Corporation's recently-formed de novo banks to detract from consolidated earnings performance and additional de novo banks formed in 1999 and beyond will similarly adversely impact short-term profitability. On a consolidated basis, such operating losses reduce net income by the pro rata share of the Corporation's ownership percentage in those de novo banks. When de novo banks become profitable, their operating results will contribute to consolidated earnings to the extent of the Corporation's ownership percentage. Commercial banks continue to be subject to significant regulatory requirements which impact current and future operations. In addition to the extent of regulatory interaction with financial institutions, extensive rules and regulations governing lending activities, deposit gathering and capital adequacy (to name a few), the costs of financial institution regulation are significant. Such costs include, but are not limited to, the significant amount of management time and expense which is incurred in maintaining compliance and developing systems for compliance with those rules and regulations as well as the cost of examinations, audits and other compliance activities. Premiums for FDIC insurance have historically been significant costs of doing business as financial institutions. In recent years, however, deposit insurance premiums have been maintained at a stable and modest level by the Corporation maintaining its banks in the so-called 34 36 "well capitalized" category of capital adequacy and the overall health of the banking industry, in general. Future deposit insurance premium levels are difficult to predict inasmuch as deposit insurance premiums will be determined based on general economic conditions, the relative health of the banking and financial institution industry and other unpredictable factors. It is reasonable to expect that deposit insurance premiums will increase at some point in the future. The future of financial institution regulation, and the costs of regulation is uncertain and difficult to predict. The ongoing expansion of Internet and `e-commerce' activity continues to evolve. Thus far, the Corporation's banks have not experienced significant competition from competitors' delivery of banking services via the Internet or other e-commerce channels. The impact of the Internet and e-commerce on the Corporation's banks is difficult to predict; the Corporation's information systems staff is continuing to explore implementation of Internet banking opportunities for the Corporation's banks. Management expects that Internet banking and e-commerce, in general, will result in deposits being obtained as more of a "commodity" in the future, while nongeneric loan products will continue to be handled face-to-face with the customer. YEAR 2000 Bank regulatory agencies, other regulatory bodies and the media have focused on business continuity issues associated with computer systems and the year 2000. Often described as the "Y2K" issue, financial institutions are collectively being closely monitored for their plans to eliminate potential computer processing problems on or after January 1, 2000. Regulatory agencies are concerned about financial institution readiness with their internal systems to accommodate the year 2000 transition. Specifically, financial institutions are required to adopt a comprehensive Y2K compliance plan which is reviewed by various bank regulatory agencies from time to time in terms of carrying out the aspects of the plan and its impact on financial institution readiness. The Corporation and its banks are subject to the requirements as outlined by the Federal Financial Institutions Examination Counsel (FFIEC). As such, the measures that have been taken follow those guidelines regarding the Awareness, Assessment, Renovation, Validation (testing) and Implementation phases as more fully defined and described in various interagency publications. Year 2000 issues and plan status updates are communicated under these same guidelines to the various boards of directors of the Corporation and its bank subsidiaries. Further, periodic year 2000 reviews are performed by various banking regulatory agencies and the Corporation's internal audit staff. Throughout 1998 and continuing in 1999, both mission-critical and nonmission-critical programs and systems are being addressed in an attempt to avoid unnecessary business interruptions. The review is comprehensive and covers a variety of third party providers as well as internal systems. The vast majority of programs in use are "packaged" or "turn key" in nature, upon which the Corporation will primarily rely on its vendors for resolution of year 2000 issues. Following the guidelines as set forth by the FFIEC, changes, modifications or replacements to those programs are being made in conjunction with test results. Except for its reliance on certain software and hardware vendors for year 2000 solutions, the 35 37 Corporation and its banks have minimal dependence on other vendors on which the century date change is expected to have a material impact. Certain key milestone dates for the Renovation and Implementation phases have been established by the FFIEC. The Awareness, Assessment and Validation phases have been completed. The Renovation and Implementation phases are on schedule as of December 31, 1998. The efforts of the Corporation and its banks on this issue are significant and ongoing. During the fourth quarter of 1998, certain of the Corporation's and the banks' systems and software were tested for year 2000 readiness. Based on the results of that testing, no significant mission-critical system failures were observed. Other key planning and testing efforts will occur throughout calendar 1999, consistent with the FFIEC's guidance and other regulatory requirements. Contingency plans, intended to address alternative courses of action in the event that certain systems and software do not function properly with the date change, are in the process of development. Timing and development of those contingency plans are currently evolving in accordance with the FFIEC's guidance and other regulatory requirements. Those contingency plans are expanded in scope and also include infrastructure issues such as continuity of electricity provided by public power companies and telecommunications provided by a variety of entities. From a federal financial institution regulatory standpoint, most of the recent monitoring and examinations performed by federal financial institution regulatory agencies have been performed by the FDIC. Those FDIC examinations have been frequent and are expected to be ongoing throughout 1999. Examinations are performed on location at each bank insured by the FDIC, as required by Congressional mandate. The FDIC, based on the results of its examination procedures, determines a financial institution's `rating' regarding its year 2000 readiness. Those ratings are `satisfactory', `needs improvement' or `unsatisfactory'. Federal banking regulations prohibit disclosure of those ratings to the public and outside parties by an institution. The FFIEC does, however, maintain a website address which includes an updated list of financial institutions that have been subject to enforcement actions relating to regulatory concerns with the banks' current year 2000 readiness status. As of December 31, 1998, none of the Corporation's banks were listed as being subject to enforcement action for year 2000 readiness. The Corporation's and its banks' risk of year 2000 problems principally center around the ability of various systems and software to continue processing transactions and accurately accounting for activity in customer accounts after the century date change. Even with the extensive testing methodologies implemented by this Corporation, its banks and other financial institutions, until the century date change actually occurs and it is determined that such systems properly process data after that date, there can be no assurance that such systems will function properly, despite adequate and appropriate planning, testing and remediation efforts. 