-----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, SvefOlSJByOUmL3P6n7hDgPNWY4tqxyUrZ85BxhzdSci/Wx38sXz5wG3945m6fT3 QPrqbd3zd6sBRT06EAoGwQ== 0000950124-96-003343.txt : 19960807 0000950124-96-003343.hdr.sgml : 19960807 ACCESSION NUMBER: 0000950124-96-003343 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960806 SROS: NASD 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-24728-C FILM NUMBER: 96604237 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 10QSB 1 FORM 10-QSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to ------------ ------------- Commission file number 33-24728C CAPITOL BANCORP LTD. (Exact name of issuer as specified in its charter) MICHIGAN 38-2761672 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification organization) Number) 200 WASHINGTON SQUARE NORTH, LANSING, MICHIGAN (Address of principal executive offices) (517) 487-6555 (Issuer's telephone number) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common stock, No par value: 3,976,807 shares outstanding as of July 31, 1996. Page 1 of 17 2 INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated balance sheets - June 30, 1996 and December 31, 1995. Consolidated statements of income - Three months and six months ended June 30, 1996 and 1995. Consolidated statements of cash flows - Six months ended June 30, 1996 and 1995. Notes to consolidated financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Item 2. Changes in Securities. Item 3. Defaults Upon Senior Securities. Item 4. Submission of Matters to a Vote of Security Holders. Item 5. Other Information. Item 6. Exhibits and Reports on Form 8-K. SIGNATURES Page 2 of 17 3 PART I, ITEM I CAPITOL BANCORP LTD. Consolidated Balance Sheets As of June 30, 1996 and December 31, 1995
June 30 December 31 1996 1995 ------------------- ------------------ (in thousands) ASSETS - ------ Cash and due from banks $ 16,521 $ 14,715 Interest-bearing deposits with banks 74 16 Federal funds sold 26,150 30,600 ------------------- ------------------ Cash and cash equivalents 42,745 45,331 Loans held for resale 14,457 7,030 Investment securities: Available for sale, carried at market value 33,206 34,546 Held for long-term investment, carried at amortized cost which approximates market value 2,103 1,783 ------------------- ------------------ Total investment securities 35,309 36,329 Portfolio loans: Commercial 251,756 222,161 Real estate mortgage 49,407 48,954 Installment 14,599 12,356 ------------------- ------------------ Total portfolio loans 315,762 283,471 Less allowance for loan losses (4,123) (3,687) ------------------- ------------------ Net portfolio loans 311,639 279,784 Investment in and advances to Amera Mortgage Corporation 2,969 3,077 Premises and equipment 2,606 2,438 Accrued interest income 2,654 2,634 Excess of cost over net assets of acquired subsidiaries 2,444 2,540 Other assets 5,527 4,907 ------------------- ------------------ TOTAL ASSETS $ 420,350 $ 384,070 =================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Deposits: Noninterest-bearing $ 45,817 $ 43,797 Interest-bearing 323,266 296,490 ------------------- ------------------ Total deposits 369,083 340,287 Accrued interest on deposits and other liabilities 4,369 3,815 Debt obligations 7,062 8,712 ------------------- ------------------ Total liabilities 380,514 352,814 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 3,040 391 STOCKHOLDERS' EQUITY Common stock, no par value: 10,000,000 shares authorized; issued and outstanding: 1996 - 3,938,629 1995 - 3,395,288 26,961 22,150 Retained earnings 10,033 8,414 Market value adjustment (net of tax effect) for investment securities available for sale (86) 413 ------------------- ------------------ 36,908 30,977 Less note payable by ESOP (112) (112) ------------------- ------------------ Total stockholders' equity 36,796 30,865 ------------------- ------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 420,350 $ 384,070 =================== ==================
Page 3 of 17 4 CAPITOL BANCORP LTD. Consolidated Statements of Income For the Three Months and Six Months Ended June 30, 1996 and 1995 (in thousands except per share data)
