-----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, V9ni3rbsoKR84DOSpXDFeDoA2F828HuJ3LVznIBhhbI1p7cY8C3UZGopqp52fNZy GC9+o/1ug/hBiQzCnGIvXQ== 0000950124-96-004770.txt : 19961111 0000950124-96-004770.hdr.sgml : 19961111 ACCESSION NUMBER: 0000950124-96-004770 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961108 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: 96656552 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 10QSB 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 SEPTEMBER 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: 3,986,536 shares outstanding as of October 31, 1996. Page 1 of 19 2 INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated balance sheets - September 30, 1996 and December 31, 1995. Consolidated statements of income - Three months and nine months ended September 30, 1996 and 1995. Consolidated statements of cash flows - Nine months ended September 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 19 3 PART I, ITEM I CAPITOL BANCORP LTD. Consolidated Balance Sheets As of September 30, 1996 and December 31, 1995
September 30 December 31 1996 1995 -------------- -------------- (in thousands) ASSETS - ------ Cash and due from banks $ 15,081 $ 14,715 Interest-bearing deposits with banks 1,550 16 Federal funds sold 33,475 30,600 ------------- ------------- Cash and cash equivalents 50,106 45,331 Loans held for resale 7,674 7,030 Investment securities: Available for sale, carried at market value 41,159 34,546 Held for long-term investment, carried at amortized cost which approximates market value 2,103 1,783 ------------- ------------- Total investment securities 43,262 36,329 Portfolio loans: Commercial 265,141 222,161 Real estate mortgage 51,381 48,954 Installment 15,898 12,356 ------------- ------------- Total portfolio loans 332,420 283,471 Less allowance for loan losses (4,261) (3,687) ------------- ------------- Net portfolio loans 328,159 279,784 Investment in and advances to Amera Mortgage Corporation 2,884 3,077 Premises and equipment 3,248 2,438 Accrued interest income 2,722 2,634 Excess of cost over net assets of acquired subsidiaries 2,395 2,540 Other assets 5,472 4,907 ------------- ------------- TOTAL ASSETS $ 445,922 $ 384,070 ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Deposits: Noninterest-bearing $ 46,822 $ 43,797 Interest-bearing 345,124 296,490 ------------- ------------- Total deposits 391,946 340,287 Accrued interest on deposits and other liabilities 4,180 3,815 Debt obligations 7,062 8,712 ------------- ------------- Total liabilities 403,188 352,814 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 4,966 391 STOCKHOLDERS' EQUITY Common stock, no par value: 10,000,000 shares authorized; issued and outstanding: 1996 - 3,981,966 shares 1995 - 3,395,288 shares 27,051 22,150 Retained earnings 10,853 8,414 Market value adjustment (net of tax effect) for investment securities available for sale (24) 413 ------------- ------------- 37,880 30,977 Less note payable by ESOP (112) (112) ------------- ------------- Total stockholders' equity 37,768 30,865 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 445,922 $ 384,070 ============= =============
Page 3 of 19 4 CAPITOL BANCORP LTD. Consolidated Statements of Income For the Three Months and Nine Months Ended September 30, 1996 and 1995 (in thousands except per share data)
Three Months Ended Nine Months Ended September 30 September 30 ----------------------- ----------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Interest income: Portfolio loans (including fees) $ 8,004 $ 6,656 $ 22,862 $ 18,948 Loans held for resale 207 90 656 179 Taxable investment securities 575 549 1,616 1,556 Federal funds sold 449 410 1,025 1,041 Interest-bearing deposits with banks 10 35 12 Dividends on investment securities and other 26 15 337 45 ---------- ---------- ---------- ---------- Total interest income 9,271 7,720 26,531 21,781 Interest expense: Demand deposits 592 590 1,683 1,710 Savings deposits 359 310 1,014 939 Time deposits 3,502 2,960 9,828 7,915 Debt obligations and other 95 147 471 404 ---------- ---------- ---------- ---------- Total interest expense 4,548 4,007 12,996 10,968 ---------- ---------- ---------- ---------- Net interest income 4,723 3,713 13,535 10,813 Provision for loan losses 274 219 751 659 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 4,449 3,494 12,784 10,154 Noninterest income: Service charges on deposit accounts 171 153 539 407 Trust fee income 67 65 199 170 Gain on sale of investment securities available for sale 2 82 Other 249 5 364 