36 38 Regulatory agencies require banks to update their customers on the banks' compliance efforts. Letters and informational brochures are being sent to customers notifying them of the banks' efforts at addressing the year 2000 issue, while block messages are being included on customers' account statements. The Corporation and its banks are also following regulatory mandates that require an assessment of their customers' year 2000 readiness efforts. Each bank has distributed questionnaires requesting the status of certain customers' year 2000 readiness which the banks are reviewing and pursuing as deemed necessary. The Corporation estimates its cost to address the year 2000 issue approximated $250,000 in 1998. These costs principally relate to the added personnel costs, external consultants and software upgrades in addition to the costs of testing and planning. Such costs are difficult to estimate. Management expects to incur a similar amount of such costs on this matter in 1999. The Corporation and its banks, in their ongoing effort to competently address evolving Y2K issues, will continue to devote both human and financial resources to this issue. NEW ACCOUNTING STANDARDS Certain new accounting standards became applicable to the Corporation during 1998. Financial Accounting Standards Board (FASB) Statement No. 130, "Reporting Comprehensive Income" requires presentation of all components of "comprehensive income" and "total comprehensive income". This new standard became effective for the Corporation January 1, 1998. Implementation of this new accounting standard had no impact on the Corporation's financial position or results of operations for the year ended December 31, 1998. Components of comprehensive income and total comprehensive income are included in the consolidated statements of stockholders' equity. FASB Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" revises reporting of information about operating segments in annual and interim financial statements. This Statement sets revised standards for disclosures about products and services, geographic areas and major customers. It is intended to promote a more practical approach to segment reporting by requiring presentation of information on the basis which is used internally by management for evaluating segment performance and allocation of resources to segments of the enterprise. The Statement permits aggregation or combination of segments which have similar characteristics. Although the Corporation's banks operate independently and are managed and monitored separately, each bank is substantially similar in terms of business focus, types of customers, products and services. Further, each of the banks and the Corporation are subject to substantially similar laws and regulations unique to the banking industry. Accordingly, the consolidated financial statements reflect the presentation of segment information on an aggregated basis. FASB Statement No. 133, "Accounting For Derivative Instruments and Hedging Activities" requires all derivatives to be recognized in financial statements and to be measured at fair value. Gains and losses resulting from changes in fair value would be included in income, or comprehensive income, depending on whether the instrument qualifies for hedge accounting and the type of hedging instrument involved. This new accounting standard will become effective 37 39 for the Corporation in 2000 and, because the Corporation has not typically entered into derivative contracts either to hedge existing risks or for speculative purposes, is not expected to have a material effect on its financial statements. The American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-1, "Costs of Computer Software Developed or Obtained for Internal Use". It requires capitalization of certain costs of development of software and is not expected to have a material effect on the Corporation's financial statements when implemented in 1999. The AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities". It requires start-up costs and organizational costs to be charged to expense when incurred. The initial application of the statement will require a cumulative effect adjustment for those companies that had previously capitalized start-up and organization costs and will become effective in 1999. Based on management's preliminary analysis, implementation of this standard is not expected to have a material impact on the Corporation's consolidated financial statements. A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to the Corporation's financial statements in future periods. 38 40 RESPONSIBILITY FOR FINANCIAL STATEMENTS The Corporation's management is responsible for the preparation of the consolidated financial statements and all other information appearing in this Annual Report. The financial statements have been prepared in accordance with generally accepted accounting principles. The Corporation's management is also responsible for establishing and maintaining the internal control structure of the Corporation. The general objectives of the internal control structure are to provide management with reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with generally accepted accounting principles. In fulfilling this objective, management has various control procedures in place which include, but are not limited to, review and approval of transactions, a code of ethical conduct for employees, internal auditing and an annual audit of the Corporation's consolidated financial statements performed by a qualified independent audit firm. Management believes the internal control structure of the Corporation to be adequate and that there are no material weaknesses in internal control. FORWARD-LOOKING STATEMENTS Certain of the statements contained in this Annual Report, including the Corporation's consolidated financial statements, Management's Discussion and Analysis of Financial Condition and Results of Operations and in other portions of this Annual Report that are not historical facts, including, without limitation, statements of performance and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, are subject to known and unknown risks, uncertainties and other factors which may cause the actual future results, performance or achievements of the Corporation and/or its subsidiaries and other operating units to differ materially from those contemplated in such forward-looking statements. The words "intend", "expect", "project", "estimate", "predict", "anticipate", "should", "will", "believe", and similar expressions also are intended to identify forward-looking statements. Important factors which may cause actual results to differ from those contemplated in such forward-looking statements include, but are not limited to: (i) the results of the Corporation's efforts to implement its business strategy, (ii) changes in interest rates, (iii) legislation or regulatory requirements adversely impacting the Corporation's banking business and/or expansion strategy, (iv) adverse changes in business conditions or inflation, (v) general economic conditions, either nationally or regionally, which are less favorable than expected and that result in, among other things, a deterioration in credit quality and/or loan performance and collectability, (vi) competitive pressures among financial institutions, (vii) changes in securities markets, (viii) actions of competitors of the Corporation's banks and the Corporation's ability to respond to such actions, (ix) the cost of the Corporation's capital, which may depend in part on the Corporation's asset quality, prospects and outlook, (x) changes in governmental regulation, tax rates and similar matters, (xi) "Year 2000" computer, imbedded chip and data processing issues, and (xii) other risks detailed in the Corporation's other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. All subsequent written or oral forward-looking statements attributable to the Corporation or persons acting on its behalf are expressly qualified in their entirety by the foregoing factors. Investors and other interested parties are cautioned not to place undue reliance on such statements, which speak as of the date of such statements. The Corporation undertakes no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of unanticipated events. 39 41 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Capitol Bancorp Ltd. We have audited the accompanying consolidated balance sheets of Capitol Bancorp Ltd. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' 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 Corporation'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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capitol Bancorp Ltd. 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. Grand Rapids, Michigan January 29, 1999 40 42 CONSOLIDATED BALANCE SHEETS
- December 31 - 1998 1997 ----------- --------- (in thousands) ASSETS Cash and due from banks $ 45,263 $ 29,860 Interest-bearing deposits with banks 1,732 260 Federal funds sold 104,050 62,650 ----------- --------- Cash and cash equivalents 151,045 92,770 Loans held for resale 36,789 11,426 Investment securities--Note C: Available for sale, carried at market value 83,597 62,253 Held for long-term investment, carried at amortized cost which approximates market value 2,867 2,217 ----------- --------- Total investment securities 86,464 64,470 Portfolio loans--Note D: Commercial 590,351 395,938 Real estate mortgage 80,808 66,630 Installment 53,121 40,187 ----------- --------- Total portfolio loans 724,280 502,755 Less allowance for loan losses (8,817) (6,229) ----------- --------- Net portfolio loans 715,463 496,526 Premises and equipment--Note F 11,646 7,579 Accrued interest income 5,100 4,116 Excess of cost over net assets of acquired subsidiaries 2,626 2,154 Other assets 15,311 11,515 ----------- --------- TOTAL ASSETS $ 1,024,444 $ 690,556 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $ 120,986 $ 83,487 Interest-bearing--Note G 769,904 520,920 ----------- --------- Total deposits 890,890 604,407 Debt obligations--Note H 23,600 Accrued interest on deposits and other liabilities 8,831 5,971 ----------- --------- Total liabilities 923,321 610,378 GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE CORPORATION'S SUBORDINATED DEBENTURES-- Note I 24,255 24,126 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES-- Note A 27,576 11,020 STOCKHOLDERS' EQUITY--Notes J and O: Common stock, no par value, 10,000,000 shares authorized; issued and outstanding: 1998 -- 6,344,886 shares 1997 -- 6,238,056 shares 51,868 50,312 Retained earnings (2,019) (4,553) Market value adjustment (net of tax effect) for investment securities available for sale (accumulated other comprehensive income) 168 143 ----------- --------- 50,017 45,902 Less unallocated ESOP shares--Note K (725) (870) ----------- --------- Total stockholder's equity 49,292 45,032 ----------- --------- TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 1,024,444 $ 690,556 =========== =========