Three Months Ended Six Months Ended June 30 June 30 ---------------------------- --------------------------- 1996 1995 1996 1995 ------------ ------------- ------------ ------------ Interest income: Portfolio loans (including fees) $ 7,637 $ 6,358 $ 14,858 $ 12,292 Loans held for resale 324 45 449 89 Taxable investment securities 523 537 1,041 1,007 Federal funds sold 255 406 576 631 Interest-bearing deposits with banks 9 8 25 12 Other interest income 7 10 Dividends on investment securities 17 15 301 30 ------------ ------------- ------------ ------------ Total interest income 8,772 7,369 17,260 14,061 Interest expense: Demand deposits 544 84 1,091 628 Savings deposits 337 797 655 1,121 Time deposits 3,180 2,764 6,326 4,955 Debt obligations 193 125 376 257 ------------ ------------- ------------ ------------ Total interest expense 4,254 3,770 8,448 6,961 ------------ ------------- ------------ ------------ Net interest income 4,518 3,599 8,812 7,100 Provision for loan losses 260 301 477 440 ------------ ------------- ------------ ------------ Net interest income after provision for loan losses 4,258 3,298 8,335 6,660 Noninterest income: Service charges on deposit accounts 189 142 368 254 Trust fee income 68 56 132 105 Mortgage loan origination fee income and net servicing income 265 Gain on sale of investment securities available for sale 80 80 Other 74 34 115 81 ------------ ------------- ------------ ------------ Total noninterest income 411 232 695 705 Noninterest expense: Salaries and employee benefits 1,423 1,129 2,837 2,495 Occupancy 216 208 426 446 Equipment rent, depreciation and maintenance 309 201 424 410 Deposit insurance premiums 33 162 65 321 Other 906 772 1,874 1,762 ------------ ------------- ------------ ------------ Total noninterest expense 2,887 2,472 5,626 5,434 ------------ ------------- ------------ ------------ Income before federal income taxes 1,782 1,058 3,404 1,931 Federal income taxes 634 394 1,155 730 ------------ ------------- ------------ ------------ NET INCOME $ 1,148 $ 664 $ 2,249 $ 1,201 ============ ============= ============ ============ NET INCOME PER SHARE $ .31 $ .20 $ .61 $ .36 ============ ============= ============ ============
Page 4 of 17 5 CAPITOL BANCORP LTD. Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1996 and 1995
1996 1995 ------------------ ------------------ (in thousands) OPERATING ACTIVITIES Net income $ 2,249 $ 1,201 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 477 440 Depreciation of premises and equipment 282 263 Amortization of mortgage servicing rights 101 Amortization of excess of cost over net assets of acquired subsidiaries 96 142 Net amortization of investment securities premiums (accretion of discount) (12) 60 Gain (loss) on sale of premises and equipment 6 (4) Originations and purchases of loans held for resale (108,089) (28,925) Proceeds from sales of loans held for resale 100,662 26,415 Decrease (increase) in accrued interest income and other assets (295) 2,360 Increase in accrued interest and other liabilities 165 108 ------------------ ------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES (4,459) 2,161 INVESTING ACTIVITIES Proceeds from sale of 51% interest in mortgage subsidiary 250 Proceeds from sales of investment securities available for sale 3,966 Proceeds from maturities of investment securities 10,031 4,293 Purchases of investment securities (13,701) (7,446) Net increase in portfolio loans (32,332) (19,809) Proceeds from sales of premises and equipment 10 21 Purchases of premises and equipment (467) (346) ------------------ ------------------ NET CASH USED BY INVESTING ACTIVITIES (32,493) (23,037) FINANCING ACTIVITIES Net payments (borrowings) on debt obligations (1,650) 1,150 Net proceeds from issuance of common stock upon exercise of stock options and warrants 4,811 1,124 Cash dividends paid (630) (464) Resources provided by minority interest 3,040 Increase (decrease) in demand deposits, NOW accounts and savings accounts 4,647 (4,516) Increase in certificates of deposit 24,148 42,222 ------------------ ------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 34,366 39,516 ------------------ ------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,586) 18,640 Cash and cash equivalents at beginning of period 45,331 24,211 ------------------ ------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42,745 $ 42,851 ================== ==================
Page 5 of 17 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CAPITOL BANCORP LTD. Note A - Basis of Presentation The accompanying condensed consolidated financial statements of Capitol Bancorp Ltd. have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-QSB. Accordingly, they do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The statements do, however, include all adjustments of a normal recurring nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which the Corporation considers necessary for a fair presentation of the interim periods. The results of operations for the six-month period ended June 30, 1996 are not necessarily indicative of the results to be expected for the year ending December 31, 1996. The consolidated balance sheet as of December 31, 1995 was derived from audited consolidated financial statements as of that date. Certain 1995 amounts have been reclassified to conform to the 1996 presentation. Note B - Implementation of New Accounting Standards Financial Accounting Standards Board Statement No. 122, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", establishes