351 ---------- ---------- ---------- ---------- Total noninterest income 489 223 1,184 928 Noninterest expense: Salaries and employee benefits 1,558 1,210 4,395 3,705 Occupancy 228 216 654 662 Equipment rent, depreciation and maintenance 262 207 686 617 Deposit insurance premiums 350 24 415 345 Other 800 737 2,674 2,499 ---------- ---------- ---------- ---------- Total noninterest expense 3,198 2,394 8,824 7,828 ---------- ---------- ---------- ---------- Income before federal income taxes 1,740 1,323 5,144 3,254 Federal income taxes 562 475 1,717 1,205 ---------- ---------- ---------- ---------- NET INCOME $ 1,178 $ 848 $ 3,427 $ 2,049 ========== ========== ========== ========== NET INCOME PER SHARE $ .29 $ .23 $ .90 $ .57 ========== ========== ========== ==========
Page 4 of 19 5 CAPITOL BANCORP LTD. Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 1996 and 1995
1996 1995 ----------- ----------- (in thousands) OPERATING ACTIVITIES Net income $ 3,427 $ 2,049 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 751 659 Depreciation of premises and equipment 437 390 Amortization of mortgage servicing rights 101 Amortization of excess of cost over net assets of acquired subsidiaries 145 213 Net amortization of investment security premiums (accretion of discount) (114) 30 Gain (loss) on sale of premises and equipment 6 (4) Originations and purchases of loans held for resale (153,960) (54,664) Proceeds from sales of loans held for resale 153,315 50,770 Decrease (increase) in accrued interest income and other assets (252) 2,392 Increase (decrease) in accrued interest and other liabilities (25) 733 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 3,730 2,669 INVESTING ACTIVITIES Proceeds from sale of 51% interest in mortgage subsidiary 250 Proceeds from sales of investment securities available for sale 4,460 251 Proceeds from maturities of investment securities 26,911 7,115 Purchases of investment securities (38,834) (10,946) Net increase in portfolio loans (49,126) (31,882) Proceeds from sales of premises and equipment 13 22 Purchases of premises and equipment (1,267) (440) --------- --------- NET CASH USED BY INVESTING ACTIVITIES (57,843) (35,630) FINANCING ACTIVITIES Net payments on debt obligations (1,650) (351) Resources provided by minority interest 4,966 Net proceeds from issuance of common stock 4,902 1,156 Cash dividends paid (988) (697) Increase (decrease) in demand deposits, NOW accounts and savings accounts 15,988 (4,156) Increase (decrease) in certificates of deposit 35,670 49,175 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 58,888 45,127 --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 4,775 12,166 Cash and cash equivalents at beginning of period 45,331 24,211 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 50,106 $ 36,377 ========= =========
Page 5 of 19 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 nine-month period ended September 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. 121, "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 September 30, 1996. Note C - New Banks During the nine months ended September 30, 1996, two de novo banks have been added. Bank of Tucson, in Tucson, Arizona, was formed effective June 27, 1996 and capitalized with $5.4 million of which $2.7 million was invested by the Corporation. Macomb Community Bank commenced operations on September 18, 1996 in Clinton Township, 6 of 19 7 Michigan, and was capitalized with $4.0 million of which $2.0 million was invested by the Corporation. The Corporation's investments in these new banks were funded primarily from proceeds from exercise of warrants and related issuance of common stock earlier in the year. The Corporation owns 51% of the common stock of Bank of Tucson and Macomb Community Bank and, accordingly, these new banks are consolidated for financial reporting purposes with corresponding accounting recognition given to applicable 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 $2.1 million ($.58 per share) for the nine months ended September 30, 1995. Note E - Prospective Impact of New Accounting Standards Not Yet Adopted Financial Accounting Standards Board ("FASB") 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 pro forma 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. FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", provides additional guidance for the accounting for transfers of financial assets. Management has not completed its analysis of this new standard which will become effective January 1, 1997. A variety of proposed or otherwise potential accounting standards are currently under 7 of 19 8 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. 