See notes to consolidated financial statements. 41 43 CONSOLIDATED STATEMENTS OF INCOME
- Year Ended December 31 - 1998 1997 1996 ------- ------- ------- (in thousands, except per share data) Interest income: Portfolio loans (including fees) $59,132 $42,448 $31,454 Loans held for resale 1,529 536 819 Taxable investment securities 3,765 3,525 2,262 Federal funds sold 5,013 2,805 1,541 Interest-bearing deposits with banks and other 118 33 60 Dividends on investment securities 111 202 343 ------- ------- ------- Total interest income 69,668 49,549 36,479 Interest expense: Demand deposits 7,211 4,111 2,418 Savings deposits 1,487 1,544 1,384 Time deposits 25,450 18,445 13,490 Debt obligations 2,486 752 496 Other 36 12 ------- ------- ------- Total interest expense 36,670 24,852 17,800 ------- ------- ------- Net interest income 32,998 24,697 18,679 Provision for loan losses--Note D 3,523 2,049 1,196 ------- ------- ------- Net interest income after provision for loan losses 29,475 22,648 17,483 Noninterest income: Service charges on deposit accounts 1,202 859 746 Trust fee income 472 355 262 Fees from origination of non-portfolio residential mortgage loans 1,383 298 200 Realized gain on sale of investment securities available for sale 2 69 82 Other 499 576 415 ------- ------- ------- Total noninterest income 3,558 2,157 1,705 Noninterest expense: Salaries and employee benefits 13,376 8,394 6,387 Occupancy 2,373 1,421 924 Equipment rent, depreciation and maintenance 3,030 2,052 1,011 Deposit insurance premiums 121 88 425 Other 6,921 4,405 3,560 ------- ------- ------- Total noninterest expense 25,821 16,360 12,307 ------- ------- ------- Income before federal income taxes 7,212 8,445 6,881 Federal income taxes--Note L 2,584 2,888 2,245 ------- ------- ------- NET INCOME $ 4,628 $ 5,557 $ 4,636 ======= ======= ======= NET INCOME PER SHARE--Note Q: Basic $ 0.74 $ 0.91 $ 0.85 ======= ======= ======= Diluted $ 0.72 $ 0.88 $ 0.82 ======= ======= =======
See notes to consolidated financial statements. 42 44 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated Other Unallocated Common Retained Comprehensive ESOP Stock Earnings Income Shares Total ----- -------- ------ ------ ----- Balances at January 1, 1996 $22,150 $ 8,414 $413 $(112) $30,865 Issuance of 606,446 shares of common stock upon exercise of warrants 4,543 4,543 Issuance of 213,457 shares of common stock upon exercise of stock options 1,549 1,549 Issuance of 20,360 shares of common stock pursuant to Shareholder Investment Plan 179 179 Issuance of 491,284 shares of common stock upon distribution of 10% stock dividend 6,551 (6,553) (2) Allocation of shares to ESOP participants' accounts 112 112 Cash dividends paid ($.24 per share) (1,347) (1,347) Components of comprehensive income: Net income for 1996 4,636 4,636 Market value adjustment for investment securities available for sale (net of tax effect) (376) (376) ------- Total comprehensive income for 1996 4,260 ------- ------- ---- ----- ------- BALANCES AT DECEMBER 31, 1996 34,972 5,150 37 40,159 Issuance of 189,728 shares of common stock upon exercise of warrants 1,292 1,292 Issuance of 75,758 shares of common stock upon exercise of stock options 619 (1,015) (396) Issuance of 566,676 shares of common stock upon distribution of 10% stock dividend 13,429 (13,429) Allocation of shares to ESOP participants' accounts 145 145 Cash dividends paid ($.30 per share) (1,831) (1,831) Components of comprehensive income: Net income for 1997 5,557 5,557 Market value adjustment for investment securities available for sale (net of tax effect) 106 106 ------ Total comprehensive income for 1997 5,663 ------- ------- ---- ----- ------- BALANCES AT DECEMBER 31, 1997 50,312 (4,553) 143 (870) 45,032 Issuance of 73,852 shares of common stock upon exercise of stock options 816 816 Issuance of 33,205 shares of common stock to acquire minority interest in bank subsidiary 745 745 Allocation of shares to ESOP participants' accounts 145 145 Cash dividends paid ($.33 per share) (2,094) (2,094) Cash in lieu of fractional shares upon issuance of stock split (5) (5) Components of comprehensive income: Net income for 1998 4,628 4,628 Market value adjustment for investment securities available for sale (net of tax effect) 25 25 ------- Total comprehensive income for 1998 4,653 ------- ------- ---- ----- ------- BALANCES AT DECEMBER 31, 1998 $51,868 $(2,019) $168 $(725) $49,292 ======= ======= ==== ===== =======
See notes to consolidated financial statements. 43 45 Consolidated Statements of Cash Flows
- Year Ended December 31 - 1998 1997 1996 --------- --------- --------- (in thousands) OPERATING ACTIVITIES Net income $ 4,628 $ 5,557 $ 4,636 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 3,523 2,049 1,196 Depreciation of premises and equipment 2,025 1,325 653 Amortization of goodwill and other intangibles 225 193 193 Net accretion of investment security discounts (174) (315) (267) Loss on sale of premises and equipment 51 486 7 Deferred income taxes (1,657) (842) (550) Originations and purchases of loans held for resale (361,769) (142,254) (192,643) Proceeds from sales of loans held for resale 336,406 137,577 192,923 Increase in accrued interest income and other assets (2,818) (3,065) (1,301) Increase in accrued interest on deposits and other liabilities 2,860 1,263 503 --------- --------- --------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (16,700) 1,974 5,350 INVESTING ACTIVITIES Proceeds from sales of investment securities available for sale 1,005 5,943 4,461 Proceeds from maturities of investment securities available for sale 64,266 34,262 39,742 Purchases of investment securities available for sale (87,049) (55,481) (56,882) Net increase in portfolio loans (222,460) (145,529) (74,457) Proceeds from sales of premises and equipment 38 407 13 Purchases of premises and equipment (6,181) (4,376) (3,656) --------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES (250,381) (164,774) (90,779) FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts and savings accounts 137,953 74,259 43,902 Net increase in certificates of deposit 148,530 93,982 51,977 Net proceeds from (payments on) debt obligations 23,600 (6,500) (2,100) Resources provided by minority interest 16,556 6,289 4,730 Net proceeds from issuance of common stock 816 1,912 6,271 Net proceeds from issuance of trust-preferred securities 24,126 Cash dividends paid and payments in lieu of fractional shares (2,099) (1,831) (1,349) --------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 325,356 192,237 103,431 --------- --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 58,275 29,437 18,002 Cash and cash equivalents at beginning of year 92,770 63,333 45,331 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 151,045 $ 92,770 $ 63,333 ========= ========= =========
See notes to consolidated financial statements. 44 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE A--NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION Capitol Bancorp Ltd. (the "Corporation") is a multibank holding company. Consolidated subsidiaries consist of the following:
Percentage Year Formed Affiliate Location Owned or Acquired - ------------------------------------- ------------------------------- ------------- ------------------ Ann Arbor Commerce Bank Ann Arbor, Michigan 100% 1990 Brighton Commerce Bank Brighton, Michigan 59% 1997 Capitol National Bank Lansing, Michigan 100% 1982 Detroit Commerce Bank Detroit, Michigan 93% 1998 Grand Haven Bank Grand Haven, Michigan 100% 1995 Kent Commerce Bank Grand Rapids, Michigan 51% 1998 Macomb Community Bank Clinton Township, Michigan 51% 1996 Muskegon Commerce Bank Muskegon, Michigan 51% 1997 Oakland Commerce Bank Farmington Hills, Michigan 100% 1992 Paragon Bank & Trust Holland, Michigan 100% 1994 Portage Commerce Bank Portage, Michigan 100% 1990 Sun Community Bancorp Ltd.: 51% 1997 Bank of Tucson Tucson, Arizona 1996 Camelback Community Bank Phoenix, Arizona 1998 Mesa Bank Mesa, Arizona 1998 Southern Arizona Community Bank Tucson, Arizona 1998 Sunrise Bank of Arizona Phoenix, Arizona 1998 Valley First Community Bank Scottsdale, Arizona 1997