new guidelines for accounting and measurement of potential impairment of certain long-lived assets, including intangibles and goodwill, among other things. This new standard became effective for the Corporation January 1, 1996 and requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Statement requires the use of estimates of future cash flows and other estimates of fair value. Implementation of this new accounting standard had no impact on the Corporation's financial position or results of operations for the period ended June 30, 1996. Note C - Bank of Tucson Effective June 27, 1996 Bank of Tucson, a de novo commercial, bank was formed in Tucson, Arizona. Bank of Tucson was capitalized with $5.4 million of which $2.7 million was invested by the Corporation (funded primarily by proceeds from exercise of warrants and related issuance of common stock) and the remainder was invested by individuals and other 6 of 17 7 entities primarily located in the Tucson community. The Corporation owns 51% of the common stock of Bank of Tucson and, accordingly, the Bank is included for financial reporting purposes as a consolidated subsidiary with corresponding accounting recognition given to minority interest. Note D - Sale of Majority Interest in Mortgage Banking Unit Effective March 31, 1995, the Corporation sold a 51% interest in Mortgage Connection, Inc. ("MCI", previously a wholly-owned mortgage banking subsidiary acquired in 1992 and engaged in the origination, sale and servicing of residential mortgage loans) to an individual. The purchase transaction resulted in no gain or loss and, under certain circumstances, the majority owner and the Corporation each have the right to purchase the other party's interest in the mortgage company. The Corporation has retained a 49% interest in the mortgage company and appoints two persons to its five-member board of directors. The majority owner of the mortgage company (its current President and CEO) appoints the other three board members. Subsequent to March 31, 1995, MCI changed its name to Amera Mortgage Corporation. For periods after March 31, 1995, the Corporation's remaining investment in Amera Mortgage Corporation is accounted for under the equity method of accounting for its pro rata share of the mortgage company's net income or loss. If such sale had occurred at the beginning of 1995, net income would have approximated $1.26 million ($.38 per share) for the six months ended June 30, 1995. Note E - Prospective Impact of New Accounting Standards Not Yet Adopted Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation", revises the accounting recognition of compensation expense for compensatory stock options and related disclosures. This new standard permits alternative expense recognition using certain option valuation models. For companies electing to continue past expense recognition practices (which the Corporation expects to implement), certain expanded proforma disclosures of expense amounts and earnings are required using those valuation models (as if the alternative expense methods had been implemented). Management has not completed its analysis of this new accounting standard, which is expected to result in expanded disclosures to be made for the Corporation effective December 31, 1996. A variety of proposed or otherwise potential accounting standards are currently under study by the accounting profession 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. 7 of 17 8 PART I, ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition Total assets amounted to $420.3 million at June 30, 1996, an increase of $36.2 million from the December 31, 1995 level of $384.1 million. The consolidated balance sheets include the Corporation and its banking subsidiaries, Capitol National Bank, Portage Commerce Bank, Ann Arbor Commerce Bank, Oakland Commerce Bank, Paragon Bank & Trust, Grand Haven Bank (85% owned) and, effective June 27, 1996, Bank of Tucson (51% owned). The financial statements also include a mortgage subsidiary, previously consolidated, for which a majority interest was sold effective March 31, 1995. Effective June 27, 1996 Bank of Tucson, a de novo commercial bank, was formed in Tucson, Arizona. Bank of Tucson was capitalized with $5.4 million of which $2.7 million was invested by the Corporation (funded primarily by proceeds from exercise of warrants and related issuance of common stock) and the remainder was invested by individuals and other entities primarily located in the Tucson community. The Corporation owns 51% of the common stock of Bank of Tucson and, accordingly, the Bank is included for financial reporting purposes as a consolidated subsidiary with corresponding accounting recognition given to minority interest. The net increase in portfolio loans for the six-month period approximated $32 million. Loan growth was funded primarily by higher levels of time deposits coupled with proceeds from maturities of investment securities. The majority of portfolio loan growth occurred in commercial loans which increased approximately $29.6 million, consistent with the Corporation's banks' emphasis on commercial lending activities. Loans held for resale increased approximately $7.4 million. This increase was funded through lower levels of federal funds sold and bank borrowings from secured lines of credit. The allowance for loan losses at June 30, 1996 approximated $4.1 million or 1.31% of total portfolio loans, a slight increase from the year-end 1995 ratio of 1.30%. For the first half of 1996, net loan charge-offs approximated $41,000, as compared to $264,000 for the corresponding 1995 period. Provisions for loan losses have been maintained at a higher level in 1996 ($477,000) relative to 1995 ($440,000) commensurate with portfolio growth, levels of delinquent and other nonperforming loans and other factors. The timing of loan charge-offs generally differs from accrual of provisions for loan losses. Management expects loan charge-offs in the second half of 1996 to be higher than amounts for the first six months. The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on evaluation of the portfolio (including volume, amount and composition, potential impairment of individual loans and concentrations of credit), past loss 8 of 17 9 experience, current economic conditions, loan commitments outstanding and other factors. The table below summarizes portfolio loan balances and activity in the allowance for loan losses for the interim periods (in thousands):
1996 1995 ------------ ------------ Allowance for loan losses at January 1 $ 3,687 $ 3,220 Loans charged-off: Commercial 64 477 Installment 24 13 ------------ ------------ Total charge-offs 88 490 Recoveries: Commercial 42 210 Real estate 1 1 Installment 4 15 ------------- ------------- Total recoveries 47 226 ------------- ------------ Net charge-offs 41 264 Additions to allowance charged to expense 477 440 ------------ ------------ Allowance for loan losses at June 30 $ 4,123 $ 3,396 ============ ============ Average total portfolio loans for period ended June 30 $ 297,952 $ 250,224 ============ ============ Ratio of net charge-offs to average portfolio loans outstanding 0.01% 0.11% ============ ============
The allowance for loan losses is a general allowance for the Corporation's loan portfolio. For internal purposes, management allocates the allowance to all loan classifications. The amounts allocated in the following table (in thousands), 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. In addition, amounts allocated are not intended to reflect the amount that may be available for future losses, since the allowance is a general allowance.
June 30 ----------------------------------------------------- 1996 1995 ----------------------- ------------------------- % % Total Total Portfolio Portfolio Loans Loans --------- --------- Commercial $ 2,060 .65% $ 1,775 .68% Real estate mortgage 72 .02 105 .04 Installment 68 .02 54 .02 Unallocated 1,923 .62 1,462 .56 ---------- --------- ----------- --------- Total allowance for loan losses $ 4,123 1.31% $ 3,396 1.30% ---------- ========= ----------- ========= Total portfolio loans outstanding $ 315,762 $ 261,128 ========== ===========
In addition to the allowance for loan losses, certain loans are enrolled in a state government loan program and have additional reserves established to provide for loss protection. At June 30, 1996, total loans under this program approximated $13.4 million. Reserves related to these loans, which are represented by earmarked funds on deposit at the 9 of 17 10 banks, approximated $1.4 million and are not included in the recorded allowance for loan losses. 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 in 1995 and through June 30, 1996. Nonperforming loans (i.e., loans which are 90 days or more past due and loans on nonaccrual status) at June 30, 1996 amounted to $1.93 million compared with $1.34 million at December 31, 1995 as summarized in the following table:
June 30 Dec 31 1996 1995 --------- --------- Nonaccrual loans: Commercial $ 802 $ 438 Real estate 145 115 Installment 52 28 --------- --------- Total nonaccrual loans 999 581 Past due (>90 days) loans: Commercial 710 379 Real estate 111 299 Installment 114 82 --------- ---------- Total past due loans 935 760 --------- ---------- Total nonperforming loans $ 1,934 $ 1,341 ========= ==========