8 of 19 9 PART I, ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition Total assets amounted to $445.9 million at September 30, 1996, an increase of $61.8 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 and September 18, 1996, respectively, Bank of Tucson and Macomb Community Bank (each 51% owned by the Corporation). During the nine months ended September 30, 1996, two de novo banks have been added. Bank of Tucson, in Tucson, Arizona, was formed effective June 27, 1996 and capitalized with $5.4 million of which $2.7 million was invested by the Corporation. Macomb Community Bank commenced operations on September 18, 1996 in Clinton Township, Michigan, and was capitalized with $4.0 million of which $2.0 million was invested by the Corporation. The Corporation's investments in these new banks were funded primarily from proceeds from exercise of warrants and related issuance of common stock earlier in the year. The Corporation owns 51% of the common stock of Bank of Tucson and Macomb Community Bank and, accordingly, these new banks are consolidated for financial reporting purposes with corresponding accounting recognition given to applicable minority interest. Portfolio loans increased during the nine-month period by approximately $49 million. Loan growth was funded primarily by higher levels of time deposits. The majority of portfolio loan growth occurred in commercial loans which increased approximately $43 million, consistent with the Corporation's banks' emphasis on commercial lending activities. The allowance for loan losses at September 30, 1996 approximated $4.3 million or 1.28% of total portfolio loans, a slight decrease from the year-end 1995 ratio of 1.30%. For the first three quarters of 1996, net loan charge-offs approximated $177,000, as compared to $322,000 for the corresponding 1995 period. Provisions for loan losses have been maintained at a higher level in 1996 ($751,000) relative to 1995 ($659,000) 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 for 1996 to be consistent with the preceding year. 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 experience, current economic conditions, loan commitments outstanding and other factors. The table below summarizes portfolio loan balances and activity in the allowance for 9 of 19 10 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 186 537 Installment 45 45 -------- -------- Total charge-offs 231 582 Recoveries: Commercial 43 235 Real estate 6 3 Installment 5 22 -------- -------- Total recoveries 54 260 -------- -------- Net charge-offs 177 322 Additions to allowance charged to expense 751 659 -------- -------- Allowance for loan losses at September 30 $ 4,261 $ 3,557 ======== ======== Average total portfolio loans for period ended September 30 $306,735 $259,740 ======== ======== Ratio of net charge-offs to average portfolio loans outstanding 0.06% 0.12% ======== ========
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.
September 30 ------------------------------------------------------------------------------- 1996 1995 ---------------------------------- ------------------------------- % % Total Total Portfolio Portfolio Loans Loans --------- --------- Commercial $ 2,154 .65% $ 1,675 .61% Real estate mortgage 122 .04 71 .03 Installment 76 .02 54 .02 Unallocated 1,909 .57 1,757 .64 --------- ------- --------- ------- Total allowance for loan losses $ 4,261 1.28% $ 3,557 1.30% ========= ======= ========= ======= Total portfolio loans outstanding $ 332,420 $ 273,143 ========= =========
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 September 30, 1996, total loans under this program approximated $14.3 million. Reserves related to these loans, which are represented by earmarked funds on deposit at the banks, approximated $1.5 million and are not included in the recorded allowance for loan losses. 10 of 19 11 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 September 30, 1996. Nonperforming loans (i.e., loans which are 90 days or more past due and loans on nonaccrual status) at September 30, 1996 amounted to $2.55 million compared with $1.34 million at December 31, 1995 as summarized in the following table:
Sept 30 Dec 31 1996 1995 --------- --------- Nonaccrual loans: Commercial $ 776 $ 438 Real estate 145 115 Installment 26 28 ------- ------- Total nonaccrual loans 947 581 Past due (>90 days) loans: Commercial 1,385 379 Real estate 138 299 Installment 81 82 ------- ------- Total past due loans 1,604 760 ------- ------- Total nonperforming loans $ 2,551 $ 1,341 ======= =======