Sun Community Bancorp Limited ("Sun") was formed in 1997 and became a majority-owned subsidiary as a result of a share exchange with the shareholders of Bank of Tucson. In that share exchange, Bank of Tucson (previously a majority-owned direct subsidiary of Capitol Bancorp Ltd.) then became a wholly-owned subsidiary of Sun. Consolidated subsidiaries of Sun, exclusive of Bank of Tucson, are approximately 51% owned by Sun. Sun raised additional capital in 1998 through private stock offerings aggregating $17 million, including $8.7 million invested by Capitol Bancorp. The Corporation and its subsidiaries are engaged in a single business activity--banking. The bank affiliates provide a full range of banking services to individuals, businesses and other customers located in their respective communities. Each of the banks generally operate from a single location and focus their activities on meeting the various credit and other banking needs of entrepreneurs, professionals and other high net-worth individuals. A variety of deposit products are offered, including checking, savings, money market, individual retirement accounts and certificates of deposit. In addition, trust services are offered through Paragon Bank & Trust. The principal markets for the banks' financial services are the communities in which they are located and the areas immediately surrounding those communities. In addition to commercial 45 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE A--NATURE OF OPERATIONS, BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION--Continued banking units, mortgage banking activities are offered through Amera Mortgage Corporation, a 49% owned affiliate, and Sun Community Mortgage Company, a wholly-owned subsidiary of Bank of Tucson. Financial Accounting Standards Board ("FASB") Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" became effective for and has been implemented by the Corporation in 1998. This new accounting standard revises the definition of reportable `segments' and the presentation of related disclosures. The standard focuses on the identification of reportable segments on the basis of discreet business units and their financial information to the extent such units are reviewed by an entity's `chief decision maker' (which can be an individual or group of management persons). The Statement permits aggregation or combination of segments which have similar characteristics. In the Corporation's operations, each bank is viewed by management as being a separately identifiable business or segment from the perspective of monitoring performance and allocation of financial resources. Although the banks operate independently and are managed and monitored separately, each bank is substantially similar in terms of business focus, type of customers, products and services. Further, each of the banks and the Corporation are subject to substantially similar laws and regulations unique to the banking industry. Accordingly, the Corporation's consolidated financial statements reflect the presentation of segment information on an aggregated basis. The consolidated financial statements include the accounts of the Corporation and its majority-owned subsidiaries, after elimination of intercompany accounts and transactions, and after giving effect to applicable minority interests. Banks formed or otherwise acquired during 1996, 1997 and 1998 are included in the consolidated financial statements for periods after joining the consolidated group. Certain 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation. NOTE B--SIGNIFICANT ACCOUNTING POLICIES Estimates: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 46 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE B--SIGNIFICANT ACCOUNTING POLICIES--Continued Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds transactions are entered into for a one-day period. Loans Held For Resale: Loans held for resale represent residential real estate mortgage loans held for sale into the secondary market. Loans held for resale are stated at the aggregate lower of cost or market. Investment Securities: Investment securities "available for sale" (generally most debt securities investments of the Corporation), are carried at market value with unrealized gains and losses reported as a separate component of stockholders' equity, net of tax effect (accumulated other comprehensive income). All other investment securities are classified as held for long-term investment and are carried at amortized cost which approximates market value (see Note C). Investments are classified at the date of purchase based on management's analysis of liquidity and other factors. The adjusted cost of the specific securities sold is used to compute realized gains or losses. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Loans, Credit Risk and Allowance for Loan Losses: Portfolio loans are carried at their principal balance based on management's intent and ability to hold such loans for the foreseeable future until maturity or repayment. Credit risk arises from making loans and loan commitments in the ordinary course of business. Substantially all portfolio loans are made to borrowers in the banks' geographic areas. Consistent with the banks' emphasis on business lending, there are concentrations of credit in loans secured by commercial real estate, equipment and other business assets. The maximum potential credit risk to the Corporation, without regard to underlying collateral and guarantees, is the total of loans and loan commitments outstanding. Management reduces the Corporation's exposure to losses from credit risk by requiring collateral and/or guarantees for loans granted and by monitoring concentrations of credit, in addition to recording provisions for loan losses and maintaining an allowance for loan losses. The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the portfolio. Management's determination of the adequacy of the allowance is based on evaluation of the portfolio (including potential impairment of individual loans and concentrations of credit), past loss experience, current economic conditions, volume, amount and composition of the loan portfolio, loan commitments outstanding and other factors. The allowance is increased by provisions charged to operations and reduced by net charge-offs. 47 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED Interest and Fees on Loans: Interest income on loans is recognized based upon the principal balance of loans outstanding. Fees from origination of portfolio loans approximate related costs incurred. The accrual of interest is generally discontinued when a loan becomes 90 days past due as to interest. When interest accruals are discontinued, interest previously accrued (but unpaid) is reversed. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest and the loan is in process of collection. Premises and Equipment: Premises and equipment are stated on the basis of cost. Depreciation is computed principally by the straight-line method based upon estimated useful lives of the respective assets. Leasehold improvements are generally depreciated over the respective lease term. Excess of Cost Over Net Assets of Acquired Subsidiaries: Goodwill is amortized on a straight-line basis over various periods not to exceed 15 years. Management periodically reviews long-lived assets, including associated goodwill, for potential impairment based upon projected undiscounted net cash flows, when applicable, and the related amortization periods. Other Real Estate: Other real estate (included as a component of other assets and which, at December 31, 1998 and 1997 approximated $541,000 and $165,000, respectively) comprises properties acquired through a foreclosure proceeding or acceptance of a deed in lieu of foreclosure. These properties held for sale are carried at the lower of cost or estimated fair value (net of estimated selling cost) at the date acquired and are periodically reviewed for subsequent impairment. Stock-Based Compensation: No stock-based compensation expense is recorded upon granting of stock options, because such stock options are accounted for under the provisions of Accounting Principles Board (APB) Opinion 25 and are granted at an exercise price equal to the market price of common stock at grant date. Pro forma disclosure of alternative accounting recognition is made elsewhere herein (see Note J). Trust Assets and Related Income: Customer property, other than funds on deposit, held in a fiduciary or agency capacity by the Corporation's banks is not included in the consolidated balance sheet because such property is not an asset of the banks or the Corporation. Trust fee income is recorded on the accrual method. 48 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE B--SIGNIFICANT ACCOUNTING POLICIES--CONTINUED Federal Income Taxes: The Corporation and subsidiaries owned 80% or more by the Corporation file a consolidated federal income tax return. Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred income taxes of a change in tax laws or rates is recognized in income in the period that includes the enactment date. Comprehensive Income: "Comprehensive income", as that term is defined in FASB Statement No. 130, is the sum of net income and certain other items which are charged or credited to stockholders' equity. For the periods presented, the Corporation's only element of comprehensive income other than net income was the net change in the market value adjustment for investment securities available for sale. Accordingly, the elements and total of comprehensive income are shown within the statement of changes in stockholders' equity presented herein. Implementation of this new accounting standard in 1998 had no impact on the Corporation's consolidated financial position or results of operations. NOTE C--INVESTMENT SECURITIES Investment securities consisted of the following at December 31 (in thousands):