Nonperforming loans increased approximately $600,000 during the six months ended June 30, 1996 of which $380,000 occurred during the second fiscal quarter relating to three loans. Most of the 1996 increase relates to nonaccrual loans for which management believes the loans to be adequately collateralized or otherwise appropriately recorded in management's determination of the adequacy of the allowance for loan losses and are in various stages of resolution. If nonperforming loans (including loans in nonaccrual status) had performed in accordance with their contractual terms during the period, additional interest income of $43,000 and $94,000 would have been recorded for the six months ended June 30, 1996 and 1995, respectively. Interest income recognized on loans in nonaccrual status for the period approximated $21,000 and $10,000, respectively. Other real estate owned (generally real estate acquired through foreclosure or a deed in lieu of foreclosure and classified as a component of other assets) approximated $488,000 at June 30, 1996, a decrease of $484,000 from the year-end 1995 level of $972,000. The following comparative analysis summarizes each bank's total portfolio loans, allowance for loan losses, nonperforming assets and certain ratios (dollars in thousands): 10 of 17 11
Allowance as a Percentage of Total Allowance for Nonperforming Total Portfolio Loans Loan Losses Loans Portfolio Loans ------------------------ ----------------------- ----------------------- --------------------- June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 June 30 Dec 31 1996 1995 1996 1995 1996 1995 1996 1995 ----------- ---------- --------- ------- --------- -------- -------- ------- Ann Arbor Commerce Bank $ 68,916 $ 58,869 $ 907 $ 765 $ 357 $ 147 1.32% 1.30% Bank of Tucson --- n/a --- n/a --- n/a --- n/a Capitol National Bank 77,963 75,468 1,090 1,058 564 396 1.40 1.40 Grand Haven Bank 21,134 14,630 233 155 --- --- 1.10 1.06 Oakland Commerce Bank 49,717 46,146 607 552 431 448 1.22 1.20 Paragon Bank & Trust 43,255 41,288 532 494 30 --- 1.23 1.20 Portage Commerce Bank 53,624 45,870 754 663 552 350 1.41 1.45 Other, net 1,153 1,200 --- --- --- --- --- --- ---------- ---------- --------- ------- --------- -------- ------ ------- Consolidated $ 315,762 $ 283,471 $ 4,123 $ 3,687 $ 1,934 $ 1,341 1.31% 1.30% ========== ========== ========= ======= ========= ======== ====== ======= n/a - Not applicable
Noninterest-bearing deposits approximated 12.4% of total deposits at June 30, 1996, a slight decrease from the December 31, 1995 level of 12.9%. The decline in the ratio of noninterest-bearing deposits in 1996 relates primarily to escrow and custodial funds associated with mortgage servicing activities of the mortgage affiliate placed on deposit at one of the Corporation's banks. Results of Operations Net income for the six months ended June 30, 1996 amounted to $2,249,000 ($.61 per share), a significant increase over the $1,201,000 ($.36 per share) earned during the corresponding period of 1995. Net income for the three months ended June 30, 1996 approximated $1,148,000 ($.31 per share), as compared to $664,000 ($.20 per share) for the same period of 1995. Net income for interim 1996 periods has been favorably impacted by higher interest margins and fees, dividend income and lower deposit insurance premiums. Operating results (in thousands) were as follows: 11 of 17 12
Six months ended June 30 ------------------------------------------------------------------------- Return on Return on Total Assets Net Income Beginning Equity Average Assets ------------------------ -------------------- --------------------- -------------------- June 30 Dec 31 1996 1995 1996 1995 1996 1995 1996 1995 ---------- ---------- -------- ------- ------- ------- ------- ------- Ann Arbor Commerce Bank $ 88,829 $ 75,954 $ 545 $ 349 22.14% 17.03% 1.38% 1.14% Bank of Tucson (2) 5,782 n/a 10 n/a .61 n/a .59 n/a Capitol National Bank 96,409 97,622 747 549 20.65 17.04 1.57 1.21 Grand Haven Bank (1) 26,728 20,930 102 16 7.69 n/a .87 n/a Oakland Commerce Bank 72,645 61,469 430 246 16.57 8.91 1.29 .88 Paragon Bank & Trust 52,756 56,064 346 188 13.65 9.20 1.26 .71 Portage Commerce Bank 69,059 64,019 526 420 22.26 20.73 1.61 1.48 --------- --------- ------- ------- -------- -------- --------- -------- Total Banks 412,208 376,058 2,706 1,768 18.16 13.49 1.40 1.11 Mortgage Banking (3) 2,969 3,077 (58) (106) n/a n/a n/a n/a Other, net 5,173 4,935 (399) (461) n/a n/a n/a n/a --------- --------- ------- ------- -------- -------- --------- --------- Consolidated $ 420,350 $ 384,070 $ 2,249 $ 1,201 14.57% 9.34% 1.14% 0.70% ========= ========= ======= ======= ======== ======== ========= ========