Nonperforming loans increased approximately $1.2 million during the nine months ended September 30, 1996. Most of the increase relates to a small number of loans in various stages of resolution which management believes to be adequately collateralized or otherwise appropriately recorded in its determination of the adequacy of the allowance for loan losses. If nonperforming loans (including loans in nonaccrual status) had performed in accordance with their contractual terms during the period, additional interest income of $73,000 and $81,000 would have been recorded for the nine months ended September 30, 1996 and 1995, respectively. Interest income recognized on loans in nonaccrual status for the period approximated $23,000 and $49,000, 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 $333,000 at September 30, 1996, a decrease of $639,000 from the year-end 1995 level of $972,000. 11 of 19 12 The following comparative analysis summarizes each bank's total portfolio loans, allowance for loan losses, nonperforming assets and certain ratios (dollars in thousands):
Allowance as a Percentage of Total Allowance for Nonperforming Total Portfolio Loans Loan Losses Loans Portfolio Loans ----------------------- --------------------- ------------------- ------------------ Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 1996 1995 1996 1995 1996 1995 1996 1995 --------- --------- ------- ------- ------- ------- -------- ------ Ann Arbor Commerce Bank $ 74,414 $ 58,869 $ 990 $ 765 $ 380 $ 147 1.33% 1.30% Bank of Tucson 1,303 n/a 12 n/a --- n/a .92 n/a Capitol National Bank 77,907 75,468 1,035 1,058 469 396 1.33 1.40 Grand Haven Bank 24,090 14,630 266 155 --- --- 1.10 1.06 Macomb Community Bank 549 n/a 6 n/a --- n/a 1.09 n/a Oakland Commerce Bank 51,661 46,146 638 552 1,189 448 1.23 1.20 Paragon Bank & Trust 43,468 41,288 537 494 315 --- 1.24 1.20 Portage Commerce Bank 57,874 45,870 777 663 198 350 1.34 1.45 Other, net 1,154 1,200 --- --- --- --- --- --- --------- --------- ------- ------- ------- ------- ---- ---- Consolidated $ 332,420 $ 283,471 $ 4,261 $ 3,687 $ 2,551 $ 1,341 1.28% 1.30% ========= ========= ======= ======= ======= ======= ==== ==== n/a - Not applicable
Noninterest-bearing deposits approximated 11.9% of total deposits at September 30, 1996, a 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. 12 of 19 13 Results of Operations Net income for the nine months ended September 30, 1996 amounted to $3,427,000 ($.90 per share), a significant increase over the $2,049,000 ($.57 per share) earned during the corresponding period of 1995. Net income for the three months ended September 30, 1996 approximated $1,178,000 ($.29 per share), as compared to $848,000 ($.23 per share) for the same period of 1995. Net income for interim 1996 periods has been favorably impacted by higher interest margins and fees and dividend income. Operating results (in thousands) were as follows:
Nine months ended September 30 ------------------------------------------------------------------ Return on Return on Total Assets Net Income Beginning Equity Average Assets ---------------------- -------------------- ------------------- ------------------- Sept 30 Dec 31 1996 1995 1996 1995 1996 1995 1996 1995 --------- --------- -------- ------- ------- ------- ------- ------- Ann Arbor Commerce Bank $ 94,661 $ 75,954 $ 841 $ 579 22.80% 18.82% 1.35% 1.22% Bank of Tucson (1) 11,440 n/a (59) n/a n/a n/a n/a n/a Capitol National Bank 97,108 97,622 1,125 897 20.74 18.58 1.56 1.30 Grand Haven Bank (2) 29,647 20,930 159 42 8.02 n/a .85 n/a Macomb Community Bank (1) 5,036 n/a (18) n/a n/a n/a n/a n/a Oakland Commerce Bank 72,239 61,469 430 396 11.04 9.57 .83 .93 Paragon Bank & Trust 54,964 56,064 475 290 12.51 9.50 1.16 .75 Portage Commerce Bank 72,822 64,019 805 650 22.69 21.37 1.59 1.48 -------- -------- ------ ------ ----- ----- ----- ----- Total Banks 437,917 376,058 3,758 2,854 16.82 14.43 1.24 1.13 Mortgage Banking (3) 2,884 3,077 ( 93) (106) n/a n/a n/a n/a Other, net 5,121 4,935 ( 238) (699) n/a n/a n/a n/a -------- -------- ------ ------ ----- ----- ----- ----- Consolidated $445,922 $384,070 $3,427 $2,049 14.80% 10.63% 1.11% 0.79% ======== ======== ====== ====== ===== ===== ===== =====