1998 1997 --------------------------------- --------------------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value -------------- --------------- --------------- -------------- Available for sale: United States Treasury securities $35,123 $35,307 $24,132 $24,243 United States government agency securities 45,322 45,360 36,298 36,407 States and political subdivisions 2,897 2,930 1,610 1,603 ------- ------- ------- ------- 83,342 83,597 62,040 62,253 Held for long-term investment: Federal Reserve Bank stock 116 116 116 116 Federal Home Loan Bank stock 1,431 1,431 1,073 1,073 Corporate stock 1,320 1,320 1,028 1,028 ------- ------- ------- ------- 2,867 2,867 2,217 2,217 ------- ------- ------- ------- $86,209 $86,464 $64,257 $64,470 ======= ======= ======= =======
At December 31, 1998, securities with a market value approximating $7 million were pledged to secure public and trust deposits and for other purposes as required by law. 49 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE C--INVESTMENT SECURITIES--CONTINUED Gross unrealized gains and losses on investment securities available for sale were as follows (in thousands):
- December 31 - 1998 1997 ---------------------- ------------------ Gains Losses Gains Losses ----- ------ ----- ------ United States Treasury securities $185 $ 1 $112 $ 1 United States government agency securities 131 93 142 33 States and political subdivisions 33 2 9 ---- ---- ---- ---- $349 $ 94 $256 $ 43 ---- ---- ---- ----
Gross realized gains and losses from sales and maturities of investment securities were insignificant for each of the periods presented. Scheduled maturities of investment securities held as of December 31, 1998 were as follows (in thousands):
Estimated Amortized Market Cost Value -------------- -------------- Due in one year or less $40,653 $40,728 After one year, through five years 37,744 37,928 After five years, through ten years 2,089 2,088 After ten years 2,856 2,853 Securities held for long-term investment, without stated maturities 2,867 2,867 ------- ------- $86,209 $86,464 ======= =======
NOTE D--LOANS Transactions in the allowance for loan losses are summarized below (in thousands):
1998 1997 1996 -------------- -------------- -------------- Balance at January 1 $ 6,229 $ 4,578 $ 3,687 Provision charged to operations 3,523 2,049 1,196 Loans charged off (deduction) (1,305) (718) (438) Recoveries 370 320 133 ------- ------- ------- Balance at December 31 $ 8,817 $ 6,229 $ 4,578 ======= ======= =======
50 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE D--LOANS--CONTINUED Certain commercial loans are enrolled in a loan program sponsored by the State of Michigan. Under that program, the governmental unit shares loss exposure on such loans by funding reserves, which are placed as deposits at the banks. Loans participating in this program and related reserves approximated $24,870,000 and $1,953,000, respectively, at December 31, 1998 ($18,719,000 and $1,788,000, respectively, at December 31, 1997). Such reserve amounts are separate and excluded from the allowance for loan losses. At December 31, 1998 and 1997, impaired loans (i.e., loans for which there is a reasonable probability that borrowers would be unable to repay all principal and interest due under the contractual terms of the loan documents) were not material. NOTE E--RELATED PARTIES TRANSACTIONS In the ordinary course of business, the Corporation's banking subsidiaries make loans to officers and directors of the Corporation and its subsidiaries including their immediate families and companies in which they are principal owners. At December 31, 1998 and 1997, total loans to these persons approximated $59,939,000 and $28,962,000, respectively. During 1998, $52,397,000 of new loans were made to these persons and repayments totaled $21,420,000. Such loans are made at the banking subsidiaries' normal credit terms. Such officers and directors of the Corporation (and their associates, family and/or affiliates) are also depositors of the banking subsidiaries. Such deposits are similarly made at the banks' normal terms as to interest rate, term and deposit insurance. NOTE F--PREMISES AND EQUIPMENT Major classes of premises and equipment consisted of the following (in thousands):
- December 31 - 1998 1997 -------- -------- Land, buildings and improvements $ 2,795 $ 1,975 Leasehold improvements 3,789 2,109 Equipment and furniture 9,485 6,561 -------- -------- 16,069 10,645 Less accumulated depreciation (4,423) (3,066) -------- -------- $ 11,646 $ 7,579 ======== ========
The Corporation and certain subsidiaries rent office space under operating leases. Rent expense (net of sublease income) under these lease agreements approximated $1,577,000, $958,000 and $614,000 (including rent expense of $893,000, $506,000 and $222,000 under leases with related parties) in 1998, 1997, and 1996, respectively. Future minimum rental payments under operating 51 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE F--PREMISES AND EQUIPMENT--CONTINUED leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1998 aggregate $18,374,000 due as follows: $2,191,000 in 1999, $2,208,000 in 2000, $1,995,000 in 2001, $2,005,000 in 2002, $1,882,000 in 2003 and $8,093,000 thereafter. NOTE G--DEPOSITS The aggregate amount of time deposits of $100,000 or more approximated $221.1 million and $139.9 million as of December 31, 1998 and 1997, respectively. At December 31, 1998, the scheduled maturities of such time deposits were as follows (in thousands): 1999 $ 182,008 2000 25,627 2001 6,419 2002 743 2003 and thereafter 6,303 --------- $ 221,100 =========
Interest paid approximates amounts charged to operations on an accrual basis for the periods presented. NOTE H--DEBT OBLIGATIONS Debt obligations consisted of the following (in thousands):
- December 31 - 1998 1997 -------------- -------------- Short-term borrowings from Federal Home Loan Bank $ 14,000 Notes payable to unaffiliated bank 9,600 ---------- ------ $ 23,600 $ 0 ========== ======
Short-term borrowings from Federal Home Loan Bank of Indianapolis in 1998 represented advances secured by certain portfolio residential real estate mortgage loans. Such advances become due at varying dates, generally within one year, and bear interest at market short-term rates. At December 31, 1998, unused lines of credit under these facilities approximated $1.1 million. 52 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE H--DEBT OBLIGATIONS--CONTINUED Notes payable to unaffiliated bank at December 31, 1998 represented borrowings under lines of credit. As amended and increased in early 1999, up to $20 million can be borrowed pursuant to a one-year revolving credit agreement which bears interest at a rate slightly less than prime rate (effectively 7.50% at December 31, 1998), payable monthly. The credit facility is reviewed annually for continuance and requires the Corporation, among other things, to maintain certain minimum levels of capital, rates of return on assets and other ratios or requirements and is secured by the common stock of certain bank subsidiaries. Interest paid under this credit facility approximated $5,000 in 1998, $562,000 in 1997 and $342,000 in 1996. NOTE I--TRUST-PREFERRED SECURITIES On December 19, 1997, the Corporation and a subsidiary (Capitol Trust I) completed a public offering of trust-preferred securities. Under the terms of the offering, Capitol Trust I (of which the Corporation owns 100% of the common interests of the Trust) issued 2,530,000 shares of preferred securities, $10 liquidation amount per preferred security. Gross proceeds from the offering aggregated $25.3 million. Upon receipt of the proceeds of the offering, Capitol Trust I purchased subordinated debentures of the Corporation of like amount, which bear interest at 8.5% payable quarterly and which mature in 2027 (which may be extended to 2036 if certain conditions are met) and are callable after 2002. The liquidation amount of the trust-preferred securities is guaranteed by the Corporation. Interest paid to the Trust by the Corporation (which is recorded as interest expense in its consolidated financial statements) is distributed by the Trust to the holders of the trust-preferred securities. Under certain conditions, the Corporation may defer payment of interest on the subordinated debentures for periods of up to five years. Because Capitol Trust I is a subsidiary (due to the Corporation's ownership of the common interests of the Trust), Capitol Trust I is consolidated with the Corporation for financial reporting purposes. The amount of outstanding trust-preferred securities (net of issuance costs which are being amortized over the life of the securities) is classified between liabilities and equity in the Corporation's consolidated balance sheet. Under current regulatory guidelines, such trust-preferred securities are included as capital for purposes of meeting certain ratio requirements. NOTE J--COMMON STOCK AND STOCK OPTIONS In December 1998 a 6-for-5 stock split occurred. In 1997 and 1996, the Corporation issued stock dividends of 10%. All share and per share data have been restated to reflect the stock split as if it had occurred at the beginning of the periods presented. Per share data has been restated for stock dividends. 