n/a - Not applicable. (1) - Grand Haven Bank (85% owned and formerly a branch of Paragon Bank & Trust) commenced operations effective May 1, 1995. (2) - The Corporation made a 51% investment in the common stock of Bank of Tucson, a de novo bank, effective June 27, 1996. (3) - 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 (49%) has been accounted for under the equity method. Net interest income increased 24.1% during the six-month 1996 period versus the corresponding period of 1995. The growth in net interest income was primarily the result of margins associated with growth in loans and deposits in addition to certain nonrecurring dividends in March 1996. In addition, 1996 results include the operations of Grand Haven Bank (formerly a branch of the Paragon Bank & Trust subsidiary), which has contributed favorably to earnings and was included for only a portion of 1995. Bank of Tucson, because of its brief period of inclusion, had no impact on earnings for the 1996 period. Noninterest income decreased in 1996 to $695,000 for the six-month period, as compared with $705,000 for the corresponding 1995 period, primarily due to inclusion of the mortgage unit's revenues for the first quarter of 1995. Service charge income and trust fee income increased 44% and 25%, respectively, primarily due to a larger number of accounts. The provision for loan losses amounted to $477,000 for the six-month 1996 period as compared to $440,000 for the corresponding period of 1995. The increased interim provision for loan losses in 1996 compared to the interim 1995 period relates primarily to portfolio growth. The provision for loan losses is based on management's analysis of the loan portfolio as discussed elsewhere herein. Noninterest expense for the six months ended June 30, 1996 approximated $5.6 million compared with $5.4 million in 1995. The increase in noninterest expense is associated with increases in general operating costs and is net of significantly lower costs of deposit insurance premiums. Liquidity and Capital Resources Cash and cash equivalents amounted to $42.7 million or 10.2% of total assets at June 12 of 17 13 30, 1996 as compared with $45.3 million or 11.8% of total assets at December 31, 1995. The change is primarily the result of funds deployed into commercial portfolio loans. Liquidity levels vary continuously based on customer activities and, accordingly, amounts of cash and cash equivalents can vary widely at any point in time. Management believes the Corporation's liquidity position at June 30, 1996 is adequate to fund loan demand and meet depositor needs. In addition to cash and cash equivalents, a source of long-term liquidity is the Corporation's marketable investment securities. The Corporation's liquidity requirements have not historically necessitated the sale of investments in order to meet liquidity needs. It also has not engaged in active trading of its investments and has no intention of doing so in the foreseeable future. At June 30, 1996 and December 31, 1995, the Corporation had approximately $33 million and $34 million, respectively, of investment securities classified as available for sale which can be utilized to meet various liquidity needs as they arise. At June 30, 1996, the Corporation had lines of credit from an unrelated financial institution aggregating $10 million. Under this credit facility, borrowings outstanding approximated $4 million at June 30, 1996 ($5.6 million at December 31, 1995). During the six months ended June 30, 1996, borrowings thereunder were reduced as proceeds from exercise of warrants and stock options exceeded current cash needs. Future funding needs for formation of new banks (to the extent not otherwise funded by internal capital reserves) or other needs may be met by additional future borrowings. Under the terms of the credit agreement, $8 million is convertible into long-term notes; $2 million of the lines of credit are revolving in nature and are reviewed annually for continuance. In addition, Oakland Commerce Bank had borrowings outstanding of $3 million and $8.4 million of additional availability at June 30, 1996 in the form of secured lines of credit from the Federal Home Loan Bank. Certain recent transactions have increased the Corporation's capital and stockholders' equity in 1996. In conjunction with the 1994 merger of Paragon Bank & Trust and its parent, Financial Center Corporation, approximately 743,000 warrants were issued. Each warrant enables the holder to purchase one share of the Corporation's common stock at an exercise price of $8.99 per warrant. During the period ended June 30, 1996, approximately 458,000 warrants were exercised, resulting in proceeds to the Corporation of $4,114,000. In addition, the exercise of 69,938 stock options resulted in additional proceeds during the period of $444,000. At June 30, 1996, 170,000 warrants relating to the 1994 merger transaction remained outstanding. Those warrants expire on June 30, 1997. If all remaining warrants were exercised, the Corporation would receive additional cash and capital approximating $1.5 million and issue 170,000 shares of previously unissued common stock, although there is no assurance that such warrants will be exercised. Stockholders' equity also increased in 1996 through net income, less dividends paid. The Corporation's Board of Directors recently approved a cash dividend of $.09 per share payable September 1, 1996 to shareholders of record as of August 1, 1996 following prior dividends of $.09 per share paid on March 1, 1996 and June 1, 1996. The dividend amounts in 1996 represent an increase over the dividends of $.07 per share paid quarterly in 1995. 