n/a - Not applicable. (1) - Bank of Tucson and Macomb Community Bank, de novo banks, commenced operations June 27, 1996 and September 18, 1996, respectively, and are 51% owned by the Corporation. (2) - Grand Haven Bank (85% owned and formerly a branch of Paragon Bank & Trust) commenced operations effective May 1, 1995. (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 25.2% during the nine-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. Both Bank of Tucson and Macomb Community Bank, because of their brief period of inclusion, had minimal impact on earnings for the 1996 interim period. Noninterest income increased in 1996 to $1.2 million for the nine-month period, as compared with $928,000 for the corresponding 1995 period, primarily due to inclusion of the mortgage unit's operations for the first quarter of 1995. Service charge income and trust fee income increased 32% and 17%, respectively, mainly due to an increasing number of accounts. The provision for loan losses amounted to $751,000 for the nine-month 1996 period as compared to $659,000 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 nine months ended September 30, 1996 approximated $8.8 million compared with $7.8 million in 1995. The increase in noninterest expense is associated with normal growth and increases in general operating costs. In addition, the increase reflects 13 of 19 14 an assessment accrued effective September 30, 1996 in the amount of $320,000 at Oakland Commerce Bank related to recent legislation adjusting FDIC deposit insurance premiums for certain financial institutions. This large assessment amount will result in substantially lower FDIC insurance premiums for Oakland Commerce Bank in the future while the Corporation's other banks will incur slightly higher deposit insurance premiums. Liquidity and Capital Resources Cash and cash equivalents amounted to $50.1 million or 11.2% of total assets at September 30, 1996 as compared with $45.3 million or 11.8% of total assets at December 31, 1995. As liquidity levels vary continuously based on customer activities, amounts of cash and cash equivalents can vary widely at any given point in time. Management believes the Corporation's liquidity position at September 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 September 30, 1996 and December 31, 1995, the Corporation had approximately $41 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 September 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 September 30, 1996 ($5.6 million at December 31, 1995). Borrowings were reduced during interim 1996 periods as proceeds from issuance of common stock upon exercise of warrants and stock options exceeded current cash needs. Future funding for formation of new banks (to the extent not otherwise funded by internal capital resources) 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 and are reviewed annually for continuance. Two of the Corporation's banks, (Oakland Commerce Bank and Ann Arbor Commerce Bank) have secured lines of credit with the Federal Home Loan Bank. Borrowings thereunder approximated $3 million and additional borrowing capacity approximated $9.1 million at September 30, 1996. In 1994, approximately 743,000 warrants were issued in a merger transaction. 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 interim periods in 1996, approximately 488,000 warrants were exercised, resulting in proceeds to the Corporation of $4,391,000. In addition, the exercise of 81,334 stock options resulted in additional proceeds during the period of $520,000. These and other transactions resulted in issuance of 586,678 shares of common stock during the nine months ended September 30, 1996. At September 30, 1996, 164,000 warrants remained outstanding and expire on June 30, 1997. If all remaining warrants were exercised, the Corporation would receive additional cash and capital approximating $1.5 million 14 of 19 15 and issue 164,000 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 December 2, 1996 to shareholders of record as of November 1, 1996 following prior 1996 dividends of $.09 per share paid on March 1, June 1, and September 1. The dividend amounts in 1996 represent an increase over the dividends of $.07 per share paid quarterly in 1995. On October 30, 1996, the Corporation announced a 10% stock dividend distributable on December 31, 1996 to shareholders of record on December 2, 1996. 