53 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE J--COMMON STOCK AND STOCK OPTIONS--CONTINUED Stock options have been granted to certain officers which provide for the purchase of shares of common stock. Generally, stock options are granted at an exercise price equal to the fair value of common stock on the grant date, expire seven years after grant, and are currently exercisable. Under the terms of an employment agreement with a certain director and executive officer of the Corporation, options granted thereunder shall be increased when the Corporation issues additional shares so that such options granted equal 15% of outstanding shares prior to exercise. In addition, certain other stock options resulted from a 1994 merger transaction. Stock option activity is summarized as follows:
Weighted Number of Average Options Exercise Exercise Outstanding Price Range Price -------------- --------------------------- ------------ Outstanding at January 1, 1996 580,775 $ 4.92 to $ 8.75 $ 6.59 Granted in 1996 237,901 8.49 to 13.54 10.84 Exercised in 1996 (213,457) 5.23 to 6.06 5.72 Expired in 1996 (336) $4.92 4.92 -------- --------------------------- ------- Outstanding at December 31, 1996 604,883 4.92 to 13.54 8.57 Granted in 1997 149,384 12.40 to 25.10 21.20 Exercised in 1997 (75,758) 4.92 to 13.25 6.20 Expired in 1997 (6,653) 4.92 4.92 -------- --------------------------- ------- Outstanding at December 31, 1997 671,856 4.92 to 25.10 11.63 Granted in 1998 18,710 17.23 to 24.38 20.94 Exercised in 1998 (73,852) 4.92 to 13.25 6.80 Expired/other in 1998 1,000 -------- --------------------------- ------- Outstanding at December 31, 1998 617,714 $ 4.92 to $25.10 $ 12.48
As of December 31, 1998, stock options outstanding had a weighted average remaining contractual life of 4.2 years. As of that date, stock options with an exercise price of $15.00 or less had a weighted average exercise price of $9.62 and a weighted average remaining contractual life of 3.8 years; stock options with an exercise price of more than $15.00 had a weighted average exercise price of $24.45 and a weighted average remaining contractual life of 6 years. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", establishes a fair value method of accounting for stock options whereby compensation expense is recognized based on the computed fair value of the options on the grant date. However, as permitted by Statement No. 123, the Corporation accounts for its stock options under APB 25 and, therefore, does not recognize compensation expense. By electing 54 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE J--COMMON STOCK AND STOCK OPTIONS--CONTINUED this alternative, certain pro forma disclosures of the expense recognition provisions of Statement No. 123 are required, which are as follows:
1998 1997 1996 -------------- -------------- -------------- Fair value assumptions: Risk-free interest rate 5.0% 7.5% 7.5% Dividend yield 1.5% 2.0% 2.0% Stock price volatility .41 .36 .36 Expected option life 7 years 7 years 7 years Pro forma net income (in thousands) $4,521 $4,700 $4,300 Pro forma net income per diluted share $.70 $.74 $.76
NOTE K--EMPLOYEE RETIREMENT PLANS The Corporation has a contributory employee retirement savings 401(k) plan which covers substantially all full-time employees of the Corporation and certain subsidiaries over age 21. The Plan provides for contributions by the Corporation in amounts determined annually by the board of directors. Eligible employees make voluntary contributions to the Plan. Contributions to the Plan, which are an employer match (50%, subject to certain limitations) for employee contributions, charged to expense for the years ended December 31, 1998, 1997 and 1996 were $182,000, $111,000 and $88,000, respectively. The Corporation also has a defined contribution employee stock ownership plan ("ESOP") which covers substantially all employees of the Corporation and certain subsidiaries. Certain common stock purchases by the ESOP were financed by long-term debt. ESOP contributions charged to expense in 1998, 1997 and 1996 approximated $256,000, $180,000 and $131,000 (including ESOP note payable interest of $74,000, $51,000 and $8,400), respectively. Shares of common stock held by the ESOP which have not yet been allocated to participants' accounts are shown as a reduction of stockholders' equity. As of December 31, 1998, the ESOP held 154,000 shares of the Corporation's common stock which have been allocated to participants' accounts and 59,200 shares of common stock (with an approximate fair value of $1.2 million) which have not yet been allocated to participants' accounts. NOTE L--INCOME TAXES Federal income taxes consist of the following components (in thousands):
1998 1997 1996 -------------- -------------- -------------- Current $ 4,241 $ 3,730 $ 2,795 Deferred Credit (1,657) (842) (550) --------- -------- -------- $ 2,584 $ 2,888 $ 2,245 ========= ======== ========
55 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE L--INCOME TAXES--CONTINUED Federal income taxes paid during 1998, 1997 and 1996 approximated $2,975,000, $3,639,000 and $2,451,000 respectively. Differences between federal income tax expense recorded and amounts computed using the statutory tax rate are reconciled below (in thousands):
1998 1997 1996 -------------- -------------- -------------- Federal income tax computed at statutory rate of 34% $ 2,452 $ 2,871 $ 2,339 Tax effect of: Amortization of goodwill 77 66 66 Other 55 (49) (160) --------- --------- --------- $ 2,584 $ 2,888 $ 2,245 ========= ========= =========
Net deferred income tax assets consisted of the following (in thousands):
- December 31 - 1998 1997 -------------- -------------- Allowance for loan losses $ 2,726 $ 1,925 Deferred compensation 463 363 Market value adjustment for investment securities available for sale (80) (72) Other, net 1,530 412 --------- --------- $ 4,639 $ 2,628 ========= =========
56 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE M--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying values and estimated fair values of financial instruments were as follows (in thousands):
- December 31 - 1998 1997 --------------------------------- ---------------------------------- Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value -------------- -------------- --------------- --------------- Financial Assets: Cash and cash equivalents $ 151,045 $ 151,045 $ 92,770 $ 92,770 Loans held for resale 36,789 36,789 11,426 11,426 Investment securities: Available for sale 83,597 83,597 62,253 62,253 Held for long-term investment 2,867 2,867 2,217 2,217 --------- --------- --------- --------- 86,464 86,464 64,470 64,470 Portfolio loans: Fixed rate 482,276 482,460 327,096 327,517 Variable rate 242,004 241,938 175,659 174,399 --------- --------- --------- --------- Total portfolio loans 724,280 724,398 502,755 501,916 Less allowance for loan losses (8,817) (8,817) (6,229) (6,229) --------- --------- --------- --------- Net portfolio loans 715,463 715,581 496,526 495,687 Financial Liabilities: Deposits: Noninterest-bearing deposits 120,986 120,986 83,487 83,487 Interest-bearing deposits: Demand accounts 247,139 247,188 156,376 156,706 Time certificates of deposit less than $100,000 301,665 305,303 224,606 227,438 Time certificates of deposit of $100,000 or more 221,100 223,766 139,938 140,276 --------- --------- --------- --------- Total interest-bearing deposits 769,904 776,257 520,920 524,420 --------- --------- --------- --------- Total deposits 890,890 897,243 604,407 607,907 Debt obligations 23,600 23,596 Trust-preferred securities 24,255 25,300 24,126 25,300