13 of 17 14 As discussed previously, certain investment securities are designated as "available for sale" and, accordingly, are adjusted to market value at the balance sheet date (net of corresponding tax effect). Changes in market values of investment securities at their respective balance sheet dates decreased stockholders' equity by $499,000 for the six months ended June 30, 1996. The Corporation and its banks are subject to complex regulatory capital requirements which require maintaining minimum capital ratios. These ratio measurements, in addition to certain other requirements, are used by regulatory agencies to determine the level of regulatory intervention and enforcement applied to financial institutions. The Corporation and each of its banks are in compliance with the regulatory requirements and management expects to maintain such compliance. Capital, as a percentage of total assets, approximated 8.8% at June 30, 1996, a slight increase from the beginning of the year ratio of 8.0%. The Corporation and each of its banking subsidiaries continue to exceed regulatory capital requirements as shown below (dollars in thousands):
Ann Arbor Bank Capitol Grand Oakland Commerce of National Haven Commerce Bank Tucson (1) Bank Bank (1) Bank ---------- ---------- -------- -------- --------- Financial Position: Total Assets $88,829 $ 5,782 $96,409 $26,728 $72,645 Total Assets for Risk-Based Capital Purposes 89,673 5,782 97,560 26,771 73,271 Risk-Weighted Assets 64,611 1,375 72,339 19,291 53,284 Tier I Capital 5,675 5,373 7,609 2,498 5,431 Allowable Tier II Capital 809 --- 1,090 233 607 Tier I and Allowable Tier II Capital, Combined 6,484 5,373 8,699 2,731 6,038 Ratios Based on Financial Position: Ratio of Tier I Capital to Risk-Weighted Assets 8.78% 390.76% 10.52% 12.95% 10.19% Ratio of Combined Tier I and Tier II Capital to Risk- Weighted Assets 10.04% 390.76% 12.03% 14.16% 11.33% Leverage Ratio 6.39% 92.93% 7.89% 9.35% 7.48% Ratios Required: Tier I 4.00% 4.00% 4.00% 4.00% 4.00% Tier I and Tier II Combined 8.00% 8.00% 8.00% 8.00% 8.00% Leverage Ratio 4.00% 8.00% 4.00% 8.00% 4.00% Paragon Portage Capitol Bank & Commerce Bancorp Trust Bank Ltd. Consolidated -------- ---------- --------- ------------ Financial Position: Total Assets $52,756 $69,059 $42,763 $420,350 Total Assets for Risk-Based Capital Purposes 53,207 69,773 39,074 420,666 Risk-Weighted Assets 41,868 52,540 38,403 314,343 Tier I Capital 5,126 5,000 33,872 36,912 Allowable Tier II Capital 523 658 (567) 3,353 Tier I and Allowable Tier II Capital, Combined 5,649 5,658 33,305 40,265 Ratios Based on Financial Position: Ratio of Tier I Capital to Risk-Weighted Assets 12.24% 9.52% 88.20% 11.74% Ratio of Combined Tier I and Tier II Capital to Risk- Weighted Assets 13.49% 10.77% 86.73% 12.81% Leverage Ratio 9.72% 7.24% 79.21% 8.78% Ratios Required: Tier I 4.00% 4.00% 4.00% 4.00% Tier I and Tier II Combined 8.00% 8.00% 8.00% 8.00% Leverage Ratio 4.00% 4.00% 3.00% 4.00%
(1) Conditional to their commercial bank charters, Grand Haven Bank and Bank of Tucson are required to maintain Tier I leverage capital to total assets ratios of not less than 8% for the first three full years of operations. Effective June 27, 1996, the Corporation made a 51% investment ($2.7 million) in the common stock of Bank of Tucson, a de novo bank. This new bank is discussed more fully elsewhere herein and in the notes to the consolidated financial statements. The Corporation's operating strategy continues to be focused on the ongoing growth and maturity of its existing banks, coupled with de novo bank expansion in selected markets as opportunities arise. On this basis, management is engaged in the ongoing process of exploring opportunities for future growth which includes de novo bank formation and other growth strategies. Accordingly, the Corporation may invest in or otherwise add additional banks in future periods, subject to economic conditions and other factors, although the timing of such 14 of 17 15 additional banking units, if any, is uncertain. Such future de novo banks and/or additions of other operating units could be either wholly-owned or majority-owned by the Corporation. Subsequent to June 30, 1996, the Corporation filed applications with certain regulatory agencies for permission to acquire a majority interest in a de novo bank to be formed in Macomb County, Michigan, a suburb of metropolitan Detroit. Additionally, the