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 $437,000 for the nine months ended September 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 8.5% at September 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 Macomb Oakland Paragon Portage Capitol Commerce of National Haven Community Commerce Bank & Commerce Bancorp Bank Tucson(1) Bank Bank(1) Bank(1) Bank Trust Bank Ltd. Consolidated ------- --------- --------- ------- --------- -------- ------- -------- ------- ------------ Financial Position: Total Assets $94,661 $11,440 $97,108 $29,647 5,036 $72,239 $54,964 $72,822 $43,744 $445,922 Total Assets for Risk-Based Capital Purposes 95,670 11,453 98,179 29,899 5,042 72,887 55,433 73,636 42,535 448,998 Risk-Weighted Assets 69,709 3,615 72,412 21,557 1,964 52,504 44,819 55,096 40,058 326,247 Tier I Capital 6,171 5,304 7,787 2,563 3,690 5,331 4,181 5,128 35,397 40,363 Allowable Tier II Capital 873 12 907 266 6 638 537 690 (1,097) 2,832 Tier I and Allowable Tier II Capital, Combined 7,044 5,316 8,694 2,829 3,696 5,969 4,718 5,818 34,300 43,195 Ratios Based on Financial Position: Ratio of Tier I Capital to Risk-Weighted Assets 8.85% 146.73% 10.75% 11.80% 187.88% 10.15% 9.33% 9.31% 83.38% 12.28% Ratio of Combined Tier I and Tier II Capital to Risk-Weighted Assets 10.10% 147.06% 12.01% 13.12% 188.19% 11.37% 10.53% 10.56% 85.62% 13.24% Leverage Ratio 6.52% 46.36% 8.02% 8.69% 73.27% 7.38% 7.61% 7.04% 85.61% 9.10% Ratios Required: Tier I 4.00% 4.00% 4.00% 4.00% 4.00% 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% 8.00% 8.00% 8.00% 8.00% 8.00% Leverage Ratio 4.00% 8.00% 4.00% 8.00% 8.00% 4.00% 4.00% 4.00% 3.00% 4.00%
(1) Conditional to their commercial bank charters, Grand Haven Bank, Bank of Tucson and Macomb Community Bank 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. 15 of 19 16 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. In the second and third quarters of 1996, two new 51% owned banks (Bank of Tucson and Macomb Community Bank, respectively) have been added to the Corporation's consolidated group. Management continues to be actively 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 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. As of September 30, 1996, 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 September 30, 1996 to be adequate to fund existing operations, future growth and expansion. Impact of New Accounting Standards Financial Accounting Standards Board Statement No. 121, "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 September 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. FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", provides additional guidance for the accounting for transfers of financial assets. Management has not completed its analysis of this new standard which will become effective January 1, 1997. 16 of 19 17 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. 17 of 19 18 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. (27) Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended September 30, 1996. 18 of 19 19 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: November 4, 1996 19 of 19 20 EXHIBIT INDEX ------------- EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 11 Statement Regarding Computation of Per Share Earnings 27 Financial Data Schedule EX-11 2 COMPUTATION OF EARNINGS 1 PART II, ITEM 6(a) EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS CAPITOL BANCORP LTD.
Three Months Ended Nine Months Ended September 30 September 30 ------------------------- ------------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Primary Net Income Per Share: Weighted average number of common shares outstanding 3,976,908 3,329,941 3,685,780 3,321,335 Net effect of dilutive stock options and warrants-- based on the treasury stock method or modified treasury stock method, as applicable 127,765 658,294 116,944 658,294 ----------- ----------- ----------- ----------- Total 4,104,673 3,988,235 3,802,724 3,979,629 =========== =========== =========== =========== Net income for the period $ 1,177,700 $ 847,907 $ 3,426,885 $ 2,049,222 Adjustment for modified treasury stock method 66,982 200,946 ----------- ----------- ----------- ----------- Adjusted earnings for purposes of computation of per share earnings $ 1,177,700 $ 914,889 $ 3,426,885 $ 2,250,168 =========== =========== =========== =========== Net income per share $ .29 $ .23 $ .90 $.57 =========== =========== =========== =========== Fully Diluted Net Income Per Share (A) $ .29 $ .23 $ .90 $.57 =========== =========== =========== ===========
(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 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 15,081 1,550 33,475 0 43,262 0 0 340,094 4,261 445,922 391,946 3,112 4,180 3,950 0 0 27,051 10,829 445,922 23,518 3,013 0 26,531 12,525 12,996 13,535 751 82 8,824 5,144 3,427 0 0 3,427 .90 .90 0 947 1,604 0 0 3,687 231 54 4,261 4,261 0 1,909
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