Estimated fair values of financial assets and liabilities are based upon a comparison of current interest rates on financial instruments and the timing of related scheduled cash flows to the estimated present value of such cash flows using current estimated market rates of interest unless quoted market values or other fair value information is more readily available. Such estimates of fair value are not intended to represent market value or portfolio liquidation value, and only represent an estimate of fair values based on current financial reporting requirements. 57 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE N--COMMITMENTS AND CONTINGENCIES In the ordinary course of business, various loan commitments are made to accommodate the financial needs of bank customers. Such loan commitments include stand-by letters of credit, lines of credit, and various commitments for other commercial, installment and mortgage loans. Stand-by letters of credit, when issued, commit the bank to make payments on behalf of customers if certain specified future events occur and are used infrequently by the banks ($8,813,000 and $5,162,000 outstanding at December 31, 1998 and 1997, respectively). Other loan commitments outstanding consist of unused lines of credit and approved, but unfunded, specific loan commitments ($145,028,000 and $109,402,000 at December 31, 1998 and 1997, respectively). These loan commitments (stand-by letters of credit and unfunded loans) generally expire within one year and are reviewed periodically for continuance or renewal. All loan commitments have credit risk essentially the same as that involved in routinely making loans to customers and are made subject to the banks' normal credit policies. In making these loan commitments, collateral and/or personal guarantees of the borrowers are generally obtained based on management's credit assessment. Such loan commitments are also included in management's evaluation of the adequacy of the allowance for loan losses. The Corporation's banking subsidiaries are required to maintain average reserve balances in the form of cash on hand and balances due from the Federal Reserve Bank and certain correspondent banks. The amount of reserve balances required as of December 31, 1998 and 1997 were $1,845,000 and $1,914,000, respectively. Deposits at each of the banks are insured up to the maximum amount covered by FDIC insurance. To supplement deposit insurance coverage, certain municipal government deposits at some of the banks have their deposits guaranteed by the Corporation ($21.2 million at December 31, 1998). NOTE O--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS Current banking regulations restrict the ability to transfer funds from subsidiaries to the Corporation in the form of cash dividends, loans or advances. Subject to various regulatory capital requirements, bank subsidiaries' current and retained earnings are available for distribution as dividends to the Corporation (and other bank shareholders, as applicable) without prior approval from regulatory authorities. Substantially all of the remaining net assets of the subsidiaries are restricted as to payments to the Corporation. Each bank and the Corporation are subject to certain other capital requirements. Federal financial institution regulatory agencies have established certain risk-based capital guidelines for 58 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE O--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS--CONTINUED banks and bank holding companies. Those guidelines require all banks and bank holding companies to maintain certain minimum ratios and related amounts based on `Tier I' and `Tier II' capital and `risk-weighted assets' as defined and periodically prescribed by the respective regulatory agencies. Failure to meet these capital requirements can result in severe regulatory enforcement action or other adverse consequences for a depository institution and, accordingly, could have a material impact on the Corporation's consolidated financial statements. Under the regulatory capital adequacy guidelines and related framework for prompt corrective action, the specific capital requirements involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgements by regulatory agencies with regard to components, risk weighting and other factors. As a condition of their charter approval, de novo banks are generally required to maintain a core capital (Tier I) to assets ratio of not less than 8% and an allowance for loan losses of not less than 1% for the first three years of operations. As of December 31, 1998, the most recent notifications received by the banks from regulatory agencies have advised that the banks are classified as "well capitalized" as defined by the applicable agencies. There are no conditions or events since those notifications that management believes would change the regulatory classification of the banks. Management believes, as of December 31, 1998, that the Corporation and the banks meet all capital adequacy requirements to which the entities are subject. The following table summarizes the amounts (in thousands) and related ratios of the individually significant subsidiaries (assets of $125 million or more at December 31, 1998) and consolidated regulatory capital position as of December 31, 1998 and 1997: 59 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE O--DIVIDEND LIMITATIONS OF SUBSIDIARIES AND OTHER CAPITAL REQUIREMENTS--CONTINUED
Sun Ann Arbor Capitol Community Commerce National Bancorp Bank Bank Limited Consolidated ------------- -------------- --------------- --------------- December 31, 1998 Total capital to total assets: Minimum required amount => $ 7,858 => $ 5,471 => $ 5,411 => $40,978 Actual amount $12,901 $ 9,759 $26,627 $50,017 Ratio 6.57% 7.14% 19.68% 4.88% Tier I capital to risk-weighted assets: Minimum required amount(1) => $ 5,898 => $ 4,178 => $ 3,397 => $29,262 Actual amount $12,906 $ 9,750 $35,102 $98,143 Ratio 8.75% 9.34% 41.33% 13.42% Combined Tier I and Tier II capital to risk-weighted assets: Minimum required amount(2) => $11,797 => $ 8,355 => $ 6,795 => $58,525 Amount required to meet "Well-Capitalized" category(3) => $14,746 => $10,444 => $ 8,494 => $73,156 Actual amount $14,752 $11,057 $35,798 $106,842 Ratio 10.00% 10.59% 42.15% 14.60% December 31, 1997 Total capital to total assets: Minimum required amount => $ 5,536 => $ 5,062 => $ 2,200 => $27,622 Actual amount $ 9,759 $ 8,893 $ 9,691 $45,903 Ratio 7.05% 7.03% 17.62% 6.65% Tier I capital to risk-weighted assets: Minimum required amount(1) => $ 4,298 => $ 3,631 => $ 1,474 => $19,961 Actual amount $ 9,746 $ 8,888 $11,236 $71,142 Ratio 9.07% 9.79% 30.49% 14.26% Combined Tier I and Tier II capital to risk-weighted assets: Minimum required amount(2) => $ 8,596 => $ 7,263 => $ 2,948 => $39,922 Amount required to meet "Well-Capitalized" category(3) => $10,745 => $ 9,079 => $ 3,685 => $49,903 Actual amount $11,092 $10,024 $11,553 $82,898 Ratio 10.32% 11.04% 31.35% 16.61%
(1) The minimum required ratio of Tier I capital to risk-weighted assets is 4%. (2) The minimum required ratio of Tier I and Tier II capital to risk-weighted assets is 8%. (3) In order to be classified as a `well-capitalized' institution, the ratio of Tier I and Tier II capital to risk-weighted assets must be 10% or more. 60 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE P--PARENT COMPANY FINANCIAL INFORMATION CONDENSED BALANCE SHEETS
- Year Ended December 31 - 1998 1997 -------------- -------------- (in thousands) ASSETS Cash on deposit with subsidiary banks $ 1 $ 35 Money market funds on deposit with subsidiary banks 4 13,182 Investment securities held for long-term investment 649 318 Investment in subsidiaries 75,673 49,364 Notes receivable 1,105 1,105 Investment in and advances to Amera Mortgage Corporation 3,037 2,913 Equipment and furniture, net 727 170 Excess of cost over net assets of acquired subsidiaries 2,172 2,154 Other assets 3,553 2,646 ------- ------- TOTAL ASSETS $86,921 $71,887 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable, accrued expenses and other liabilities $ 2,992 $ 1,946 Debt obligations payable to unaffiliated entities 9,600 Subordinated debentures 25,037 24,909 ------- ------- Total liabilities 37,629 26,855 Stockholders' equity 49,292 45,032 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $86,921 $71,887 ======= =======
CONDENSED STATEMENTS OF INCOME
- Year Ended December 31 - 1998 1997 1996 --------------- --------------- -------------- (in thousands) Income: Dividends from subsidiaries $ 2,600 $ 2,100 $ 2,690 Intercompany fees 4,232 3,812 2,046 Interest 394 254 182 Other (162) (183) 312 ------- ------- ------- Total income 7,064 5,983 5,230 Expenses: Interest 2,311 660 386 Salaries and employee benefits 2,524 1,618 1,546 Occupancy 202 171 109 Amortization, equipment rent and depreciation 1,889 1,528 708 Other 1,606 926 653 ------- ------- ------- Total expenses 8,532 4,903 3,402 ------- ------- ------- (1,468) 1,080 1,828 Equity in undistributed net earnings of consolidated subsidiaries 4,810 4,203 2,479 Federal income taxes (credit) (1,286) (274) (329) ------- ------- ------- NET INCOME $ 4,628 $ 5,557 $ 4,636 ======= ======= =======
61 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE P--PARENT COMPANY FINANCIAL INFORMATION--Continued Condensed Statements of Cash Flows