Corporation has applications pending with certain regulatory agencies for permission to acquire a majority interest in a de novo bank to be formed in Brighton, Michigan. Management believes the Corporation's capital resources at June 30, 1996 to be adequate to fund existing operations, future growth and expansion. Impact of New Accounting Standards Financial Accounting Standards Board Statement No. 122, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", establishes new guidance for accounting and measurement of potential impairment of certain long-lived assets including intangibles and goodwill, among other things. This new standard became effective for the Corporation January 1, 1996 and requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Statement requires the use of estimates of future cash flows and other estimates of fair value. Implementation of this new accounting standard had no impact on the Corporation's financial position or results of operations for the period ended June 30, 1996. Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation", revises the accounting recognition of compensation expense for compensatory stock options and related disclosures. This new standard permits alternative expense recognition using certain option valuation models. For companies electing to continue past expense recognition practices (which the Corporation expects to implement), certain expanded proforma disclosures of expense amounts and earnings are required using those valuation models (as if the alternative expense methods had been implemented). Management has not completed its analysis of this new accounting standard, which is expected to result in expanded disclosures to be made for the Corporation effective December 31, 1996. At any time, there are a number of proposed new accounting standards under consideration by standard-setting bodies, bank regulatory agencies and other entities. Because of the fluid status of such proposals, the potential impact thereof on the Corporation's financial statements is unclear. 15 of 17 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Corporation and its subsidiaries are parties to certain ordinary, routine litigation incidental to their business. In the opinion of management, liabilities arising from such litigation would not have a material effect on the Corporation's consolidated financial position or results of operations. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and reports on Form 8-K. (a) Exhibits: (11) Statement regarding computation of per share earnings. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended June 30, 1996. 16 of 17 17 SIGNATURES Pursuant to the requirements 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) \s\ Joseph D. Reid --------------------------------------- Chairman, President and CEO (duly authorized to sign on behalf of of the registrant) \s\ Lee W. Hendrickson --------------------------------------- Vice President and Chief Financial Officer Date: July 31, 1996 - ----------------------------------- 17 of 17 18 EXHIBIT INDEX SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------- ----------- ------------ 11 Computation of Per Share Earnings 27 Financial Data Schedule EX-11 2 EXHIBIT 11 1 PART II, ITEM 6(a) EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS CAPITOL BANCORP LTD.
Three Months Ended Six Months Ended June 30 June 30 ------------------------------- -------------------------------- 1996 1995 1996 1995 -------------- -------------- -------------- --------------- Primary Net Income Per Share: Weighted average number of common shares outstanding 3,600,354 3,323,656 3,538,616 3,316,962 Net effect of dilutive stock options and warrants-- based on the treasury stock method or modified treasury stock method, as applicable 111,740 61,397 116,020 58,140 -------------- -------------- -------------- --------------- Total 3,712,094 3,385,053 3,654,636 3,375,102 ============== ============== ============== =============== Net income for the period $ 1,148,151 $ 663,919 $ 2,249,185 $ 1,201,315 ============== ============== ============== =============== Net income per share $ .31 $ .20 $ .61 $ .36 ============== ============== ============== =============== Fully Diluted Net Income Per Share (A) $ .31 $ .20 $ .61 $ .36 ============== ============== ============== ===============
(A) Same as for primary net income per share since dilution is less than 3% or is otherwise not applicable for the period. EX-27 3 EXHIBIT 27
9 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 16,521 74 26,150 0 35,309 0 0 330,219 4,123 420,350 369,083 3,112 4,369 3,950 0 0 26,961 9,947 420,350 15,307 1,943 10 17,260 8,072 8,448 8,812 477 80 5,626 3,404 2,249 0 0 2,249 .61 .61 0 999 935 0 0 3,687 88 47 4,123 4,123 0 1,923
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