- Year Ended December 31 - 1998 1997 1996 -------------- -------------- --------------- (in thousands) OPERATING ACTIVITIES Net income $ 4,628 $ 5,557 $ 4,636 Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity in undistributed net earnings of subsidiaries (4,810) (4,203) (2,479) Depreciation and amortization 140 260 255 Decrease in amounts due from subsidiaries and other assets (97) (1,602) (681) Increase (decrease) in accounts payable, accrued expenses and other liabilities 1,046 (43) 526 -------- -------- -------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 907 (31) 2,257 INVESTING ACTIVITIES Net cash investment in subsidiaries (21,410) (8,450) (5,202) Net decrease in note receivable due from Amera Mortgage Corporation 294 Purchases of investment securities (316) (25) Proceeds from sales of equipment and furniture 6 4 Purchases of equipment and furniture (716) (99) (81) -------- -------- -------- NET CASH USED BY INVESTING ACTIVITIES (22,436) (8,574) (4,985) FINANCING ACTIVITIES Net borrowings (payments) on debt obligations 9,600 (3,500) (2,100) Net proceeds from issuance of subordinated debentures 24,909 Net proceeds from issuance of common stock 816 1,912 6,271 Cash dividends paid and payments in lieu of fractional shares (2,099) (1,831) (1,349) -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 8,317 21,490 2,822 -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,212) 12,885 94 Cash and cash equivalents at beginning of year 13,217 332 238 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5 $ 13,217 $ 332 ======== ======== ========
62 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITOL BANCORP LIMITED NOTE Q--NET INCOME PER SHARE The computations of basic and diluted earnings per share were as follows (in thousands, except per share amounts):
1998 1997 1996 --------------- --------------- -------------- Numerator--net income for the year $4,628 $5,557 $4,636 ====== ====== ====== Denominator: Weighted average number of shares outstanding (denominator for basic earnings per share) 6,284 6,130 5,477 Effect of dilutive securities: Warrants 16 73 Stock options 141 180 86 ------ ------ ------ Potential dilution 141 196 159 ------ ------ ------ Denominator for diluted earnings per share--weighted average number of shares and potential dilution 6,425 6,326 5,636 ====== ====== ====== Basic earnings per share $ 0.74 $ 0.91 $ 0.85 ====== ====== ====== Diluted earnings per share $ 0.72 $ 0.88 $ 0.82 ====== ====== ======
Additional disclosures regarding stock options are set forth in Note J. 63 65 CAPITOL BANCORP LIMITED - -------------------------------------------------------------------------------- OFFICERS OF THE CORPORATION JOSEPH D. REID Chairman, President and CEO DAVID O'LEARY Secretary ROBERT C. CARR Executive Vice President and Treasurer PAUL R. BALLARD Executive Vice President DAVID K. POWERS Executive Vice President LEE W. HENDRICKSON Senior Vice President and Chief Financial Officer CARL C. FARRAR Senior Vice President JOHN C. SMYTHE Senior Vice President BRUCE A. THOMAS Senior Vice President CRISTIN REID ENGLISH Vice President of Corporate Development and General Counsel MARC A. DEUR Vice President JANET L. HARDIN Vice President CHARLES J. MCDONALD Vice President LINDA D. PAVONA Vice President MARIE D. WALKER Vice President and Controller WILLIAM E. RHEAUME Senior Counsel OTHER CORPORATE INFORMATION CORPORATE OFFICE One Business & Trade Center 200 Washington Square North Lansing, Michigan 48933 (517) 487-6555 www.cbcl.com INDEPENDENT AUDITORS BDO Seidman, LLP Grand Rapids, Michigan SHAREHOLDER INFORMATION ANNUAL MEETING The 1999 Annual Meeting of Capitol Bancorp Ltd. will be held on Tuesday, May 4, 1999 at 4:00 p.m. at the Lansing Center, 333 E. Michigan Avenue, Lansing, Michigan. SHAREHOLDER INVESTMENT PLAN Capitol Bancorp Ltd. offers its shareholders an easy and affordable way to invest in Capitol Bancorp Ltd. common stock through the Shareholder Investment Program. The Program's benefits include features such as reinvestment of dividends in additional common stock, direct deposit of dividends, ability to purchase as little as $50 in common stock as frequently as once a month, and the option to make transfers or gifts of Capitol Bancorp Ltd. common stock to another person free of charge. Participation in the Program is voluntary, and all shareholders are eligible. Purchases under the Program are not currently subject to any brokerage fees or commissions. For further information regarding the Capitol Bancorp Ltd. Shareholder Investment Program or a copy of the Program prospectus, informational brochure and enrollment materials contact UMB Bank, n.a. at (800) 884-4225 or Capitol Bancorp Ltd. at (517) 487-6555. COMMON STOCK TRADING INFORMATION Common stock of Capitol Bancorp Ltd. trades on the Nasdaq National Market Tier of The Nasdaq Stock Market(SM) under the trading symbol "CBCL" . The following brokerage firms make a market in the common stock of Capitol Bancorp Ltd.: ROBERT W. BAIRD & CO., INC. Milwaukee, Wisconsin HOWE BARNES INVESTMENTS, INC. Chicago, Illinois EVEREN SECURITIES, INC. Chicago, Illinois RONEY & CO. INC. Detroit, Michigan FIRST OF MICHIGAN CORPORATION Detroit, Michigan STIFEL, NICOLAUS & COMPANY, INC. St. Louis, Missouri HERZOG, HEINE, GEDULD, INC. Detroit, Michigan COMMON STOCK TRANSFER AGENT UMB Bank, n.a. 928 Grand Avenue P.O. Box 410064 Kansas City, Missouri 64141-0064 Telephone (800) 884-4225 TRUST-PREFERRED SECURITIES TRADING INFORMATION Preferred securities of Capitol Trust I (a subsidiary of Capitol Bancorp Ltd.) trade on the Nasdaq Stock Market(SM) under the trading symbol "CBCLP". THE FOLLOWING BROKERAGE FIRMS MAKE A MARKET IN THE TRUST-PREFERRED SECURITIES OF CAPITOL TRUST I: Robert W. Baird & Co., Inc. - Milwaukee, Wisconsin Howe Barnes Investments, Inc. - Chicago, Illinois Stifel, Nicolaus & Company, Inc. - St. Louis, Missouri TRUST PREFERRED SECURITIES TRUSTEE The First National Bank of Chicago, Chicago, Illinois 64 EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT CAPITOL BANCORP LTD. DECEMBER 31, 1998
PAGE 1 OF 2 STATE OR OTHER JURISDICTION NAME OF SUBSIDIARY OF INCORPORATION - ------------------ ---------------- Consolidated Subsidiaries: - -------------------------- Ann Arbor Commerce Bank Michigan Brighton Commerce Bank (59% owned) Michigan Capitol National Bank United States (national bank) Detroit Commerce Bank (93% owned) Michigan Grand Haven Bank Michigan Kent Commerce Bank (51% owned) Michigan Macomb Community Bank (51% owned) Michigan Muskegon Commerce Bank (51% owned) Michigan Oakland Commerce Bank Michigan Paragon Bank & Trust Michigan Portage Commerce Bank Michigan Sun Community Bancorp Limited (51% owned) Arizona Bank of Tucson (100% owned by Sun Community Bancorp Limited) Arizona Valley First Community Bank (51% owned by Sun Community Bancorp Limited) Arizona Camelback Community Bank (51% owned by Sun Community Bancorp Limited) Arizona Southern Arizona Community Bank (51% owned by Sun Community Bancorp Limited) Arizona Mesa Bank (51% owned by Sun Community Bancorp Limited) Arizona Sunrise Bank of Arizona (51% owned by Sun Community Bancorp Limited) Arizona Capitol Trust I Delaware Unconsolidated Subsidiary: Amera Mortgage Corporation, Inc. Michigan (49% owned equity method investee) Inactive subsidiaries: MOI, Inc. Michigan (wholly-owned subsidiary of Oakland Commerce Bank) Financial Center Corporation Michigan C.B. Services, Inc. Michigan
2 EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT - CONTINUED: CAPITOL BANCORP LTD. DECEMBER 31, 1998 PAGE 2 OF 2 The following summarizes regulatory agencies of the registrant and its subsidiaries: The Corporation's state-chartered banks located in Michigan are regulated by the Financial Institutions Bureau of the Michigan Department of Commerce. Capitol National Bank, as a national bank, is regulated by the Office of the Comptroller of the Currency. Bank subsidiaries located in Arizona are state-chartered and are regulated by the Arizona Corporation Division. Each of the banking subsidiaries, as federally-insured depository institutions, are also regulated by the Federal Deposit Insurance Corporation. As a bank holding company, Capitol Bancorp Ltd. is regulated by the Federal Reserve Board, which also regulates its nonbanking subsidiaries. Sun Community Bancorp Limited is also regulated by the Federal Reserve Board. In addition to the bank regulatory agencies, the registrant and its subsidiaries are subject to regulation by other state and federal agencies. EX-23 6 CONSENT OF BDO SEIDMAN, LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Capitol Bancorp Ltd. Lansing, Michigan We hereby consent to the incorporation by reference and use of our report dated January 29, 1999, which appears on page 40 of Capitol Bancorp Ltd.'s Annual Report to shareholders for the year ended December 31, 1998, in that corporation's previously filed Form S-3 Registration Statement No. 33-71774 for its Shareholder Investment Program. BDO SEIDMAN, LLP s/BDO Seidman, LLP - ------------------ March 16, 1999 Grand Rapids, Michigan EX-27 7 FINANCIAL DATA SCHEDULE
9 1000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 45263 1732 104050 0 86464 0 0 761069 8817 1024444 890890 23600 8831 0 0 0 51868 (1851) 1024444 60661 3876 5131 69668 34148 36670 32998 3523 2 25821 7212 4628 0 0 4628 .74 .72 8.76 2992 4250 0 0 6229 1305 370 8817 8817 0 3927
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